“There is no place like home” -Dorothy from the Wizard of Oz
“Home is where the heart is” -Pliny the Elder
“Coming home is one of the most beautiful things” -Andre Rieu
The quotes above are beautiful and true. The quotes make you feel warmth, love, and longing for family. But from an investment standpoint, a house that you live in is not an investment. A house that you live in is an operating cost. It is the operating cost of keeping your family under a roof to provide security from the outside elements. It is a place to create long-lasting memories. It is a place to nourish love. It is not a place to make money. As such, a house that you live in is an emotional investment rather than a financial investment.
Houses you live in can be great investments because they can appreciate. I have made money on homes I lived in and I have broken even. Luckily, I have never lost money on a home that I have lived in. But, I have NEVER EVER made money on the house while I was living in the house. I have never had rent checks coming in while living in the house. I have never had someone else covering my operating costs such as real estate taxes, utilities, repairs and maintenance, or insurance while I have been living in my house. I have never had someone covering my mortgage while I was living in the house.
And that, my friends, is the fundamental difference between a house you live in and an investment…
A house should be part of your budget. If you make $50,000 per year and do not have outside wealth, there is not reason for you to go stretch on a house out of your financial grasp. Using standardized rules about not spending more than 30% of your gross income on your house, you should theoretically spend no more than $15,000 on your housing costs per year. I am going to ignore real estate taxes, insurance, utilities, and repairs and maintenance for the property because that is dependent on your area.
If we assume that your mortgage can be $15,000 per year, your mortgage should be no more than $1,250 per month. Using a 3.75% interest rate and a 30-year amortization schedule, your mortgage should be no more than $270,000. Further assuming industry standard 20% down payment, your home price should be no more than $337,500.
Remember, your family’s operating cost is at least $15,000 per year in this example excluding real estate taxes, insurance, utilities, and repairs and maintenance. If you have to add another $5,000 to $10,000 in expenses per year for the other property related expenses, is that doable or will it put a crimp on your lifestyle.
The bottom line for residential properties that you live in is that you have to be comfortable with the costs to own the property. You have to think rationally about your finances. You have to know that you can afford the cost of home ownership without stressing your family. If you do not know where to get started, I highly recommend using www.mint.com not only for your home budgeting needs, but also for your general household budgeting.
The goal is to know that you can afford your home so that you can create the loving memories in your house without feeling the stresses related to the expenses of owning your home. Focus on your budget first, understand the costs to own your home, and then create the home your desire. This does not have to be your forever home. You can always upgrade homes as you earn more money through your active and passive income. You may even make money off of the house that you live through appreciation. My only caveat, and forgive me if I sound like a broken record, is that you should not expect appreciation. Hope for it, but don’t bank on it. This is your family’s lifestyle at stake, so make sure that you can afford your home and that you do not get sucked into a house that is too expensive for your income.
Nurture love and long-lasting memories in your house! Hopefully you can also have financial gain from your house even if the house that you live in is not an investment.
Until next time, happy investing!
Robert