I hear a lot from people saying that they invest in their own house. And mostly I disagree with them. I’m not talking about investment property like houses for fix-and-flip or rental property.

Location, Location, Location
Some of you may have a valid point like if the location is good, the house value will be growing over time, and may double in 15-30 years. That can happen, if the location is good. There are cases when a family bought a house for $100,000 15 years ago; and now the area is booming so much, they can sell the house for $230,000, which gives them $130,000 before all the fees and taxes. Looks lovely, isn’t it?

The Dark Side
Now, let’s look at the dark side, the mortgage payments. We look at an average family of three living in USA. They need a house of around 1500 square feet (about 148 sq. m.) to feel comfortable at the $180,000 price tag. The parents have a good credit score and may qualify for the annual interest rate of 6.5%, and they do not want to put any down-payment. Their mortgage payment for 30 years could be around $1,137, monthly.

Suddenly, they see another house, bigger inside, with better kitchen, in a slightly better location for $220,000. The principal and interest monthly payment becomes $1,390, which creates a difference of $253, monthly. So, our family decides that such small difference is justified by a bigger kitchen, and moves in.

10 years later. Our family needs to move in another location, and it’s time to sell the house. Their house appreciates and is valued at $325,000 at that point (I took average annual appreciation of 4%, which is very close to the reality in US). They make $105,000 before the fees and taxes, not bad, and if we remove estate agents fee of 6% (yes, real estate agents also need to pay their mortgages and feed their families ), they make only $85,500 ($325,000-$325,000*6%/100%) before taxes. Looks less exciting…

The Ultimate Sacrifice…
If you can rewind the time wheel, and force our family to buy cheaper house and invest the difference into a mutual fund, we will see a slightly different picture. That difference of $253 could make them $50,277 before taxes over 30 years with safe 9% of annual gains. Their house would be valued at $260,000, which would be $260,000(new price)-$180,000(old price)-$15,600(agents fee)=$64,400 in profit before taxes. In fact, the sacrifice for the smaller kitchen actually makes them $64,400+$50,277=$114,677 before taxes, or about $30,000 in difference.

More Taxes And Fees…
However, the actual money you make after selling your house also will be decreased by that nasty mortgage interest rate of 6.5% (insert your rate here) over years, so if you buy a house for $100,000, sell it for $150,000, remove agent fees($9,000), you will not see those $150,000-$100,000-$9,000=$41,000… What you gonna see is $41,000 minus 6.5%(from the loan of $100,000), and it will make you only $34,500 before taxes… And there are annual property taxes that will steal the money from your pockets every single year…

Can you make such sacrifice?

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