Americans see home as an investment again. Is that good?
For the first time in years, Americans are seeing their homes as investments.
The American Dream of homeownership—having a place to call your own—may not have dissipated during the housing crisis, but the concept of home-as-investment tumbled just as home prices did.
According to a recent Gallup poll, real estate beats out stocks, bonds, savings accounts and even the Great Recession's investment darling, gold, as the favored form of long-term investment. A full 30 percent of Americans see real estate as the best investment—up from just 19 percent in 2011.
A new survey by the Pulte Group echoes such sentiments: 35 percent of Americans reported that they would like to buy a home soon in part because they see it as a smart financial investment, said Valerie Dolenga, spokesperson of Michigan-based home builder, Pulte Homes.
This kind of growing confidence should make us all wonder, though: Haven’t we learned anything from the housing crash? One of the big takeaways from the crash was to avoid this exact line of thinking.
During the heyday of the housing bubble, plenty of people bought homes just to sell them a few years later, taking advantage of steady and predictable price growth. They then turned around and took all the tax-free money gained by exploding home prices and invested into their next house, fueling the cycle.
But that doesn’t make for a sound investment strategy, and when the bubble burst, anyone caught up in that suddenly saw their home equity drain away. It became pretty clear pretty fast that treating your home as your primary investment was actually more of a gamble than a guaranteed return.
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Now that the market is recovering, and home prices are growing again—in fact home prices are at an all-time high in nearly 1,000 cities across the country, according to Zillow—the siren song of seeing your home as an investment is becoming tempting once again.
But if you really want to treat your home as an investment and make some money off of it, you have to make smart choices. Think about these four steps to making a home not just a place to call your own, but a real investment as well.
1. Be strategic about where you buy.
Scott Lauri, owner of ERA Levinson Realtors in New Jersey, suggests that your best bet is on a place near a major metropolitan area, off a main road and in a thriving neighborhood.
“A lot of people are coming back to wanting to be in a community atmosphere, rather than all on their own in a single house without neighbors nearby,” he said.
Dolenga agrees. “You want a good neighborhood, near amenities that are specific to that demographic.”
But you have to go deeper than that.
You really have to think about who lives in the neighborhood, what kind of jobs they have and if their salaries and wages are growing. Home prices very closely mirror the income of the people who live there, so if you live in an area where everybody is a cop or teacher, at best home prices will go up about 1 percent a year. But if there’s a mixed and expanding job base where salaries are growing, home prices will follow.
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2. Buy a home that is not in perfect condition.
You need room to build in value to the home through some minor renovations. So buy a home that needs some work, such as refinishing the floors, upgrading the kitchen or peeling off the ugly wallpaper. For the best return on investment, look for a home that needs a facelift, not a complete overhaul.
Focus on areas where you will see the biggest bang for your buck. Dolenga, who recommends focusing on the kitchen and bathroom, goes so far as to say the kitchen is the “heartbeat of America.”
Look for a strong layout, even if the details need a little work, and a home with more than one bathroom.
“Not many people buy houses with just one bathroom anymore,” she added.
3. And especially don’t buy the best house on the block.
Buying the best house in the area would limit your potential for price growth. Putting some good, old-fashioned elbow grease will boost value much farther when you’re buying the smallest, ugliest house on the block rather than the biggest and best.
“Buying the ugly duckling of the neighborhood is the better investment than one in pristine condition,” particularly in the short term, Lauri said.
He recommends asking your real estate agent to pull all sales from around the area -- not just comparable sales -- so that you can see the neighborhood's big picture.
4. Want a profit? Expect to stay put for at least five years, and probably closer to 10.
The longer you stay, the more time your home has to value and to ride out any dips in the market.
“At about three to five years you’re probably OK,” Lauri says, “But seven to eight years is the sweet spot.”
As a rule of thumb, don’t expect to profit without owning a home for at least five years. It costs about 10 percent of the sales to move, between the commission, closing costs and fees and the cost of the move itself, so your home value has to go up at least 10 percent just to break even. At a typical rate of inflation, that takes about five to 10 years to happen. The longer you stay, the more safety you have in your home investment.
Ilyce Glink is an award-winning, nationally syndicated real estate columnist, blogger and radio talk show host, and managing editor of the Equifax Finance Blog. Follow her on Twitter @Glink.
