Residential Real Estate is Not an Investment!

I bet I got your attention with that headline!  The housing market of the last 24 months highlights a concept I have tried to explain to all of my buyer clients over the last several years (yes well before the current meltdown). It is a simple concept but one which I have been derided for by other members of my industry. The concept of which I speak, primary residences are not investments but rather lifestyle choices (oh, the horror, the heresy).

I look at investments as being things I don't have to water, paint, replace roofs, fix sprinklers, and a whole host of other items which fall on the expense/maintenance side of the ledger (just an FYI – new paint or carpet is not a capital improvement, it an expected maintenance item). Now for those of you in my industry who will immediately respond “but what about income property/rental property?” we are in full agreement: income-producing items are investments. The key word there is income (as in ongoing consistent income). Since a primary residence does not generate ongoing income (and no I don't wish to get into the theoretical discussion on investment economics), I place a personal residence in the category of lifestyle choice.

What do I mean by lifestyle choice? Very simply, it is the ability to conduct oneself on a day-to-day basis as they see fit within the confines of where they live. Want to knock out a wall? Go for it. Want to paint the living room purple? Go for it. Want to plant and cultivate an herbal garden? Go for it. No need to check with the landlord. You own it so feel free to be creative (within the confines of zoning laws, of course).

Don't like the rendition of Led Zeppelin you hear from the apartment next to you as they play Rock Band? Home ownership could be for you. Don't like that the tenant in the apartment above you decided to take tap dancing lessons as an exercise regimen? Home ownership could be for you.

However, if your only reason for owning a home is a tax credit or a mistaken belief that you can simply sell this asset for a 50% profit in three years - perhaps you may not be an ideal candidate for home ownership (at least in terms of facing major disappointments at some point). Also, if you're going to only live in the property for one or two years before relocating or a job change, once again home ownership might not be the ideal choice. By the same token, if you value the lifestyle that home ownership provides, then even a short-term living situation may warrant owning a home.

As I talk with buyers, I always ask why they are considering purchasing a home. The range of responses one receives to that question is very instructive. The responses are invaluable to me as I advise my clients as to potential property “fits.” After some initial back-and-forth and a variety of different property types, my clients invariably come to appreciate the value of choosing based on their preferred lifestyle (one within their means of course) as opposed to what might make the best “investment.” All of a sudden, the way buyers look at properties takes on a different objective. I have also found as I follow up with my clients, those that truly did select a home based on their lifestyle focus, they tend to be happier with their purchase over time.

Now, should that lifestyle purchase happen to appreciate in value over the course of their ownership, that's a great bonus but should not be the primary motivator.