Posted by: Daryl & Wendy Ashby | April 2, 2010

Is an Investment in a Home Different?

With so many investment alternatives to consider, we will attempt to touch on a few of the more common.

1. Like most other investments, you may find it hard to get your money out of a home when you need it. Other high earning investments can lock in your money for a while, or you can usually pay a penalty and get your money out if you really need it (for example, a five-year Guaranteed Interest Certificate (GIC)).

If you buy a home, you may find it will tie up your savings and make turning it into liquid cash just a little bit more difficult than a GIC. To turn your house into cash means selling it or another option is to rent it out, and that can take time and effort. The fact that you have options renders home ownership unique in itself.

A home is not considered a very liquid investment.

2. Before you purchase, be aware that you will pay very different kinds of front end costs. Most investments have costs like service charges, fees, or commissions. The costs to maintain a home investment are quite different, and many are difficult to plan for in advance. There are taxes and utility costs, for starters. Then there’s maintenance. On top of that, if you have a mortgage, you will pay interest – and interest rates change, making the cost of your home investment impossible to predict.

3. Many factors affect what profit you will see when you decide to sell. Some investments, such as GICs or bonds, give you a fixed rate of return, so there’s no guesswork. You can estimate the return on other investments as well, such as stocks or mutual funds, based on their past results and other factors, but like an investment in a home, there is no guarantee what you will actually make.

To predict how much money you could make when you sell a home, you will have to look at factors such as:

* The average historical increase in housing prices over time, for a given location

* The location of your home is crucial to the increase you will see, as is the demographics associated with the local community.

* Your home’s age, size, and condition. The property size and its exposure. Obviously a waterfront home will gleam a greater degree of interest than a home with a breath taking view and the latter over a home nicely situated at the end of a quiet no-through road.

4. Unlike any other investment, with the purchase of a home you get the unique advantage of living in your investment. Most every investment bring you a return in the future. A home can do that too, but with a home, you also get to enjoy your investment day one, by moving into it.

5. Now keep in mind that you are not just investing, you are also borrowing. A few lucky people have enough money to pay cash for their homes, but most of us make a down payment and borrow the rest by taking out a mortgage. When you buy investments like stocks and bonds, you don’t normally borrow the money you invest – or at least, not to the same degree.

6. You use different sources of information to research your home investment. Your real estate agent is your best source of information when it comes to buying a home. Find one that you feel comfortable with, who seems to understand your needs and your budget. Make sure they are familiar with the area you are interested in.

Don’t overlook other sources of information, the likes of this Blog is a good example. People in the neighbourhood you are focusing on are often willing to share information that can help you make your final decision. Newspapers, books and the Internet also provide useful information. The local police department will guide you as well as to whether the area in question should be of concern. They don’t usually say a lot but you will be able to read between the lines.

Remember: Location, location, location, matters when you’re buying a home

The return on investment for homes in some places is higher than it is in others. Whether you live in a small town or a big city, you get the same interest on a GIC.

If you buy a house in a small town, you probably will not pay as much for it as you will for a similar house in the centre of a large Canadian city, close to public transit, shopping, schools, and entertainment, and then again, your return when you sell should be commensurate.

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