I Lost out on $95,000 by Investing in the ‘Safest’ Asset There Is
By: Charlie Brown
Tags: Investment, Financial Freedom, Finance, Money, Housing

It turns out that houses are not as safe as houses.

In 2015, my husband and I bought a repossession (foreclosure) house for 20% less than market value. The house, although requiring a LOT of TLC (we didn’t even have a front door), was solid with no major structural problems.

It was my home for 5 years, and I loved every minute of living there. In fact, my whole house buying and owning experience was a positive one.

On paper, we made money. We bought it for £206,000 and sold it for £298,100. We also had super-low mortgage repayments. It looked like a great investment.

But tomorrow, the house becomes someone else’s. And I will never repurchase another house.

Why? Because I’m interested in my freedom — both financial and physical — and buying a house makes for a terrible idea on both counts.

I know it’s not a popular opinion — my family, friends, and society at large have made that very clear to me. And trying to explain to a pro-house society that they’re kidding themselves is akin to persuading a Donald Trump supporter that Bernie Sanders has some great ideas.

I’ve had the following conversation with family members and friends a hundred times over. However, still, it doesn’t persuade them, maybe because it’s hard to get through this sort of conversation without reverting to a door-slamming, angry teenager.

So it’s time to get it down in black and white, facts and figures in plain sight.

Mum, Dad, I hope you’re reading…

Charlotte, you’ve done so well! You bought a house for £206,000 and sold it for £298,100. You’ve made £92,100 in just 5 years!

Actually, the opportunity cost of me buying this house was negative £70,000 / $95,000.

Here, I’ll show you:

We bought the house for £206,000.

Our deposit was a very healthy £100,000.

We spent £49,000 on remodelling, upkeep, specific insurances, interest on the mortgage, and the costs of buying and selling the house — basically all things that you don’t spend money on when renting.

The house sold for £298,100.

So over 5 years, we made approximately £43,100 (~$59,000).

This sounds OK until you think that If we had invested our original deposit into an S&P500 Index Fund, we would have made returns of £113,000 or $154,785.

So we effectively lost out on £70,000 / $95,000.

That’s no small chunk of change.

Yes, but you’d have had to rent if you’d invested your deposit into the stock market

We would. But if we had stayed in our previous rental — which was in a fancy bit of town — it would have cost just £4,000 more than what we spent on the house's upkeep. And that’s taking into account rental increases. If we moved to the same area as our house, the difference would have been negligible.

OK, but house buying is a long game. You only played it for 5 years; If you’d stayed longer, you would have made more money

I’ll have to answer this one with some historical facts in the absence of a crystal ball. Let’s look at a 15 year period. I’ll be super generous and look at pre-pandemic data, 2004–2019.

The average UK house price in 2004 was £136,976. In 2019 it was £231,829. That’s a 70% increase. In the salubrious pocket of southeast England that I called home, it was a little more at 83%.

In the same time period, S&P500 returns were 285.57%. Because of a little something called compound interest.

Your house cannot compound.

The stock market is really risky. Your great grandfather put all his money into the stock market once and lost it all. A house is a safe investment

This was my mother’s two-cents when I told her about my no-house plan.

A house is not always a safe investment. House prices do fall, sometimes a lot. You only need to look at the 2008 housing crash to see that — prices fell by 20% and took 6 years to recover.

And the risk of investing in the stock market has vastly reduced since the advent of index funds in the 1970s. To lose all his money, my great grandfather likely picked a few stocks of some companies that tanked.

Besides, your house could burn down, and the insurance company doesn’t pay out (it does happen). Then you’ve lost all your money anyway.

When you buy a house, you’re not at the mercy of other people’s whims — how they decorate the place, if things go wrong, if they decide to sell. You have control of your own place

OK, we’re into the softer stuff now, which is still important to address, so here goes.

Yes, the rental market, particularly in places like the UK and the United States, SUCKS. You are indeed at the mercy of your landlord — they can kick you out with hardly any notice, they might not fix things that go wrong (I’ve been there with — outside temperatures of 15 degrees Fahrenheit and a broken boiler for a week). The level of decor and appliances may be shoddy.

The lack of rights for renting tenants is atrocious. We should be lobbying for better rental conditions, similar to those in Germany, Austria, and Spain. With longer leases, fewer rental increases, and more control over what you can and cannot do with the unit.

But — and I can’t stress this enough — just because you buy a house does not mean you have control over it.

What if your nice neighbours move out and you end up with neighbours from hell?

What if Japanese knotweed invades your garden?

What if a house across the road is offloaded on the cheap, thus lowering the benchmark for how much your house is worth?

What if you can’t sell your house because, I don’t know, a global pandemic / housing crash / there just aren’t enough buyers wanting what you have to sell?

And this isn’t taking into account the great swathes of the population who overstretch themselves on buying the house in the first place (we’re talking 74% of first-time buyers). When the boiler packs up, or the roof leaks, or damp creeps in, how much control do they have over fixing these problems? 40% of Americans don’t even have enough savings to cover a $400 bill.

That doesn’t sound like having control to me.

I’m concerned you’re pulling out of the housing market. Your Uncle Dave did that once, and house prices went up, and he lost a lot of money

My mother again. She knows a lot of people who lost a lot of money. And frankly, Uncle Dave should have been more sensible with where he put his money. If financial education wasn’t so woefully poor, perhaps he would have known better.

And seeing as I don’t intend to enter the housing market again, I’ll not be lamenting the pathetic gains I could — maybe — make if I stay in it.

But you loved your house! Surely that’s worth something

I did — I loved it. And there are many good reasons for buying a house, but none of them relate to using it as an investment tool. Even me, with a huge 50% deposit on a low priced house, didn’t beat the stock market.

And I didn’t love the restraints of house ownership. I hated the remodelling. I am not a person who thinks a weekend spent redecorating is a weekend well spent. I hated that it tied me to a job to pay the mortgage. I hated that it took me 2 months to buy and 4 months to sell, costing me £6k in the process.

Buying a house may have many advantages, but your freedom is not one of them.

Because you only realise any investment gains on a house once you sell. For someone interested in financial independence — as I am — it seems ludicrous to tie your money into one of the lowest-performing, hardest to access kinds of investments out there.

Now, if you’ll excuse me, I’m off to pop the Champagne. Because, as of tomorrow, I’ve finally unlocked the gains I made on my wonderful house but a shitty investment. It may be £70,000 less than it could have been — this is the price I pay for a late-in-the-day financial education — but it’s not a mistake I intend to make again.

And don’t worry mum — I promise I won’t lose all my money.