Lots of folks love the Home Depot Weekend: buy some stuff you may or may not need, spend the weekend puttering around. This may be a fun lifestyle, but I wouldn't rationalize it by saying 'we're increasing the value of our home.' The wallpaper that goes up in the den will be stripped out by the next buyer.
Home ownership is not all it’s cracked up to be. So why do the financial gurus roll it out as the best step for those who want to improve their finances? Mostly because home ownership is an excellent form of “enforced savings.” No one wants to see the sheriff setting their fridge on the lawn, so people move mountains to get that mortgage payment in.
I don’t have a problem with home ownership. I do have a problem with people listing their homes in the asset column and assuming they are set financially. Homes are an asset, no doubt about that, but there is a huge difference between an asset we live in and a rental property we own. A rental property is an asset with a capital “A.” A home is an asset with a lower case “a.” We do all kinds of things to our homes which may or may not help their ultimate market value. You put a pool in for your kids and justify it as an asset. When you try to sell that home, some buyers view it as a big lawsuit in the ground.
True, there are areas of improvement that almost always increase a home’s value: a revamped kitchen, a new master bedroom. Home ownership can be a step in the right fiscal direction, or it can also be a huge drain of time and energy. Lots of folks love the Home Depot Weekend: buy some stuff you may or may not need, spend the weekend puttering around. This may be a fun lifestyle, but I wouldn’t necessarily rationalize it by saying “we’re increasing the value of our home.” The wallpaper that goes up in the den will be stripped out by the next buyer.
People tend to “upgrade” with each home they buy. Trading up may lead to a better lifestyle, but it also means there is not nearly as much cashing out on the appreciation as we might think. Often, homeowners don’t see the benefit of trading up until the kids leave the nest and they sell the big place and downsize.
I’ll concede this: home ownership can prevent some worst case scenarios. When you get stuck, you can borrow against a home, and it helps that home equity credit lines are also superior to credit card and car loan rates. But for this book’s purposes, we will take a skeptical view of home ownership as an asset. It only qualifies to be our “asset under development” if it meets certain additional criteria.
To call a home an asset, it must be approached as an investment, with the same analytical disinterest we apply to our other investment holdings. It’s hard to separate out emotional considerations when it comes to the home we’re going to live in. I know some very successful real estate investors that got their start living in homes, fixing them up, “flipping” them, and moving on, but most people don’t feeling like boxing up their lives every year or two.
A lot of folks have gotten rich off the appreciation of real estate, but beware the “click your heels together and wait for the price to go up” mentality. Contrary to popular belief, the appreciation of real estate is not a given.
So how can a home become an asset? Start by making good on the first principle of business: buy low, sell high. Good real estate investing often comes down to a simple question: how much did you pay for it? You have to know your neighborhood and your market and the cost of time and materials for the fix-ups. You have to know which enhancements are marketable and what the red tape (inspections and building regulations) is in your area. And if you find a home outside of your price parameters, no matter how much you covet it, you cannot buy. Not if you want to call it an asset.
If you have the skills to fix up your home yourself, that’s yet another way you can add value to the price you paid. The more you have to outsource the improvements to specialists either due to lack of time or the regulations in your area for trade work (electrical, plumbing), the harder it is to make money through rehab.
Unless you live in a “lucky area” where home prices are surging and you’re locked in, the way to succeed in real estate is by approaching it as a true business. For those who put their energy into mastering a specialized aspect of real estate (new construction, foreclosures, buy/fix/flip), it can be one of the best side businesses you can start. The upside is high, and the risk is buffered by the underlying asset. If it’s hard to increase the value of a home, it’s even harder to wreck it – though I understand the artist once again known as Prince is being sued by NBA player Carlos Boozer for “Princifying” one of Boozer’s homes.
Perhaps it’s a disadvantage to invest in real estate when you own your own home (it may limit your purchasing power on investment properties), but this can be overcome. The main thing is to make sure that the time you spend on your own home doesn’t suck up the time you spend pursuing your investment strategy.
Real estate investing has been vital to my own efforts – my company would not be in business today without two buy/fix/sell properties I turned around in Boston in the late ’90s. The one thing to remember is that real estate is not a very liquid asset. Until the point where you own a bunch of properties and can leverage one against the other, it’s easy to run into a cash flow pinch.
At one point during our rehab projects, I almost lost my job. I had to take a pay cut and carry $5,000 a month in mortgage payments on credit cards. While I was carrying those mortgages, I found myself in a work situation that I really needed to walk away from. But I could not afford to lose that job until the homes were sold, so I sucked it up and endured one of the most ridiculous years of my life. It was probably a smart decision, but I was dogged by a feeling of self-betrayal.
Whether you are improving your own home or buying rental properties, make sure the real estate business suits you. I’ve already written about why I chose to develop books instead of real estate, even though real estate is the better investment: my passion lies elsewhere.
Life is too short to focus on side businesses we don’t love. Our work lives are already filled with projects we have misgivings about. Anything we start on the side needs to lean more towards “labor of love” than grudging responsibility. We can (and should) take the marketplace into account when we choose our projects, but not to the point where we have tenants with broken water heaters taking us away from the next Great American Novel.
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