Even in this real estate market, is your home truly a good investment?

The real estate market is hot in Kansas City and across the country. Houses are selling fast and often above the asking price. Many people are hearing from friends and neighbors about how much money they made on a recent home sale.

Homes are commonly referred to as a good investment because they tend to appreciate in value over time. This perception seemed to go away after the housing crisis and real estate bust in 2008. Given the current real estate market, homes are again being noted as investments.

However, when all of the costs are considered, a home may not offer financial returns that many assume to be a given.

I believe a home is a “personal use asset” for most people. The purpose of the home is to provide shelter, establish community roots and be enjoyed as a place for family and friends to congregate.

This is different than an investment, where the primary purpose is to generate income or realize capital appreciation. When a person buys a home, the primary factors they consider are usually not related to an investment decision but rather proximity to work, school district quality, community and local amenities.

We can examine a plausible example to illustrate how a home transaction would stack up from an investment perspective.

Let’s say a homeowner purchased a home for $300,000 in 2011. Fast forward 10 years to 2021 and the home is worth $450,000 in today’s market. On its face, this home has increased in value by $150,000. That’s a tidy profit that is fun to talk about with family and friends or share on social media.

However, if you look inside the numbers, the rate of return on the home as an “investment” is not exceptional.

The compounded annualized return on the home value change over that 10-year period scenario is 4.14%. For comparison, the annualized return of U.S. stocks as measured by the S&P 500 over a 10-year period (ending April 20, 2021) was 14.17%.

If you take a deeper look into the hypothetical situation above, the numbers become even less favorable.

Over the 10-year holding period, the owner would have paid property taxes, homeowner’s insurance and maintenance costs on the home. These expenses reduce the investment return on the property. Assuming some reasonable assumptions for these items and a 6% Realtor commission on the sale of the home, the net annualized return on the home sale drops to just 0.21%.

The homeowner would barely break even on the transaction, which is not exactly a good investment.

The point of the example is not to say that the homeowner made a poor decision. After all, they likely enjoyed a decade of memories, built friendships with their neighbors and shared countless experiences with their family in the home. These are all important things that give meaning to life and are impossible to quantify. They are also classic benefits of a personal use asset.

Even in a hot real estate market, a personal residence may not generate an investment return that most would consider a good investment from a financial perspective. The financial calculations do not quantify the value that a home offers in terms of personal use, including a place to make family memories and community connections.

Buying a home is often the right decision for many people and families, even if the numbers as an investment do not back it up.

Lucas Bucl is a CERTIFIED FINANCIAL PLANNER professional and member of the Financial Planning Association of Greater Kansas City. He is a principal at Aspyre Wealth Partners in Overland Park, where he helps clients define what success means to them and then craft and execute a plan to achieve it.

This story was originally published June 1, 2021 at 12:00 AM.