Financial Planning

The aftermath of the Great Recession of 2009 won’t be known for quite sometime, but already people are sifting through the remains to ask questions. One of the most important ones is weather or not your home is an investment or not; and if it is an investment, what sorts of returns you should expect. This was a critical question to my wife and I as we looked at Naples FL homes. We decided that for us the home would be an investment, but dont’ forget to check with your wealth adviser!

Until the Real Estate bubble burst, most Americans would say that their home was indeed an investment. They had good reason to, homes were used to fund retirement homes in southern cities, and could be sold at some profit to buy a larger home as families grew. Unfortunately, many Americans made the tragic leap from homes as investments to homes as cash machines. Banks allowed us to leverage our homes to the hilt, and when home values dropped, many Americans were under water. In Naples, this turned into an outright foreclosure crisis.

However, it seems clear that, at least for a families primary residence, a house is an investment, but not really comparable to stocks or bonds. First of all, if you’re not buying a home through paying off a mortgage, you’re essentially buying somebody else’s house for them,and getting nothing in return. While the ROI on your home may not be the greatest, its better than renting, where the ROI is nil. This is supposing that the cost of renting is roughly equal to the cost of home ownership, and this has varied historically. Don’t forget, you have to factor in the cost of repair to your house, but you also get to write off the interest on the mortgage payments, which are large at first.

But what about a second home? Here, the numbers are very different. Unless you can buy the house with cash and attain a 10% capitalization rate on your outlay, it seems like you’re relying on the value of the house to increase in the future. As we’ve recently seen, this is a risky idea!