Is Your Home An Investment?
- Greg Luken
- 5 days ago
- 4 min read
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,” and here’s why.
There are two major factors to consider.
Factor 1: Your Home Doesn’t Produce Income.
Often times people make the mistake of counting their home in their net worth as though it is an investment that will pay them dividends. And this can be deceiving. If you have a $1 million home and a $1 million portfolio, certainly you’ve accomplished something. And you have built a foundation. But you can’t spend money like you have a $2 million portfolio.
According to Financial Samurai, the typical American has more than 70% of their net worth tied up in their primary residence. However, wealthy households usually have much less than 30% of their net worth in their home. In our experience, most wealthy clients have 8% - 20% of their net worth tied up in their primary residence. Of course, this varies by age and stage of life.
If you plan to sell your home, downsize, and buy a much less expensive home, you can make an argument for your home being an investment. But from an income standpoint, you can only count the part you’d reinvest for income. For example, if you plan to sell that $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 are already renting out, you can make an argument that your home is an investment. It is producing income. Or, if you plan to get a reverse mortgage (most wealthy people don’t), then your home could be an investment.
Short of those scenarios, your home is a place to live. Its primary function is not to provide you with additional income. Your home is a place to live. If you enjoy where you live, that certainly has value. If it saves you money compared to renting, that has value as well.
For this reason, home value is a number, but rarely plays a major role in financial planning for income.
Factor 2: Carrying Cost.
The factor that most people don’t consider is the carrying cost of a property. On most investments, you would think that an annual fee of 2% to 4% would be high. And yet, that is what many people pay on their homes.
Let’s break it down.
1. Property Taxes
Effective Tax Rate: Approximately 0.54% of the home's market value.1
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. 2
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.3
For a $300,000 home, this translates to $3,000 to $12,000 annually.
Key Considerations
Let’s move this closer to home and do the calculation for a hypothetical home valued at $1 million in Brentwood, Tennessee, where 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.5
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 5,6,7
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. 8
Maintenance Costs
A common recommendation is to budget between 1% and 3% of the home's value annually for maintenance. 9
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 eat into your investment return.
To be clear, this is not an argument against home ownership. This is simply suggesting consistency when evaluating a real estate investment. Too often the temptation is to remember the purchase price and the sales price and to use mental accounting to conveniently forget the costs of maintaining a property along the way.
Owning a home is a fantastic idea for many people. It is something most wealthy people do. We are well-served to remember what a home is, its purpose, and not use it to overestimate our own wealth.
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