Why a House Is Not Always an Investment
Updated: Feb 13, 2020
A house can be an amazing investment if you buy at the right time and hold for a lengthened period of time. However, that does not mean that a house is always a good investment. For some, it would be better for some to not buy a house at all. For others, a house can be a great investment if they do not overextend themselves.
SHOULD I BUY OR RENT?
While it’s hard to give a one-size-fits-all strategy, a common rule of thumb to follow is this. If you are going to live in the house for longer than seven years, you will most likely be better off buying a house rather than renting.
One obvious advantage of buying a house is the ability to build up equity in the home. Unlike renting, part of your house payment is built up in the house. On the other hand, when paying for rent, all that money goes directly to the landlord.
However, build equity in home alone does not necessarily make it a solid investment. Even though you are putting equity into the home, you also are paying for utilities and are put at risk of the home value dropping. For most, owning a home is merely just a forced savings plan. While this might be good for some who don’t save, overall, a lot of money is being put away into an investment that isn’t providing a substantial return.
HOW DO I KNOW I AM OVEREXTENDING MYSELF?
It is difficult for many to see if they are overextending themselves when buying their first home because they are not used to that change in expenses. Most professionals advise keeping your house payment at or below 28%. While this is a decent number to shoot for, I would highly recommend making it more around 25% if you are a first-time homebuyer.
While buying a home can be great for the long-term, you should not attempt buying something you cannot afford. This will make your home more of a nightmare than an investment if even minimal tragedies occur.
HOW TO MAKE A HOUSE A GOOD INVESTMENT
There are a few precautions you can take to buying a home that will prove as a solid investment for your future.
First, as discussed before, do not overextend yourself when buying a home. If a market correction or unexpected tragedy occurs in your family, your investment will go right down the drain. However, if you did not overextend yourself as much, the extra cash flow you’d have would help you through these times.
Secondly, do not buy a brand-new house for your first house, unless you can easily afford it. Often, brand-new homes are overpriced and often take a long time to pay off. On the other hand, do not buy a house that has major problems such as structural issues. While these houses might seem cheap, you will “pay through the roof” literally for all this additional maintenance.
Some of the best houses to buy are semi-old homes that mainly need cosmetic upgrades. The reason for this is that these houses are cheaper while still being dependable.
WHERE TO GO FROM HERE
Whether you’ve decided to keep renting or buy a house for yourself, the one piece of advice I can give both parties are to not overextend yourself. If you want to start investing for your retirement, as you should, it is not smart to bite off more than you can chew when renting or buying a house.
Disclaimer: I am not a financial advisor, so please review all of this advice with your CFP or financial advisor first.