It is often said that a home is the biggest investment most people will ever make. But is your home really an investment?
As home prices rise, the long-lived debate over housing as an investment once again takes the limelight. Viewpoints are strongly held on both sides, and for good reason. The answer, in our opinion, depends entirely on your unique circumstances and goals.
The median value of an existing single family home in the U.S. is now above $200,000. How can deploying $200,000 into an asset not be an investment?
Take for example, John and Jean, a retired couple of 65 living in their house which will be fully paid-off in five years. John and Jean have no intention to move so long as they are physically able to live in their home. Their expenses are covered for their lifetime by a stock and bond portfolio. In this case, their home ownership meets a clearly defined goal: to provide a roof over their heads and a comfortable place for them to live for the rest of their days. While their home is most certainly an asset, and one that would be considered part of their net worth, John and Jean’s purpose for owning the home is not to generate income or appreciation; the home is not owned to accumulate financial wealth.
So when is a house an investment?
Now consider Mark and Mary. They, too, are a retired 65-year-old couple living in their soon-to-be paid off single family home. But Mark and Mary plan to downsize to a less expensive condo or patio home at age 75 and use the net proceeds to help fund their daily living expenses. Here, Mark and Mary’s current home can be considered an investment. They plan to use the equity in their home – and ideally a degree of appreciation – to fund a stated objective. Mark and Mary’s capable financial planner has likely helped them project the future value of their home upon sale (net of taxes and sales costs) and assess the degree to which the equity in their home can help cover their projected living expenses. Mark and Mary’s home is part of a long-term investment plan to meet their financial needs.
What are other instances of a home serving as an investment?
- Renting out an extra bedroom or a basement apartment within your home;
- Converting your home to a rental property after moving; or
- Using a reverse mortgage to access equity from your home to fund other financial goals.
Check back in two weeks to see what role the real estate asset class can play in a diversified investment portfolio.