We will analyze real estate a lot throughout this blog. My day job is in real estate and I have a passion for it. My grandfather worked in real estate at one time as well. I like the concept that it is a tangible asset that one can touch, see, enjoy, improve, and generally take care of. Warren Buffett called his home his best investment ever. Although, probably not due to the economics of it, but because it was a place that his family spent quality time together enjoying life. What is a viking without his or her territory? That said, there are many pitfalls to believing one’s primary home is a “good” investment. Many experts agree that it should not be considered an investment at all, but mainly a place to safely raise your family, cook food and enjoy life and productivity.
Here are some things to keep in mind in terms of your primary home. For most people in the US this is their largest real estate investment (or investment at all) over their lifetime. With the US home ownership rate hovering around 63%, that is a lot of people and investment. Here are some ideas to keep in mind:
1. Try and think of your home as a home first. A place to build memories and protect your family. A place to rest and learn. A place to enjoy being with friends, children, etc. Any home can become this for you, it does not have to be the “dream home.” It is a tangible asset that you actually have a lot of control over. People get way too fixated on an overly romantic vision of the perfect house. Make what you good for you.
2. Buy in a great neighborhood. You can always make improvements to the house over time. It is cliche, but location is very important. Families are clambering to get into good school districts. And of course people have a natural tendency to keep their families in a safe area.
3. A house is never perfect, just learn to live with it and take care of it. Sometimes people get too caught up in the fixing up craze, probably being manipulated by advertisers. This is good if you own Home Depot stock, but probably bad if you are trying to save money.
4. Buy the right size for your needs. A bigger home can be more expensive to maintain over the long term. Factor in greater property taxes, more maintenance and utilities over 30 years and that extra 500 or 1500 square feet may not be worth it! It might mean anoth $500-$1500 a month over 30 years, that could have been an additional $30,000-$90,000 in your investment accounts.
5. Keep in mind a mortgage is a hedge against inflation. While rent and costs go up around you over the years, your monthly mortgage payment stays the same for 30 years. It helps one plan, maintain and beat inflation in terms of housing.
6. Try to pay it off prior to the 30 years. Try paying an extra principal reduction payment each year, this saves huge amounts on interest payments over time. Just a 100-200 more each month can help pay off a mortgage years in advance.
One extra. I am personally not a big fan of tapping home equity unless one truly needs to. There can be cases when using this equity to buy another property may be advantageous, but more wealthy people I know resist the urge to use this equity. Especially for things like vacations, cars, RV’s, consumer goods, etc.