Home, Investment, or Both

 

I’ve heard it said that your primary home, the place you live, is not an investment but I disagree. I have been very clear that it is not an ATM, a source of cash to be used to finance an unsustainable lifestyle but I do believe it’s an investment. I know I’ll get strong opinions on this from a lot of people but first let me explain.

When people hear the word investment they often think of stocks, bonds, mutual funds, or business ventures but there is a lot more that you can invest in including intangibles. You can invest in time, spending time with family and friends. You can invest in yourself by exercising and taking care of yourself. You can invest in knowledge by being curious and always learning.

When it comes to your home it is an investment in stability, in yourself, in a better future. Handled recklessly buying a home can lead to disaster. Handled properly, like other investments it can provide decent returns. How? Let’s start with a simple example.

Assume you’re 25 years old and are buying your first home. You spend what you can afford and put a proper 20% down payment (crazy right? – it shouldn’t be) on a $100,000 home (keeping the math simple here). You would have liked to buy a bigger $200,000 home but simply couldn’t afford it. Ten years later, assuming “normal” appreciation of 3% per year you sell your home for $135,000 the equity you’ve built up plus your other savings and investments allows you to purchase a $200,000 home.

ToolbeltNow let’s look at two other options. First, you’re a handy person and over the years you make improvements to the house at considerably less cost than if you had hired people to do the work. When you sell the home in ten years it commands more than the “normal” price increase and you sell it for $150,000. Now combined with your other savings and investments you can afford to buy a $250,000 home. Second, let’s assume that you paid extra toward principle each month and were able to build even more equity. When you sell in ten years at $150,000 you can now afford a $300,000 home.

The term investment doesn’t mean you’re going to get rich or that you’re even going to get a positive return, any investment has risk and that goes for housing as well – I think we all know that now.Home Values Chart

People who say it’s better to rent point out facts such as you’re not paying property taxes and insurance but the fact is you are. As a landlord I make sure your rent covers my expenses which include property taxes and insurance. When you leave the rental you have no equity to show for it.

To me a home is a great investment because it serves two purposes; the first is as a place to live and the second is as an asset that gives you more options in the future. Used properly a home is indeed an investment just not a get rich quick scheme.


Posted in General, Money and tagged , , , by with 2 comments.

Comments

  • Hi AJ, I completely agree. A primary home is absolutely an investment. That it was purchased to be lived in does not dismiss that it usually will appreciate. I’ve seen some remarkable returns even just in a 5 year period.

    While many purchase other properties solely for purposeful investment, it can be a dangerous game. Tenant rights are upheld over the rights of the landlord so much so that it can be detrimental financially and emotionally. You really have to be careful and do your homework to make sure you find the right tenant fit.

    • AJ says:

      Thanks Shelley – I think the key is to respect the market. A home is not a lottery ticket or an ATM and is a long term investment rather than short term (for the most part). As for tenant rights, it can be very scary. I’ve only been involved with short term vacation rentals at my investment properties and that’s worked out just fine.

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