A home as an investment

**ironmaiden** · 10-08-2005, 10:27 AM

The biggest fallicy out there is that fixing up your house is an investment.

The idea that a "new" kitchen is an investment is a joke. First you don't reap 100% of what you put in. Secondly, unless you are selling the house within a 3-5 years, anything you do becomes dated. I don't care what style you pick, 10 years from now, someone will come into your house and guess when you did it. It is no longer up-to-date. Styles and fads constantly change.

Getting a new roof is maintenance and in a way insurance - spending money so you wont have to spend more money due to damage.

Adding physical space increases the value of your house simply because the house now has more square footage, but don't do it for that reason - do it cause you really need the space and it is cheaper than moving to a bigger house.

Unless you are willing to sell your house and downgrade (either by a smaller size or cheaper area), your house is not an investment. IT doesn't matter what your house is worth unless you sell it. What it is worth at this point is how much you OWE on it. To take out equity from your home is basically rebuying your own house at a more expensive price and restarting your loan.

We know people who took out a 30 year loan and refinanced multiple times over the past years. What they didn't stop to think of is that they turned their 30 year loan into a 40 year loan by continually restarting their loan. I'm not saying that it was a bad idea to refinance, but that you have to think the whole thing through. We went from a 30 year 8.5% loan to 6.5% to 5.5% and now we are at a 4.5% 10 year loan which costs us the same as that original 8.5% 30 year loan.

**staceyy** · 10-08-2005, 11:41 AM

Ironmaiden, I agree that a house is not an investment unless it is sold but I don't fully agree about not upgrading. I am a mortgage banker by trade and I practice frugality. 5 years ago I purchased a home in Pittsburgh because the cost of living was low and I could live anywhere I wanted as long as I was close to an airport to travel to work. I moved into my home and did cosmetic changes but no major upgrades.

At the same time a relative of mine purchased a home in the busy metropolis of Washington, DC. She paid double what I paid for a townhouse not a single family home like mine. She bought a new house and I purchased a 30 year old home. She put in numerous upgrades that I thought were frivolous. But she just sold her townhouse for 1.5 million. she quadupuled her investment. If I were to sell my home now I would be lucky to have made $40,000 more . She made over 1 million more in 5 years. I attribute this to living in a high cost, over- priced area that is very desirable in terms of location and to the amount of upgrades she made. She put $25,000 into landscaping a postage stamp backyard etc. etc. and she recouped her investment and then some.

Frugality has its place and pays off slowly but surely over time ad especially on day to day items, but if you are an astute investor (or even an accidental investor who is in the right place at the right time) you can make a lot of money in a short period of time. Frugality and investing are two separate things. By being frugal you can save the money to invest.

**Darlene** · 10-08-2005, 01:24 PM

I try to keep up with maintanance and do improvements when I can. In our last house we did alot of remodoling just before we moved. Wish we did it earlier so we could have enjoyed it longer.
We did luck out that we got double our initial investment when we sold and sure some of that went to improvements along the way but we still came out ahead.
Ironmaiden & Stacyy, your both right, lots of thought and wise investments are very important.

**canadian gardener** · 10-08-2005, 05:00 PM

Remodeling and routine care and maintenance which includes appropriate for your area type upgrades are different.

ITA that remodelled kitchens are being sold to people as something they'll get their money out of whereas the numbers I've seen are that you might get half back if you are lucky, and of course only if you happen to sell your house. (leaving half the cost behind in the house for the new owner!)

THAT SAID, I also think that living in a house, and replacing a kitchen that isn't functional is important to keep from having to move. Moving always chews up dollars. So when it comes to move or stay, sometimes the cost of a reno makes some sense if it means you can stay in a home that otherwise meets all your needs. Our neighbors added on to avoid having to move, and I think it worked out for them.

But reno for the sake of reno, well you can run into a lot of dollars being sold on a new kitchen or bathroom, and when you go to sell, you risk having overbuilt or overdone your house for the area. People who flip houses for a living are extremely cautious what they will and won't put into a home.

Fixing a furnace, a roof or replacing hot water tanks or a fridge or stove/washer/dryer etc is routine care and maintenance. As is repainting the inside every 10 to 15 years, replacing old or outdated hardware, light switches etc. And carpets do wear out, needing replacement and you are wise to consider what is "in" at the time or is just coming "in" such as hardwood or laminate flooring.

it's not a question of making money back, because you won't. But what does happen is that you will lose money when buyers see deferred maintenance and begin to wonder what else isn't being cared for, that they can't see.

One or two things, buyers can handle but not maintaining a home will bite in the long term when you go to sell and have to make a lot of expensive repairs all at once simply to make it saleable.

BTW I read your answer on the what I do that works well for us financially thread and you hit the nail on the head I think when you talked about the smaller home.

One of the things dh and I did, when all our friends were buying bigger (we had financial problems) and did what we probably would have done anyway

and that is buy smaller when we moved.

We downsized and it was the best thing we did.

Our kids were within 5 or 6 years of leaving home respectively and even though it was a bit tight for fit in the house, now that they've left, it's a perfect fit for retirement.

Smaller homes take less paint, carpet, taxes, mtg interest and mtg payments, less maintanence, less to go wrong than bigger homes.

Most of our friends with kids that age, soon to leave home are buying the trophy houses. That is crazy in my humble opinion, because I'm watching them work to pay for them, clean them, HEAT THEM, pay insurance on them, pay taxes for them.

and all they do is rattle around in them.

My smaller house is fast and easy to clean, cheap to heat or cool, takes way less taxes, costs less to insure, and while we are mtgd to the hilt just to have it (long story) our costs are still way less than our friends and way less than rent.

**ironmaiden** · 10-08-2005, 05:24 PM

Your relative made money because prices zoomed up over those 5 years. And she SOLD!!! And any improvements were sold within the short time of them still being "in".

I'm talking to people whose intent is to stay in their home. Don't worry about being the fanciest house in the neighborhood if you are going to be living in that house 10 - 20 or a lifetime. If you do, you'll always be dumping thousands upon thousands into the house.

DH and I had a 6 months debate about our house. He wanted to double our outstanding mortgage through refinance, move bathrooms, kitchen around still within the same square footage. I convinced him it wasn't worth it in the end. We did end up putting in hardwood floors (the rest of the house had them, the addition put in by the previous owners had laminate that was literally ripping). We did cabinet refacing and they built us a new island. And we did get new appliances and countertops. So we did dump money into our house. But we did it for us and within our means i.e. we paid cash. The floors were a necessity the rest was a "want" not a "need". I can't wait to stop dumping money into the house so I can go back to paying it off.

And because people's house values have been going up, people have stopped saving money. Their house is now their 401K. Our neighbors just plan to pull out money out of their house to pay for their kids colleges. The house is now the rainy day fund. People are treating their houses like a bank.

I like that my house is worth more than when we bought it and much more than what we owe. I see it as insurance though. If we were desparate we could pull money out of it. And once it is paid off just think of the thousands per year that we are no longer paying out - that's money we either don't need to earn, can be used for much more than an awesome vacation, as well as saved for the kids college.

**canadian gardener** · 10-08-2005, 05:39 PM

I get frightened when other baby boomers do what you mention your friends are doing, and that is veiwing the house as a bank.

When the boomers that bought trophy houses start to sell, they'll soon find a limited # of buyers (baby bust generation) that wants to buy the elephant homes.

I'm thinking that housing prices for the big trophy homes will start to crash soon.

What will be in demand is smaller homes, new and old and good condo's that are well maintained and in good areas.

The boomer generation is getting ready to sell their "investment" trophy homes over the next few years and what they want, is smaller.

**Telephus44** · 10-08-2005, 06:40 PM

I'm looking at buying my first house next year, so I've done a lot of research on this subject, although I have no actual experience.

From what I've read, it seems to me that "your house is an investment" is not so much a black and white truth (it's either right or wrong" but a philosophical viewpoint. Obviously one can buy real estate for investment purposes. One can even buy a house, stay in it for 30-40 years, and sell it when they retire, need to go into long term care, etc. and use the money from sale of a house to fund that. On the other hand, there is the fact that houses do cost upkeep (new furnace, roof, etc). A house doesn't necessarily drop value (like, say, a car does - very few people would argue that buying a car is an investment) but it can be considered an asset that can be tapped.

I think its more of a matter of your point of view. And people's viewpoint vary considerably, as do people's housing needs and philosophies.

**PrairieRose** · 10-09-2005, 01:15 PM

I think that your house is an investment but not one that you should count on for huge returns, per say. We've lived in this old house for almost 23 years and naturally have had to do some maintenance and updates. But, I'm not doing granite countertops, thinking I'll recoup the $5000 "investment" of it. (I'm not doing real granite or corian or even silestone, I may in fact faux paint my countertops, but I digress) *Most* houses will appreciate with time (in most markets, and most economies) but that's not a reason to feel as if you have a blank check to update in grand style. Depending on the house, the area, the market it may be worthwhile to do so but I think it's a bit more risky than I'm willing and comfortable to jump onto (the grand update bandwagon I mean).
I agree that some people go nuts on the rennovations, thinking they have the correct motivation in doing so. It really makes no sense in lots of situations.
For us, we live here. We *really* live here. We want comfort and a bit of style, but we don't have to have the best of everything...not even close. And we don't go over the top and use the excuse of "investment purposes", if ya kwim.