You just found your dream home in a great neighborhood. It’s spacious with a big backyard, and it has all of the amenities you’ve been looking for. You can’t seem to find anything wrong with this house, no matter how hard you look. But, is it a good investment?
This is a question that most people don’t think about when buying a primary residence. Why should someone care about this? Well, even though I think that a primary residence is a liability and not an asset, I still think it’s extremely important to look at buying a home as if it were an investment.
When you buy a primary residence as if it were an investment, you have more options. Let’s say that after a year of living in the home, you get an amazing new job offer that you can’t refuse. The problem is, the job requires you to move 150 miles away. What do you do with the house?
Well, if you bought it at the right price, you can most likely sell it for a nice profit. Or if you want to keep the house, you can rent it out and generate positive cash flow. You have multiple options.
If you overpaid for the home when you bought it, your options might be limited. You want to sell, but the market price is well below what you paid for it. You probably can’t rent it out either because the mortgage and expenses are higher than what you can rent it out for. This might leave you stuck or forced to sell the property at a loss. Not the most ideal situation.
Most people buy a primary residence based on emotions rather than logic. They really like the house, so they’re willing to overpay for it. They’re even willing to go over their initial budget that they set to make it work. This can cause problems.
The biggest problem, which may not be so obvious, is opportunity cost. Since you overpaid for the property, you’re spending a lot more on the property than you should be. This means you’re saving less money for other important things, such as college for your children, family vacations, and retirement. I already mentioned the limited options you have if you want to move, too.
It can cause other financial problems, as well. If you stretched your budget to buy a house that you can barely afford, it may lead to major money problems. One unexpected emergency can leave you broke. This is a dangerous situation to be in.
Buying a primary residence is a huge decision. It’s important not to make a purchase based on emotions. Rather, view the purchase as if it were an investment. This ensures that you won’t overpay for the property and leave yourself in a bad situation.