5 REASONS WHY YOUR HOME IS NOT AN INVESTMENT
Although your home may hold enough untapped equity on which to build a foundation portfolio, it itself is not an investment property. It’s essentially a place where you shape your dreams, you nurture your family and you house your body, mind and soul.
It is also a place for which you work your ass off.
An investment property is something you put your money into with the intention of getting a return, a home is something you put your money into so you have somewhere to live.
Let’s break it down further…
1. IT DOESN’T YIELD AN INCOME
You can’t live off your home. Its value lies in its equity – which you can’t live off to support your lifestyle without paying interest on it and putting your financial health in jeopardy. Using your equity to invest in a wealth generating asset like an investment property could be a good move, but withdrawing your equity to pay for your new car, holiday or your bills may not be the best idea.
2. YOU INVEST MONEY INTO IT WITH NO RETURN
It costs money to hold and maintain your house – mortgage repayments, council rates, water and utilities, not to mention repairs and routine maintenance. Every month you pour your hard earned income into your house so that it is a comfortable, safe and attractive place to live. Does all of this yield a financial return or a tax benefit? Not likely.
One of few ways you can create a financial benefit from your home is to do a renovation which creates more value than it costs. This is easier said than done, because while a cheap renovation might be easy in an old flat, personal taste and emotion usually complicate the process of renovating your home with over overspending on a renovation being a common mistake homeowners make.
3. CAPITAL GROWTH IS RELATIVE
Well, actually, it does yield a financial return – in capital growth, but the problem is it’s relative. If you want to sell your house, then you have to buy another one to live in. Unless you sell a metropolitan house and move to the middle of nowhere, you won’t feel any benefits of that capital growth because every other property nearby would have also increased proportionally. Unlike with property investment, you would not have created an overall gain in wealth or purchasing power.
Having said this, you can benefit financially from the sale of your home if you decide to rent while leveraging the profit from the sale of your home into investment properties.
4. IT COULD HINDER YOUR ABILITY TO INVEST IN OTHER PROPERTIES
Owning a principal place of residence can load you up with a lot debt that doesn’t generate any income. This would reduce the amount you can borrow, by reducing your perceived ability to service the good debt on an investment property. What’s more, a home is an emotional purchase and buyers often pay too much for their home. Doing this could put you into negative equity territory, once again making it harder to borrow in order to grow an investment portfolio.
5. IT MAY HAVE EQUITY YOU CAN BUILD A PORTFOLIO ON
The good news for those who have purchased in a good growth area is that they may have equity with which can be tapped to transition into property investment. Although not an investment in itself, your home can be used as a tool for building an investment property portfolio that does generate wealth and income.
But even in this situation, if you had a portfolio of investment properties, your home would still be a PPOR, not an investment that has incomings and outgoings which translate into financial gain.
HOW INVESTMENT PROPERTIES DIFFER?
Investment properties differ from your home because they make financial sense. Investors who treat their investing like a business don’t get emotional like home buyers often do, instead, they buy properties in strategic locations and at the right price. The properties themselves compliment their financial goals, not only their lifestyle ambitions. This means investment properties can create a passive income and meaningful capital growth, something which a personal home can never achieve.
WHAT CAN YOU DO?
So, although your home is not an investment property, it may hold the potential for you to build a property portfolio without saving for a starting deposit. Building a property portfolio using equity from your own home can be safe and low risk, as long as you buy the right kinds of properties strategically and under the best structure for your goals. Pulling equity out to invest in an income generating investment property will allow you to comfortably service the interest on the equity withdrawn.
The next step for anyone interested in finding out whether their home will help or hinder their investment journey is to consult a specialist investment mortgage broker. A good mortgage broker will understand how to give you the right financial foundations to build a large property portfolio in line with your lifestyle.
To find out more, contact us via the web.
Have you used equity from your principal place of residence to build an investment portfolio? Please share your experiences in the comments section below.