The question of whether your house is an investment will likely be a debate until the end of time in the financial community.  Some see it as a great way to build wealth, while others see it as an expense.

There are good arguments both for and against buying a house.  The main point is that you should only buy a house when you can afford to do so.  You should only buy a house if you have some backup reserves for all of the potential things that can go wrong with a house.  Despite getting homeowners insurance, there are a lot of big potential expenses that a policy likely won’t cover, such as a new roof or a new air conditioning unit.

There is no question that a house is a consumer good.  It just happens to be a consumer good that is a necessity.  A 2,500 square foot house with 5 bedrooms is not a necessity.  It may seem like a necessity for a large family with a lot of stuff (or even a smaller family with a lot of stuff), but there are many large families living throughout the world that have accommodations far smaller.

The shelter part is a necessity.  Assuming you don’t want to be homeless, it is a basic necessity.  Even homeless people have to seek some shelter, especially when it is cold.

Assuming you are at least middle class, living in the U.S., it is reasonable to expect a decent living environment with indoor plumbing, electricity, air conditioning, appliances, and some room to move around.  Even most of the lower class in the U.S. gets to have these basic things.

There is a point where getting a larger house becomes more of a luxury than a necessity.  This is highly subjective, but the point is important.  There is nothing wrong with a family buying a larger house than what is reasonably necessary.  We just shouldn’t delude ourselves that this is somehow an investment.  It is basically a consumption item.  But in our world of central banking and inflation, it is something that tends to go up in value – at least nominally – over the long run.

You can buy an investment house to make money, especially if you don’t live in it.  Otherwise, it is hard to call it an investment, unless you are renting out rooms while living in it yourself.  There is a difference between a wise financial move and an investment.

As far as rental real estate, this is essentially a business.  You could also buy a van and rent it out to people.  You could buy a powerful snow blower and rent it out to people when it snows.

If you buy a house for $100,000 (without a mortgage), and you can net $8,000 per year after expenses by renting it out, then your return is 8% per year.  This is a good return.  If the house appreciates in value, then this is bonus money.

If you buy a house to live in, it may or may not be profitable.  It is hard to calculate, even after the fact.  There are many expenses that go into owning a house that are hard to add up.  You would also have to consider the possible return on your money during this time if you hadn’t spent it all on a house.

I find that most people’s opinion on this subject reflects their actual experiences.  If someone bought a house in California 8 years ago and it has doubled in price, then they are thinking pretty highly of real estate.  If they are smart enough to sell and become renters (or buy in a much cheaper area), then they will probably always have a high opinion of real estate because it was so profitable.

If someone bought a house in a bubble area in 2006 and held on, they still might not be back to even 12 years later.  It would be hard to convince this person that buying a house is a good investment.

There are some lucky people who buy a house and have it appreciate significantly.  If they are smart, they cash out.  If they are dumb (unless they are truly wealthy), they sell the house and move to an even more expensive house in the same bubble area.

Aside from the possibility of getting lucky with major appreciation, the main benefit of buying a house is that it acts as something of a forced savings plan.  Every month when you pay the mortgage, a certain portion of that is going towards the principal, even if it is relatively small at first.  If you stay in the house for a long time, you can eventually find yourself owning the house (as long as you keep paying your property taxes).  This has been a way for middle class families to build some wealth.

Of course, there is also a benefit of owning a house in that you can control what you do with it, as long as you are not violating any association rules or local ordinances.  You also can’t be kicked out by a landlord, as long as you keep paying your mortgage and property taxes.

When I am asked whether someone should buy a house, I list a few conditions that should be met before someone considers buying.

1. You should be planning to live in the house for at least 7 years, if not longer.
2. You should have some extra money set aside for repairs and maintenance.  You could call these “unexpected expenses”, except any homeowner will know that they aren’t that unexpected.  You are guaranteed to have some major repairs.
3. Check the rental rates in your area versus the monthly cost of owning a similar sized house.  If the expenses to own a house (which include mortgage, insurance, property taxes, association fees, maintenance, and repairs) are significantly higher than it would cost you to rent, then you should probably just rent.

If, based on the three things listed above, you are still in the running for buying a house, then it really comes down to your preference.  Even here, I would not recommend getting in over your head with too much house.  You should never buy as much house as what you qualify for with a loan.  You don’t want to be house rich and poor in every other way.

The one caveat to all of this is for someone with significant wealth.  If you are worth $50 million, go ahead and buy the $4 million mansion in California.  I’d rather take advice from you on how you accumulated so much money.

Whether a house turns out to be a good investment or not really depends on the real estate market.  It depends on where you buy and when you buy.  Part of this is pure luck, as you cannot predict the future.

However, you can look at prices compared to rent and see what is reasonable.  You also control your own finances and whether you can still afford to stay in a house even if there is a major downturn in the economy.  If you plan to stay in the house for a long time, then this virtually eliminates the need to worry about short-term fluctuations in the housing market.

If you are buying a house to live in, buy it as a consumer good.  You don’t pay extra for leather seats in a new car because you hope to get a good return on your money.  You buy the leather seats because you want them and you think it is worth the cost.  You should look at a house in the same way.