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Your Home Is Not The Same As An Investment Property
Your home can mean a number of things to you.
It could be your escape from a hectic job, your pride when friends come to visit, and even your sacred place of worship.
Property investing is not the same as being the owner of an apartment.
Since it seems like everyone is rushing headfirst to purchase properties to get a piece of the property pie, it is even more critical that you understand that your home is not an investment property.
Thinking otherwise can be detrimental to your finances.
Not because the value of your home will depreciate (not impossible), but because you are probably going to spend more money living there than you will ever make from selling it.
Investing is about making more money from using money. Buying a home is spending instead of investing.
Returns must be higher than inflation as well or you might as well just buy treasury bonds and save yourself from all the hassle of property investing.
When you start off learning about real estate investing, you might come across hundreds of formulas, ratios and equations that savvy investors use to measure their investments.
All of them filters down to the very fundamentals of investing – profits and cash flow.
This is the key element that is missing from your home.
You might be thinking this is crazy.
You bought your condominium in 2003 at $800k. you spent close to $200k over the years on renovations, remodeling, interior design, and furnishing. Now it is worth $1.5m.
How can it not be an investment when you are sitting on $500k of minimum profits?
This is an issue for a lot of home owners.
They take the selling price minus the cost and derive the remaining as profits.
But everyone knows deep inside that it is not as simple as this.
Why you are not making money from your home:
1) Firstly as explained above, you are sitting on paper gains only.
Whether you do make money from your home also largely depends on being able to find a buyer that is willing to pay market price.
2) You have been paying interest on your mortgage.
You must be made aware that most mortgages have a huge proportion of your installments going to paying off interest instead of offsetting the loan principle during the initial years of the loan.
Mortgages are also known to cost you many times your original loan amount if you hang onto it for the full tenor of the loan.
3) You have refinanced with an equity loan.
If your property is now worth $1.5m from an initial purchase price of $1m, you might have refinanced and taken up an equity term loan.
So your mortgage owing has not decreased over the years but increased instead.
If you tally this up together with the interest you have paid over the last 10 years, you will find that you are not doing as well as you think.
4) Painting, repairs, remodeling, etc can take a huge chunk off your personal account.
Over 10 years, you must have spent considerable sums to upkeep your property.
Expenses include property tax, insurance, replacement of furniture and electronics, plumbing works, maintenance fees, utility bills, etc.
These are costs that you have to factor in.
Note that if your home is not in good condition, it might not be worth $1.5m.
5) You will be using the proceeds for your home sale to buy a new one.
If you are doing this, the profit you are thinking about is an illusion.
You are selling your home at high prices to buy a more expensive one at high prices.
You will also be taking up bigger mortgage this time.
Even if you downgrade you are buying lower tier homes at high prices. This is hardly profitable.
Even when you have worked out all your numbers and somehow arrived at a positive number, you must compare it to a benchmark.
The benchmark that most investors use is bond rates.
Look out for the safest and highest return bond you can find and calculate if it will make more money for you over the last 10 years compared to your home.
Still think your home is an investment property? Think again.