Property as an investment - Part I

With all the speculation about property bubbles it might be useful to look at ways of valuing property. In this week's column we'll cover your home as an investment and why the valuing of this property has to be different to the way you would value investment property.

Many financial advisors will advocate not treating your own home as an investment while others will eagerly argue exactly the opposite. Lets look at some arguments for both sides of the story.

Arguments for your home as an investment
The house you live in has certain attributes that differentiate it from property as a simple investment. Living in a house and deriving benefit from it while at the same time being in a position to renovate and extend with less financial risk then other investment properties make your own home a special case of investment.

Even if your home might not be considered an investment it does give you certain benefits while you own it. The positive equity that is created in your home over time becomes a useful form of collateral when you want to buy anything else that requires some collateral. I'm not advocating entering into risky investment with your home as collateral as that just puts your home at risk, but if, for example, you're looking at buying that holiday home, positive equity in your own home will stand you in good stead to get the necessary finance.

There are also other ways to maximize the value of your home for when you do upgrade or move. As mentioned earlier, renovating and extending is beneficial and can be seen as an investment that will give you immediate returns in terms of improving your lifestyle and longer-term rewards when you sell.

Arguments against your home as an investment
The nay-sayers remind the other side that your home is but a place to stay and owning it is just an attempt at limiting the cost of staying somewhere. If you move elsewhere you will always have to sell and buy in the same market.

There are hidden costs that many homeowners overlook when buying and these can come back to haunt them. Levies, rates and taxes, maintenance and upkeep, insurance all add to a running cost that must be factored into the cost of ownership.

Many people also use this positive equity as the 'ATM in the kitchen'. This is the trap that some people will fall into, always accessing the positive equity and spending it on maintaining their lifestyles. Dip into the bond to buy that new BMW. Ouch. Have you worked out how much you'll pay in interest when you finance that vehicle over 20 years? Not that they would ever keep that depreciating asset for 20 years, but rather trade up for the next latest model and also pay that off over the length of the bond. This positive equity is a liability then and these people will never reap the rewards of home ownership.

Adopting this approach that owning your own home is a cost limiting exercise still bodes well for exactly that purpose. It is an excellent way of slowly reducing the amount that you pay to live your desired lifestyle while renters will always be slowly increasing the cost of their lifestyle.

Conclusion
It's obvious that home ownership has many rewards but also comes with some responsibility and needs to be managed to some extent to avoid it becoming a drain on your resources. Anybody thinking short term should be careful as markets are cyclical and not everything goes up and never comes down. There are bound to be market corrections especially in a changing economic environment like South Africa.

Article by: Dave Welmans - (www.thepropertygame.co.za)