You’ve probably used the phrase “investing in a home,” but is your home an investment?
Some financial writers have challenged that idea.
For example, James Altucher says owning a house is “financial suicide.”
Robert Kiyosaki says investment assets produce income, unlike your home. A house only produces expenses, and any potential gain in value is typically locked up or simply rolled into the next home you buy.
And even the appreciation in value is iffy at best. Home prices fell for years after 2006, and according to Robert Schiller, when you adjust for inflation “over the 100 years ending in 1990 — before the recent housing boom — real home prices rose only 0.2 percent a year, on average.”
On the other hand, you can make your house into an investment in several ways.
It helps to buy the right home. But even if you already own a house, you can make it a better investment. Here are some examples.
A Home as a Save-Money Investment
There are make-money investments, but there are also “save-money investments.” With the latter, you invest to cut expenses.
A house can be a great way to invest to save money, but only if you buy it properly.
Suppose you’re renting an apartment for $950 per month and you have the opportunity to buy a house with mortgage payments of just $650 per month. You’ll probably lower your housing costs by buying.
But do the math carefully.
Compare all costs, including taxes, insurance, maintenance and anything else related to owning a home (maybe even commuting costs if you have to live farther away from work).
Look at your down payment and closing costs, too. Let’s say those add up to $15,000 and you figure all ongoing expenses will be $50 less per month versus renting.
That $600 per year represents a “savings return” of only 4% on your investment — so you might be better off renting and putting your money in mutual funds.
The easiest way to maximize your “savings return-on-investment” is to buy a cheaper and smaller home.
Not only will it require a lower investment or down payment, but the ongoing expenses are likely to be lower, meaning you’ll save even more money versus renting. Taxes and insurance are based on value, for example, and a smaller home usually costs less to heat and cool and maintain.
Another option is to buy a true investment property to live in…
A Home as a Make-Money Investment
My wife and I recently bought a duplex as our home. After fixing and cleaning the side we don’t occupy, we raised the rent by $100 per month. That made it an even better investment than we anticipated.
And you don’t have to stop at two units. The FHA finances four-unit properties with only 3.5% down, making this investment scenario a realistic option for many homebuyers.
By the way, the income gets the attention when people consider buying a rental property as a home, but they also make great save-money investments.
For example, to get the amount of space in a single-family home that we have in our half of our duplex, we would have paid over $100,000. Our entire duplex cost us $123,000 with closing costs and repairs, meaning we only paid $61,500 for the half we live in.
As a result, we save on taxes and insurance, and have more money left over for other investments.
Another way to make money from your home is to rent out rooms. In my first home, room rent paid for the entire house twice over.
A Home as a Speculative Investment
If you buy and sell at the right times, you can make a good profit on your home.
Of course, if you buy another home that costs even more, what have you really gained? And if you spend too much on your home, you may not recover those so-called “investments.”
Buying a home with the hope of reaping a big gain is a speculative investment. To make it more likely to pay off, use these strategies:
Buy at the Low End of the Market for Safety
You may bag a bigger profit with a bigger home, but a small and inexpensive home is a safer investment.
For example, we bought a one-bedroom house for $65,000 in June of 2006, widely considered to be the peak of the real estate bubble. Three years later, deep into the “crash,” we sold the house for $72,000.
My explanation: People have to live somewhere, so the cheapest homes are never going to drop in price as much as expensive ones — and they may even go up in value while others go down.
Stay for at Least Two Years
Stay for at least two years and you can sell your home for a tax-free profit. We did that with a condo in Florida.
Make the Right Improvements
A Realtor.com report on home renovations found only one that increased the resale value of a home more than what the project costs. Basic maintenance may be more valuable if you’re thinking like an investor.
My wife and I have managed to make decent profits on several homes without major renovations — we just clean like crazy and keep them maintained.
If you do renovate, think like a house-flipper: Look for ways to increase value at the lowest cost.
Downsize to Cash In Your Profits
What have you really gained if you sell your home for more than you paid, but then put it all into another home? Consider downsizing your home to truly cash in.
My wife and I did that a few years ago when we sold our condo for $112,000 (for a profit of $16,000) and then moved into a home for which we paid $65,000. Our monthly expenses were also reduced, making our new home a good make-money and save-money investment.
Your Turn: Do you think of your home as an investment?
Steve Gillman is the author of “101 Weird Ways to Make Money” and creator of EveryWayToMakeMoney.com. He’s been a repo-man, walking stick carver, search engine evaluator, house flipper, tram driver, process server, mock juror, and roulette croupier, but of more than 100 ways he has made money, writing is his favorite (so far).