This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Wednesday, October 3, 2007

Your home is not an investment

Posted by Matt
I used to be a big believer in real estate as an investment (two weeks from now, my wife and I will be closing on our third house in less than 4 years), mainly because of the concept of leverage.

For those of you who aren't familiar with the term leverage, it just means that we get the benefits of appreciation on the entire value of the house even though we only "invest" the down payment. This is great, and it does actually work. The Portland area has seen great appreciation over the last few years and real estate has been pretty good to us overall. But:

  1. We're tired of moving.

  2. We're tired of making decisions about our house with prospective buyers in mind.

  3. We want stability for our son.

  4. We found our dream house in a great school district.

  5. Every time we make money on a house, we end up putting it into the next house we buy.

I think the last point is probably the most compelling financial one for me. Yes, we can still technically count the home equity as an asset, but I no longer really think of it as an investment because we'd have to sell again to access it and we have NO desire to do that. We want the new house to be the last house we ever buy.

The good news is that, even if we don't consider our home equity an investment, it is still there in case of emergency (via HELOC) or if we decide to implement a reverse mortgage in retirement.

Overall, I'm happy with our choices over the last few years as all the moving, shopping and building (the last two houses were new construction) really helped us decide on and locate exactly what we wanted.


Kacie said...

I view a home as an investment because eventually, if you do it right--you own it. Instead of throwing money away each month on rent, as you're paying your mortgage, you're buying a little more of that house.

I'm looking forward to buying a home and eventually not having a mortgage. To me, that's one heck of an investment.

Matt said...

I agree that, in many situations, getting equity in a house is better than "wasting" money on rent. I think the crucial distinction is that I think of "investments" as something that I'm planning to be able to sell at some point down the line to make a profit, and I don't want to sell my house. Plus, when you sell your house, you have to find another place to live and I found that our home sale profits were always necessary to put back into the down payment on our next house. Not because we were upscaling; just because the same market appreciation that helped us when selling hurt us when buying.

I would consider a home purchase an investment if you had a plan to periodically upgrade to bigger and more expensive homes and then finally do a big downgrade at the end so that you could use all of the equity build up to pay for your last house outright. I know people who have actually been successful with this.

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