Why are homes considered an investment?
Investment is a catchall word that we hear a lot in our daily lives. You invest time in your job, invest effort in a project or invest money in a bank account. Really, it means that you’re giving something valuable to another entity with the hope that it will return to you more valuable. When you invest time in your job, you’re rewarded for your work with a paycheck. When you invest effort in a project, you give your time and labor for an outcome that will serve your needs. When you invest money in a bank account, you’re lending your assets to the financial institution with a guaranteed return that multiplies over time.
Similarly, buying a home is an investment. You place money in your home with the hope that it will increase in value over time. But unlike a paycheck based directly on the time you spend at work or the rate of return the bank guarantees you, your home is an investment with risk. We break down how homes can provide long-term value, the general risks and how to make a wise investment.
How do homes generate value?
Homes can generate value in a few ways. Immediately, homeowners reap the value of consistent shelter. While this is not necessarily a financial benefit, the reduction of stress and pride that comes with owning a home should not be devalued. In Memphis and Shelby County, it’s also possible that owning a home would cost less per month than paying rent – so there could be a monthly financial benefit to homeownership depending on your circumstances.
But most often when people discuss how homes provide value as an investment, they point to the long-term financial benefits. When you purchase a home, you put money down and secure a mortgage for the price of the home that day. As you pay your mortgage over time, you increase the share of the home that you own. If market conditions are good, your home will also increase in value. Over several years or decades, your home could be worth more money and you own a greater percentage of it.
What are the risks of investing in a home?
Investing in a home is generally considered a safe choice. However, there are very specific things to consider that may make homeownership or a specific home a poor way to invest your resources.
Timing – If you’re unsure where you want to live, buying a house might not be a wise investment. You need time for your home to appreciate in value and to contribute toward your mortgage’s principal balance to see financial returns. If you sell your home too quickly, you may not see a return and could even see a loss.
Price – If you buy a too-expensive home, you’re making a risky investment. You need to be able to comfortably pay your mortgage each month or you risk going into foreclosure. We recommend that clients spend no more than 30% of their monthly income on housing. If the house you’re considering is too expensive for your budget, work toward saving more for a down payment or consider looking at homes that are less expensive.
Interest – The conditions of your mortgage, especially combined with the timing and price, can make your home an unwise investment. Higher interest rates mean you’re spending more money monthly that isn’t going toward the percentage of your home you own. Over time, that can equate to thousands of dollars lost – money you may not be able to recoup.
How can I avoid losing money in a home?
The more you know going into the homebuying process, the better outcomes you’ll have! We provide homebuyer education courses online with live instructors or through virtual modules you can complete at your own pace. In these courses, you’ll learn about the financial aspects of buying a home and tons of other resources to help you make a wise investment. From there, you can work with one of our counselors to discuss your specific needs and create a plan to find the perfect home for your family. With a team of experienced counselors, real estate professionals and financial partners in your back pocket, you’re on the path toward making a smart investment in your next home!