I have been questioning myself on this issue for some time now and I posted similar question here , https://www.workingus.com/bbs/view.php?id=life&page=1&sn1=&divpage=1&sn=off&ss=on&sc=off&select_arrange=hit&desc=desc&no=2605
, as well but it seems nobody has clear understanding on buying primary residence and investment. I have been told by many “savvy guys” that buying bigger (whatever you can afford) is the best investment.

While I was talking to my wife I had my break through. Basically, I was SO stupid.
My answer is a buying a primary residence is far from investment.
Simply, think about compareing the following 2 cases.

Case 1: buying a less expensive house with monthly mortgage $1000 and putting extra $1000 toward principle each month
Case 2: buying a expensive house with monthly mortgage $2000

Both cases, I spend $2000 monthly. However, case 1 builds much more home equity and pays much less property tax and much less interest.

Then what are the advantages on case two? (My wife likes to answer this one) A better and luxury life! But I say that’s for a “Spending” not for a investment we talking about, right?

What about the tax break every savvy guy is talking about?
Actual effective mortgage rate = Interest rate x (1 – Marginal federal income tax rate – State income tax rate)
The tax break can give you basically low APR on your morgage. That’s IT. It can be about 2-3 % lower than your mortgage APR, depending on your income and your state tax rate. That’s a fraction of your home equity you gonna build when you go with case 1 and also which is not the return from your investment but just simply you are paying less interest. Of course, you will get the same less interest for case1. So it’s no advantage over case 1 from begin with.

So my friends/”savvy guys” was telling me about the buying bigger house (primary residence) gives me a chance to build up home equity and giving me a tax break was not quite true.

Am I suggesting buying a small house and paying extra money towards your principle? NO! Absolutely not!
I don’t think that’s the smartest move. I’m just comparing 2 cases here. But I’m saying that’s the extra $1000 you should invest not paying extra interest on the bigger house, probably with tax-deferred account.


Good luck.

Your conclusion assumes stationary real estate market and good stock market. If we are talking about rapidly appreciating housing market like that of Southern California has been so far, the rising house price could well surpass any extra interest payment and property tax. Also there is no guarantee that stock market will do well in your time frame. That is why I said you have to consider your local housing market and all.

Good point, rr,

My assumption was “So my simple assumption is that average house appreciation, say 5% per year. and any index for the market growth.”

what do you think of average house appreciation then?

I think “(national) average house appreciation” is less meaningful than “expectation on your LOCAL housing market”.

Of course, when you apply for yourself, yes, you have to use your numbers and rate. That’s given.

However, my point here is that your house appreciation rate should be much higher than you think to beat all those odds(interest payment, property tax, maintenace fee, transaction fee, insurance, and more).
How high your house appreciation rate can beat all these? Well, plug your number.

I just wanted to talk about what I found what everybody thought the greatest investment ever was not so sweet.