Can Your House Be an Investment and a Home?

by Jason Unger

When we bought our house back in May, we had a number of reasons pushing us toward the purchase.

The biggest reason? Our daughter, born in February, was ready to move out of our bedroom and into her own. But in our two-bedroom apartment, the second bedroom was my office — which I used full-time for work.

We were running out of space, and couldn’t last for much longer with what we had.

But there were also a number of financial incentives for buying when we did:

  • The house was more than 27% cheaper than its last price, 2 years ago
  • Interest rates were ridiculously low, giving us a 30-year fixed at 4.875%
  • We could get the first-time homebuyer tax credit of $8,000

So, it made financial sense — as well as family sense — to buy.

But if there’s anything we’ve learned from the ridiculous housing bubble of the past few years, it’s that buying a house in order to make money is not a good idea.

Is it a House or a Home?

Considering that nearly one-third of homeowners are underwater on their mortgages (they owe more than the house is worth), treating your home as an investment is a losing proposition.

Even worse is the idea to take money out of your home and use it to “invest” in upgrades, assuming it will pay off in appreciation.

Most financial planners are now suggesting that homeowners not treat the homes they live in as both a home and an investment, according to the New York Times.

A good first step, said Elizabeth Ruch, a financial planner at the asset management firm Waddell & Reed in San Diego, is to look at that brick, stucco or wood dwelling whose walls surround you and “determine whether it’s a house or a home.” Explaining the difference, she said: “A house turns into an asset for you. A home is where you’re going to live and possibly see out your days.”

It is best not to confuse the two, she and other financial planners say. Using a home as a house ? an investment ? involves taking a risk with something that the owner cannot afford to lose.

Why I Can’t Watch ‘My House is Worth What?’

My wife and I have watched a lot of HGTV, especially in the past year or two as we’ve thought about homeownership.

Easily, the worst show on that channel is My House is Worth What?, where homeowners get a real estate agent to assess their home’s value. While this doesn’t sound ridiculous at first, invariably the homeowners are doing it for one reason: to determine whether or not to continue to upgrade the house.

They aren’t doing the upgrades for themselves, because they want the new appliances or the upgraded kitchen or bathroom. It’s solely to see if they are making a buck.

They’re treating their house as an investment — not as a home.

The real estate agents add fuel to the fire by telling the homeowners that they’re guaranteed to get a return on some upgrades, often saying they’ll get a 100% return on investment.

While I won’t go as far as to say this show and HGTV are responsible for the housing bubble, others certainly will.

Writing in the Wall Street Journal, Jim Sollisch, creative director at Marcus Thomas LLC, says that “HGTV pumped up the housing bubble by parading the most mediocre, unworthy-looking homeowners into our living rooms to watch while they put their tacky, run-of-the-mill tract homes on the market for twice what they paid and then went out and bought houses with price tags too obscene to repeat.”

Time magazine, in its 25 People to Blame for the Financial Crisis, included Burton Jablin, programming czar at Scripps Networks, which owns HGTV. He “helped inflate the real estate bubble by teaching viewers how to extract value from their homes. Programs like Designed to Sell, House Hunters and My House Is Worth What? developed loyal audiences, giving the housing game glamour and gusto.”

Ouch.

Too many people have been hurt because of the housing bubble. And while HGTV is obviously not solely to blame, you’d be hard-pressed to disagree that they didn’t have some effect.

What do you think: can a house be both an investment and a home?

Let me know in a comment below.

{ 7 comments… read them below or add one }

Lee Distad August 26, 2009 at 3:29 pm

I think that people have to keep their domicile and their real estate investments discrete from each other. Levering up your home is quite literally “betting the farm” and most popular upgrades have no real effect on the resell price.

As it is, house flipping is not for the faint of heart or the under capitalized. The perception that anyone can do it led to a lot of dumb money trying to play the game, and they got burned.

Another huge factor in the housing collapse was people losing sight of the principle that it’s your duty to yourself to pay off your mortgage and own your home outright. Instead, people were levering up their homes into ludicrous valuations in order to spend that capital on stupid and frivolous things.

Practically speaking, your residence is a sort of savings account. If you bought frugally and wisely and put reasonable maintenance into it, years down the road when you sell, if you were both prudent and lucky, you’ll realize a gain. Only then is it an “investment.”

Funny about Money September 8, 2009 at 8:56 am

From this point of view, then, there’s no point in maintaining your home at all–in painting it, spending anything on keeping the landscaping up, updating various features as they become decrepit. It would be better to let your house slide downhill as it ages than to spend the money to keep it up, and really, using the front lawn (or dirt patch) as a parking lot for your fleet of junkers is reasonable, too.

Yipe! Let’s be sure none of the neighbors gets wind of this! 😉

Jason Unger September 8, 2009 at 9:41 am

@Funny – thanks for the comment, but I think you’re missing the point.

There’s a big difference between maintaining your house — keeping it from falling apart — and upgrading your house for the sake of getting a return on investment.

When something is broken, of course you fix it — but you fix it because it’s broken, not because when you sell it you expect to get 100% of the cost back.

See the difference?

Evolution of Wealth September 13, 2009 at 9:01 pm

How about starting with a reasonable house, adding maintenance and upkeep and then managing the way in which you pay for it? Could it then combine the two? What I mean is you have a house you can afford normally but you manage the equity in the house and take advantage of other people’s money. Do you think that would work well to accomplish both? Give you a little velocity of money.

Jason Unger September 14, 2009 at 10:54 am

@ Evolution – I’m not sure I’m answering your question specifically, but the biggest problem is borrowing against your house in order to improve upon it. Sure, there’s a chance you’ll get your money back, but the bigger likelihood is that you’ll end up with just a bigger bill.

Evolution of Wealth September 14, 2009 at 11:34 am

I don’t mean borrowing to spend the money or to do improvements. I mean keeping your equity seperate from your home to manage the equity. That way your home and your equity can both have returns rather than just your home.

Susanna May 2, 2012 at 4:47 pm

I do not think that there is an inherent contradiction between living in a house and making money off it. But one of the best ways to make money is to pay off the mortgage. There really isn’t any other investment out there that has such a high return with so little risk. This is especially true for people like me who don’t itemize. It is certainly possible to make a home into a very bad investment by making bad decisions about it. Bad investment decisions can be made in other asset classes too. I have never seen the TV shows described, but they do sound like they were designed to make mortgage brokers rich, not home owners. Of course it’s worthwhile to maintain something you own and use. Don’t you ever change the oil in your car? We spent $40K on our 35 acre lot. I am confident we will make money on this investment. It is also a wonderful place to live.

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