You have heard it a million times that buying a home is a fantastic investment and homeownership puts you miles ahead of renters. But that can be pretty false and most people that make these statements do not clarify how rare it is that the home is an investment that had strong returns. When I think of an investment it means taking an amount of money whether cash or borrowed and turning into a lot more money with the least amount of risk to get there. The greater the risk, the greater the return is typical and all with the least amount of ongoing cash injection. That is investing. So when someone says that buying a house is the greatest way to create personal wealth or a great investment you must follow several guidelines to be true. Otherwise it can be a terrible investment and in the end burry us in debt we are unable to keep up with.
- Don’t Cash out – I am a big fan of lowering an interest payment when the cost of refinancing does not exceed the lowering of the interest payment. What I am not a big fan of is pulling out any equity that you may have on a house. The wealth is in the equity because that is the difference between what you owe and what it is worth. Taking out the equity to pay off other bills or go on vacation is immediately devolving the wealth or return on investment you may have in your home. Equity is very hard to build back up after this.
- Pay off the mortgage – Interest payments on a home normally make the cost of a home 2 or 3 times the original purchase price and that is if you never refinance the home. This is because we pay interest on any outstanding loan amount monthly. So the goal to get a return on a home investment is accelerated by paying as much principle as possible as quickly as possible. Making double payments or lump sum payments with a commission are a great way to decrease interest amounts and speeding up the increase in equity. Ask you lender to work up a pay off scenario for early payments, double payments and other options to see the benefits over the next 20 years.
- Maintenance – Home maintenance is one of the reasons renting can be a better investment on a home but when you do own you must be smart about the maintenance. Think about having to come up with $5000 for a roof or new furnace. You either have the cash or put it on credit or worse, refinance to get that money out. As soon as you do this you are back to square one and it can be avoided many times.
- Save – Start an emergency maintenance fund with $100/mo in its own account. This will lesson the blow when the siding falls off or your well needs replacing
- Routine – Do a quarterly check on equipment and structure as well as maintain all equipment per the instructions of the manufacturers. You will be surprise how long stuff lasts when you just maintain it regularly. We currently have an air conditioner in our house that is 30 years old. Works fine because it has been maintained.
- Buy less – As a Realtor we want you to buy the most expensive home you can “afford” and lenders do a really good job of making that dream come true. But buying a home below your means is a smart investment. Being able to make double payments, make repairs and save for major problems is a fantastic mind set to get into when creating wealth. A large home mortgage with little equity can be burdensome on finances especially with a job loss or hard times. Consider buying less home and making the highest payment your lender said you can afford. If your payment is $1500 per month and you can afford $2300, thats $800 per month that you are not paying interest on over time. Thats a lot of wealth
- Update and improve – Over the next 20 to 30 years your home is going to break down, wear out and go out of date. To avoid the hard decision down the road of how to pay for a complete remodel, pick 1 large update per year to keep costs minimal. Paint the bedrooms every few years. Its cheap and easy to do on your own. Change out bathroom fixtures as they become outdated. With Costco and Lowes and lots of other options, these things are becoming more and more affordable and available so take the time to switch them out. By the time you get 20 years down the road, you will have a lot less updates and repairs to make and you will avoid having to cash out or reduce your equity to take those into consideration.
While owning a home can be rewarding and really easy to do, it takes some planning and patience to build wealth with it. If you are a new home buyer do not get caught up with the affordability and excitement of owning a home. Sit down with a family member or someone you trust to really look at what a house costs and what mistakes not to make. Remember you can always rent a sweet place and when buying a home you should not neglect the added expenses that come along with it especially if you are looking at it to build wealth down the road.
Curt has been in the Indianapolis Real Estate business for over 10 years and spent his first years learning all aspects of commercial management and brokerage. He has had great success in managing existing commercial projects and new retail and office developments. Curt specializes in building owner representation and purchases in the Westfield Indiana market as well throughout the Indianapolis Metro area. Curt is passionate about growing the local Westfield community and in his free time volunteers with Westfield Youth Assistance and raising 2 children with his wife Jennifer.