Owning your own home has long been a part of the American dream. Put down some roots, get your piece of the pie, and build valuable equity to help shore up your financial future at the same time.
But is buying a home is a good investment in today’s economy?
While being a homeowner has many benefits, home ownership is not necessarily the slam-dunk financial strategy that it used to be … but that doesn’t mean you should write off home ownership altogether.
Here are some things to think about.
Should you think of your home as an investment?
Historically, the housing market has seen significant ups and downs. Some people have made a lot of money, while others have faced foreclosure and declared bankruptcy because they could no longer afford their mortgages.
This unstable housing market has caused a lot of people to challenge the notion that your home is the path to building wealth.
According to a study coducted by the MacArthur Foundation, 43% of people said that home ownership is no longer a reliable long-term investment, nor is it one of the best ways to build wealth and assets.
In a USA Today article, Yale economist Robert Shiller said that if you look at the history of the housing market, it hasn’t been a good provider of capital gains. Rather, it has been a provider of housing services.
And popular podcaster and finance guru Jame Altucher frequently shares his opinions about home ownership. His main message: your home is not an investment.
On his website, he explains that only in small periods have housing prices really jumped ... and usually right after they fall again.
He goes on to list the qualities of a good investment as:
- Not being the bulk of your net worth
- Nor requiring heavy debt
- You can get money back when you need it.
Anything that’s your biggest investment (as a house often is) can also be your biggest money loser. Obviously, most homeowners take on mortgages and are forced to put down hefty down payments.
And of course, a “good” investment is something that will pay you more than you paid for it.
Why you might want to buy a house anyway
Yes, James Altucher is a smart guy and he makes some very good points.
But the fact is, many people want to become homeowners for reasons above and beyond financial stability.
On a primal level, buying a home provides shelter. It gives you the comfort of knowing you have a stable place to raise a family. And it gives you a sense of pride and accomplishment.
But is it wrong to look at your house as a financial investment? Not necessarily. You just need to know that your primary motivation shouldn’t be investment.
One of the main reasons people fail at real estate is because they buy more than they can afford. Just because your mortgage lender says you qualify for a certain loan amount doesn’t mean you can afford it.
If part of your motivation for buying a house if a financial investment, then you’re better off starting low and building up. Look into homes that have the potential to increase in value if you put some elbow grease into them.
Settle for buying a home that is not turnkey ready.
Make sure the location you buy in is affordable and has a decent growth projection.
And make sure your monthly mortgage still allows you to invest money in other places. You still need to be able to contribute to your retirement and other investments.
The bottom line
Before entering the real estate market, consider your motivations for buying or not buying. Whatever you decide, be sure that the rest of your financial portfolio gets the attention it needs as well.
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