How does your home compare to stocks as an investment?

The former home of Groucho Marx, the cigarchomping, roundglasswearing comedian of the 1920s, is up for sale in Long Island, N. Y. For the low price of just $ 2.3 million, you too could own the five- bedroom, 3,800- square- foot home built in 1926. Marx paid a scant $ 27,000 for it in 1926 ( roughly $ 465,000 in 2023 dollars) and lived there for a few years before selling and relocating to the budding Hollywood scene on the West Coast.

Had Marx stayed in his home and ultimately gifted it to his children, how would his investment have performed over the years? Like many of those interested in real estate, I was curious to see how the numbers worked out. An investment purchased for $ 27,000 ultimately sold for $ 2.3 million. Seems good, right?

As an investment adviser, I tend to compare returns to that of the S& P 500. Using a starting date of January 1926 and compounding until August 2023, the S& P 500 had an annual rate of return of 6.21% ( excluding dividends). This means the $ 27,000 would have become $ 9,319,839. If we include dividend reinvestment, that number jumps to an astounding $ 327,591,227 or an annual return of 10.18%. Can’t you just see Groucho saying in his clever way: “What a difference a few percentage points make over the long term, eh?”

Compared to the real estate return of roughly 4.69% per year on this home, the outcomes prove fairly clear. Consider just the dividend income of the comparable S& P investment, which starts at roughly $ 1,400 per year in 1926 and finishes in 2023 at roughly $ 143,000 per year, and we see an annualized growth rate of 4.88%. The dividends alone grew at a faster rate than the property! Now obviously this is just a thought exercise. Under these circumstances, someone would need to pay the dividend income taxes from an external source and allow the returns to compound untouched for almost 100 years.

But how does this scenario change when the housing market booms? Or does it change at all?

Over the last several years, many people have seen their homes appreciate at a previously unthinkable rate. Those who purchased a home pre- COVID saw value increases of as much as two to three times their purchase price. But should you think of your primary residence as an investment? Furthermore, should you consider allocating a large portion of your investment to real estate? A 200% return in three years is astronomical, and likely the source of this pervasive question.

With the dramatic rise in prices, it’s easy to attach “home” to the thought of “investment.” We believe your home is an investment, but not the usual kind. Let’s explore why.

For an honest evaluation comparing an investment in real estate versus a portfolio of businesses ( stocks), a few key characteristics must be considered.

The first and most obvious is leverage. Traditional home financing typically involves a mortgage, often with 20% or more as a down payment. Let’s use that 20% down payment as an example. Effectively for every $ 100,000 down, you can purchase $ 500,000 of real estate. We’ll assume you pay a fixed interest rate for 30 years. This leverage magnifies your equity if the home value increases by 10%, going from $ 500,000 to $ 550,000. In this example, your equity goes from $ 100,000 to $ 150,000, resulting in a 50% gain should you sell the property. By virtue of the leverage, your economic gain is magnified.

Conversely, borrowing to purchase stocks is limited to a maximum of 50% of that stock’s value via a method called margin.

In other words, with the same $ 100,000 to invest, you’re limited to purchasing $ 200,000 of businesses. With 10% appreciation, from $ 200,000 to $ 220,000, your gain would be $ 20,000 on $ 100,000 of equity, roughly a

20% gain. Other variables excluded, real estate has an unfair advantage of permitting greater leverage.

But with the leverage in real estate come increased expenses. Seemingly every Denver homeowner was schooled on the impact of large valuation changes by Colorado Property Assessors this past year. Property taxes are real yet often forgotten when an investor considers their rate of return over time. This is especially true when considering a home purchased 20 years ago for only $ 250,000 which is now worth north of $ 1 million. Add the annual property taxes to the original investment, and the calculated return changes dramatically. Include increases in property insurance premiums, and that “amazing investment” suddenly doesn’t look so stellar anymore.

Don’t forget maintenance and upkeep, another expense that’s generally swept under the rug when comparing investment performance. Whether it’s general fixes or elaborate remodels, the expense of keeping the home safe, habitable, and enjoyable is still a necessary evil.

I’m not telling you to avoid investing in your residence. On the contrary, we believe it can be an excellent place to allocate capital for a balanced net worth. But our view is that it’s an investment in your lifestyle, your family, and where you rest, rejuvenate, gather with friends and play. These home ownership “dividends” can’t be quantified or measured. And if your home happens to appreciate significantly, all the better.

The generalization that real estate is a better investment than a portfolio of the largest businesses in America over a long period of time is simply not accurate. So instead of thinking about your house as a financial investment, enjoy it for what it is: a home for you and your family.

Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. He is the author of “Blind Spots: The Mental Mistakes Investors Make” and “Intelligent Investing: Your Guide to a Growing Retirement Income.” He was named by Forbes as a 2021 Best- in- State Wealth Advisor, and a Barron’s 2021 Top Advisor by State.

This column is not intended to provide specific investment advice or recommendations.