NEW YORK (BankingMyWay) -- A house is a home. No, it's an investment. OK, then, it's both.
And that's problem -- a muddled view that can be used to rationalize an unsuitable property. If the home's too expensive, we figure, well, it's a good investment. And if the value isn't rising as we'd hoped, we say, well, it's a good home. In fact, the property may not be serving either purpose as well as it should.
Disentangling these two functions is key to making the homeownership decision more rational. That's becoming more important as some experts warn about a new housing bubble, at least in some parts of the country.
"Bubble Fears Emerge As Experts Predict Home Value Appreciation Will Remain Above 5 Percent This Year," proclaims the headline on a recent press release from Zillow (Z), the mortgage and home-selling website. Zillow said its survey of 105 economists unearthed growing concerns that low mortgage rates will push home prices up too fast. If a bubble follows and bursts, homeowners would be left underwater -- owing more than their homes are worth.To avoid this, you can keep the home you already have or rent instead of owning. But renting means you don't build any equity. So how do you figure how much of your home expense is an investment that will grow in value and how much is the cost of shelter -- a cost you'd have whether you rent or own? Actually, it's fairly simple. The investment portion of your cost is the down payment and principal portion of the monthly payment, plus the cost of major improvements. That's the money actually put into the home you hope to get back after a sale, plus gains from appreciation. For the investment to pay off, the value must grow enough to leave you with more than you put in, accounting for costs of buying and selling such as the real estate agent's commission, real estate transfer taxes, legal and document fees and so on. Imagine you'd bought a $300,000 home with 20% down and 4% for transfer tax and other purchasing expenses -- an initial investment of $72,000. Now assume you had a 3.5% loan for 10 years and put the home on the market. Your investment would come to $126,176 -- the initial $72,000 plus $54,176 in principal through your monthly payments. (In other words, your loan balance would have dropped from $240,000 to $185,824.) If the home sold for $400,000, you'd pay $24,000 in commission, plus, let's say, $3,000 in other costs, so you'd net $373,000. After paying off the loan balance, you'd have $187,176. So you'd have made $61,000 on your $126,176 investment, or about 4% a year.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV