February 5th, 2016 7:06 AM by Jackie A. Graves, President
It stands as the conventional wisdom of the real estate
market—the mantra you’ve likely heard over and over from well-meaning
friends or family, and even your pals here at realtor.com®.
It goes like this: “Buying a home is the best investment you’ll ever make.”
Which sure sounds pretty
awesome if you’ve just bought a home, but let’s take a big step back. Is
In many ways and in most cases, yes. Homeownership is a
critical step to building wealth and financial security. After all, you’re
no longer throwing money at a landlord who can jack up your rent to
stratospheric levels, all without giving you a shred of equity. More?
Owning a home is also a great way to put roots down in a neighborhood and
explore your DIY hankerings while reaping the benefits. The list of
advantages goes on and on.
But all that said, some experts
argue that a home is actually not the ultimate “investment”—nor is it guaranteed
to gush cash once you retire.
What, what?? Are we really
telling you not to invest in a home? Of course not—we just want you to have a
sense of perspective.
“A home is part asset and part
shelter,” says Jonathan Smoke, chief
economist at realtor.com. “As an asset, it has pluses and minuses, and since it
represents the single largest investment that most households make, it makes
sense for consumers to understand the primary downsides and risks.”
Here’s a quick rundown. We’ll
even start with the downsides:
is a concentrated asset that ties up funds.
Homes can be a great form of
forced savings, but it’s not so easy to get to those savings. In order to tap
your equity, you’ve got to refinance the house, take out a home equity line of
credit, or sell the property. All of those options require a significant amount
of time and often incur fees.
lesson: For starters, you should never put all your eggs in one
basket. Experts recommend that your monthly house payments should not exceed
28% of your gross monthly income, and it’s important to have a separate savings
account with at least three to six months’ worth of expenses. Another way
to mitigate your risk is to plan to stay put.
“Don’t buy a home if you’re
planning on leaving in three to five years,” says Michael Foguth,
founder of Foguth Financial Group in Howell, MI.
Smart investments make
money on their own. And even in the best-case scenario—you bought your
house five years ago for $300,000 and just sold it for $350,000 for a return of
15%!—there’s something you may be forgetting. How much money did you spend
on your home over those years? For example, what about that $20,000 kitchen
renovation, or the $10,000 you spent replacing the roof? These
big-time expenses can quickly eat into your “profits,” so don’t go
around bragging until you’ve considered them.
lesson: Whatever renovations you’ve made to your home, it’s a mistake to
assume you’ll make 100% of that money back when you sell. Renovations vary
wildly on their return on investment. Here’s a list of the top 10
home renovations that make the best (and worst) return on investment.
emotions can get in the way.
When it comes to investing,
making rational decisions are key to long-term success. Only problem: All
that cool, rational thinking becomes difficult when you’re talking about the
place that you live in, where you plan to start a family or while
away your golden years.
“You’ve got to be objective about investments, and it’s just too
easy to get emotionally attached to your home,” says George Guerin,
a Denver-based certified financial planner.
lesson: As much as you adore your home, that doesn’t mean you
should stay there just because of those memories, or a sense of pride
you’re unwilling to let go. Sometimes it makes sense to downsize, sell, or
just move on and make a new home somewhere else (trust us, you will
feel at home again soon enough).
lock in your housing costs.
Over the long haul, houses can
help you build
wealth. They tend to appreciate around 1% per year after inflation,
so you can’t count on your home as a ticket to long-term riches.
“But you also typically won’t
lose money, and compared to the inflation trap alternative of renting, it
is far superior because it locks in your housing costs” and over time your real
costs decline, Smoke says. In the past two years alone, rents
have risen an average
of 4% per year. While home prices have seen greater gains than those, homeowners
with a fixed-rate mortgage haven’t seen any change in their out-of-pocket
savings is actually a good thing.
With mortgages available now
for as little as 5% down, you can use an amortized loan to acquire an
asset that you would otherwise never be able to afford. Your returns
are even greater if that asset appreciates, but in the meantime you’re usually
building equity each month that contributes to your net worth. The longer you
make loan payments, the larger your share of equity, and ultimately you can own
outright an extremely valuable asset. Given many Americans’ inability
to build up savings in
more traditional financial accounts, the forced savings of a mortgage is a
valuable backstop for long-term financial goals.
with valuable tax benefits.
As long as they itemize their
taxes, most homeowners can take advantage of both the property tax
deduction and the mortgage-interest tax deduction, two of the most valuable tax
deductions available to filers. Plus most profits from the sale of a home are
tax-free (up to $250,000
for individuals and $500,000 for couples) as long as you’ve lived in
the property for at least two of the five years preceding the sale.
By Beth Braverman – To view the original article click here