Investment Value

For the most part, homes increase in value at a rate of approximately four or five percent a year. This phenomenon is known as “appreciation.” In some years, this increase will be higher; in other years, this increase will be lower. Also, this figure varies from one neighborhood to another, and from one region to another. However, an overwhelming majority of the time, the value of a home goes up, not down, as the years go by.

Five percent probably sounds like a small amount. You might think, I may as well invest in stocks, bonds or even treasury bills. However, you have to do a little bit of math to discover the true investment value of a house.

Let’s say, for example, that you paid $300,000 for a house. Chances are, you didn’t fork out this amount in nickels and dimes. You probably took out a mortgage in order to pay for it. A mortgage would have required you to put out a down payment. Let’s assume you decided that this down payment would be twenty percent—so, $60,000 is what you originally invested in the home.

Now, let’s assume that the value of the house increases at a rate of 5% a year. This means that your $300,000 home increased in value by $15,000. So, by investing $60,000, you made $15,000. Your annual "return on investment" would be thirty percent—a sky-high number!

Of course, you don’t get to keep all this money. As the years go buy, you’ll make mortgage payments, pay property taxes and cover other costs. However, don’t forget that the interest on your mortgage and your property taxes are both tax deductible. One way of looking at this is, the government is pretty much subsidizing the purchase of your new home!

The bottom line? Your rate of return when buying a home is higher than pretty much any other investment you can possibly make.

A freshly-renovated home is going to be more expensive than a run-down replica of the Bates home. That’s not rocket science. However, it’s a pretty drastic misconception to assume that, because you paid more for a home, you’ll get more investment value out of it.

Someone who buys a freshly renovated home, then sells it three years later, will make back what he or she paid for it, plus appreciation amounts. So, our $300,000 home will probably sell for close to $350,000. There’s no denying it—the person who bought this home has made a profit. However, when you consider all the payments he or she made over the years (property taxes, for example) it’s probably not that much of a profit.

Now consider a young couple who bought a home for $150,000. This home was a real “fixer-upper”—real estate-speak for “a dump.” Why? The house probably hadn’t undergone any renovations since the Civil War. However, this young couple was very forward-thinking. They realized that, with a little work, this “love shack” of theirs would be worth a lot more than they paid for it. So, they invested some funds into renovation—around $50,000. When you take into consideration the payment for the house and the renovation, they ended up paying $200,000 for a dump. However, it didn’t stay a dump for long. After two and a half years, this couple sold their freshly renovated home for $300,000. So, even though they bought a seemingly lesser home, they actually ended up making much more money on their home than the owners of the posh home made on theirs. The couple used this money to pay off their mortgage and put a larger down payment on a bigger home, one in which they actually wanted to live.

If you’re looking for investment value, don’t assume that bigger is better—or that better is bigger. Sometimes the seemingly least desirable houses can make you the most amount of money.

Should you decide to re-sell your home, then the value of your investment will be determined by the value of your home. This is why so many real estate experts advise that you take into consideration the resale potential of your home when making a purchase. Resale potential refers to how desirable your home will be to future buyers, should you decide to sell at some point (and many homeowners do sell—that is, after all, probably how you found your home!) It’s important that you buy a place with good resale value, because chances are, if you do one day decide to sell, you’ll want to move to a bigger, better place—which means you’ll have to make, not lose, money on your current home.

The resale potential of your home will depend on many factors. For example:

This is the number one factor in determining your home’s resale potential… and was more than likely a deciding factor in your own choice to purchase the home. Hopefully, your home is in a location that is desirable to live in. It should be in a community, town or city with a good reputation. Check for community pride. Are there local organizations, or perhaps even celebrations? Do you get a sense that the community is safe, friendly and welcoming? Would someone feel welcome moving in to the community, or does the neighborhood resemble the artificial universe created in the 1998 film The Truman Show?

It should be located in an economically stable region. To test the economic stability of your prospective neighborhood, have a look around. Obviously, there are residential districts (that’s presumably where you’re buying your home), but are there commercial and business districts nearby as well? If so, you can safely assume that there will be commercial happenings in the area for at least another decade or so—meaning that yes, you probably are moving into an economically stable area.

Also, what are the local government services like? If you’re purchasing a family home, keep in mind that kids and teenagers should be near libraries. Is there a decent, up-to-date library nearby? Is there a hospital, fire department and police station nearby? Are local residents satisfied with their services? If there is a local paper, read through it to get a sense of what the area is like. An even better source of information is a local real estate agent, who can give you access to all kinds of community statistics that might be useful to you.

As well, prospective buyers will want to know how close the home is to major employment areas. A popular trend among homebuyers is to move to “bedroom communities” of big cities; fairly new suburban neighborhoods on the outskirts of large cities. This way, buyers get the peace and quiet of living outside the city, but can still access employment opportunities within the city itself. Of course, homes that allow for an easy commute to employment areas—homes near a highway connecting the community to the downtown city core, for example—will have a higher resale value than homes that require long drives through dimly lit, poorly maintained county roads in order to get to and from work.

A final factor to consider when evaluating the location of the home is the proximity of public schools. Keep in mind that many potential homebuyers either have children or are planning to have children, and will take the local school system into consideration when checking out potential homes. Make sure that the local schools are not overcrowded. Auxilary trailers surrounding the main buildings are typically a dead giveaway. Also, have a chat with someone from the local school district. Ask if local children automatically get sent to local schools. If not, ask for a reason. Perhaps there are not enough schools to support the local school-age population. If this is the case, ask if the community is planning on building more schools in the area. If yes, will this affect local property taxes? If so, how? Also, ask about average standardized test scores for local children; these scores will give you an idea of the quality of education in the area. Also, surf the web to find free school reports online.

Property taxes are often an important factor in a buyer’s decision to purchase a home (as you yourself are undoubtedly aware of; chances are, you took them into consideration when purchasing your own home). These taxes can be higher in one city than in a neighboring town. Typically, buyers would prefer to live somewhere with lower taxes. This is not always the wisest choice; high taxes tend to pay off in the form of newer schools, well-maintained roads, and plenty of community services. Besides, the "cost per square foot" of homes is less in areas with high property taxes, so you can purchase a larger house for a smaller amount of money. Unfortunately, that’s just the way it is. Even agents tend to shun areas with high property taxes. If you are looking at investment value and resale value, consider property taxes when deciding where your new home will be located.

Most of the other factors affecting resale value have to do with the house itself.

For example, the following factors are likely to make your home more desirable to future buyers:

On the other hand, the following factors are likely to make your home less desirable to future buyers:

Appreciation, money invested into the home, and resale potential are all things that can determine the investment value of your home.

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