Home or Investment

In less than a week I will have lived in four countries in the last two years. Living through so many moves, we have long lost the idea of calling a physical dwelling home. Home is where we create it.

However, treating a real estate property you own as Home or Investment seems like an eternal debate. Almost all the client couples I have worked with had some disagreements about housing. Whether they know it or not, many of those disagreements come from the fact that one side is viewing the property as Home, and the other as an investment.

Of course, I’m not saying in practice it can’t be both. You may very well find a property that you call home and also is a great investment. Nevertheless, I’ve found that it’s difficult to make purchasing, selling, or even management decisions without knowing your priority. In fact, I argue that in order to make any property-related decision that makes sense to you, you need to pick one or the other.

And if you are married, you need to arrive on the same page as to whether you view the property as Home or Investment.

So during this transition season, no matter if you own a real estate property or not, let’s figure out which side you are on, how to get on the same page with your spouse, and how to make the housing related decisions going forward.

Home

I think we can all agree that Home is more than just a property. It’s a place that you associate with comfort, security, and family. You go “back” home instead of going “to” your home. In other words, you have a special emotional attachment to your home that you do not have toward an investment.

Home can even be some place that you do not own. For example, sometimes I still consider my parents’ apartment to be my home, since it is still where I’ve spent the most time on this earth.

It is usually more difficult to come to the decision to sell a home. It generally takes longer deliberation for you to purchase a place you want to call home. People are likely to put more thought into fixing up and upgrading their home.

Some people may have the same attachment toward more than one property. You don’t always have just one home. Or you may not even have to live in the property to feel like it’s your home; whereas the place you are currently living may not be your home.

If you feel this way about a house, a condo, or a farm, you’ll know it. You may also have the expectation that the property you wish to buy in the future will create the same emotional attachment.

Investment

If you intuitively think about a property as an investment, generally you care more about the economic benefit of your decisions, not the emotional benefits. You would rather that your actions make a financial return.

When you view a property as an investment, you care more about its utility than how it makes you feel. You want something that’s desirable to others, not just to you. In a sense, you are making decisions through the lens of the masses. The more the property is desirable in other people’s eyes, the more profit it can make you.

Many people think they want a good investment, but they can’t reconcile their desires for the property with what is good for the investment. If you treat the property as an investment, you will want what will increase your resale value, and features that appeal to renters. None of these may be what you want in a home.

Prioritize Home or Investment

What could go wrong if you don’t prioritize? Either you can’t make a decision, or the series of decisions you make don’t work together to maximize your utility. You would constantly question whether you are making the right decisions.

For instance, a couple came to me specifically to ask me to help them make the decision on whether to buy their first house. The math works out – they have the down payment, the rates are low, and the mortgage payment fits in their budget. The problem is they can’t agree on the property to buy.

The wife kept looking at the nice houses in the suburbs that have all the upscale appliances and large yard for the (future) kids to play. The husband kept pushing for smaller houses closer to town and easier to sell so they can upgrade in a few years. The wife can’t see herself calling the smaller houses home. The husband doesn’t think a nice house in the suburbs is a good investment. So they are stuck in their rental apartment. Neither gets what he or she wants.

Usually the side that views the property as an investment wants to talk to a financial planner. The “Investment” person will surely take my side, right? Unfortunately, that’s not how I roll.

My solution always comes after the couple can agree on whether to treat the property primarily as Home or Investment. Of course, it takes some negotiation and compromise.

Coming up with a joint priority doesn’t mean that the other person’s desire doesn’t matter. It just means that you will try to satisfy the first priority before you move on to the second priority. After negotiation, the wife may agree that the financial benefit of owning a home at a location that appreciates is more important than having a perfect home. But that doesn’t mean that they can’t still allocate some budget to make the Investment as homey as possible.

The same strategy applies to you if you are single. If you find yourself flip-flopping on these decisions, take a step back and ask yourself – is this property my Home or an investment? Once you know which one it is, stick with it, and make all decisions through this lens. You will find that the decisions come more naturally to you and you won’t doubt yourself as much.

Check the numbers

Even though emotional attachment has value, it’s still important to check the numbers to make sure you are not making a financially devastating decision.

I’ve worked with a couple that bought a home they could not afford, but they are unwilling to revisit that decision. In their minds, Home is the last thing they would give up. So, they would sacrifice saving for retirement and even put daily expenses on credit cards just so they can pay 40% of their salary toward housing costs.

On the other hand, to prioritize investment over home doesn’t guarantee that your investment will automatically be profitable. It’s even more crucial that you do the research and run the numbers in advance to estimate a return on investment. Also know that with any investment, there is risk. If you bought a starter house in 2007 hoping to upgrade in 3 years, you would have been very disappointed.

Either way, making sure the numbers work does not equal maximizing profit. If you treat the property as Home, it’s easier for you to accept that it may not be the best investment you could have made. But the opposite is true. You don’t have to find the property that will be the most profitable (unless it’s your goal). As long as it meets your expectation as an investment, it’s good enough.

What should you expect a residential property to return? It’s a matter of perspective. In this Investment Property Decision Tool, I compare the potential return you may get from a specific investment property versus from the US stock market. If you live in this property, it’s unlikely you can make as much profit since you can’t generate income. However, you may be in a situation where you are able to rent out your Home as an investment. This tool will help you estimate how much return you actually get.

I hope this post helps you evaluate your real estate property decisions, on your own or with your spouse! Let me know if it works!