Is Your Home Considered an Investment?
It is a Real Estate so as a piece of Real Estate it will appreciate and gain value over time. As an Investment, it’s like putting in money in GIC and you are investing it and its growing and year after year it accumulated wealth through the power of appreciation. Depending on the market it will probably do well for you. Appreciation varies anywhere from 2-5% depending in the area that you are, some places are flat some are more than that like metropolitan areas.
What you have to look at like any other Investment is what you are paying to service that investment. What is the debt that you are paying? For example: when you buy a house you have to pay for the mortgage, taxes, insurance, interest all those monthly expenses associated with owning a home. In addition, you also have to up keep that home. You have to mow your lawn, paint, replace windows, and do any renovations, all that needs to be taken into consideration if you are trying really justify your personal residents as an Investment because that true return on investment has to take into account all the costs associated with owning that property.
Some people try to justify, well I have to live somewhere so I might as well make money at it. So they will buy a house and it will appreciate and I will make a return. So, if you do the calculation and that is based on the area that you live in and if you decide that you just want to rent and take all that extra money the difference of what your rent would be and what your ownership cost would be and in most cases it would be significant.
For Example: Let’s say you go out and rent a house similar to the one you are living in at $2000.00 a month. You look at all the expenses associated with owning a house mortgage, interest, principal, taxes, insurance and taking into the account all the time and money you spend on maintaining the property.
Generally your personal residence is not really an investment. Because if you look at taking that money that you would have paid for the extra cost associated with owning vs renting a similar property and invest that in a good return investment, like a second Mortgages at 10-12%.
Another thing you can do which is a variation to this is as you pay down the principal on you home you go out and you take out a line of credit on that home. So you get what is called a Homeownership Line of Credit. So let’s say you have owned your home for 5-10 years and now there is $100,000.00 worth of equity on the home.
Get a line of credit on that equity, take that money and loan it out to someone else and make 10-15% return offset that with the cost of that loan of let’s say 3-4% and you are making a net return of about 10% on the equity on your home. Everybody should be doing that.
People come to me all the time saying their house is paid off and owe nothing on it. I tell them, “That’s too bad” You have dead equity in your home. Why don’t you refinance your home take the equity out and put it in very secure real estate based investments.
So if you are looking at your home purely as an Investment it’s not, in my opinion. The lost value of the money that you are spending with those extra costs associated with owning a home and in general the overhead to maintain that. Its considered a liability because you have to maintain that property and it’s not getting you any return. Other than the saved costs of your living Expenses.
One other variation would be if you are living in a duplex or triplex or fourplex and you rent out the other units and live in one. In this case you can live rent free and get the other units to pay your rent and cover your expenses.