From the time we’re young and purchasing property with Monopoly money, we’re taught that real estate is a valuable commodity. Yet, when it comes to buying a home, we usually have a long list of personal needs that come first—enough bedrooms and baths, a safe neighborhood, good schools, maybe a fenced yard.
It is important to make sure the home fits your family. But it’s also a good idea to keep in mind the fact that, while a home may not be your only investment, it’s probably your biggest asset, and one you should manage carefully for maximum future value.
Keep your eye on the prize.
Real estate has historically been a good long-term investment. While you may be able to get higher return on other investments over the short haul, few offer the same combination of generous returns and relatively low risk over the long term—five years or longer.
Real estate tends to appreciate ahead of inflation (typically 1 to 2 percent above) for a number of reasons, which include the old tenet of supply and demand as well as a universal need for housing and increasing costs to build new homes. But it takes time to recoup the large up-front costs of a home purchase, and it should never be considered a liquid asset.
So how is a home a good investment?
There are many financial rewards to home- ownership. As we’ve mentioned, real estate offers a decent return at moderate risk. While you can lose your shirt in the stock market, real estate almost always retains at least most of its value. Also, buying a home is kind of like having a forced savings plan—you have to make those mortgage payments every month, and as you pay down the principal, your equity continues to grow.
As many people have already discovered, you can leverage your investment in your home and borrow more against it than you could with stocks and most other investments. Most lenders allow a homeowner to borrow about 80 percent of the value of the home, but with a brokerage account, you’re limited to 50 percent of the fund’s value.
There are tax advantages to owning a home as well. When you first purchase a home, the settlement and closing costs may be tax-deductible, as are any points you pay. And the interest, property taxes, mortgage insurance and depreciation are also deductible.
How do you choose a home that’s a smart investment?
While “buy low, sell high” works in the stock market, it’s not always an appropriate strategy for real estate. Of course you want to sell for more than what you bought the property for, but the lowest price in the market isn’t necessarily a good investment.
If you can, it pays to choose the time to buy—ideally when there’s a good supply of homes on the market and when interest rates are favorable. Then sell when conditions are favorable to sell—when there’s a smaller supply of homes on the market.
There’s a lot of truth in the old adage, “location, location, location.” Look at how favorably the property is located. Is it in a good school district? Is it near businesses and major roadways? What are the property taxes like? Does the area have a low crime rate?
Home Pricing Guide Also consider the future as well as the present. What are the plans for the neighborhood and local development? If there will soon be a glut of new homes going in, your existing structure might not be as competitive in a tight market.Even within a neighborhood, there are things to consider. The best homes for investment purposes are not the largest and most expensive in a neighborhood. In fact, often the smallest home in a good neighborhood is a smart buy, as long as it has the requisite number of bedrooms and baths. (In general, three-bedroom, two-bath homes are the most marketable, although, in more upscale areas, those numbers are often higher.) And if there are both older and newer homes in the area you’re looking in, keep in mind that while older homes may be less expensive to purchase, they also may require larger outlays for repairs and maintenance.
Take care of your investment and it will take care of you.
Once you’ve chosen your new home, be a smart investor and take care of it. Expect to make regular capital expenditures for repairs and maintenance, and if you’re going to invest in improvements, make sure they’re ones that will add value and yield a good return on investment when it comes time to sell. Again, make sure you’re thinking long-term—major home improvements rarely return 100 percent on your investment, especially in the short- term.
Profit potential shouldn’t be your only consideration when shopping for a family home, but it certainly is a nice fringe benefit to enjoy dividends when you sell. If you shop wisely and treat your home with an eye to increasing its value, you could enjoy significant appreciation over the course of your stay.
Tips
Building Equity
There are other ways to increase the equity in your home besides waiting for time and appreciation to work their magic. Here are a few:
Strategies at purchase. To start off with more equity, make a higher down payment and pay loan fees up front instead of rolling them into your mortgage.
Refinance to a shorter term. Consider refinancing with a shorter-term loan—for example, a 15-year instead of a 30-year term. If your loan balance is low, you might be able to do this without increasing your house payment.
Refinance but make the same payment. When interest rates dive, you can refinance to a lower rate but still make the same payments you were making at the higher rate.
Make extra lump-sum payments. Put down some extra chunks of cash during the year to pay down your principal. This is called mortgage cycling, and it’s not really as difficult as you might think. Consider using your tax refund, cash gifts, work bonuses, garage sale money—any kind of unexpected income.
John
