Owning a home of your own has long been described as a key part of the American dream -- and buying a house is often described as one of the best investments you can make. Unfortunately, this is one of the most pervasive and alarming myths associated with real estate investing.
That's because while homeowners tend to have a higher net worth than renters, that doesn't mean buying a property of your own is always a good choice. And falling victim to the misconception that a home purchase should always be something you aspire to could actually leave you with lots of regrets.
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Why treating a primary home as a great investment could get you into financial trouble
The myth that purchasing a primary home is a good investment is especially alarming for a number of reasons:
- It could lead to purchasing a property before you're ready: If you're over-eager to buy a home because you believe it's a great investment, you might be prompted to purchase a property at an inopportune time. This could be the case if you buy a home when you don't plan to stay put for at least a few years or if you purchase a property before you have the money to make a down payment and cover all costs. You'll want to make sure you have good credit, an emergency fund, a solid plan for the future, and have your financial life in order before you buy.
- It could prompt you to stretch to buy a home you can't afford: If you believe your home is an investment that will always pay off for you, you could find yourself justifying spending more than you should. This can put you at risk of foreclosure or could leave you house poor.
- It could cause you to tie up too much of your money: Spending too much of your income on a home purchase could leave you without the funds to accomplish other financial goals -- such as investing in assets that could potentially reduce a higher ROI.
- Your "investment" could result in losses: Finally, you can't assume that properties will always go up in value and that you'll always be able to sell your home for more than you paid for it. While properties usually appreciate over time, there's no guarantees.
What should you do instead?
While it's true that you can sometimes make money by buying a primary home and selling it for more than you paid for it, you shouldn't count on your home purchase to make you money.
Instead, you should treat your house as an expense rather than just as an investment and should make sure to take into account all the costs you'll face including property taxes and insurance. You'll want to make absolutely certain your home is affordable given all the costs and that you're in a good financial position to buy.
You'll also want to remember that while buying and paying off a home will give you a place to live, you can't cash in on your investment in your property unless you sell it or tap into the equity by borrowing. As a result, you'll need other more liquid investments to fund your retirement or help you accomplish other financial goals.
If you don't fall victim to the myth that a home is always a great investment, you can make more informed choices about the role your house will play in helping you grow your net worth -- and you can make sure you are practical in assessing whether a home purchase is worth it. This will put you in a much better financial position in the end.
