Your Home is not an Investment

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As a real estate broker that has been in the business for almost 20 years there are two questions that I get asked all the time about buying a home, “Anthony..

is buying a home a good investment?”

or

is now a good time to buy a home?”

 

I wish there was a short answer but there isn’t.  The media will almost always say “Yes!” a home is a great investment and it’s always a great time to buy a home. But I can’t answer the question without exploring the topic in detail.  That’s why I decided to write this article, in hopes it will provide buyers some clarity on these complicated questions.

 

Let’s tackle the first question… “Is buying a home a good investment?”

 

The truth is, for the most part we have all been lied to by mainstream media about why buying a house is a good investment and that information has caused major disappointment to homeowners when the market hasn’t gone their way. This wrong information start buyers off with unrealistic expectations and when not fulfilled, leave the homeowners feeling disappointed and unhappy.

 

What constitutes an investment?

 

Dictionary.com defines an investment as: the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.

 

A true real estate investment property is defined and evaluated based on the criteria in the definition to determine how good the investment property is. Simply put, how much cash flow does the property give in relation to its cost?

 

Basic example of an investment property – A single family home is being sold for $300,000. Rental income is $1,800 per month and after any expenses (property taxes, utilities, insurance) the net income is $1,500 per month or $18,000 per year. Divide the income by the cost $18,000/$300,000 and that gives you the rate of return on the “Investment” or ROI, which in this example would be 6% return per year.

 

An investor can then take that rate of return and evaluate if at the given price, the property is worthwhile to purchase.

 

When real estate investors are counting on “appreciation” to determine if a property is a good investment it can get really complicated. They could be talking about buying a commercial property right in the path of future development, buying a distressed property at a deep discount or that can be fixed up to add value, or maybe changing a property’s use from single family to a multi-unit to add value.

 

Most people that are buying a property based on future appreciation are not talking about these type of examples. They are referring to buying a single family home to live in at today’s prices in hopes that the property appreciates. This my friends is not called investing, it’s called speculation and in essence, gambling.

 

For the majority of homeowners the home you live in doesn’t produce income, may or may not appreciate by the time you sell it, so..“NO” your home is not an Investment in the true sense of the word. Even though your home isn’t an investment there are some intrinsic benefits to consider-

 

  • Stability – with a fixed rate mortgage you know what your monthly payment will be, it’s fixed. When renting, it can be unpredictable and will often rise over time.
  • Security -not having to move if the landlord decides to sell.
  • Freedom – make it how you want it. Paint the house the color you love, put in the new floors or cabinets you’ve always dreamed of, landscape the yard, add an addition, new pool? Most of the time when renting you don’t have these freedoms.
  • Hedge against inflation – When the house is paid off you protect yourself against the cost of housing rising or pushing you out because it’s too expensive.

 

If you still don’t believe me that your home is NOT a true real estate investment then consider these situational examples I often encounter:

Example  1 – We purchased a home 3 years ago for $400,000 and now it’s worth $300,000. We have spent money on repairs, interest on our mortgage, taxes and we are now upside down. We bought a home in the first place because we thought it was going to go up in value.  What did we do wrong?

Example  2 – My company is downsizing and I am losing my job. I purchased a home 4 years ago and need to sell it because I can no longer can afford it. I owe $275,000 but it’s only worth $250,000. What can I do?

Example 3 – We bought a home last year, but we want to move. It looks like it’s worth about the same today as it was when we bought it. I know there are expenses in selling and marketing the home for sale. How do we get our down payment back in order to purchase another home?

Example 4- We purchased a home in a town close to our new jobs right after we got married. Now we are faced with a job relocation and we want to move closer to family. We owe more than the house is worth and if we decided to rent it out, we would be coming out of pocket over $1,000 per month. What can we do?

In the short term the market can be very unpredictable, making moving or selling a difficult decision or almost impossible. If we can start to look at buying a home differently and consider the fact that your home is not a true investment then we can move onto the next question..

 

 “Is now a good time to buy a home?” 

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When people ask me this question what they really means is..

“If we buy a home right now, will it be worth more money in

the near future or will it be worth less?”

Future house values could be a factor in purchasing a home if you knew what the market was going to do and when, but I am saying that it shouldn’t be the main factor.  Nobody can time the market with precision and if you try, you will likely lose.  The best thing you can do is buy when the time is right for your situation, even if the market forecast is saying home values will decline. Buying may still be a good option for you!

 

In order to better answer this question we need to take a look at several considerable factors. Here is a short list I put together…

 

  • How long do you plan on living in the area?
  • What are the market rents compared to a mortgage in your area?
  • If you buy now and need to move soon would rents cover your mortgage?
  • Is deducting mortgage interest on your taxes a factor in purchasing?
  • Can you afford the homes in the areas you would like to live?
  • What is the available housing inventory like?
  • Are children a factor?
  • Do you expect a job relocation soon?
  • Is your income likely to change in the future?
  • What is the real estate market doing right now?
  • What are interest rates doing?
  • How much money are you able to put down?
  • How protected are you financially in case of an emergency? What’s your savings look like?
  • Are you over leveraged or have large amounts of debt? (Cars, boats, credit cards, ect)

Navigating these questions before you buy a home can be difficult, but necessary. We can’t predict the future or rely solely on past cycles, but we can be more informed. If you ask yourself some of these important questions and make an educated decision, chances are you will have a favorable outcome. In doing so, regardless of where the market goes you will be more prepared.

The ultimate goal, in my opinion is to buy a home with the intention of paying the mortgage off.  That is truly the only way to make sure you win.

Is paying off your very first house realistic? I would say it’s possible, but odds are you will likely move before that happens because situations often change early in life and those changes may lead you in another direction.  So, with that in mind, plan on keeping your newly purchased home for a extended period of time (consider maybe a 10 +/- year plan) to counter or hedge against potential market fluctuations.

Home ownership is a staple of our country and something we can all hope for and look forward to someday. I don’t want to discourage anyone from buying a home but if we can retrain ourselves to set the right expectations ahead of time, make educated decisions, we stand a good chance of not being disappointed and to be  positioned for a bright future.

I want to Help!

If you know of someone that is considering buying a home please consider sharing this article with them or have them call me. I can help them navigate the buying process, help them set realistic goals, educate them on market conditions and achieve home ownership when they feel it’s the best time for them.

 

IMG-1538Anthony Pigati

Broker Owner – NextHome Town & Country

Direct| 925.383.5590

pigati.com | nexthometc.com | anthonypigati@gmail.com

CalBre Lic #01252162