Is Your Home An Investment?

Greg Luken
Jul 6
4 min read

Updated: Sep 3

Is Your Home Really an Investment?

While many real estate professionals will always tell you it is, the question is a little more nuanced. The truth is, for most people, the answer is a resounding “no.” Here’s why.

Understanding Home Ownership

The Investment Debate

When discussing home ownership, it's crucial to understand its implications. Many view their homes as investments, but this perspective can be misleading.

Factor 1: Your Home Doesn’t Produce Income

People often mistakenly count their homes in their net worth as if they are investments that yield dividends. This can be deceiving. If you have a $1 million home and a $1 million portfolio, you’ve certainly built a foundation. However, you can’t spend money as if you have a $2 million portfolio.

According to Financial Samurai, the typical American has over 70% of their net worth tied up in their primary residence. In contrast, wealthy households usually have less than 30% of their net worth in their homes. Most wealthy clients have only 8% to 20% of their net worth tied to their primary residence. This varies by age and life stage.

If you plan to sell your home, downsize, and buy a less expensive one, you could argue that your home is an investment. However, from an income perspective, you can only count the portion you would reinvest for income. For instance, if you sell a $1 million home, buy a $500,000 home, and reinvest the other $500,000, then you have a half-million-dollar investment.

If you have in-law quarters or an apartment above the garage that you rent out, you can argue that your home is an investment. It generates income. Alternatively, if you plan to get a reverse mortgage (though most wealthy individuals do not), then your home could be considered an investment.

Short of these scenarios, your home serves primarily as a place to live. Its main function is not to provide additional income. If you enjoy your living space, that has value. If it saves you money compared to renting, that also holds value.

For this reason, home value is a number but rarely plays a major role in financial planning for income.

Factor 2: Carrying Costs

Many people overlook the carrying costs of a property. On most investments, an annual fee of 2% to 4% would seem excessive. Yet, that is what many homeowners pay.

Let’s break it down.

1. Property Taxes

Effective Tax Rate: Approximately 0.54% of the home's market value. This rate is derived from the combined city and county property tax rates in Brentwood TN.

2. Homeowners Insurance

Average Annual Premium: Between $2,435 and $4,532, depending on coverage and provider. For a home valued at $300,000, this equates to approximately 0.8% to 1.5% of the home's value annually.

3. Maintenance Costs

Recommended Budget: Financial experts suggest setting aside 1% to 4% of the home's value each year for maintenance and repairs. For a $300,000 home, this translates to $3,000 to $12,000 annually.

Key Considerations

Home Age & Condition: Older homes may incur higher maintenance costs.
Location-Specific Risks: Areas prone to severe weather may have higher insurance premiums.
Personal Preferences: Choosing premium services or materials can increase maintenance expenses.

Calculating Costs for a $1 Million Home

Let’s consider a hypothetical home valued at $1 million in Brentwood, Tennessee. Homeowners can expect the combined annual costs of property taxes, homeowners insurance, and maintenance to range between 2.5% and 4.5% of their home's market value. Here's a detailed breakdown:

Property Taxes

In Brentwood, property taxes are calculated based on the assessed value, which is 25% of the appraised value for residential properties. The combined tax rate for Williamson County and the City of Brentwood is $1.83 per $100 of assessed value.

Assessed Value: 25% of $1,000,000 = $250,000
Tax Rate: $1.83 per $100 of assessed value
Annual Property Tax: ($250,000 / $100) × $1.83 = $4,575

Homeowners Insurance

Homeowners insurance premiums in Tennessee vary based on several factors, including the home's value, location, and coverage levels. For a $1,000,000 home, the annual premium can range from approximately $3,000 to $6,000.

Maintenance Costs

A common recommendation is to budget between 1% and 3% of the home's value annually for maintenance.

Annual Maintenance Cost: 1% to 3% of $1,000,000 = $10,000 to $30,000

Total Estimated Annual Costs

Expense Category	Estimated Annual Cost
Property Taxes	$4,575
Homeowners Insurance	$3,000 – $6,000
Maintenance	$10,000 – $30,000
Total	$17,575 – $40,575

This equates to approximately 1.76% to 4.06% of the home's value annually.

These estimates are general guidelines. Actual costs can vary based on specific property details, coverage choices, and maintenance needs. It's advisable to consult with local professionals for precise assessments tailored to your situation.

Even without a mortgage, you can see that annual costs of $17,575 to $40,575 can significantly impact your investment return.

To clarify, this is not an argument against home ownership. Instead, it suggests consistency when evaluating a real estate investment. Too often, people remember the purchase price and the sales price while conveniently forgetting the costs of maintaining a property along the way.

Owning a home is a fantastic idea for many. It is something most wealthy individuals do. We must remember what a home is, its purpose, and not use it to overestimate our own wealth.

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