Just a roof over your head or an investment? Here’s how to think about your home

Troy Fenske recently bought a spacious townhome just outside downtown Denver with high ceilings and an upscale kitchen. But swapping city life for suburban living was more than just buying into a good neighborhood with more parks and a better “stay-at-home-friendly” vibe while he’s working from home.

The 37-year-old computer programmer says he also views the home purchase through the eyes of an investor.

“It’s definitely both a home and an investment,” Fenske says of his three-bedroom, four-bath townhome. Because housing is typically the biggest monthly expense for most households you should “turn it into a financial opportunity,” if possible, he says. Why just pay rent and pass up the chance for price appreciation.

That’s Fenske’s winning strategy. With his latest home purchase, he saw an “opportunity” to buy with mortgage rates at historic lows. And he zeroed in on a location with “good rental potential” in case he ever wanted to lease the townhome.

That combination of viewing a primary home as both a way to facilitate a lifestyle and boost wealth also went into his thinking when he bought his first home, a fixer-upper he got at a “fantastic price” in 2009. Despite buying the new townhome, Fenske kept his first home as a rental property that brings in more than enough rental income to cover his mortgage.

Saeed Ghasem from Mission Viejo, California, views his primary home a little bit differently. He owns a 1,400-square-foot condo he shares with his wife and two young daughters but is shopping for a bigger single-family “forever home.”

A family-first prism His motivation for buying is more about living in a place that checks all the boxes from a personal standpoint, such as adequate space, good schools, and a good lifestyle. Ghasem, 40, views real estate through a “family-first” prism.

“We are buying a house for the memories, the backyard, the house we want to live in,” Ghasem says. But it’s impossible, he says, “not to be cognizant” that there are financial benefits to homeownership as well as an investment component.

He estimates that the home he bought in 2013 for $450,000 is now worth $625,000. Owning a residential home, he says, gives a homeowner a chance to build equity, profit from any price appreciation, and possibly benefit from tax perks related to deductions for mortgage interest and property taxes.

The ongoing debate over whether a home should be viewed as just a roof over your head or an investment kind of misses the point. The reality is you must live somewhere. And for most people buying a home serves a dual purpose, says Danielle Hale, chief economist at Realtor.com.

“It fulfills a lot of needs,” Hale says. “It’s healthier to view a home as a balance between a home and an investment. Like all assets, homeowners are making trade-offs and trying to strike the right balance.”

Ownership a big part of American life Homeownership remains a big part of American life. At the end of September, more than two-thirds (67.4%) of American households owned homes, still shy of the 69% peak in 2008, according to the U.S. Census Bureau.

Surveys confirm that homebuyers view their home as a good investment. In 2020, real estate ranked second behind stocks as the best way to invest over a period of 10 years, according to a Bankrate survey released in July. In Bankrate’s 2019 survey, real estate was No. 1.

And 83% of homebuyers view a home purchase as a “good financial investment,” according to the “2020 Profile of Home Buyers and Sellers” published by the National Association of Realtors.

“You need a roof over your head to sleep,” says Rob Leiphart, vice president of financial planning at RB Capital Management. You can rent or own. He prefers ownership.

“If you’re going to make that monthly payment, why not at least have (home) equity building,” Leiphart says, referring to the difference between what you owe on the house and its market value.

Emily Johnson, a Realtor at West + Main Homes in Denver, views a house as a place for shelter and a place for parking money. Even buyers who view their home as just a home, don’t completely discount the financial aspect. “In the back of their minds, they want to make sure they are making the correct investment,” Johnson says.

Making a home a great investment Buying at the right price and taking advantage of refinancing opportunities and low borrowing costs can boost the chances of a real estate purchase becoming a great investment, Johnson says. Not “over-stretching” your budget is another way to avoid a home investment souring.

Even though there’s no guarantee a home will go up in price or won’t decrease in value, the odds of home appreciation are better the longer you’re in the house, Johnson says.

The average price of a single-family home was $260,325 through October, up 19% from $219,035 in October 2010, according to the U.S. Bureau of Labor Statistics. The average holding period for homeowners who sold in the second quarter of 2020 was nearly eight years, according to ATTOM Data Solutions.

And while large-company stocks have posted annualized gains of roughly 10% on average over the long haul, homeowners also can count on positive, albeit smaller, home price gains. Home prices have risen 5% on average per year since 1976, according to the CoreLogic Home Price Index. Price gains since 2010 were 4%. But in the 12-month period ending in October, home prices jumped 7.3%.

Home equity remains a big part of most Americans’ wealth. According to Homebot data, “83% of personal wealth comes from home equity at retirement.”

Suzanne Seini, CEO and partner at Active Realty in Orange County, California, tells clients that no matter if they plan on living in a home or not, “you are investing.” She scoffs at critics who say homes are bad investments because extra costs related to maintenance, property taxes and other upkeep costs eat into potential appreciation profits.

Borrowing money from a bank to buy a home, a form of leverage, amplifies return potential, Seini says. A $25,000 investment in the stock market, she notes, that nets a 5% return equates to a gain of $1,250. By contrast, putting down 25%, or $25,000, on a $100,000 house nets a gain of $5,000 on that same 5% return. Plus, you are paying yourself not a landlord.

“You also have the advantage of living and using your investment,” Seini says.

Ideally, Seini says, a home purchase should be viewed as one part of a diversified investment portfolio, that includes retirement accounts, an emergency fund, and other assets with appreciation potential, such as stocks and bonds.

One of many baskets “The key is … not having all your eggs in one basket,” Seini says. “Real estate is one of those baskets.”

Fenske says what he likes about his new townhome is that it gives him not one, but two ways to profit on his investment.

“I build equity as I pay down my loan and can also profit from appreciation,” Fenske says.

This article was originally published by Adam Shell, usatoday.com.