Peter Lynch, one of the best investors of all times, says before you buy stocks you should pass the Mirror Test. What does this test consist of?

1 – Do I own a house? 2) Do I need the money? 3) Do I have the personal characteristics that will bring me success in stocks?

Maybe you don’t fulfill 2) and 3),  but owning a house is definitely a good way to start.

Lately, the current vibe is: own nothing, rent everything. You take your MacBook, your AirPods, your iPhone, all properly paired, and you work from the beach somewhere for a few months until you’re bored and change the vibe. You have no weight of ownership; you own no house, no car; you’re a minimalist, and your mind is clear.

On top of that, you have all the money instead of being stuck in the house, free to invest in a 7% ETF long-term that you can withdraw at any time, where you’re going to invest until your retreat and have X million USD/EUR.

Well, I enjoy freedom, and I agree with many of the advantages regarding renting. Anxiety from owning stuff is real, and you likely benefit from owning only the stuff you really need. When I do long travels on a bicycle or walking, you really do feel that you don’t need a lot, and your mind is clear. I typically carry 3-6 kg depending on whether I go to a hot/cold place with the possibility of rain or not. After a few days, you probably think that you have too many things back at home, which are holding you back. Because things consume energy: break, get old, and they need repairs or replacements, from gadgets to dishes to dogs and fishes. They consume time, so they better be worth it. If you don’t like cycling, you can go for a multi-day trek; you will get the similar feeling. It’s good exercise and helps you prioritise and downsize.

Also, if you don’t know how long you wish to stay in a place, it makes sense; sometimes it is even cheaper than buying. If your neighbourhood is getting worse, full of junkies, you can move much easier, if you have a neighbour that you feel like strangling, or some dog that likes to bark all the time, you can easily move without having to use violence. Also, sewer infiltrations are a big problem… as well as humidity, and so on…

So why am I saying to buy a house?

Well, your first house is much more than an investment. It’s a roof.

Your second house and your third, etc., are just yields, equity appreciation, and problems with tenants. But your first is a different story; it’s real, it’s not directly comparable to stocks or other investments. It acts as a safety net.

If things go south, you have a roof. Imagining your house is paid, you can live pretty much with nothing; you can buy pasta and vegetables and spend pretty much no money. That reduces anxiety, that first feeling of stability, of robustness.

If you bought anything different from a studio, you can rent the remaining rooms to help you live or pay for the mortgage if you did not pay for the house yet. Ideally, you would choose as a first investment a house with some type of income and the possibility to live there at the same time. Either multi-room, multi-floor, an attachment, an attic, etc. Buying an upscale studio in the trendy area with a high comparable price per square meter/foot may not be the best idea. Surely it can go up, but it does not bring a lot of options – and options have value (not the post to talk about options, but they can be definitely measured as value – just assume you have a roof and income in case of a probability of things going bad and discount it). My first apartment was a very cheap 5-bedroom apartment in a neighborhood where things were improving fast. At some point, I had to rent the other rooms… not something you would love, but if you need it, believe me, it’s very nice to have that option.

Even if you didn’t really make the best deal, it’s very likely you make money in the long term. How many people do you know that made a lousy investment in their house when they bought the house 20 years ago? Sure, there are bad investments, if you bought right in the middle of a bubble, if you bought a house full of problems described before, etc., but generally you’ll make money. It’s unlikely you’re going to be wiped out from your investment, even if it was lousy in the beginning – you’ll likely just need to wait more time to compensate for your bad choice.

However, it does compensate to invest time in choosing and negotiating a nice deal as your first investment. Since you have more time ahead of you, it will compound much more than let’s say, if you’re buying a house when you’re 60. Doing 2-3 times your money at 25 is incredibly powerful.

On top of that, you’re much more likely to really hold the house for the long term, as there are many transaction taxes and costs and a lot of work to find another property and change all the things from one house to another. That laziness is a barrier to change. Compare that to an ETF where surely you said you’re there for the long term, but now someone invited you on a nice vacation and with the punch of a click, you’ve sold it. The fact that the ETF is sold by a click makes it feel like cash… you need the mindset to place it as a long-term investment. If you’re not really disciplined, you’re much better off buying a house, as you would likely not save as much as you committed yourself. Same as with the arguments that if you quit smoking, you had a ton of cash; well, my guess is that likely you have just spent it somewhere. You better off spending it on mortgage.

There are other big advantages. The supposed advantage of not committing financially is at the same time a big disadvantage. Let’s say you committed yourself to save X amount per month, let’s say 1000 €, and place it in an S&P 500 ETF. It’s so easy to find an excuse to not save. Either because you now have a kid, either because you had an unexpected expense like car maintenance, or worst, you feel like you need to change a car… (because you deserve it..). If you have a mortgage, you surely will pay that mortgage; you will find a way to pay first, and that way you’re really “investing” 1000 € per month.

You don’t need to “pay yourself” first. You are obliged to. Sure, disciplined people could argue that they don’t need the threat of losing their house to save every month, but I would bet it is a big motivation for the majority of people.

Other big advantages… the list goes on as you can see! Again, let’s say your stocks went down 20% – and again – you said you were there for the long term, so no panic, but now, they went 40% down. Believe me, you would panic. Unless the value you have invested is not meaningful to you, you would suffer. And if you’re investing everything in it, you’re likely to have a big part of your net worth in it. You will convert that value to salary months and years, and how much time and effort it took to save, just to see it go away in a few days/weeks.

As you may remember, you don’t see the price of the house when you enter it. Imagine having the price of the house every time you enter there; it would be painful. Just standing there at the entrance, blood-red color, as it is when stocks go down. But you don’t. And when real estate markets go down, most of the time transactions decline a lot, and liquidity drops, but the fall of prices is not as clear as stocks as you don’t have thousands of houses exactly like yours being traded every day where you have an equilibrium price. Remember that when you see a price of stock, you see the price of the equilibrium, of the “motivated” seller, which does not mean you would be able to buy the entire company at that price.

So… all to say, much less anxiety when prices drop; it’s still a roof! Not a piece of paper that has no value now (stocks are part of the company, that should be the way to see it, but when prices drop significantly, it’s not as easy to remember it like that, they seem like paper that burns).

I have to refer to another advantage… and I could go on, but this one I have to mention.

Where can you leverage yourself 5 to 1 for up to 40 years at fixed rates for a considerable period, like 30 years? In a house, you can invest with 20% down, and you could, up to a few months ago, fix your interest rate at less than 2.5% for 30 years (Europe). This applies to the first house, of course. There is no “traditional” investing where you can do this. You can invest in stocks with margin, but never more than 50%, and if the price of your portfolio goes down, you’re asked to put more money or they liquidate the position. That does not happen in real estate; it can go down, no one would ask you to put more money.

So if the house goes up 5%, your equity goes up 25%. Long-term, the return of the house would be similar to the S&P 500 if you bought an average deal and count the rent plus appreciation (many studies exist, depends on the date, the location, etc. – some refer values above 10%, others below 5%).

Other advantages include the fact that if you sell the house where you live, you are usually able, in most countries, to have some kind of capital gains tax exemption if you reinvest. Some countries also consider the interest paid tax-deductible for your personal income tax. It’s also a great inflation hedge in times like today.

Sum it all up, and it’s probably a great investment for the average investor, which is hard to beat for many of us and requires much less knowledge than other investments.