4 Reasons You Shouldn't Think of Your Home as an Investment

I'd heard most of the typical arguments for buying a home by my mid-20s. Land...they're not making any more of it! Rent is just throwing your money away. And of course, a home is a great investment.

Looking at the average house price, that last argument would seem to be correct. It went from $273,600 at the end of 2013 to $435,400 at the end of last year, according to data gathered by The Motley Fool Motley Fool Money. That's an increase of over $160,000.

Buying a home could be a good decision if you can afford it and you're ready to settle down in one place. But you shouldn't do it as an investment. Here's why.

1. Homes and investments serve different purposes

Even though homes are often seen as investments, that's not really accurate. A home is a place to live. An investment is an asset you purchase to make money. The only way to make a profit on your home is to sell it. If you don't want to move, or you've found your forever home, you won't be making any money from it.

What makes your home more livable also doesn't always make it a better investment. If you're like many homeowners, you might decide at some point that you want to remodel. Most remodels cost more than the value they add to a home. In the 2024 Cost vs. Value Report by Zonda, only three out of 23 types of remodels had a positive return on investment (ROI).

Let's say you'd like to do a major kitchen remodel. This costs more than twice as much as it adds to a home's value, on average. It may make your home a nicer place to live for you, but it wouldn't make any sense as an investment.

2. There are regular costs to owning a home

Some home buyers focus on how much their mortgage payment will be. But that's just one of many costs of homeownership. Here are a few more you'll need to be ready for:

• Property taxes
• Homeowners insurance
• Maintenance and repairs
• Utilities (this often includes bills you didn't have to pay as a renter, such as sewage and garbage collection)

Those are all expenses you'll have on a regular basis after buying a home. This isn't a big deal, assuming you planned for these costs and can afford them.

But if you're looking at your home as an investment, it's a huge disadvantage. On top of the fact that your home isn't making you any money, you also need to keep putting more money into it -- not something you need to do when you invest in stocks.

3. Homes don't always increase in value

Investing has its risks. One of the most effective ways to reduce the risk of losing money is to build a diversified portfolio. Instead of putting all your money into a few companies, you put it into a few dozen. Or you buy index funds that invest in a large number of stocks. For example, you could pick an index fund that invests in the entire stock market.

You can't do that with your home. You're only buying one, after all. When you buy a home, you're putting all your eggs in one basket. Once again, this isn't a problem if you're looking at it as a place to live. But it's the opposite of what you'd want to do as an investor.

4. You can't use your home to fund your retirement

One big reason why investing is so important is so you have money to live on in retirement. Social Security benefits only replace about 40% of pre-retirement earnings, according to the Social Security Administration. When you have an investment portfolio, you can gradually withdraw from that to help cover your bills.

There's no way to do this with your home. You could get a home equity line of credit (HELOC) or loan, but you'd need to pay that back. If you want to tap into the value of your home, you'd need to sell it, which also means finding a new place to live.

Homeownership has plenty of benefits. You'll have your own place and the freedom to do what you want with it (although you may need to check with an HOA first). And if you sell your home one day, you might make a profit from it. But if you decide to get a mortgage and buy a home, remember that it's a place to live, not a part of your investment portfolio.