November 5th, 2012
When buying a home, people don’t always consider it an investment, but it is. It’s actually one of the most common, smart investments people make.
But as in any other kind of investments, a home can be an asset, a good investment, or a liability, a bad investment.
A Zillow post by ProfessorBaron.com “Is a Personal Residence an Investment?” breaks down what constitutes a good investment versus a bad investment when it comes to homes.
As explained in the post, the definition of investment is “taking risk with capital in expectation of earning a profit.” So, a home serves two purposes. First, it offers a residence and shelter. But the whole benefit of owning versus renting is you get back more than what you put it. You never get rent back, but if you sell your home down the road, you see a return, and hopefully a profit.
So, what makes a good investment?
First, you need time. The average period of time to see a gain in equity from a home is five years. So unless you plan to stay put for at least half a decade, it probably isn’t worth the investment, unless the home is a huge steal. If you do plan to stick around, a home is a great way to see a return on your cash.
Second, the home should be in good physical shape with adequate insurance. If you want to ensure it’s a stable investment, opt for a fixed rate mortgage so you know just what your costs will be each month. And make sure you purchase a home that not only you love, but that is appealing to other people as well. If the home has certain characteristics that aren’t widely valued, you could have trouble selling.
As for bad investments, those are the homes that have a small likelihood of gaining value. Examples include fixer-uppers and prize properties, which cost much more to own than a similar property would cost to rent.