Do you know anyone who remodeled their home? Maybe it was making over the kitchen and
bathrooms? Maybe it was an in-law
addition? Or a new deck? Or maybe even as simple as new siding.
If you’ve done this, I’m sure that you were quite excited
with this new project. Saw yourself
cooking fabulous meals in that new kitchen.
Or taking a nice relaxing shower or bath in that new bathroom. Or enjoying the view out on that new deck.
(You might not have
enjoyed the time while construction was taking place, but that’s another
story…)
Recently, I posted on my LinkedIn profile an article from a
housing industry expert. Robert Shiller,
of Case Shiller housing price index fame, was interviewed in on TV recently
regarding the housing market. An article
about his interview is here.
I’m sure very few people initially viewed buying their home
as an investment. Yet many people
justify home improvement projects that way.
One thing that Mr. Shiller argues is that housing is a
terrible investment from a liquidity standpoint. That is, it is very tough to get “cash” out
from this investment.
Think about it. If
you wanted to withdraw money from a savings account, you could do that very
simply. And it was just take a ride to
the closest ATM, and press a few buttons.
What if you wanted to take money out from a house? Sure you can get a home equity loan. But how fast is that? There’s paperwork, then an appraisal, then
more paperwork, etc. Typically, this
takes at least 30 days. Similar to this
would be to refinance and take cash out.
Or you could sell your house. How long would that take?
Once you get past all of the paperwork, how much “cash”
could you take out? If you had $100k in
a savings account, you could withdraw all of it. But if you have $100k in equity in your home,
how much could you withdraw? Most loans
will limit you to a certain loan-to-value percentage. That $100k in equity is really worth $80k or
so.
Assuming, of course, that the bank approves your loan.
Another aspect to “investing” in a home (especially home
improvement projects) is the return on investment, or how much of that project
cost will the homeowner get back at time of sale.
Every major personal finance magazine, and many news sources
have articles on the “best” home improvement projects in terms of how much
money can you recover. The “best” projects might return 90% - 100% of the
cost. But many others return less.
Still, if a project returns 90%, that sounds pretty good
right?
Think about what that means – a project that will return 90%
of the cost at time of sale means that
YOU ARE GUARANTEED TO LOSE 10%!
If you knew before you “invested” in something that you were
guaranteed to lose money, would you still invest?
Mr. Shiller’s interview doesn't suggest you shouldn't buy a
house or remodel your kitchen. A house
is more than just an investment, it’s a home. It’s somewhere you live, have a
family, entertain friends and family, and relax with loved ones.
And the great view off that new deck is priceless.
Next time you consider buying a home or improving the one
you already have, do it for love, not money.
What improvements have you made to your home? Did you do it for love or money?
