The thought process, expectations, and intended outcomes from a real estate investment and homeownership originate in different realities. Seldom, if ever, do the two philosophies meet. A real estate investment is represented by an outlay of cash (equity) in exchange for an expected return on investment (yield). Few people can commit investment dollars to a property because it is cute or has a good vibe. Your home is not real estate because the value it creates is not measured in financial terms, nor would you sell it purely for monetary gain.
Your Home is Definitely NOT Real Estate
Why am I so adamant about saying your home is not real estate? Well, yes, it is “real estate.” It’s just not a real estate “investment.” A home and a real estate investment are two entirely different things. Whereas there is no better way to build wealth than through homeownership, homeownership represents far more than a simple idea; we call our home our castle, refuge, and kingdom. Do you ever hear anyone say that about an investment duplex? No.
Buying a house is a significant financial decision that can give you peace of mind and a beautiful place to live your life. But it’s not an investment. Money Under 30
Homeownership allows a family to advance on many objectives concurrently; a home provides shelter, safety, peace of mind, a sense of place, community, comfort, and, often, joy. No place in this description have I mention financial security or gains in value; these are possible advantages but cannot be counted on, nor should they be in terms of why you purchase a home. Any financial gains are ancillary to the underlying reasoning of buying a home.
Your home is not real estate because, aside from affordability, the reasoning behind the purchase places yield on investment below the top five reasons for the purchase. Sure, we all wish to purchase a home in a neighborhood we believe will offer some appreciation over time.
I submit a few people to perform a return-on-investment (ROI) analysis when buying a home. In contrast, every single last real estate investment asset is put through the paces of ROI immediately.
One of the advantages of homeownership is having a fixed cost of living. With a fixed-rate mortgage, the is a “fixed” payment monthly – forever (notwithstanding changes to taxes and insurance). Over time this one factor brings stability to living expenses well into the future.
Think about your current lease; how much will you pay for rent next year? And the year after that? And the year after that? Exiting from this unknown fate to a fixed-rate mortgage (forever) is an advantage to homeownership that keeps on giving year-after-year. This feature, this advantage – a long-term fixed payment for housing is unlike goals oriented towards real estate investing.
Real estate investing represents an on-going part of a well-diversified investment strategy. A home is a home – a place to have and hold memories, stories of life, and living. It’s…home.
Most investors are under-allocated in real estate, believing their residence is part of this allocation. That thinking allows for wrong-headed decisions. Does a person that owns two one-million dollar homes, one they live in and one they rent own two-million dollars in real estate.
From my frame of thinking, the answer is no. The reasoning is that economic changes in the economy that would persuade them to liquidate to redistribute or reallocate their investments will likely exclude the decision to sell the house where they reside. Why? Because they do not consider it an investment. It is their home. What people regard as real estate assets owned is vast and often confusing.
Do You Own Real Estate: Paper or Parcels?
Do you own paper investments, such as stock or mortgage debt, or bonds with real estate as security? Or do you own the actual dirt, land, houses, storage facilities, a gas station, warehouse, or storefront? This knowledge about the varying types of real estate-related investment vehicles allows for a much more honest answer: excluding your home, do you own real estate?
The variations are endless; REITs (Real Estate Investment Trust), hotels (direct ownership or stock purchase), mortgages (debt), a commercial office building, a strip mall, land. All of these represent a derivative of real estate exposure, and none represent homeownership.
Seasoned investors believe themselves invested in real estate with ownership of a limited partnership that owns a building, for example. They indeed have a fractional ownership interest. What they own is set out in the documents of a Limited Partnership Agreement, security agreement, or bond issue. Here is a simple definition of real estate ownership:
A person that owns real estate (ie: homeowner) has the full rights to the benefits derived from the investment.
In my view owning stocks or bonds secured by real estate represents the investor (you) placing money into real estate securities as represented by equity (stock investment) or mortgages (bonds). Real estate ownership is entirely different.
Your security interest is served by documents that convey minuscule percent ownership is the underlying asset that is usually buildings on the land. You have no right to alter anything other than selecting the officers charged with managing the investment.
Someone that has “full rights” to the land and buildings set thereon is a homeowner. The homeowner resides within and can alter or make changes (within reason of zoning laws) and thus does indeed own the real estate and have full rights to its use.
A simplified look at a real estate investment considers the yield delivered by the investment. This view confirms that your home is not a real estate investment as it fails to provide a return or income. Excluding the “yes but” outliers, a real estate investment does this: investment real estate offers four forms of yield. They are:
- Income – as derived from rents or other ancillary income generated.
- Tax shelter – provided by the depreciation of the physical asset over time
- Appreciation – the increase in value over time
- Mortgage pay down – the growth in value created as income decreases debt.
Allocation theory suggests that a portfolio should have between 5% and 15% of real estate (excluding your residence). Thus, investors should have between $50,000 and $150,000 in real estate for every one million dollars in net worth.
When excluding your residence, what percentage of your investment portfolio is in real estate? Direct real estate ownership provides a buffer to the daily market swings in stocks and bonds. Real estate is an essential part of a balanced portfolio.
New to Homeownership?
Becoming a homeowner builds personal wealth; it will positively impact your net worth over time. Homeownership is a cornerstone of building personal wealth.
For those new to homeownership following is an excerpt from my book 12 Steps to Homeownership: A Guide for First Time Homeowners. If you already own a home, consider giving this book to a family member or friend that is in the market for a home. This book will save them hours, if not weeks, and point them towards a clear path forward through the home buying process.
When buying a home, as the dollar amount gets more significant, more and more people seem interested in how, where, and why you are buying a house. Please remember that no matter the dollar amount, if you are purchasing a home with your very own money and your opinion is the only one that matters. The caveat being you will want the house to be of good quality and financially sustainable. Never wave inspections for expediency in pursuit of a home. Hire the inspector that reports only to you. Inspect, review results, contemplate, proceed accordingly.
What makes the home buying decision so difficult? Because it is often both an emotional and financial decision. Many people tend to tie their “self-worth” to the value range of the purchase (this is invalid thinking, to say the least). The home buying decision is hard because of fear; fear of making a mistake, fear of losing out on a better place (if only we had waited), fear of over-paying, fear of unforeseen market forces. Let me try to remove some of these fear factors.
For your entire life, you will require these three things: food, water, and shelter.
For your entire life, you will require someplace to live; why not own it? Yes, mistakes occur, that prices are sideways, that your dream house sold before you could make an offer. All of these things are possible. Yet one thing can remain a positive constant by becoming a homeowner; at some point, you will own your home free and clear. Becoming a homeowner will never occur if you decide to remain a renter. From 12-Steps to Homeownership: A Guide for First Time Homeowners. Tips to Save You Time & Money and Avoid Rookie Mistakes. By John Wilhoit, Jr.