Purchasing a home of your own has long been described as a key part of the American dream, and as one of the best investments you can make. Unfortunately, this is one of the most pervasive and alarming myths associated with real estate investing.
That's because, while homeowners tend to have a higher net worth than renters, that doesn't mean buying a property is always a good choice. And falling victim to the misconception that a home purchase should always be something you aspire to can actually leave you with lots of regrets.
Why treating a primary home as a great investment can get you into financial trouble
The myth that purchasing a primary home is always a good investment is alarming for a number of reasons:
- It could lead to purchasing a property before you're ready: If you're over-eager to buy a home because you believe it's a great investment, you might be tempted to purchase a property at an inopportune time. This could be the case if you buy a home when you don't plan to stay put for at least a few years, or if you purchase a property before you have the money to make a down payment and cover all costs. You'll want to make sure you have good credit, an emergency fund, and a solid plan for the future, and have your financial life in order before you buy.
- It could prompt you to stretch to buy a home you can't afford: If you believe your home is an investment that will always pay off for you, you could find yourself justifying spending more than you should. You could also end up taking a risky mortgage loan, such as an Adjustable Rate Mortgage, just to bring your payments within your budget. But that loan could end up costing you more over time, or even becoming unaffordable. The worst-case scenario is this can put you at risk of foreclosure, or could leave you house-poor.
- It could cause you to tie up too much of your money: Spending too much of your income on a home purchase could leave you without the funds to accomplish other financial goals -- such as investing in assets that could potentially produce a higher return on investment (ROI).
- Your "investment" could result in losses: Finally, you can't assume that properties will always go up in value and that you'll always be able to sell your home for more than you paid for it. While properties usually appreciate over time, there are no guarantees.
What should you do instead?
While it's true that you can sometimes make money by buying a primary home and selling it for more than you paid for it, you shouldn't count on your home purchase to make you money.
Instead, you should treat your house as an expense as well as an investment, and make sure to take into account all the costs you'll face, including property taxes and insurance. You'll want to make absolutely certain your home is affordable given all the costs, and that you're in a good financial position to buy.
You'll also want to remember that while buying and paying off a home will give you a place to live, you can't cash in on your investment in your property unless you sell it or tap into the equity by borrowing. As a result, you'll need other more liquid investments to fund your retirement or help you accomplish other financial goals.
If you don't fall victim to the myth that a home is always a great investment, you can make more informed choices about the role your house will play in helping you grow your net worth -- and you can make sure you are practical in assessing whether a home purchase is worth it. This will put you in a much better financial position in the end.