Ask the grumpies: Is a single house a good investment for retirement?

Amin asks:

My husband and I own a house in a city with a very high cost of living and expensive real estate. We bought the house at a very good price because while it was structurally sound it needed (still does) some aesthetic renovations. We currently have a lot of money saved up, and we’re debating what to do with it. My question is basically: are we naive to think that putting in new windows, finishing our basement, and upgrading some insulation would be good investments? We put money into TIAA-CREF every month and our universities match our contributions, but we’re hoping that in 20 years we could sell our home, buy something smaller or outside the city, and use our profit for retirement. Do you think real estate is a reliable investment? Homes in our neighborhood are currently in high demand and often sell within a few weeks (sometimes with cash offers!), but I worry that the real estate market is too fickle and unreliable for retirement plans. Any advice?

Investing in a single property is a high risk potentially high reward proposition.  No, it is not a reliable investment. Sometimes you get lucky and sometimes you don’t.  In addition, everywhere outside of California, increasing home value leads to increasing property taxes which make the cost of ownership more expensive.  So no, don’t rely on a single house in a single real estate market as a big part of your retirement (most people who have retirement wealth have that from their house, but that’s because they don’t have any other wealth).  It might work out but it might not.  It is far more risky than a diversified portfolio of index stock and index bond funds.

If you’re talking 20 years time, then most of the renovations you’re talking about will be out of date and not worth as much in the market at that point anyway.  Possible exceptions for things that tend to have a high return, like adding a second bathroom.

That doesn’t mean you shouldn’t renovate if you can afford to do so and want to.  Insulation and new windows can cut your energy costs (which is a form of investment depending on the break-even point).  Finishing your basement can increase the usefulness of your house.  But you shouldn’t consider them investments in the same way that your 403b portfolio is invested.  For the most part, these renovations will be consumption.

In terms of how much should you save for retirement, you should aim for at least 15% of your income, and more if you have catch-up savings to do.

18 Responses to “Ask the grumpies: Is a single house a good investment for retirement?”

  1. First Gen American Says:

    For me, I think the housing investment thing is more of a cash flow question. If you retire mortgage free and now your expenses are way low, then yes, it might make sense to own a home and keep your monthly out of pocket costs low. If your house is worth a fortune and you are paying tens of thousands in property taxes a year, then I don’t think it’s necessarily a sustainable long term plan as renting may be a cheaper long term plan and give you some mobility as well to move to a cheaper area or closer to kids or whatnot.

    For house upgrades, it should never be just about the ROI. There are charts on the Internet. No upgrades return 100% of the money in terms of resale. So if it’s anything, it is a losing investment unless you factor in things like energy savings or quality of life upgrades over the time horizon you will be living there for. New windows were pretty huge for me as many in my house were broken and painted shut and very hard to clean. Being able to open my windows was important for me.

    Being on my 3rd junky home, here are my 2 cents. Insulation almost always pays for itself in less than 5 years. I think my attic job was like 18 months and it was relatively cheap.

    New windows are a toss up…it really depends on how bad they are. If they work and are not obviously really bad (rotten windowsills, cracked panes, big gaps in the sills, don’t stay open) then they could be a detractor on the house when it comes time to sell.

    Finished basements…also it depends. Around here the basements tend to inevitably flood and many basement remodels are do it yourself jobs wrought with problems, so to me it was a detractor. I think this one depends on what region you live in.

    Perhaps a modified approach is best for you. It sounds like you may want to set yourself a home maintainance budget that keeps your house up but doesn’t pour a ton of money all at once. If your gut is telling you it’s a risky use of money then replace Windows in one room and see what happens. If you say, wow…how did I live without these windows for so long, then do more.. After all, 20 years is a long time to live with crappy Windows. If it doesn’t really make a big difference then maybe the money is better spent paying down your mortgage balance or otherwise invested. Good luck.

  2. Susan Says:

    House-as-retirement is really an artifact of the Boomer generation and their parents. Boomers who first bought in the 70s have done fantastically well. Their children who bought in the 90s or 00s have not. That’s just how the housing market has done, and I don’t see that big 80s – 90s boom ever happening again.

    Another generational truth is that boomers were more likely to stay with one company, and thus stay in that house, for decades. More recently, job-switching is a thing, and switching houses means multiple sets of transaction costs cutting into long-term gain.

    So, no, I agree that housing these days is more froth and bubble than nest egg.

  3. Leigh Says:

    Will these improvements make your life better while you’re in the house? Can you afford to do them while still saving enough for retirement? If so, then they seem reasonable. Don’t consider upgrades in terms of whether other people will like them too unless you plan to sell very soon. Would making these changes make you less likely to hunt out a different house and are they cheaper than moving?

    Insulation and window improvements can cut your energy costs like nicoleandmaggie said, but they can also increase the comfortable temperature in the rooms. My electricity is really cheap, but I would love the idea of insulation and window improvements for the fact of then the temperature inside would be much easier to moderate.

  4. Amy Says:

    I have a question that touches on some of the same issues. Sometimes I read advice like, “You should have X in savings/net worth in order to retire” or “You should save X% of your income in order to retire.” And it doesn’t seem specific or individualized enough to be of much use.

    For example, are those who talk about “savings” really talking about net worth? liquid net worth? or what? I live in a high-cost-of-living area, and I might have a vast amount of net worth, almost entirely wrapped up in a house. (Indeed, many people here have huge difficulty saving much of anything if they buy a house — not that renters are able to save, either.) Obviously, that doesn’t give me anything to live on if I retire, unless the market stays up and I sell my house and move somewhere cheaper. And yet there is huge value to owning your home, not because it brings inflows of cash but because it reduces your outflows once you pay off your mortgage. There is a huge difference between having a certain amount in liquid net worth and renting, and having the same amount in liquid net worth and having a home paid off!

    I tend to believe (at least for myself) that, if you can’t afford to buy a home in a particular location and pay it off by, say, age 65, then you can’t afford to live in that location. Even if you don’t want to retire, you may at some point become less able to work and be unable to keep generating enough income to deal with increasing rents. So is there any guideline that is more specific than that you should “save” $X or X%? Like a guideline as to how much or what percentage you should save or have in liquid net worth, depending on whether you rent or own, or depending on whether you are in a high- or low-cost-of-living area?

    • nicoleandmaggie Says:

      “because it reduces your outflows once you pay off your mortgage” is true in expensive areas of California, not necessarily true other places– the rent vs. buy market isn’t the same everywhere and property taxes can go up a lot everywhere that doesn’t have prop 13. Owning a house really does have a lot of costs after the mortgage is gone– property taxes, insurance, maintenance, etc. In perfect markets, the return from owning would be the same as the return from renting and putting the additional money in the stock market. But there is stickiness so things vary depending on geography.

      • Amy Says:

        Well, I know that Proposition 13 sure does help to give an advantage to long-time homeowners. But I have seen versions of that phenomenon of property taxes being held down in at least two other places where I have lived. And it is true everywhere that tenants end up paying all the costs of home-ownership in addition to generating a profit for owners — that’s the point of having tenants. And markets are REALLY FAR from being perfect in the area of rent-vs-buy. Especially in high-cost-of-living areas, people cannot choose freely between renting and buying because vast numbers of people can’t ever save up enough for a down payment.

      • nicoleandmaggie Says:

        Our prop taxes were held down until the recession when the county suddenly needed a lot more money. Now they increase it each year seemingly randomly. This past year they revalued our home at 10% more than they valued it at last year, meaning our property taxes will go up 10%. Zillow doesn’t agree with them and we have to decide if we want to pay someone to value our house (another cost) because that’s the only way we win when we contest the increase. And the contested value only lasts for one year, at which point they increase it again.

        Obviously markets are far from being perfect. That’s why there is so much regional variation in whether renting or buying is better. Credit constraints is only one part of it. It is not always better to buy. NYTimes has a calculator that goes through the rent vs. buy details and when the break-even point happens if at all.

        We are currently renting out our house where we normally live for less than it is costing us to keep it, especially once you include maintenance, risk, etc. There are a lot of costs in landlording besides just the mortgage.

        Even in CA, which is a really weird market, five years ago the housing market was bottomed out and there were lots of foreclosures. People lost a lot of money they couldn’t recoup because they couldn’t hold onto the house waiting for prices to double again (unlike index funds).

        In answer to your original question, there are a lot of calculators on the internet for more specific retirement circumstances. Heuristics (like save 15% for retirement) are based on assumptions like your spending will be 80% in retirement what it is during the year, you’re not receiving an inheritance, etc. They work better than putting one’s head in the sand. But a fee only financial planner with fiduciary responsibility is another way to go.

      • Rosa Says:

        property taxes may be held down (though, really long term, that ought to hurt value by making the stuff property taxes pay for, like schools, parks, and roads, degrade) but upkeep costs only go up as a building ages.

  5. chacha1 Says:

    Oh goody another house question. I love these. :-)

    The cost of being in a house, even without a mortgage, is something that is nearly always underestimated. It’s not just property tax. It’s insurance, maintenance, and utilities – costs that all get higher as the house gets bigger. My MIL lives in San Francisco; it costs roughly $1000/mo to stay in that house.

    The cost of moving out of a big house into a smaller house is also underestimated. The longer you have been in a house, the more likely it is to be packed full of crap that you used in year 1, 5, 10, or 15 and just never bothered to get rid of. Getting rid of stuff takes a lot of time; and if you don’t have a lot of time, it will cost money.

    Ability to adequately maintain a house goes off a cliff when you are older. Unless you are Jack LaLanne, you won’t have the physical capacity you did in your youth. You also – in retirement – won’t have the disposable income that makes freshening up the window treatments, the paint job, or any other cosmetic fixes relatively painless. Without a reasonable retirement income, the only way to pay for major fixes like a roof, windows, new HVAC etc is to take a home-equity loan. And then your “retirement investment” is encumbered.

    The only way to realize the investment value of a house is to sell it. If that is the plan, then carry on, but plan to sell it at the highest point of the market that you can, as close to your projected retirement date as you can. You need to be ready to sell it at more or less a moment’s notice so that you can hit that high point. You also need to have actual MONEY because shit happens, and the market may be in the toilet for the ten years bracketing your projected retirement date. (People in California think the market will never really get bad again. People are delusional. A big earthquake, or a failure of the water system, and people will be leaving in droves. Point being, you have to look at more than the history and trends of home pricing. You have to look pretty far out at what the employment market is likely to be in your area; people will not buy a big house if they cannot get a job. See: Detroit.)

    As to renovations: do renovations that will reduce your COL and increase your QOL. The investment value of a house nearly always rests in its location and its permitted square footage; the older a structure is, the more likely that a buyer is going to do a tear-down and rebuild anyway (especially in California). A renovated bathroom in a 60-yr-old house is not going to materially change the valuation.

    Frankly I would take half of your “lot of money” that is saved up, and put it in the most tax-advantaged retirement account that you can. And THEN think about how best to deploy the remainder in improving your house so that you can live in it with maximum quality and minimum cost.

    • gasstationwithoutpumps Says:

      chacha1 said ” the older a structure is, the more likely that a buyer is going to do a tear-down and rebuild anyway (especially in California)”. I believe that Californian cities have more restrictions on teardowns than many other parts of the country, especially on buildings old enough to have historic preservation status.

      For years, Hinsdale, IL was teardown capital of the country, and teardowns are still common there.

      • chacha1 Says:

        Here in L.A. there is a loophole where they can leave one original wall standing and still call it a “renovation.” :-)

  6. SP Says:

    New windows, finishing a basement, and upgrading insulation are things that mostly would not become dated in 20 years. In my very limited experience, new windows and insulation are unlikely to increase the value of a house much, even if you sold it next year. Old windows are a minor detraction, but modern windows are something you almost don’t notice. That doesn’t mean they shouldn’t be done. They make a house nicer to live in and are part of an overall maintenance of a house. I agree it is a naive to think of this stuff as investment into retirement though.

    I was thinking the other day about the big drawbacks of getting starter homes in Cali, specifically because of prop. 13. It will probably motivate us even more to keep our house as long as we stay in the area (which could be forever, but who knows what will happen?). We discuss the “what is the worst thing that happens if the market tumbles at an inconvenient-for-us time?” question now and then. The answers are certainly not great news and would hurt – but they are something we can live with.

    • nicoleandmaggie Says:

      Unless you put faux wood paneling in that newly finished basement back in the 1970s and now it’s the 1990s… (The Midwestern furnishing the basement story.) Though I guess one can paint over that. The textured plaster/paint thing also really dates a place and is harder to get rid of. 20 years seems like exactly the wrong amount of time for selling after a fad.

  7. Amin Says:

    I originally asked this question, and I’m realizing in looking through these (very helpful!) answers that things are so region specific. I’ll out myself a little by explaining that I live in NYC, but not Manhattan– in the outer boroughs. Our property taxes are low compared to places outside the city. We also live in a neighborhood that’s been landmarked as historic by the city. Our house (attached to two other houses– so no chance it will be torn down unless the whole block is!) has windows from 1928, which means that when we replace them they have to look like windows from 1928. It’s expensive but you can immediately tell which houses on the block have done this and which haven’t. Anyway you’ve given me a lot to think about. Thank you! We make decisions slowly so we haven’t moved forward on any of this!

    • nicoleandmaggie Says:

      The bottom line is: Do it if you can afford it for the consumption value, don’t do it as an investment for resale value 20 years from now. (Except to the extent that you save on things like utility bills etc.)

    • Rosa Says:

      we replaced windows from the 1940s (which were oddly sized because they had replaced windows from 1902) and it made a HUGE difference in quality of life. Like, we were able to rearrange the furniture because the giant cold drafts that used to blow across the living room were gone. The windows are easier to open, they don’t have lead paint on them, they don’t frost over in winter. If we had kept the house warm in the first place, they’d save us on our heating bill – instead we pay the same amount but feel warmer. The one and only downside is the quality of light – we got the most energy efficient windows possible, and they make the sunlight look blue and cold. They’d be worth it if we lived in a sunny place, but up north if i did it over, I’d skip that.

      That said, what Nicole & Maggie said about return when you sell the house is totally true. Buyers just don’t value useful stuff. Cosmetic stuff gets way better return on sale, and even that isn’t 100%. So windows are only worth it if they make the house look nicer.

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