Your Home as an Investment? Let’s Re-think this.
Mr. ToughMoneyLove engages in many debates over “good” and “bad” debt and the logic of having substantial equity in your home or even paying off your mortgage. Regarding the latter, some folks insist that their home is an investment and resist building equity through their own efforts (such as making a substantial down-payment.) Instead, they want to rely on market appreciation to build that equity. In other words, these homeowners assign their homes to the “capital appreciation” class of investments in their portfolio. I think it is time to re-think that entire concept.
So maybe it is time to re-think this “my home is an investment” idea.
What does this mean for us? To Mr. ToughMoneyLove it means that more than ever, your home should be viewed not as an appreciating investment but as an asset to supply you shelter, one of life’s basic necessities. Therefore, it is in our best interest to preserve and protect that asset by: (a) not treating our home equity as a cash machine; and (b) paying off that mortgage so that we can receive those shelter services for as long as we need them, without having to pay for them. In other words, you should strive for a mortgage-free life as many baby boomers are now trying to accomplish.
A home that is 100% owned by the occupant can still be considered an investment, even if it never appreciates in value. Your home can be an income-producing investment.
To explain my reasoning, let’s assume that you own a home, 3-BR, 2 bath, 2000 sq. ft., in which you have invested $200k in equity. Let’s further assume that you could rent an equivalent home in your community for $1500/month. (You need some place to live, whether you own it or not.) You don’t have to pay that $1500 in rent because you own your home free and clear. Thus, your paid-for home is providing you $1500/month in imputed income, or $18,000 per year. That’s a 9% return on your $200k investment, regardless of what happens to the actual value of your home. Moreover, that imputed income is tax-free, which if you are in the 25% tax bracket, is equivalent to a 12% yield on a taxable investment. I’ll take that return any day, any year.
I realize that I am omitting some factors here, such as property tax, insurance, and maintenance costs which may reduce the imputed income benefit. I’m also aware of the argument that a homeowner can receive the same shelter services with a mortgage payment and invest the equity somewhere else. Right now, I am not sure I know what that “somewhere else” would be. On the other hand, I am not including a potential future benefit that the paid-for home can provide later in retirement: return of equity from a reverse mortgage. Also, you may end up reducing your tax obligations in retirement as well by living in a paid-for home.
To summarize, Mr. ToughMoneyLove suggests that homeowners look at their homes as an income-producing investment (like a bond or CD) rather than as an appreciating investment (like a stock or real estate during the now deflated bubble). If some experts are correct that home values will never return to their glory days, re-thinking in this way will help us make better financial decisions about choosing and paying for where we live.
What are your thoughts on owner-occupied real estate as an investment?
By the way, my writing was featured at five different personal finance carnivals this week:
Carnival of Money Stories #88 at the Dough Roller.
Money Hacks Carnival at the Financial Wellness Project.
Carnival of Personal Finance #182 at Free From Broke.
Carnival of Debt Reduction #169 at Four Pillars.
Carnival of Financial Planning at The Skilled Investor.
Thanks to all of the carnival hosts. Please take a look-see at the carnivals for some excellent reading.