Is Your House Really a Financial Investment?

Welcome to Financial Fluency - a newsletter designed to boost your understanding of financial terms and provide you with investment ideas for long-term financial success.

In today’s newsletter:

• A Look at the Markets: Bitcoin

• Is Your House Really a Financial Investment?

• Quote of the Day: Robert T. Kiyosaki

• What I’m Watching: Why The House You Live In Is NOT An Asset But A Liability?

• Word of the Day: Opportunity Cost

• Whenever you are ready, here is how I can help you

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A Look at the Markets: Bitcoin

Bitcoin is still in the same range it has been since shortly after Trump won the 2024 US presidential election.

Will it break to the upside or downside?

Is Your House Really a Financial Investment?

Last week’s newsletter mentioned that you shouldn’t consider your primary residence an investment. Why not?

A House is a Liability

I view my house as a liability rather than an asset. When I consider financial investments, I prioritise income-generating assets, such as dividend stocks, or assets that are a store of value, like gold.

The first point is simple: your primary residence doesn’t generate income unless you rent out spare rooms.

But you say, “Property is a store of value and may even appreciate.” Is it really?

Let’s consider the annual costs of rates (i.e. property taxes), insurance, and maintenance. Say 5% of the house value is a reasonable average.

That means you’ll spend the price of your house every 20 years!

Don’t underestimate the cost of home ownership. By comparison, my global ETF costs 0.22% annually!

House Price Appreciation

You say, “The house value increases over time.” True, but it depends on your location. As discussed in previous newsletters, factors like currency debasement (8%), inflation (3%), and, in this newsletter, maintenance, insurance, and property taxes (5%) all play a role. Is your house appreciating by 16% annually? It’s possible in certain areas - ultra-prime markets like central London, Singapore, Dubai, or high-demand locations like Miami and ski resorts in the Alps - but for most of us, I doubt it.

And that’s before considering the costs of buying and selling a house.

Opportunity Cost

Opportunity cost is the value of the next best alternative that you give up when making a decision. In other words, it’s what you sacrifice by choosing one option over another.

For example, if you spend €200,000 on a house, the opportunity cost is what you could have earned if you had invested that money elsewhere - such as in a global ETF or another appreciating asset. If the ETF grows at 8% annually while your house appreciates at 3%, the opportunity cost is the extra 5% return you missed out on each year.

Investing in a global ETF outperforms property in many parts of the world over time.

We All Need a Place to Live!

This is true and explains why your primary residence should be considered a consumption item, just like food, running a car, eating out and holidays. The house you choose to live in is a consumption expense.

Why is this important?

Thinking this way allows you to make a value choice about how much of your wealth and income you want to allocate towards your primary residence - just like you decide which restaurant to visit, what car to run or where to go on holiday. This mindset prevents people from convincing themselves that they purchased an expensive house (that they often cannot comfortably afford) because they believe it’s an investment.

If you decide to invest in property, that’s perfectly fine, and next week, we’ll examine some of the advantages of property investment.

Disclaimer:

Full disclosure: I own a primary residence. I consider the equity in the house (the value of the house minus my mortgage) as a financial asset but not as a financial investment.

Always speak to a financial advisor before making any financial decisions.

Quote of the Day: Robert T. Kiyosaki

I read ‘Rich Dad, Poor Dad’ when I started in business and this is one of the messages that stuck with me. It was so impactful that I invested in my business for 10 years before I bought a house. Even then, this was probably too soon - I should have bought a commercial property before a primary residence.

This quote sums up the message in my newsletter well.

What I’m Watching: Why The House You Live In Is NOT An Asset But A Liability?

I found the video below which sums up how I think about my primary residence:

Word of the Day: Opportunity Cost

Opportunity Cost - noun - countable or uncountable - the value of the action that you do not choose when choosing between two possible options. It represents the benefits you could have received by taking an alternative action.

Business Context: Understanding opportunity cost is crucial for strategic decision-making in business and investment. When a company allocates resources to one project, the opportunity cost includes potential returns from alternative investments or strategies they could have pursued instead.

For example, if a business invests €1 million in new manufacturing equipment, the opportunity cost might include:

• The benefits of using those funds for marketing expansion

• The value of acquiring a competitor

Financial professionals often use opportunity cost analysis to evaluate investment options, capital allocation decisions, and resource management strategies. It's a fundamental concept in economics that helps businesses optimise their decision-making process by considering what they must sacrifice to pursue a particular course of action.

As we have seen, private individuals should also think about opportunity cost.

Whenever you are ready, here is how I can help you:

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Disclaimer:

This newsletter is for informational and educational purposes only and should not be construed as financial advice. The information contained herein is generic and does not take into account your individual financial circumstances. You should always consult with a qualified financial professional before making any investment or financial decisions.

Additionally, the authors and/or publishers of this newsletter may hold investments in securities or other financial instruments mentioned herein. These are included for illustrative purposes only and should not be taken as a recommendation to buy or sell such securities or financial instruments.