Monica writes in:
Some personal finance books seem to treat a person’s home as an investment. Others don’t treat it that way at all. I’m confused as to whether I should look at my home as an investment or simply as a living requirement. How do you handle this when you look at things like your net worth or decisions about where to invest your money?
From my perspective, it depends on a number of factors that cross the line between investing and living.
Are you likely to move in the future? If you have external motivations to move, like living near loved ones or chasing a career, then you should look at your house more as an investment and less as a residence. Instead of focusing precisely on where you want to live for a very long time, instead focus on the potential for increased property value.
Is it easy for you to move? The easier it is for you to pick up and move, the more you should view your house as an investment.
What kinds of factors determine this? Are you living near family? Is the house worth substantially more than the rest of your assets? Do you live lightly or do you have a lot of stuff that would have to be moved (which would greatly add to the cost of a move)?
Does your house have significant resale value? If your home is in an area that’s of high value – a nice neighborhood, a well-kept property, access to services and employers – your home will be much more likely to attract buyers than a home that’s in a poor neighborhood, not well maintained, or with poor access to services.
For example, if I were buying a house in an area where I didn’t intend to live for a long period of time, I’d buy a home that was located near places of commerce and near employers. On the other hand, if I were buying a house to live in for a very long time, I would buy a rural home with lots of trees and without easy access to services. In other words, if I’m going to live here for a very long time, I’m going to buy a home according to what I want to live in rather than a home that’s a good investment.
If you view your home primarily as an investment, you’ll do things like follow the prices of homes in your area and look at home improvements from the perspective of improving the home’s value (and avoid improvements that don’t have a good return on investment from the perspective of the selling price).
If you view your home primarily as a place to live for much of the rest of your life, you’ll not worry so much about the local real estate market and you’ll make improvements to improve your livability without worrying what buyers might think of the changes.
Right now, for example, I view our current home as an investment. I’m pretty sure that in ten years, we won’t be living here.
What does that mean in terms of how we view our home? We aren’t making any home improvements that aren’t clearly going to improve the value of the home. For example, I would completely re-arrange the basement (including removing a non-load bearing wall) if we were going to live here for a long time, but I’m pretty sure that such changes might actually reduce the value of the home to other sellers.
Our next home, though, will be a home that we will live in for a long time. That won’t be viewed as an investment.
Instead, we plan to build the home according to the exact specifications that we want, regardless of what the market might want. This might result in some quirky choices, such as a very large family room in the basement with some deep shelves for board games, as well as a dumbwaiter. These might improve the value of the home and they might not, but it frankly does not matter to us. We just want the home we’ve always wanted.
In the end, whether you consider your home to be an investment has more to do with you than it does with anything else. On some level, it is always an investment because of the amount of money you’ve sunk into it, but whether you treat it like an investment is really all about you, your needs, and your situation.