Your Personal Residence is An Expense

October 14th, 2010 · 12 Comments · Commercial Property, Personal House, Rental Property

As someone who works in the real estate arena with income properties I have often heard the myth that your personal residence is an investment. This is a total fabrication. Here’s why.

You Pay More Than The Value Of Your House

Interest on your house is not tax deductible. For every $ 100,000 of mortgage, you will end up paying $175,377.01. This is calculated using a 5% mortgage interest with a 25 year amortization with a 20% down (no CMHC fees)

Property Taxes

Property taxes are partly tax deductible, but you’ll still pay out more that you’re allowed to claim. Let’s assume a very low amount of $1000 per year, that will add an extra $25,000 over the 25 years. Now our “investment” of $100,000 has cost us $200,377.01

Maintenance

You’ll have to pay upkeep and upgrade on the property. None of these expenses are tax deductible. Lets assume a modest $50,000 spent over 25 years. ($200o per year) Now we’re up to $250,377.01 in pure expense for our $100,000 property.

Inflation

It’s not all bad news, inflation will affect the value of the property over time. For instance if you bought the $100,000 house in 1984 it would be worth $203,828.52 today. You’re still down $46,548,49.

Personal Residence is an Expense

Basically the house you buy and live in is an expense pure and simple. So if someone advises you to “stretch yourself” and buy a bigger house so you have a bigger “investment” get them to explain how it can be anything other than an expense.

What Does This Mean?

Well the smart individual will seek to minimize expenses as much as possible. If you can recognize that your personal residence is going to cost you money over time then you’ll treat your purchases in an entirely different way. Buying housing for yourself becomes similar to buying a car, you need one but it will never do anything except cost you money. Buying the least car you need is a wise move.  Basically if all you need is a 3 bedroom house, you might want to pick a modest bungalow in an inexpensive part of town, instead of a large expensive house in a great neighborhood. It’s that simple. Then invest the difference in actual real life investments that produce an actual return.

Compare to an Actual Investment Property

If you compare your personal residence to an actual investment property the difference is quite apparent and the conclusion cannot be anything other than that your personal residence is NOT AN INVESTMENT.

Interest, Property Tax & Maintenance

For an investment property interest, property tax and maintenance are tax deductible.  For the same property, you will pay exactly $100,000 the rest of the outlay is expensed. This is before you even consider rental income. Once you consider inflation, you end up with a property worth $203,828.52. Plus you have not even collected any rent or considered rental income in the equation.

Income properties are taxed differently upon sale then personal residences but even considering the capital gains tax exemption with the personal residence you ended up losing $ 46,548.49 over time and the income property is worth $203,828.52 less $100,000 purchase price for a gain of $103,828.52

$ -46,548.49 vs $103,828.53

That’s the difference between a personal residence and an actual investment property. Did I mention that we haven’t yet even accounted for rental income for this property? Quite frankly, I still think that people should buy houses rather than rent, but that they should reduce their housing expenses as much as possible rather then “stretch their budget” to get a better “investment”. It’s just not an investment.

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12 Comments so far ↓

  • Jordan

    “You Pay More Than The Value Of Your House”

    You need to tell this to all the people who brag about selling their house for $100,000 more than they paid for it …. and therefore coming away $100,000 richer!

    • Rachelle

      There’s a lot of people who want you to believe your house is an investment when it’s not. Numbers don’t lie.

      Renting leaves you even poorer 🙂

  • Julie Broad

    Great post Rachelle. It’s such an important point for people to be aware of!! I believe home ownership is a lifestyle choice not an investment decision. When you realize that you’ll stop yourself from buying a home bigger and better than you need – which many people do because they get convinced its an investment.

    The other thing is that when you have a home you own you always spend WAAAAYYYYY more money on it than you would when you rent. That is something people don’t consider. Sure you made $100,000 on it when you sold, but how much money did you spend putting in shelves, painting, putting new carpet in, fixing up the garage, buying better appliances … the list of the ways people bleed out money as a home owner is huge. And without some awareness you’ll allow yourself to think it’s all an investment in your home. Yet, if it really were an investment, you’d think of the ROI of those expenditures not how lovely it will be to live in it with the new plush carpet and front loading energy efficient washer.

    • Rachelle

      True enough, I mean it’s fine as far as I’m concerned to buy a home, because you will need housing of some kind your entire life, it’s just too cold to live outside. Some people would argue with me, but you also need a car. Spend as little as you reasonably can. I’m not talking for other people here either…I myself live in a very modest 2 bedroom bungalow in Scarberia and I drive an old van.

  • Julie Broad

    By the way Rachelle … you should get a Gravatar. They are the best for bloggers. Your picture will show up beside your name whenever you comment on your blog and anyone elses. It’s free:

    http://en.gravatar.com/

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  • CB

    I agree with you here- but if my understanding of your math is right it seems to me that you are assuming that tax deductible = free. That isn’t the case. A tax deduction is a nice discount but it first cancel out the expense. Apologies if I’ve misunderstood your point.

    Also I agree with you that the numbers don’t lie but not with the conclusion that renting will leave you poorer than buying. I think that each individual needs to run the numbers for his/her own situation to make the better financial decision. Factors such as the local market conditions, length of time in the property, credit score, etc will effect the better financial decision for everyone.

    • Rachelle

      No tax deductible is not free, but $ for $ you will get your money back.

      Renters are much poorer than homeowners. The average savings for a renter in Canada is $2000. Those are the statistics. Does this mean every renter has no savings? No, just that most people spend the difference that they would use to pay their mortgage, so at the end of 25 years they get nothing.

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