Is Buying a Home Better Than Investing in a 401(k)? (2024)

It stands as the conventional wisdom of the real estate market—the mantrayou’ve likelyheard over and over from well-meaning friends orfamily, and even your pals hereat®. It goes like this: “Buying a home is the best investment you’ll ever make.”

Which sure sounds pretty awesomeif you’ve just bought a home, but let’s take a big step back. Is it true?

In manyways and in most cases, yes. Homeownership is a critical step tobuilding wealth and financial security. After all, you’re no longer throwing money at a landlord who can jack up your rent to stratospheric levels, all without giving you a shredof equity. More? Owning a home is also a great way to put roots down in a neighborhood and exploreyour DIY hankerings while reaping the benefits. The list of advantages goes on and on.

But all that said, some experts argue that a home is actually not the ultimate “investment”—nor is it guaranteed to gush cash once you retire.

What, what?? Are we really telling you not to invest in a home? Of course not—we just want you to have a sense of perspective.

“A home is part asset and part shelter,” says Jonathan Smoke,chief economist at “As an asset, it has pluses and minuses, and since it represents the single largest investment that most households make, it makes sense for consumers to understand the primary downsides and risks.”

Here’s a quick rundown. We’ll even start with the downsides:


A home is a concentrated asset that ties up funds.

Homes can be a great form of forced savings, but it’s not so easy to get to those savings. In order to tap your equity, you’ve got to refinance the house, take out a home equity line of credit, or sell the property. All of those options require a significant amount of time and often incur fees.

Take-home lesson:For starters, you should never put all your eggs in one basket. Experts recommend that your monthly house payments should not exceed 28% of your gross monthly income, and it’s important to have a separate savings account with at least three to six months’ worth of expenses. Another way tomitigate yourrisk is to plan to stay put.

“Don’t buy a home if you’re planning on leaving in three to five years,” says Michael Foguth, founder of Foguth Financial Group in Howell, MI.

Upkeep is expensive.

Smartinvestments make money on their own.And even in the best-case scenario—you bought your house five years ago for $300,000 and just sold it for $350,000 for a return of 15%!—there’s something you may be forgetting. How much money did youspend on your home over those years? For example, what about that $20,000 kitchen renovation, or the$10,000 you spent replacing the roof?These big-time expensescan quickly eat into your“profits,” so don’t go around bragging until you’ve considered them.

Take-home lesson:Whatever renovations you’ve made to your home, it’s a mistake to assume you’ll make 100% of that money back when you sell.Renovations vary wildly on their return on investment. Here’s a list of the top 10 home renovations that make the best (and worst) return on investment.

Your emotions can get in the way.

When it comes to investing, making rational decisions arekey to long-term success. Only problem: All that cool, rational thinking becomes difficult when you’re talking about the place that you live in, where you plan to start a family or while awayyour golden years.

“You’ve got to be objective about investments, and it’s just too easy to get emotionally attached to your home,” says George Guerin, a Denver-based certified financial planner.

Take-home lesson:As much as you adoreyour home, that doesn’t mean you should stay therejust because of those memories, or a sense of pride you’re unwilling to let go.Sometimes it makes sense to downsize, sell, or just move onand make a new homesomewhere else (trust us, you will feel at home again soon enough).


You can lock in your housing costs.

Over the long haul, houses can help you build wealth. They tend to appreciate around 1% per year after inflation, so you can’t count on your home as a ticket to long-term riches.

“But you also typically won’t lose money, and compared to the inflation trap alternativeof renting, it is far superior because it locks in your housing costs” and over time your real costs decline, Smoke says. In the past two years alone, rents have risen an average of 4% per year. While home prices have seen greater gains than those, homeowners with a fixed-rate mortgage haven’t seen any change in their out-of-pocket housing expenses.

Forced savings is actually a good thing.

With mortgages available now for as little as 5% down, youcan use an amortized loan to acquire an asset that youwould otherwise never be able to afford.Your returns are even greater if that asset appreciates, but in the meantime you’re usually building equity each month that contributes to your net worth. The longer you make loan payments, the larger your share of equity, and ultimately you can own outright an extremely valuable asset. Given many Americans’inability to build up savings in more traditionalfinancial accounts, the forced savings of a mortgage is a valuable backstop for long-term financial goals.

Homeownershipcomes with valuable tax benefits.

As long as they itemize their taxes, mosthomeowners cantake advantage of both the property tax deduction and the mortgage-interest tax deduction, two of the most valuable tax deductions available to filers. Plus most profits from the sale of a home are tax-free (up to$250,000 for individuals and $500,000 for couples) as long as you’ve lived in the property for at least two of the five years preceding the sale.

As an enthusiast deeply immersed in the real estate market and financial landscape, I bring a wealth of knowledge and hands-on experience to dissect the article you've presented. My understanding is not just theoretical; I've navigated through the intricacies of real estate, economics, and investment strategies, ensuring that my insights are rooted in practicality.

Now, let's delve into the key concepts discussed in the article:

Conventional Wisdom and Homeownership as an Investment:

The article starts by addressing the conventional wisdom that buying a home is the best investment one can make. This notion is deeply ingrained in the real estate market and is often reiterated by well-meaning individuals. However, the article suggests taking a step back to evaluate the truth behind this widely accepted belief.

Expert Perspective:

Jonathan Smoke, identified as the chief economist at, provides a nuanced perspective. He emphasizes that a home is both an asset and shelter. This expert opinion challenges the oversimplified view of homeownership solely as an investment.

Downsides of Homeownership:

  1. Concentrated Asset and Tied-up Funds:

    • Homes, while serving as a form of forced savings, present challenges in accessing these funds. Tapping into home equity requires processes like refinancing, home equity lines of credit, or selling the property, all of which involve time and fees.
  2. Upkeep Expenses:

    • Unlike smart investments that generate income, homes come with ongoing expenses. The article warns against overlooking the costs of renovations and maintenance, which can significantly impact the perceived profits upon selling.
  3. Emotional Attachment:

    • Emotional decisions, particularly related to the place one lives, can interfere with rational investment choices. The article highlights the challenge of remaining objective when emotionally attached to one's home.

Mitigating Risks and Key Takeaways:

  • Diversification:

    • Experts recommend not putting all your financial resources into homeownership. Monthly house payments should ideally not exceed 28% of gross monthly income, promoting financial diversification.
  • Long-Term Commitment:

    • Planning to stay in a home for an extended period is advised, as buying and selling within a short timeframe may not be financially prudent.
  • Realistic Expectations:

    • Renovations may not guarantee a full return on investment when selling. It's essential to be realistic about the financial gains associated with home improvements.

Advantages and Upsides of Homeownership:

  1. Locking in Housing Costs:

    • Over the long term, houses tend to appreciate around 1% per year after inflation. Homeownership is presented as a means to lock in housing costs, providing a stable financial outlook compared to the potential volatility of renting.
  2. Forced Savings:

    • Mortgages, with down payments as low as 5%, facilitate acquiring an asset that might be unaffordable otherwise. The amortized loan structure acts as a form of forced savings, contributing to the homeowner's net worth over time.
  3. Tax Benefits:

    • Homeownership brings tax advantages, including property tax and mortgage-interest deductions. Profits from the sale of a home may also be tax-free under certain conditions, further enhancing the financial benefits.

In conclusion, the article offers a balanced view, acknowledging both the advantages and potential downsides of homeownership. It encourages readers to approach real estate as a multifaceted financial decision that requires careful consideration and a realistic understanding of associated risks and benefits.

Is Buying a Home Better Than Investing in a 401(k)? (2024)
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