The following is an article “Why You Can’t Consider Your House an Investment” by Marc Primo.
While purchasing a dream home is one of the top priorities in most people’s bucket list, property cannot be considered a true investment as some might think. In reviewing the factors that sum up a good investment, buying a house can manifest red flags that you’d initially miss. Fortunately, this article can help you think twice before you go deep in monthly amortizations.
Owning real property is a good thing but only if you are of stable financial standing. Paying a house upfront rather than resorting to a long-term plan is the ideal thing to do for anyone. Otherwise, you may only find yourself drowning in debt because you failed to see through the cracks in you mortgage payments. While real estate values appreciate over time, other factors such as inflation, returns, and equity among others should be considered as they can affect its worth.
To drive this point home, here are some things to consider if you are looking to buy a new house.
Appreciated value does not equal a sound investment. For over a century until today, the value appreciated by real property amounted to only less than 1% versus the rate of annual inflation. What this means is that a house bought years ago can appreciate to a higher percentage in say 40 years, but the increased value will not amount to much due to the current rate of inflation. Of course, there will be instances when your property can experience huge spikes in value depending on the property’s location and the present market. However, you still can’t consider your house a real investment as it should offer more than just increased value. Why? Read on to find out.
You won’t have control. When we define “investment”, having control over the growth of your finances over time is one factor that must always be taken into account. Purchasing real property entails more risks than a true investment as it is not as flexible to sell at a time when you can absolutely maximize good returns. Unlike true investments that are placed in shares, mutual funds, and home rentals wherein you can compute for returns at a given time, buying a house and residing in it for years won’t give you the leverage to earn or grow money like true investments do. The only time you can cash in is when you sell your house for whatever reason. But then, where would you live? Most people will just buy another house from the sale they got from the previous one.
During the financial meltdown of 2007, the absence of control to buy or sell a property was the main factor that affected nearly 10 million homeowners due to foreclosures. Buying a place for high rates is only the wisest thing to do if you really are secure about your finances and don’t have to rely on the market’s volatility.
There won’t be any cash flow. A house only serves its purpose by providing you shelter and as long as you don’t rent it out or sell it in its appreciated value, you won’t get any cash flow which is what true investments are meant to do. The typical asset can earn you some profit or investment returns, but living in a house that also entails maintenance and carrying costs can actually become a burden to your daily living. An owned house does not present dividends like other investments, unless you opt to rent out bed space, or a floor, if you are able to purchase a two-storey house or larger.
While having your own home is a good thing, don’t assume that owning one will give you the benefits of a true investment. You just can’t expect any good returns from it, or at least not yet. Should you stumble upon some good earned cash and are finally able to pay off your mortgage, then maybe buying a second property for rental is the next best thing to do. When the cash starts coming in, perhaps only then can you really enjoy the benefits of a true investment.