There is a difference between “living” in a property and “living-loving” in a property. A property you “live” in serves a purpose; it is a place where you reside, perhaps in a location determined by where you work. A property that you “live-love” in is a real estate purchase, usually near a job, family, or a certain community. “Live-love” properties create a feeling of pride of ownership but do not make money.
Real estate purchases made for personal reasons are not investments. Most often, people purchase a home with the idea that they will live in it for the rest of their lives. This sentiment serves as the justification for investing money in a wish list of improvements and updates for the property.
However, statistics show that homeowners in the United States relocate every seven and a half years. On average, it takes 15 years to pay only the interest portion of a 30-year mortgage. This means that homeowners have the same amount of debt when they purchase a property and when they leave it. Few people reside in a property long enough to pay off the entire mortgage.
When the time comes to sell a property, the appraisal will not reflect the investments that have been made from the homeowner’s wish list. The market value of the property is based on square footage and the comparative market analysis of the selling prices of other properties in the area with similar square footage. All of the updates to the property, inspired by pride of ownership, will not be reflected in the appraisal value.
Renting the property that is your residence avoids this pride of ownership. It is rare that a rental property inspires the renter to spend money on unnecessary updates. As a general rule of thumb, rent a home at 6% or less per year than the current market value of the property. If you are renting, you will be much more frugal with your investments, whether you rent a house or an apartment.
Instead, you should purchase an income-producing property that you can rent or fix up and resell. It is best to purchase a property at a price that is at least 40% below market value. Since you will not live in this property, you are able to expand the area in which you are looking to buy. You will also be more careful in spending money on improvements in the investment property.
In general, I recommend renting the property in which you live to minimize investment and financial waste. Not owning your primary residence also allows you mobility if you need to relocate. Rent out your investment property and use that income to pay the rent at your residence. You may still have pride of ownership, but the key is to switch it from your personal home to investment real estate.
Advisor Abbate 