Is Your Home An Investment?

Yup, that’s what we all believed for so many years. But the gyrations in the housing market, and the huge amount of “wealth” lost by so many of us, are making a lot of people question just exactly what home-buying is worth, as well as their own homes. I’d like to propose that we re-consider just what kind of investment a home actually is: IMHO, it’s actually more like a collectible—closer to a coin or doll or maybe even a wine collection. And a lot of people would be happier with their “investment” if they re-cast their thinking along those lines. How so?

Buy a collectible or house only if you’ve taken care of the basics. You shouldn’t be buying either one if you have huge credit card bills, no emergency fund, and no significant retirement savings (appropriate to your age). Otherwise, you really can’t afford either.

Realize you can’t easily convert to cash. Of course, a Jumeau doll, a bottle of Chateau Something, or a stucco four-square in Evanston can eventually be converted to cash. But you might have to wait for the right buyer, and selling costs for the auction premium or the broker’s commission can take a healthy bite out of the proceeds.

You have to be prepared to hold them for a long time to see a profit over purchasing costs, and ride out bad markets and changes in fashion. Beanie Babies, Cabbage Patch dolls and McMansions aren’t really the top of the value heap right now.

You can see the market take surprising dips. The stock-in-trade at Antiques Roadshow is the person gasping at how much their ugly vase or over-wrought china cabinet is worth compared to what they paid. Yes, it’s my favorite show too—everyone would like to pick up a piece of junk at a yard sale and make a cool $100K. In a recent show, they re-priced items that had originally appeared on the show in the 1990s. It was a shocker—many, many items had gone down in value significantly, and many more were static. Even a crummy but diversified portfolio did better than that. I probably don’t need to draw the parallels with the housing market. There’s no investment that can guarantee steady appreciation.

Neither a housing investment nor collectibles pay you any income. I’m excluding rental property here. You can sell either one to raise cash, but you may need to overcome some emotional attachment to something you love. When you retire, at least some of your wealth needs to be generating income. If most of your net worth is tied up in something that produces no income, well, I hope your Social Security is adequate for your needs. Rich on paper doesn’t necessarily mean rich income.

Significant ongoing costs continue throughout ownership. Both cost you insurance. For collectibles, you might need to maintain ideal storage conditions. For your house, there are property taxes, ongoing maintenance, periodic major repairs, and the seemingly endless bills from the phalanx of tradespeople who are my on-going “best friends”.

Part of the fun is continuous upgrading. No, no, no.

And the one good comparison I can think of…

Both collectibles and your home can provide significant enjoyment while you own them.

Normally I don’t advise on collectibles, but for them and for a house, people can have very good reasons to own them. Sinking part of your worth into either requires more thought and less “givens” than most of us considered prior to 2008. My suggested rules of thumb: the equity in your home should constitute no more than 1/3 of your total net worth, and an investment in collectibles no more than 5% (and that’s pretty generous), and only if you actively participate and understand whatever you’re buying. We can argue about those figures, but you’d probably agree that most of your friends have way more house than they can afford. Right?

About the author

Danielle L. Schultz, CFP®, CDFA

Danielle L. Schultz, the principal financial planner of Haven Financial Solutions, is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a NAPFA-registered Financial Advisor, and a Registered Investment Advisor in the State of Illinois. She studied financial planning at Northwestern University’s Certified Financial Planner™ certification program. She also holds a Series 65 license (Registered Investment Advisor Representative) and a CCPS (Certified College Planning Specialist).

She writes a regular column for Better Investing magazine and is currently working on a revision of their mutual funds handbook. In addition to academic training and professional experience, Ms. Schultz has personally managed Social Security, Medicare, retirement and long-term care issues; college funding concerns; and cash flow and transition planning in self-employment and divorce situations. Her social work background gives her an innovative perspective on financial planning issues; for her, financial planning is not only about money, but also a key component in a satisfying and well-lived life.

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  • Danielle,
    Your advice is GREAT for the average healthy person who might be living in a very polluted area. I don’t want to buy a house, really I don’t. But if my healthy is ever to improve, I don’t seem to have a choice (rentals are cleaned with toxic products). Should I just buy a rehabbed trailer instead and find a clean air area to park it?

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