Home > Mortgages > Owning a Home: Investment or Liability?

Comments 3 Comments

We all know that the best way to make money grow is to invest — but the stock market can be a scary, unpredictable beast to those who don’t have experience with it. That’s why many choose to invest in real estate — whether it’s for your own home’s equity, buying homes to flip them, or generating rental income. Since real estate is a physical, tangible thing, the illusion is created that it’s controllable. But what happens if you end up not being able to make a mortgage payment, if no one buys the flipped home, or you can’t find a renter? Here are the pros and cons of choosing real estate so you can decide for yourself if it’s truly an investment … or a liability.

Home Equity

Many people view their own home as a real estate investment. We all need a place to live in anyway, so it just makes sense, right? It depends. It only makes sense if you’re truly financially ready for homeownership. What does that mean, exactly? For starters, aside from having sufficient savings for a down payment and an emergency fund for repairs, you’ll have a mortgage payment and taxes to deal with. Then, there’s the possibility that you signed on for a mortgage with a variable interest rate. If that’s the case, then be sure to have a contingency plan (read: another savings account with funds to cover an increased payment) for when your rates inevitably go up.  Otherwise, you may have a liability on your hands.

So let’s look at how you can pick a home that is good investment material. If you purchase a home in an area that has generally increased in value over the years (or shows promise to grow in coming years), then you could be in good shape for your home’s value to increase as well. Take a look at things like the school district, local businesses, public services, crime reports and growth data. If you’re buying in a well-established neighborhood, then that could be a more solid bet with a slower (but more steady) growth rate. If it’s an up-and-coming neighborhood, then you’re taking a risk but could stand to make a lot. Like any other investment, it all comes down to your tolerance for risk (and, in this case, where you’d actually want to live for potentially the next 10 to 30 years).

Flipping Houses

Another method of real estate investment is “flipping.” To flip a house means buying a house that needs a lot of repairs and improvements, doing the repairs yourself or paying to have them done, and then selling it for more than the purchase price and repairs combined. If you are an expert at home repair and/or home design, then this could be an excellent (although possibly expensive and definitely time-consuming) way to earn extra money. Be careful to choose your neighborhood and timing wisely, just like with your own home. Any money you invest should be money you can afford to lose, since the housing market can fluctuate much faster than you’d expect.

If you’re interested in doing this, but lack the necessary skills, you could pay someone to make the repairs. This does increase the overhead of the investment quite a bit — crunch the numbers so you know what you’d need to spend and how much you’ll have to make on the sale to turn a profit. Try speaking to professionals in your area to get a better idea of whether or not this is a worthwhile investment for you. Of course, you shouldn’t go into debt to make this investment.

Rental Income

Rental income — whether you are renting out part of your own home or a property that you’ve purchased for that reason — comes with its own set of risks and benefits. If you have a basement or attic apartment you’re not using, it could be a prime opportunity for rental income. The con is that there will be a stranger living in your home, so be sure to carefully screen and choose your tenant. You could invest your money in creating a separate entrance in order to protect your own living space. To make this a safer investment, be sure that you don’t purchase a home above what you an afford with a plan to subsidize part of the mortgage payment with rental income. At that point, you might be taking too great of a risk if you don’t find a renter or your renter doesn’t pay — which could cause you to default on your mortgage. Keeping within your budget without considering rental income will, of course, make that income all the more beneficial to you.

If you’ve purchased a home to rent it out, the same risk of default applies if your renter falls through or if you can’t find one. You’ll also have to accommodate for inevitable repair costs and updating costs to keep the home in living and sellable condition. So while this can be another great way to earn money (especially if you choose a home in a neighborhood renters want to live in — often young professionals) it’s still a risk and, ideally, not one for which you should take out a mortgage.

At the end of the day, all three of these could be solid options for investment if you’re prepared for whatever problems could arise. As always, you’ll want to make sure your own financial house is in order before you get involved in any kind of significant real estate commitments. That means staying away from other types of debt (like credit card debt) and ensuring your income exceeds expenses. And remember, home values are affected by the general state of the economy, the population growth rate and the fiscal health of the neighborhood. Make sure that you’re playing to your strengths in this decision so you don’t take on more than you can handle.

Image: Siri Stafford

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Isabel Sinton

    I own my home and recently retired on Social Security only.

    Its slightly over $1000. a month. My taxes are $110. a month and Homeowner’s Insurance is $700 a year. I am glad I paid a mortgage instead of renting. Retired friends who scoffed at me and chose to rent, are still paying a large percentage of their newly lowered income to keep a roof over their heads.

    Yes, Liz, they have the ‘Freedom ‘ to move, but not the financial ability to go anywhere they want and buy food simultaneously.

    I always have the option of a reverse mortgage. renters do not.

    It is important to think ahead. Far ahead.

    • http://www.credit.com/ Credit.com Credit Experts

      Very valid points, Isabel. There are pros and cons of each, and as you said — “It is important to think ahead. Far ahead.” Wise words, indeed.

  • liz

    No, thanks! I’ll stay a renter and keep my investments in the market. Over the last five years (so, including the big crash in ’09) I’ve had 9.5% annual increase. The Case-Schiller folks have shown that over the long term, housing barely out-paces inflation, whereas the market shows 8% annual increases in most 30 year periods. Plus, I have the freedom to move wherever the job market (or my love life!) takes me. I don’t have to do maintenance, pay condo fees, or worry about the school district, since I don’t have kids.
    Sure, if you can’t force yourself to put money in the market every month (and keep it in when times are tough), you’re better off in the “forced” investment of real estate. But if you are disciplined, even a novice can do well in index funds (that’s what I do). Try that in real estate!

  • Pingback: Owning a Home: Investment or Liability? - Debt and Credit Management.com()

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team