Is Buying A House A Good Investment? (Or How To Get Rich with Home Ownership)

Is buying a house a good investment? While buying a house with a consumer mindset can be a losing proposition, it can also be a path to wealth for the financially savvy…

A Tale of Two Homes

One of the homes down the street from me is a duplex. Each side is 905 square feet and has 2 bedrooms and 1 bathroom. The duplex is inhabited by renters who each pay $1,350 per month in rent.

I live in a fairly luxurious home that I purchased in 2013. I have about 1800 square feet of living space including 4 bedrooms and 3 bathrooms. My monthly payment, which includes principal, interest, taxes and insurance is $1,218.44 per month (15 year mortgage at 3.25% with 20% down). I pay $130 less per month than the renters who live in the duplex.

I’m in a good situation:

  • The renters will have additional rent increases in the coming years. I’ll have small property tax increases, but the majority of my payment is locked in at 3.25% (15 year loan) and will never change.
  • In less than 12 years, my mortgage will be paid off and it will cost me about $200/month to live in my home.
  • If I were to rent a home like mine, I’d have to pay at least $2,300/month in rent, over $1,000 more than I pay now for my mortgage.

Dismissing Home Ownership

It’s popular lately to dismiss home ownership. Smart bloggers who I respect like Jeremy from Go Curry Cracker, Jim Collins and Millennial Revolution have all denounced owning a home in favor of renting.

They present some solid arguments and I don’t disagree with them. In many cases, it just isn’t financially beneficial to buy a house. You’d end up with more money if you rented and invested the rest in a low-fee index fund as Warren Buffett recommends.

It doesn’t have to be this way though. With a little unconventional thinking, it’s possible to enjoy home ownership and make some money too.

My Favorite Strategies for Owning a Home

1) House Hacking

Scott Trench over at BiggerPockets bought a duplex in Denver, one of the hottest markets in the United States. His monthly payment was $1,550. He rented out one side and lived in the other. Since each side had two bedrooms, he rented the spare bedroom in his half. This arrangement brought in $1,700/month. Not only did he have a free place to live, but he brought in $150/month after all expenses.

Scott’s duplex

Scott’s strategy often works even better with larger properties. Why not consider a 4-plex? Rent three units and live in one. My friend Chad Carson over at coachcarson.com also used house hacking to get paid to live in one of his first homes. He bought a 4-plex in his hometown, lived in one unit, and rented out the other 3. He recently shared the numbers with me:

  • Rent from 3 units ($400/unit): $1,200
  • Mortgage payment + taxes/insurance: $1,100
  • House Hacking positive cash flow: $100

Chad’s 4-plex

Yes, Chad had some maintenance and long-term upkeep of the building that added to those numbers. But so does every other homeowner. The bottom line was that he was much better off financially with this house hack than renting or just buying a regular home.

House hacking encompasses much more than multi-family buildings and long-term roommates. Have you considered occasionally renting a spare room on Airbnb? How about renting your entire home when you’re not there? Sharing your home for a couple of weekends a month or a couple of weeks a year could save you loads of money.

2) Value Add

I mentioned that I’m paying significantly less than my neighbors to live in a far nicer house. You should be asking:

How did you do this?

The answer is easy; I found a really nice neighborhood and bought the worst house in it. The home was a neglected rental that had been foreclosed on. I improved the home, making it one of the prettiest on the street. This strategy is called “value add.”

Before and after

I bought the home in June of 2013 for $176,000. After spending $100,000 and about 1,000 hours of hard work, the home appraised in November of 2016 for $460,000. I realize that I have some explaining to do right now:

“You said you’re paying $1,000 less than what you’d pay to rent the home, but you put $100,000 into it! And how about your down payment?”

True. It will take me about 8 years to recoup the money spent on the renovation and another 3 years for the down payment. However, if I sold it today, I’d make a profit of almost $180,000. In under 12 years, the home will be paid off.

“1000 hours of hard work? Come on now!”

This home was time intensive. However, a $180,000 return for 1,000 hours of work is spectacular. Before you dismiss the value add strategy:

3) House Hack your Value Add

My favorite strategy is to combine house hacking with a value-add property:

  1. Buy an ugly, multi-unit property in a great or up-and-coming area. You’ll get the property at a discount because it isn’t turn-key rentable.
  2. Start swinging the hammer! Put tenant friendly finishes in the home to make it durable for years to come.
  3. Charge above average rents for your newly rehabbed property.
  4. Sit back and count your money.

To Own a House or Not…

Some folks are fond of saying this:

Your home isn’t an investment.

I don’t accept this. With a house hack, buying a house is a good investment. The home will provide an income stream that could let you live for free. With my current value add property, the payoff will come at the end when I sell it.

You should consider house hacking and value add if:

  • You’re comfortable being a landlord: It takes a certain temperament to manage tenants. Screening your potential tenants like you’re the CIA will go a long way to preventing future issues.
  • You’re willing to live in an unconventional situation: House hacking may require you to share your living space. This is a great strategy for someone fresh out of college.
  • You’re willing to give up some TV time: Yes, there will be work involved. Don’t complain. Do you want to be wealthy or do you want to watch reruns?
  • You’re willing to learn some skills: Learning basic home skills can be scary. I assure you it’s really not that hard. Fire up YouTube and visit the local library to get started.
  • You’re location independent: I like buying into an area that is up-and-coming. Look for a region with a strong job market and net population gains. Find the part of town that isn’t the nicest, but that folks are investing in. Pro tip: Look for dumpsters out front and building permits in the windows, both signs that folks are investing in their properties.

Forget ownership if:

  • You want a new home: Home builders aren’t stupid. A new home will be priced at the top of the market. There is little money to be made.
  • You must live in New York or San Francisco: There are folks who can make the numbers work in expensive cities, but it’s much more difficult.
  • You value flexibility: If you live the Go Curry Cracker lifestyle (never in one place for any length of time), don’t buy a home.

I love home ownership, but only in certain cases. Before I make an offer on a home, I’ve already planned my exit strategy, even if it’s a decade away. If I can’t be reasonably sure that the home will add to my bottom line, I keep searching.

I hope that you consider house hacking or a value add property. Why live in a normal home when you can turn your living situation into a money machine? And never forget, making money beats TV any day of the week.

Photo credit: FranceGothic Image Gallery – Creative Commons Attribution License

Mr. 1500 loves to write about personal finance, early retirement and anything else that has to do with money. When not thinking about numbers and dollar signs, you can find him with his family playing in the beautiful outdoors of Colorado.

15 Comments

  1. Freedom 40 Plan

    February 2, 2017 at 8:32 am

    The common mantra is that buying a house is a good investment. Full stop.

    The reality is, in my opinion, buying a house is just like buying any investment. You can make really poor decisions and end up with a bad investment, or you can make smart decisions and find a diamond in the rough. Clearly, Mr. 1500 was smart to buy an undervalued property in a nice community, add a little sweat equity, and viola – good investment!

  2. Mustard Seed Money

    February 3, 2017 at 8:34 am

    I love the comment “The average American watches over 1500 hours of TV per year. To look at my situation another way, I gave up 1,000 hours of TV for $180,000.” Or breaking it down even further is that one hour TV show really worth $180 to you?

    I love the idea of flipping houses and renting them out. The execution since I’m not particularly handy is a bit scarier.

    • Mr. 1500

      February 3, 2017 at 11:33 am

      Don’t worry about your skills or lack of them. What you do in your day job is probably much harder than setting tile or basic plumbing…

  3. Full Time Finance

    February 3, 2017 at 9:44 am

    So many people buy the new bright and shiny home. In 20 years that home will be as out of date as the one you bought. Given the discount you got on the older home its probably a net on cash even if you pay someone to fix it. As you noted if you do it yourself you come ahead. Besides it’s done the way you want it to be.

    • Mr. 1500

      February 3, 2017 at 11:44 am

      I had someone say this to me recently: “I just want a home that no one else has lived in.”

      Huh, what? Why? That is plain ridiculous!

      I apply that rule to socks and underwear only!

  4. Dividends 4 Future

    February 3, 2017 at 9:48 am

    Buying a house on the first few months doesn’t seem like a good investment, but at 5-6 years down the road, it will be one of the best decisions you made. I like housing for inflation hedge, if you are on a fixed mortgage payment, its the same payment for the next 15-30 years, which a lot of people tend to forget about this, in addition, there is also appreciation, might not be as nice as the next hot tech pick but if you put a little work to it, can be even better.

  5. Jax

    February 3, 2017 at 10:33 am

    When we were looking to purchase a house we only looked at muli-unit properties. We ended up buying a single family house- but with a walk out basement that we renovated to be it’s own, separate apartment. We make enough renting it out on Airbnb (way more than if we had a long term tenant) that my partner was able to quit his soul sucking corporate job. He now only works part time for paid employment while using the rest of his time pursuing his creative interests.

    We recently started our on DIY update of the kitchen and bathroom. My partner had some skills before this project, but most have been learned during the project. We’re now considering investment properties that need some work since we will be able to do a lot of it ourselves now.

    Homeownership is work, but for us it has opened so many more doors than we would have if we were just renting. It doesn’t hurt that our mortgage is less than what our rent was, either.

    • Mr. 1500

      February 3, 2017 at 11:47 am

      Holy crap I LOVE the Airbnb basement idea! That is sooooo cool that such a little thing freed up one of you to live a better life.

      We’re thinking about buying a entire property to Airbnb…

  6. Gwen @ Fiery Millennials

    February 3, 2017 at 11:33 am

    Pretty sure I’m the living embodiment of this article. My offer on a triplex was accepted yesterday! I will be bringing in $1100 a month from the tenants and my mortgage will only be ~$800. I will have more than enough money to pay the mortgage – plus I get to live there for free!

    Does this come with sacrifice? Yes. I’ll be living a bit further away from work, in a less desirable part of town, in a very small studio apartment. However, I only have to live there for a year before I can repeat the process. Hopefully into a property with a one bedroom unit to stay in 🙂

    • Mr. 1500

      February 3, 2017 at 11:48 am

      #awesome.

      And congratulations!

  7. Financial Panther

    February 3, 2017 at 3:41 pm

    I love house hacking! We’ve been Airbnbing out our spare guest room for almost a year now, and having a blast doing it! I recently read that the average household is 2.58 people. But 47 percent of new homes have 4 or more bedrooms and 38% have 3 or more bedrooms. That means, in many cases, most people have an extra room sitting there that could be monetized.

    The best part really though is that we’re able to monetize our primary residence without having to get a roommate (is there really any other way to monetize the home that you live in other than getting a roommate?).And you give up surprisingly little privacy. Folks staying in your house on Airbnb are usually coming into town for a reason – in my case, it’s for conferences or school interviews. Since they have a set itinerary, they basically only come to my house to sleep.

    And as a side benefit of this Airbnb experiment, my house is super clean. Seriously, if you need motivation to clean your house, try doing Airbnb. You’ll be super motivated to keep your house clean because you don’t want people looking down on you, and heck, why not make a little money while you’re doing it?

    • Mr. 1500

      February 3, 2017 at 3:54 pm

      Panther, that is an awesome story! We have a spare room that we’re going to rent occasionally once I no longer need it as an office. And like you said,it’s a great excuse for other stuff (decluttering in our case).

  8. Mr. Tako @ Mr. Tako Escapes

    February 4, 2017 at 5:19 am

    You really did a beautiful job on that house Mr. 1500. Nice job.

    The 1000 hours you put into it is probably worth just for the feeling of satisfaction, that you took a piece of crap and made it beautiful.

    I like that feeling myself.

    Well done Sir.

  9. Jason

    February 4, 2017 at 9:43 am

    I like that idea of house hacking, but I think we need to make our ugly duckling a little less of one before that starts happening. I am not complaining with 148k mortgage at 11 years to go with 2.875 interest…not a bad deal. Unfortunately, my property taxes are a lot higher.

  10. Benjamin Davis

    February 16, 2017 at 6:34 pm

    Awesome awesome article. I agree with the vast majority of what you said. I am sticking around.

    All the best

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