Is Your Home an Investment?
by Jeff Gustafson*, The Builders Blocks

This is considered by many a mixed question. There is no doubt that a home, for most people, is the single largest expenditure they will make in their lifetime. And the hope is that the home will increase in value over time.

But the first priorities should be: Does the home meet your families needs? Is it in the desired area? Is it a safe environment? Is it close to schools? Is it large enough to accomodate the family? Much like a car, you don't usually buy it to make money.

But a smart buyer who is starting out should have a well thought out game plan for where he or she is going with every purchase. Thinking about things like: "Will this make a nice rental once we decide to move up?"; "How does this home match up for resale value in the future?"; "How convenient is this home to necessary amenities to increase the potential buyer market for this home?"; "What imrprovements might be necessary to make sure this home will not only provide for my family but then be marketable in the future?" These sorts of questions are important to consider regardless of market conditions.

Markets fluctuate and there is no guarantees home prices will go up. But just like stocks and other investments which also come with no guarantees, home prices are market driven and we have a lot of historical data to draw from to give us a good indication of what is apt to occur. One thing that is certain, is that everything being equal, if the market increases or decreases by "X%" it is going to apply to most all homes. So if I live in what today is a $300,000 piece of property and the market drops by 20%, the value of my home drops $60,000. If my home is only $200,000 in value, then that 20% equals $40,000. But the same is true if the market goes up. A 20% increase in market conditions would be a $60,000 gain on the $300,000 piece of property versus $40,000 on the $200,000 with all things being equal. So what does that mean?

In order to truly understand the full impact of what we are looking at, you have to consider loan interest since most people have a mortgage which is the majority of what they pay for a home. If you are required to put down 20% on your purchase, then your mortgage would start at $160,000 on a $200,000 home or $240,000 on a $300,000 piece of property. This is clearly the bulk of what one pays for a home. So if we now add the interest rate, we can get a clear picture of what this home is honestly going to cost us over the life of the property.

This shows you how significant of a role the interest rate plays on your home over all. But here are some questions in a down market to consider: If you have a game plan to grow your status to get into a bigger home, should you be looking to redure your payment? ...reduce your loan but continue to make the same payment? Invest in making improvements so your home is more marketable? ...or look at stepping up because now you can qualify for more home?

A down market brings interest down to stimulate activity. An up market causes interest rates to rise since usually there is plenty of activity (supply and demand). So one has to be somewhat smart in how they think in each situation and work the game plan.

Yes, you have invested either $40,000 or $60,000 in the above scenario. But the potential "worth" of what you own is significantly greater than that so you need to make the smart decision. In a down market, don't look so much at the loss (which is on paper), look at the potential gain.

* I am not a financial advisor or investment counselor

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