Generally, it is the norm to ascribe some level of respect to house owners because of the general belief that most people that have houses are quite rich and successful. The houses owned by individuals are most times tagged as an investment which is a very wrong term to be used, this is because the word investments can only be used in a situation where money is incurred on capital goods and services which is expected to yield profit/return at the future. A definition which you having a house doesn’t fit into.
In my country, you building a house of which shelter and comfort are the primary motives could be a herculean task to complete depending on the size and quality of the building which makes it considered by most as a massive investment. Looking at it from the surface it might seem logical to call your house an investment considering the amount usually required for acquiring or building it but analyzing it from a different angle with the scenarios that would be painted below you will get to discover it’s not.
Income Generation
Having your own property means you are free from the monthly/ yearly obligation of paying rent. The fact that you acquired your house and don’t get to pay rent could be seen as a comparative advantage but it doesn’t still suffice to being an investment because you are not expected to generate any income from the building. In a situation where you acquired the property to be rented out to a second party, it would take a considerable number of year for the amount invested in acquiring or building the proper to be recouped in form of rent and by that time the house must have depreciated in value. Also, don’t forget some of the monies collected as rent would be used in carrying out repairs, maintenance, servicing and also repayment of loans used in acquiring the building as the case may be. With these, such houses cannot be termed an income-generating unit.
Depreciation
Depreciation is also expected to take place on the building which is a loss in value of the property over time. This loss is as a result of wear and tear on the structure. For example, a house built 30 years ago would definitely not retain the same value as at the time of construction as it would be worth more now than the amount incurred in constructing the house. This would only occur as a result of time value of money because the value of money used then in building the house would have changed now but still factoring the time value of money, the house should be worth way more but because of the years it has spent, full increase in value cannot be claimed. However, this doesn’t apply to the land on which the building is erected as by nature land is always known to appreciate.
It is impossible to recover your initial outlay
You getting the total value incurred on the building most times may seem impossible primarily because of two major factors which are Depreciation and a possible fall in the purchasing power of your country’s currency. In the event of a depreciating currency structure and a situation where the house is for personal use, it becomes more evident that a house can be an object of pleasure and comfort instead of a medium of wealth creation as the money incurred is classified as consumption. It’s only in relation to real estate that the input could be called investments.
The location of the house
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This is another major reason why a house shouldn’t be considered as an investment because the location of the house could have either a positive or adverse effect. A house developed in an area with bad roads, erosion and waterlogged land can never be tagged as an investment because of the impact those factors would trigger which would result in cash outflows in dealing with those drawbacks. More costs are bound to be incurred and in other cases losses in a situation where such building collapses.
Conclusion
From the above, it can be deduced that most houses depreciate over years and create additional burden with annual overhead cost incurred in maintaining it thereby making the conclusion of such being referred to as an investment wrong. However, in some cases, a house can be seen an investment if the motive behind its construction is resale or for rent.
Thanks for reading :)
I wish i could agree with you , but this is not entirely true, my grandpas house built in the eighties was sold for a really high amount, contrary to your believe, in the housing sector it gets better as it gets older. dont forget the house is built on a land.
A friend of mine recently sold his fathers house for a lot of money, his father never touched that kind of money in all his life
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I understand your point bro but check this out from the post;
In relation to your grandpa's and friend's house, what actually commanded the large sum received for the property was the land because land is known to appreciate over time, your grandpa's house which you said was built would be demolished obviously after the purchase for the erection of another building because the structure would be obsolete already. Looking at it from an accounting point of view, the house had depreciated for roughly 40 years thereby making the realizable value little but because of the land and the time value of money, they were able to sell it at a good price but the building itself isn't still an investment.
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Well said my friend
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I greatly appreciate this article. I was raised by a parent who invests in housing properties and convinces me to try to invest in that industry too. I've declined many times due to the points brought up in this article. Glad to know I'm not the only one who sees this perspective.
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