The carrying costs of owning a home are too high for it to be an investment That’s where thinking of your house as an investment becomes a dangerous assumption. Thinking of their homes as perpetual investments, many engaged in serial refinances, and ended up with an underwater mortgage (owing more on the house than what the house was worth). The widespread use of HELOCs and cash-out refinances made a lot of people feel richer in the short term, but it jeopardized their long-term financial security in the process. Related: Mortgage underwater? Here are your options ![]() That left them unable to refinance to lower the monthly payments, and unable to sell to move to a less expensive housing arrangement. As house values either went flat or declined, homeowners realized they had no equity in their homes. That liability not only creates a reduction of future cash flow via the monthly payments but also puts your house at risk.Ī lot of people found that out the hard way during the financial crisis. ![]() That may put more cash in your pocket for purposes unrelated to the house, but it also creates a corresponding liability. This can be done either through a home equity line of credit (HELOC) or through a straight-up cash-out refinance of your first mortgage.īut when you do either, you are borrowing money against the house. You can borrow the money out of your house, based on the amount of equity you have. There is another way you can get money out of your house, but it is hardly a method that’s risk-free. Related: Should you buy or rent a home? Thinking of your house as an investment can lead to equity stripping If that’s the case, your equity is “trapped,” which means you won’t make a profit, unless you downgrade to a less expensive house, or move to a rental situation. So, you’ll have to use some - if not all - of the equity you obtain from your sale to fund that purchase. However, selling your house means you’ll have to find another place to live. True, houses generally increase in value, but the only way to profit from that increase is to sell them. A house can only be an investment if you plan to sell it Then, some were forced to sell their homes when the market collapsed, so they actually experienced a negative return on investment as they bought high and sold low.Īlthough this happened over a decade ago, this scenario is not unusual when it comes to the housing market, and it’s one of the reasons that largely disqualifies a house as an investment. This latter part was proven during the financial crisis of 2008, when the lack of control over the timing of buying and selling properties had a major negative effect on houses as investments.Īt the time, many people bought houses at ridiculously high prices because that was the time when they needed a home for their families. So, it’s not something you can really do without - like a company stock or a share of a mutual fund, for example.īecause of that, you will have little control over its sale from an investment perspective, as you’ll likely sell it when it no longer fits your lifestyle, and not when it’s more convenient in terms of a return on investment. Probably the single biggest reason why a house is not an investment is that its primary purpose is providing you with a place to live.
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