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investing in your own home?

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What is it about property that makes everyone think that its the ideal investment?

I was talking to some friends of mine the other day who said that they were thinking of moving to a bigger house nearby before house prices got too expensive. At the moment they live in a nice 3 bedroom house in a small town about 10 miles from the city that I live in. I asked why they wanted a bigger house, because I know full well that there are only the two of them, and that’s the way its likely to stay. The answer was, that a bigger house will be worth more money in a few years time (we’re supposed to be thinking about 10-20 years here) and so that will make them richer.

What are the problems with this? Well, essentially, the money is tied up in the house. To release it in 10-20 years time will need them to then move to either a smaller property, or one in a cheaper area. Once they’ve spent 10-20 years in large nice house, I think that psychologically, it would become a problem to downsize. They’re proposing a very large lifestyle inflation and I can’t see them wanting to move back down the ladder.

I suggested staying where they are and investing the excess money. I wouldn’t say that this was so much an unpopular suggestion, as that I may as well have said would you like to emigrate to Mars. I think that the concept of investing in anything other than property (they already have an existing rental property) is completely alien to them.

In the end, if financially and psychologically speaking trading up their house really is a good idea compared to investing the money, they should go for it. If they are just wanting a bigger house because they think it will be a good investment, and they haven’t considered any alternatives, I think that’s plain dumb.

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6 comments for “investing in your own home?”

  1. Plonkee, I agree with you completely. Buying a house that’s too big will cause major cash flow problem. At best, they will not have any money to invest, and the worst case is they can’t pay off debts and risk losing their big house.

    I think you gave a good advice.

    Posted by Pinyo | August 21, 2007, 7:33 pm
  2. I know, but they are almost certainly going to trade up. Because property is the only foolproof way of making money. Whatever.

    Posted by plonkee | August 21, 2007, 8:12 pm
  3. I totally agree as well. When I hear someone say that their home will appreciate so much, unless it is an investment property (they don’t live in it and bought it to specifically sell later) I just think… won’t all the houses you’ll want to buy appreciate as well and you’ll be back to square one?

    That being said we do own our home but that is for happiness reasons :)

    Posted by paidtwice | August 21, 2007, 8:12 pm
  4. Also big on the happiness of my own home. I personally invest in the stock market.

    Posted by plonkee | August 21, 2007, 9:37 pm
  5. If it’s been said once, it should be said 100 times - if you want to buy a home, buy it because it’s a beautiful place in a nice neighborhood with good schools and friendly neighbors. Don’t buy it because you think it’s going to return 10% per year. Anyone who looks at their primary place of residence as an “investment” is going to be disappointed. Investment properties, sure - but thinking you’ll trade up and up and up is going to make you miserable in the long run. Two people need more than three bedrooms like fish need elbows.

    Posted by Brip Blap | August 22, 2007, 2:07 am

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