Is Your House an Investment? Or Just a Place to Live?
Question: Given the boom, then the bust, in real estate, what's the best way to think about my house: as an investment or just a place to live?
Answer: Your home may be your most valuable asset. But it's unlikely to deliver bigger gains in the long run than a diversified portfolio of stocks and bonds. And that was true even before real estate values started sinking. Over the past 20 years -- a period including the headiest days of the housing bubble -- home prices have averaged gains of just 3.6% a year. Stocks, despite their recent pummeling, were up 8.4% over the same period.
THE LONG-TERM ADVANTAGES: Owning a home, however, offers other important financial benefits. There are the tax breaks: deductions for mortgage interest and property taxes (plus, the first $500,000 that couples make after selling is tax-free.) Home ownership is also a stellar savings tool -- every mortgage payment forces you to sock more money away, the key reason most homeowners have a higher net worth than renters. And real estate hisotrically has been a good hedge against inflation.
ACTION PLAN:
Be realistic about gains. Expect the value of your home to rise about 1-2% over inflation in the long run.
All real estate is still local. Keep up with trends in your area.
Don't "over-invest" in renovations, assuming you'll recoup when you sell. Focus on projects that add functionality and fix problems.
To learn more, visit CNN.com/moneyand mainstreet