Many consumers will fall in love with their new home and say “this is my forever home.” While it’s nice to dream of that type of scenario, life has many twists and turns. People lose jobs, have children, get divorced, etc. Therefore, things which may seem like the perfect fit at the present time could certainly change in ten years. For these reasons, it makes sense to view a home purchase through the lens of an investor, regardless of how long you intend to stay there.
Thinking like an investor does not mean viewing a home purchase process as strictly a business venture. Rather, thinking like an investor means recognizing that a home is both a place where you live (a personal sanctuary) and a very large financial investment. Only the most intelligent homebuyers are able to see both sides of the coin.
Why Every Buyer Should View Themselves as an Investor
While most people equate thinking like an investor with renting homes or flipping houses, virtually all purchases of homes carry long-term financial ramifications. Whether you realize it or not, by buying a home, you are making an investment in an asset, you incur costs associated with that asset, you take on risk related to that asset, and ultimately you make decisions that may negatively or positively impact your future financial flexibility. Therefore, a buyer needs to use a thoughtful and strategic approach to the decision-making process.
Location: More Than Just Where You Want To Live
Another simple way for buyers to start thinking like investors is to look at the area where you are considering moving into. Look past whether or not you personally enjoy the street, the distance to the nearest coffee shop, etc. Take a closer look at whether or not people in general tend to flock to areas like Rossville, Woodrow, Eltingville, Annadale on Staten Island. Areas that have desirable features (i.e., access to public transportation, good school districts, walking distances to shopping/ restaurants, low crime rates, strong sense of community, etc.) will generally hold their value longer than those that do not. As previously stated, since we cannot predict the future, having a solid understanding of an area’s long term appeal is a huge advantage if you need to relocate unexpectedly.
Layout and Upgrades: Function Over Fleeting Trends
Couple looking at a house together.
Functionality vs. Trendy: Layout and Renovations
In addition to evaluating the area of consideration, the layout of a home will greatly affect its long term value. An inefficient floor plan, lack of rooms for family members (children), or poorly designed functional space can severely decrease the sale-ability of a home even if the interior design is beautiful. As mentioned earlier, buyers typically focus on aesthetic designs however the day-to-day living experience and long term appeal of a home are primarily dependent upon its function. For example, investing in a renovation project with functional improvements will normally result in greater appreciation of value compared to an aesthetically pleasing update.
The same strategic thinking applies to selecting home upgrades. While it is normal to wish to upgrade your home, not every single dollar invested in your home will increase its value. Certain upgrades represent excellent investments while other upgrades will have no effect on value. In some cases certain upgrades may actually negatively impact the saleability of a home if they are overly personalized to individual tastes or priced too aggressively for the neighborhood. Prior to initiating renovations ask yourself: Is this upgrade going to improve functionality? Did I identify a legitimate issue that needed resolution? Am I creating a solution for a problem that exists or am I just improving the aesthetics? Understanding the distinction between these three types of upgrades is essential.
Understanding the Full Cost of Homeownership
Total Monthly Costs Associated with Home Ownership
Think back to the previous point regarding upgrading your home and ask yourself: Have I clearly identified the lifestyle value versus market value of the upgrades I made to my home? These two values do not always align. By distinguishing between the two values you can make more informed decisions. Additionally, understanding your total monthly costs related to owning a home including items such as property tax, insurance premiums, utility bills and possible repair/maintenance costs is critical. While the amount paid each month toward the principal balance on your mortgage may appear reasonable based on your income level, high amounts paid toward these other categories of costs can reduce your disposable income levels. Only intelligent investors carefully evaluate their entire monthly costs associated with an investment prior to committing themselves financially. Likewise, intelligent homebuyers should do the same.
Planning for the Unexpected: Resale Value Matters
Contingency Planning: Resale Value Matters
It is not the objective of being house rich and cash poor. Too much financial pressure due to ongoing housing costs can reduce your ability to pursue new life opportunities (such as relocating for work), force refinancing and/or renovation of your current home due to unforeseen circumstances or limit your ability to adjust your plans. It is considerably easier to consider resale of your current home before you purchase it rather than after you have purchased it and realized your plans changed. Thinking like an investor includes considering resale even if you believe you will never sell your home. Divorce, relocation due to employment opportunity, job loss, sudden illness or death, etc. can occur at any moment. A “forever” home can quickly turn into a “shorter term” one depending on unforeseen events. Being prepared for these possibilities by asking yourself questions such as “Would my home appeal to a wide variety of potential buyers?” and “Does it possess general qualities that are attractive?” provides peace of mind and demonstrates prudent planning.
As previously stated, when you think like an investor you are not gambling against your future within your current home; you are protecting yourself should that future change. There is great comfort in realizing you were fully aware of your choices (and the consequences thereof) when deciding whether or not to purchase a particular piece of real estate. You weighed your desire for emotional fulfillment along side rational considerations of long term feasibility. Such clarity is a much better starting point for any home purchase decision.
Your home should undeniably provide you with a sense of personal connection and meet your needs. However, it should also be viewed as a sound financial asset. These two aspects are not mutually exclusive; in fact, perhaps the most advantageous decisions concerning your home occur when you balance both perspectives.
Therefore, go ahead and buy the home that fits your dreams. Simply remember to also think like an investor while doing so. Good decisions (like finding the right home) never go out-of-style – regardless of how long you intend to occupy it as your “forever” home
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