Most Americans treat the house that they live in as a monetary investment, perhaps even the largest investment of their life. This is bad, because one’s house is generally a horrible monetary investment.

Take for example, a single family house that is purchased for $100,000 with 5% down. Let’s assume the following:

• 95% of the purchase is financed at 6%
• long term housing appreciation averages out to 3% a year
• no primary mortgage insurance is being paid

At the end of 30 years, the house would be worth approximately $242,000. Seems pretty good, until you look at some other expenses associated with the property:

• mortgage interest payments: $110,000
• taxes: $47,500
• homeowner’s insurance: $7,500
• 5% sales fee: $12,000

Total expenses come to a whopping $177,000. We’ll add the $100,000 they paid in principal, and now the house worth $242,000 cost a total of $277,000 not counting tax advantages. Adjust for tax advantages at a 25% income tax rate, the total cost is still $237,000. Throw in a new roof, a couple of paint jobs, and a few remodelling projects, and it’s fairly clear that even if our example doesn’t include all the details that no money has been made on the house.

Seems depressing doesn’t it? If you think of the house that you live in as an investment, then yes, it is. Here’s the good news though - instead of thinking of your house as an investment, think of it as a savings account. After 30 years, you would have saved a whopping $230,000. Compare this with the $0 you would have if you rented the entire time, and all of a sudden, things don’t look so bleak.

Now, think of that rental property you own and ask yourself why it is an investment. You’ll quickly come to the conclusion that it’s an investment because your tenants are paying for most of your costs(including the principal payments on your loan). By paying down your loan, they are effectively putting cash into a savings account for you, and at the same time, this “savings account” is growing in value at 3% of the total value of the house per year, which for the first few years of owning a property that is leveraged 95%, translates into a 60% return on investment each year. Not too shabby.

Keep in mind that these analyses are monetary only. They do not take into account emotional and other personal benefits derived from owning a house, nor do they address the fact that you have to live somewhere!

Scifi writer Cory Doctorow has a blog entry about giving his latest work away in ebook format for free. He gives great, practical, economic reasons for why. A good read for the entrepreneur thinking about the future of intellectual property.