I recently sold my home. Due to its declining value, I ended up paying right around $10,000 to make it happen. Even though I wasn’t underwater on my mortgage, the value had dropped enough since I bought (at the peak of the market) that, while I could pay off the mortgage with the proceeds from the sale of the home, there wasn’t enough left over to cover the real estate commissions.
It’s been a long time since I’ve thought of my home as something that provides financial value. Right now, I’m not interested in buying again, but I have been thinking about what could have been done to get the most financial value out of a home for the long run.
Your home: investment or not?
Even though I wasn’t happy to pay so much upon the sale of my home, it was something I was prepared for, since I knew I wasn’t buying with the idea that the home would be a money-maker. I wasn’t sure how long we would be in the area (we ended up living in the home for seven years), and I knew we’d be paying interest, and other costs. I never viewed my home as a true financial investment, which is why I wasn’t completely devastated when it came time to sell.
“A family needs to decide whether or not they are going to be using their home as an investment,” says Adam Walden, a Realtor from Bonita Springs, Fla. “A family that has decided they are going to make it a generational home has decided that an investment is the furthest thing from thing from their minds.”
One the other hand, a family that plans to purchase a new home every two or three years has a different goal, and investment should be at the front of their minds.
Some of the items to consider if you’ve decided to go the investment route include:
- Rental: “If the rental market is hot, then renting out your investment may be the best option to maximize profits,” says Walden. If you do this, it’s important to keep upgrades to a minimum. Even though you need to keep up with repairs and maintenance as the landlord, there’s no reason to make major unnecessary upgrades.
- Remodeling: In some cases, the right remodeling can be a way to improve the financial value of your home. “If you have already purchased a home and want to turn it into an investment, you need to look at its current state and decide where your money is best spent for updating and remodeling,” says Walden. He suggests that you start with the kitchen. “Nothing will give your home more value than updating a tired kitchen. This room in the home is usually at the top of every buyer’s list.”
- Self-expression: Walden also suggests that you avoid too much self-expression when decorating the home. “Your style is not necessarily the style of the masses. When you have invested your money into your home to express who you are, understand that you are taking a risk,” he says. Instead, choose paint and carpet in neutral colors. That way, buyers can picture themselves in the home, and impose their own personality on the house.
If you’re going to get maximum financial value out of your home, it makes sense to keep it generic, make regular repairs, and keep up with the maintenance so that the home remains attractive and retains some of its value down the road.
Should you pay it off?
Another consideration is whether or not paying off your home quickly makes sense in terms of financial value. “If you always live in your home, you won’t get a ‘return’ on that home unless you sell it,” says Angie Grainger, a CPA and CFP, and president of Black Belt Financial & Insurance Services.
Grainger looks at long-term homeownership as an investment in cash flow. “If it’s paid off, you will improve your cash flow for the rest of your life by not having to make a house payment or pay rent,” she says. “That can be huge.”
However, in order to make this scenario work, Grainger says you have to practice restraint. “Most people seem to take out the equity and spend it, thereby extending their payments for another 30 years. Many people never expect to pay off their house.
She says that the real financial value in homeownership is the fact that you don’t have to pay for a place to live (other than paying property taxes if applicable, and keeping up with insurance, utilities, and maintenance). This can mean a lot down the road, especially during retirement. “Imagine that you have a $2,000-a-month house payment,” Grainger says. “The sooner you get your house paid off, the sooner you will be earning $24,000 per year by not having to make that payment anymore. Where else can you earn a return like that?”
Even if you decide to keep your original mortgage for the entire 30 years, rather than paying it off early, you can still benefit in later years by not having that payment. You can invest your money instead of making extra home payments, earning a return that beats your low, tax-deductible mortgage interest, and when the 30 years is up and you are ready to retire, you have a tidy nest egg and a very low-cost place to live.
Extra ways to make money
Don’t forget that you can get a little more out of your home if you consider extra ways to make money. You can rent out rooms using services like Airbnb and VRBO. I know people who rent out driveway space during parades and football games. If you live near a busy area, or near where a major event is taking place, you can use that to your advantage. Today, there is no one way to get ahead, and your home really can provide an income, as long as you are creative and resourceful.
What are some of the ways you try to wring financial value out of your home?