Description

Assuming that your home is a huge part of your investment portfolio is a common misconception.  It seems logical that it would be - however, is it or isn't it?  In this lesson, you will learn the basics of how your home fits into your financial portfolio. You may be surprised to learn that common beliefs are not exactly accurate.

Key Points

  • Intrinsic value = utility
  • Home = long term, inflation adjusted, savings account
  • Market cycles = ups and downs
  • You control the leverage factor

Lesson Files

  • Is Your Home an Investment?

    From time to time, online at least, you see the debate crop up on whether your home should be considered an investment. I don’t see the point in getting lost in the definition of what is an investment; surely there’s a financial component to it. It’s not like an equity it’s not like buying shares in Apple stock. Apple is a very different company, worth a great deal more than it was 20years ago.

    Intrinsic Value

    A home’s utility is roughly the same as it was 20 years ago. So it’s not going to change and grow and morph into something different and potentially more valuable than it is. It’s likely to be worth (from a utility standpoint) the same. It’s going to house a single family or be used as a rental and that’s unlikely to be changed a great deal over time. It will age, there’ll be some updating going on, but it’s basic core value – that intrinsic value – is likely to remain pretty stable. That said, there really is a huge financial component to a home and it does need to be factored into someone’s investment portfolio.

    What is a home?

    A home is like a long term, inflation adjusted, savings account – with leverage. The fact is you’re controlling an asset worth many hundreds of thousands of dollars. So your $400,000 home, that appreciates at let’s say at the pace of inflation, is appreciating at 2, 3, 4 or 5 percent per year – as inflation drives the price of everything up. But it’s not inflating just the dollars you have invested, its actually leveraged in inflating the entire value of that home. That actually means a great deal over the long run because now you have an inflation adjusted leveraged savings account.

    Now the housing market is cyclical – it runs through highs and lows. And its exaggerated really to the point that we call them “booms” and “busts”. So an investor, someone who really has no emotional stake in a property, has a short term advantage in housing – from an investment standpoint. An investor who is simply going to rent it out, isn’t attached to the property and if they believe the market is overvalued they can simply sell it.

    A homeowner on the other hand usually buys and sells based on life events. You have a baby and need a bigger home or the kids are off to college and now it’s time to downsize. Well that’s independent of housing cycles. It’s very difficult to be financially shrewd, pull your kids out of their high school so you can sell your home at just the right time. That’s actually pretty rare. So homeowners, families, have a very difficult time capitalizing on market cycles – like investors might in housing.

    On the other hand, homeowners – people that are going to live there – have a long term advantage. It’s a great financial tool for any family, individual, or couple to purchase a home and settle in – for the long run. Just stay there. Don’t refinance, don’t pull money out of it. In fact, pay the debt off sooner if you’re in a position to do it.

    So what does this mean to you?

    If you’re in a position to buy a home and stay in it, then time’s going to be good for you. It’s reasonable to expect that your home is going to appreciate reasonably over time. This is particularly true in light of the ongoing demand for growth and housing in the United States. This is a positive thing for homeowners or any kind of property owner.

  • Lesson File 2