Is my home an investment?


Recently I received a question from somebody looking into self-directed IRA/401(k) investment for themselves. They said, “I ran this by my financial planner in New York who said to roll over my IRA to put some of its money into my home is illegal.” This statement is technically correct. Putting IRA money into his primary residence would be a prohibited transaction. The disturbing thing about the situation is that these three people (a person, their realtor, and their financial planner) could all be on the same page about something so fundamentally ridiculous.

The misconception

In the past 10 years, many people think “real estate investing” equals “putting money into my home”. Their home can’t be an investment in the first place because they are paying for it rather than having it paid for by a renter.

When somebody wants to help people rationalize buying the stuff they sell, they often call it an “investment”. Bill Clinton started changing the way people thought about government spending (when he was increasing it) by calling it an investment.

An investment or a consumer product?

Selling a primary residence to a home buyer is selling a consumer product. It’s for their use. They can buy what they really need. Or they could get extravagant and buy the Lexus/Mercedes version of a home and spend more. Either way, it’s a consumer product if they are paying for it and using it themselves.

But realtors followed Clinton’s spin move and started calling home buying an investment. This really caught on once Fannie Mae, Freddie Mac, and the Fed all took actions to artificially inflate home prices in order to defer the recession of 2002. Once you could buy this consumer product (the home) and then have it rapidly increase in value (supposedly) and realize this value by selling it or doing a refinance cash out, then the talk about the home being an investment seemed to make sense.

Today, the bubble is over, and the illusion that your home is an investment should be easy to correct. If it was an investment, then somebody else would be paying the mortgage. If somebody else was paying the mortgage, they’d probably live in it instead of you.

It’s not to say that buying a home is a stupid thing to do. That can only be decided on a case-by-case scenario that depends on the buyer and the home in question. Buying a home can be a financially beneficial thing to do in some cases, but it hardly could be truthfully classified as “real estate investing”.

Back to basics: real estate investing means buying properties that produce income. And, yes, real estate investing can be done inside an IRA or 401(k).   😀

Reader Interactions


  1. Jeff,

    You make some good points here. Speaking of distorting the word ‘investment’, the current Presidential Administration is calling an additional 7 trillion dollars in deficit spending an (INVESTMENT). This is outrageous. The word ‘investment’ has been tossed around so much that it no longer has any meaning. It seems as if this word is just cover for our addiction to spending money we don’t have or at least money that we have not printed yet.

    Investment defined compliments of is as follows: The investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.

    I fail to see the connection of how adding 7 trillion dollars of debt to our books can be considered an investment. If it were, then we would see a positive return on the spending/investment, right?. But this not the case, we are on pace to amass trillion dollar after trillion dollar deficit year in and year out as far as the eye can see…

    When we should be saving and moving to cash the government keeps pumping air into the busted economy by propping up failed institutions. Soon we will run out of other people’s money and no one will lend to us. I guess we can ‘print and spend’ our way out of our self-inflicted economic malaise.

    Sometimes I think the only difference between Bernie Madoff and our government is that ol’ Bernie did not have the ability to print money to keep his gig going.

    Goodbye America, Hello Zimbabwe!

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