Owning a house has become one of the key aspirations of many young people. Purchasing a home is considered a good financial decision because it can give you a sense of security and provide you with a place to reside. There is an overriding fallacy that investing in a house is a good investment among Kenyans. This is because, in the past, the value of a property has increased over time.
However, in order to be sure that you have made a good investment, the potential of increasing in value cannot be your only determinant.
There are a variety of factors that make a good long-term investment, and a house does not necessarily qualify as that.
Why a House is Not an Investment
If you are planning on buying a house as a long-term investment, you need to carefully assess your decision. Below are reasons why:
- High carrying costs: These are the expenses that are usually related to the ownership of an investment. A good long-term investment should not constantly require a continuous injection of cash. However, when you buy a house, that you will live in, it will require you to pay property taxes, service your mortgage, pay your home insurance premiums, cover your utility bills and spend money on maintenance. Good long-term investments do not need an ongoing injection of capital that a house usually needs.
- Value appreciation: This is the main reason why many people think a house is a good investment. The entire notion is based on the future value of the house and how an increase in value is regarded as an investment by many people. However, one must not confuse a house and the land that the house is built on. The house may depreciate in value as a long-term investment, but the land it is on is most likely to appreciate in value, if all other economic factors remain constant. Houses like cars became major liabilities in the long-run as opposed to stable investments.
- Home equity is sometimes ‘trapped equity’: When you sell your home, chances are, you will use the equity from the sale to buy a new home. After all, you need a new residence unless you decide to go ahead and rent an apartment. This is what is referred to as trapped equity.
In order to make the investment in a house less of a liability and more profitable, you have the option of choosing not to live in it but rent out the house, or rent out extra rooms, or units. This will help you earn revenue on the house making it less of a liability.
So knowing that about houses, what can be classified as a good investment. The qualities of a long-term investment are:
- It does not comprise the bulk of your portfolio.
Good investments are typically part of a diversified group of investments you make during your life. This includes personal investments such as obtaining more skills, experiencing many things etc.
- You can get your funds when needed
With good investments, you can sell them at any time to get a fair return. Selling your house on short notice will not give you a favorable return.
- The debt required is minimal
Debt required for a good investment is less compared to large mortgages needed to buy a house.
So the biggest challenge with a house is that it the amount of money you have to keep injecting into it in order to maintain it as a good long-term investment. Having a house can be a good investment if you find a way to make it earn revenue for you.
So, you need to examine your reasons for renting or buying a home against your short and long term objectives. Then decide what is good for you and your financial goals.
Learn More:
- How Can I Make A Practical And Good Real Estate Investment Decision
- Why your home is not a good investment
- 10 simple ways to increase the Value of Your Home or Investment Property
