Ep 064 - Is Your Home Really an Investment?

Welcome to Be a Smarter Homeowner Podcast, where you'll discover strategies to save money, save time, and be better organized in managing your largest financial asset and biggest expense, your home. Your hosts, John Bodrozic and Beth Dodson, who are co-founders of HomeZada, have been supporting homeowners for over 20 years. They are here to share with you their tips and suggestions, as well as interviews with industry experts, with the goal of helping you become a smarter homeowner. Now here's your hosts, John and Beth.

You probably know what you paid for your home, and you may have a pretty good idea what it's worth today. But does that tell you whether your home has actually been a good investment? What about the money you spent on improvements, the principal you've paid down, maintenance, taxes, and insurance, or the value you've received simply from having a place to live? Today we're going beyond the estimated value of your home and asking a bigger question: what is your home really doing for you financially? I love this subject, John, especially Because it is a hot topic of conversation right now to buy a home or not to buy a home. Is it worth doing certain aspects to your home like improvements or is it not? So my first question to you to get this conversation going is, do you personally consider your home, primary home that is, an investment? Why or why not?

Absolutely, I consider it an investment. And the simple answer why, I go back to my first house. When I bought my first house, I think the price point was like, I don't know, $260,000 or $250,000. And I probably put like, I don't know, $40,000 or $50,000 of cash down. That kind of writing a check, I don't spend frivolously. I think of that as an investment. So the amount of money that you're putting into buying a home is absolutely cash out of your, you know, current net worth, and you're putting it down on a physical asset. Therefore, to me, it is a primary investment that I absolutely consider.

And for you specifically in that example, same thing with my first house, they both increased By the time we sold them as well. So there was a bit of value that we gained during the cycles that we were in.

Yeah, I mean, without a doubt, you know, I think, I think I probably bought my house for $250,000, probably sold it, I want to say, 8 years later, maybe. I can't even remember, candidly, and sold it for maybe, I think it was maybe around $400K. So definitely appreciated like $150K, which is fantastic. So That appreciation is not necessarily anything I did. It just happened to be that I bought a house that was in a pretty nice neighborhood, and the overall economy was good, and more and more people really liked that neighborhood. A lot of people were moving to our town from other areas of my state, and so it's the laws of supply and demand. If you live in a great neighborhood and more people want to get into that neighborhood, Um, then their price is going to go up on your homes, kind of mentality.

Especially if there is limited availability in that neighborhood. That definitely indicates— that's, that's basic business, basic supply and demand, where if you happen to go into a community and you buy a house in a community that's limited in terms of availability, over time, if it becomes a community that people want to live in and move to. And that's all unpredictable in some cases.

Yeah.

But if there is some predictability, then invariably supply and demand plays a role, and your home can actually go up in value because there's limited demand. That also goes back to the point where, um, if you're in a neighborhood and not a lot of houses are selling, then you you've got an opportunity. But if there are a lot of houses for sale all at the same time, then people are gonna start comparing. So 100% agree with you. But you brought up a good concept. A lot of homeowners have experienced selling a home and then making some money on it on the end. So the value increase, and you explained that when you sold your particular home. But what's missing from that calculation? Because there's a lot missing from that calculation.

Absolutely, there's a lot missing because— well, maybe we'll get into this a little bit, but I always tell people like, okay, we're talking about the home as a financial investment. However, the home is also a physical asset and a collection of physical assets that I live in, but all my other investments are digital assets. There's stocks and bonds in my investment portfolio and I buy and sell and this, that, and the other. So yeah, if I'm— if there may be some transaction costs if I buy and sell stocks, or if I've got a money manager, maybe they're getting a percentage. But when you own a home, there are added costs that go associated with that because, like for instance, for me, most people, they don't buy the home with cash. So I didn't write a check for $250 grand. I only wrote a check for $40 grand. Which means I had to get a loan for the remainder of the house, which we're also going to get into on why that's important. And then I had to pay interest on that loan. And I know that's just a sidebar. There's a lot of discussion about current interest rates and whether they're too high or too low. I think when I bought my first house, my interest rate was like 7.5%, and I thought I was getting a great deal.

Me too. Me too.

So there's interest costs. Of while I was living in the home, paying my monthly mortgage, I'm paying the interest on borrowing that money. Then there's the— what everybody oftentimes doesn't calculate is the ongoing maintenance costs. And that's either me mowing my lawn, convincing my dad to help me mow my lawn. Mm-hmm. But it's also more real financial tangible things of like, okay, the garbage disposal broke, I needed to fix it. Or get a new one, or the door started sagging and I need to rehang it. I didn't know how to do it, so I had to hire somebody to do it for me kind of mentality. So there's all these ongoing maintenance and repair costs. There's also property taxes, which is also a big point of view. So those are all the ongoing expenses. However, again, from an investment standpoint, all investments have a relationship with the tax code. So we also have property, uh, the ability on my taxes to deduct the interest to reduce my income tax, which is also a benefit. So yeah, good point. At the same time, I had more expenses living in the home— property taxes and maintenance and some projects that I did and utility costs and all these other things. But at the same time, that mortgage that I— that the interest that I was paying on the mortgage, I was deducting that from my ordinary income. And perhaps paying less income taxes as a result of that mortgage expense.

Yeah. And even when you're buying a home, you brought up a point that basically indicated many of our other assets are numbers and zeros and ones and they're digital.

Yeah.

For lack of a better word. And those digital components are, you know, maybe I've got stocks and bonds, maybe I've got savings account, maybe I've got some crypto, maybe I've got some other type of investment, but you don't physically live in it or hold it. So when you are buying a house, you not only are experiencing the maintenance, the projects, the repairs, the taxes, the interest, but you're also experiencing buying furnishings that you really love that you're going to eventually take with you elsewhere. which in my opinion become, in addition to your overall asset of a house, they become assets for you to move around with depending on how you price those assets. Some people have collectibles, some people have standard basic furniture because they don't want to spend a lot of money on it, but those assets inside your home, those personal assets, also become part of your portfolio. of assets that you're building a relationship with, and I appreciate that. But one of the other things I have a question on is, um, a lot of people look at the valuations of homes. They look at the valuations and they're always stuck on the valuations, and they're oftentimes forgetting about other financial performance opportunities that can be reflected in their house. Share with us some of your thought process on these financial aspects of the home that have an actual financial performance to them.

Sure. I mean, well, it starts with what you bought your house for. What's the price point? and the month or year in which you bought it because that also sets the point over sort of analyzing, and we'll get into this a little bit later, sort of the financial performance. You need to know what timeframe to start with. But yes, we as homeowners, we all get caught up in what we think our home is worth by going to various real estate portal sites and seeing what that's worth. But the real number is your equity. Mm-hmm. And equity is a simple expression of what is your home currently worth minus the principal balance left on your mortgage is how much equity you have. So said another way, it's a simple pie chart. If you don't write the cash check to buy the house outright, essentially every home is a pie chart with 2 slices of the pie. One is your slice over what you own. The other slice is what the bank owns. Mm-hmm. Because at that point in time, you borrowed that money from the bank. Therefore, that bank owns that percentage of your house. So the size of the pie— let's say you bought it for, in my case, $250,000. The size of the pie was 250. After I lived in it for 6 or 7 years, the size of the pie grew to 400. But that doesn't mean that I just made the difference, because every time you pay your mortgage bill, part of your mortgage bill goes to pay the interest, part of it goes to deduct the principal on the, you know, $150 grand that I borrowed. Right. So, what everybody wants to see is, yes, you want your house value to appreciate, especially given market conditions, but as you pay off your loan, You want your mortgage balance to keep going down because as it keeps going down, your pie slice increases and your bank pie slices reduces on how much of your home is owned by which party.

Now, some people, um, there's this paying down your mortgage. So you brought up, you know, equity and, and, and mortgages, and I want to bring that up again because Some people believe in the philosophy of paying down their mortgage so that they have and own their house outright and there is no loan on it altogether. However, there's a lot of people and we have varying friends that have different philosophies. But there's another side of our friends and, and people that we know that leverage the equity in their home and borrow against it because— Yeah. The mortgage rates, whether they're at 6%, 3%, whatever percent, Sometimes is a better rate than some other loan option that is available. So what's your thoughts on paying down your mortgage versus leveraging the equity as a way of borrowing? And by the way, this ties back into if you've got equity in your home, it's an investment. opportunity and vehicle that you can use to borrow against?

Great question, but it's not just one question that you asked, it's about 3. So I'm gonna start with the first one, which I think is the most important, which is when you look at what percent pie slice you own versus the bank, there's a financial metric that the banks like to call, which is loan-to-value ratio.

Yes.

Which is essentially the loan is the numerator— how much is the remaining balance on your house, on your mortgage— and then the value is the denominator, which is what is approximately the market value of your home. So in my case, if I owned $150,000 on my mortgage and my house grew from $250,000 to $300,000, then the loan-to-value ratio is 50%. Meaning I owe the bank $150 grand, my house is worth $300 grand, therefore the loan-to-value ratio is 50/50. But if I wrote down a $50,000 check and prepaid a portion of my loan as opposed to extending it over 30 years, now my equity jumps from— or the loan balance goes from $150,000 down to $100,000.

Yes.

So now the loan-to-value ratio is I own $200,000 and, and the house is worth $105,000. Therefore, it's not a 50/50, it's more like, uh, I own 60/40 kind of mentality. So I own more of the equity in the home. Does that make sense?

Yes.

Okay, now the reason why that's important, which is your second question, is can I borrow against my equity? Yes, you can, but many, many banks will not lend you money unless your loan-to-value ratio goes, let's say, below 80%. You got to get down to 80, 70, 60, 50, 40, yeah, so that they will actually loan you that amount of money. Because what they don't want to do is loan you money and then you're overextended and then you're not capable of sort of paying that sort of back.

We had that once before, didn't we? It was called 2008. Just FYI. Saw that coming.

So, I mean, it's the— it's, it's, yeah, it's a question that— okay, first and foremost, this is not personal financial advice.

No.

I'm just, I'm just telling stories, information of my personal aspects of my story about buying my first house, as well as my knowledge over sort of the, the market and John's perspective. Which is, yeah, if I put down $40K on a $250K house, right, I borrow the difference. And then let's say 2 years later I had a great, you know, great year at my job and I got a $50,000 bonus. Mm-hmm. Should I take that $50,000 and put it down against my principal as an additional payment to pay down my mortgage? And what does that actually do? Depends on what your mortgage is calculated. It either reduces your monthly rate and your duration still stays the same, 30-year loan or a 15-year loan, or it keeps your monthly mortgage rates the same, but now you're going to pay off your house much quicker.

Correct.

So therein lies—

Because you're paying down the principal.

Correct. You're paying down the principal. And then— but on the flip side, so I look at that also as an investment because it's the same thing of when you asked me in the beginning, Hey, is your home your— I wrote a check to do a down payment. Now I'm writing a check to pay down the principal of my mortgage. Of course, there are other people that are going to say, yeah, but I could take that $50,000 and invest it somewhere else.

Totally.

Because we have—

That's an option.

Exactly. You could invest it in the stock portfolio, crypto, go to Vegas and play roulette. You could do all kinds of sort of things. And so

if you're lucky, yep.

It's all about investments. People always want to know, like, what am I going to make on these things? People never sort of assess the other major column, which is what's the risk factor of this?

Correct, correct.

Roulette in Vegas is a highly risky bet.

It is. I've won big, but it is a big risk.

Exactly. So anyway, I think paying down your mortgage, either all of it or a portion of it, is absolutely considered another investment in your house, and you just need to do the numbers and, and do the investment analysis, which is kind of what this podcast is about, to figure out what's the right decision for you.

Yeah, and to reiterate what John said, we are not financial advisors at all, but it does require you to take a look at your overall well-being in your, in your property, in your investments, in your entire investment portfolio, and what You have forthcoming in your life and what have and what have you, but also what do you want to do? For instance, like John brought up a bonus opportunity. What do you want to do with that? He suggested in his case putting fifty thousand dollars down on the principal of your mortgage. But some people may say, you know what? I'm going to put ten thousand dollars down on the principal of my mortgage. I'm going to use another ten thousand dollars to take this. amazing vacation somewhere, wherever I need to go, and then I want to use the rest into improving the property. So let's move on to talking about that a little bit, unless you want to go back to some of the other questions I asked earlier.

Uh, other— maybe just wanted to make one final point, which is, uh, I've read statistics in the marketplace. Now granted, there are a lot of people that

Yes.

Meaning they did get the original loan and then they basically paid either a 30-year mortgage or they maybe paid 10 years of the mortgage, but then they came into a bonus and they paid off the remaining 20 years in one fell swoop. Correct. So I want you to sort of visualize that day, right? You own your house outright. All of the equity in the house is 100% owned by you, not any percentage by your bank. And you're not paying any monthly mortgage bill.

Correct.

So that is another way that— why do you want to get to that stage? Because you own the asset outright and you're not paying any mortgage. Yes, you still have to pay property taxes and insurance and utilities, but mortgage expenses and banks is all yours. And now you can absolutely do massive amounts of borrowing on home equity when you own your home outright, totally, because your loan-to-value ratio is zero.

Yes.

Versus your loan-to-value ratio is probably 80% when you put 20% down, if you put 20% down, and the bank owned the other 80%.

Correct. Yes. No. And that it becomes a borrowing vehicle against other opportunities that you may want to participate in.

Yes.

Yes,

absolutely.

And so, and And we did talk about this also. So because you're on this topic, one of the things in another podcast we talked about reverse mortgages, and we also talked about, uh, in, in yet another podcast with another guest, Rebecca, we talked about the financial awareness of your home and using it in retirement. Because if you are going to stay in the same home or a similar home as you retire, there are options to use that. equity in a reverse mortgage and also as living expenses as you mature. And I'm going to leave this conversation for those podcasts. I invite you to go back and watch those podcasts because they're very informative, and I learned a lot while I was interviewing these guests. Mm-hmm. But think about that equity as an opportunity later in life as well. I know a lot of people today may be thinking, well, what if I paid it off now? What could I use it for? What do I need it for? And the stories that I interviewed and the stories I heard from the people I was interviewing in those podcasts were absolutely wonderful, and they were across the board all different kinds of scenarios. So keep that in mind too when you decide you want to pay off your house or you don't. It's like I said, We have friends that do different strategies. They pay off their house, they don't pay off their house. It's however they see fit and what's going on in the market and what they choose to do with their financial strategies in life. And so there's that. But let's go back to this scenario where you get a $50,000 bonus, you put some down on the principal, some you take a vacation, and you are going to make some Updates to your home, because a lot of people feel like making an update in your home automatically gets you the return from that update. So, for instance, kitchen—I'm going to go with kitchen and bathrooms because they're just expensive remodels. They're some of the most expensive. Kitchen and bathroom remodels are expensive. They could be. $50,000. They could be $250,000. They could be a lot of money. But in this instance, from your $50,000, you only have $30,000 left. So you're gonna make a $30,000 investment into your house. And my question is— which I have my own answers and responses to— but my question is, when you make that investment into some update in your house, whatever that update is, Yes. Is it going to pay back dollar for dollar when you try to sell your house, let's say within the next 12 to, I guess, 36 months? So 1 to 2 years after that.

My— again, I'm not a real estate expert, but my general answer is probably not dollar for dollar, right? If you spent $30,000 on a kitchen remodel, does not instantly mean that your house is worth $30,000 more. Because there's— I mean, it's the— you, you're going to write the check to do the $30,000 remodel. It's really an estimate over whether you're going to get the return or not, and you won't know whether that estimate is accurate or not until the day you actually try to sell your house.

Yeah.

So you're essentially still estimating what you think is worth, because at the time you may write the check for $30,000 today to do that kitchen remodel, but you're not going to sell your house for another 5 years. It's 5 years from now that you're going to really know whether that $30,000 was a dollar-for-dollar increase in the value of your home, because the value of your home has so many other conditions associated with it. Remember, did you live in an area that was growing and appreciating? What are your neighbors' houses like? Has everybody else remodeled the kitchen, but yours is still 1970s? Yes. And there's also what I call speed to selling your house.

Yes.

A lot of times people may want to put their house on the market and sell it in a week. Sometimes you put your house on your market and you don't sell it for 3 months or 6 months or 9 months. Why? Because maybe there's a soft market, or maybe the buyers who are looking to buy a house into your neighborhood, they don't want to deal with upgrading a kitchen that's 30 years old.

So they want turnkey. They want a turnkey house so they can come in.

So maybe by not doing the $30,000 kitchen remodel and your kitchen is old compared to your neighbors, maybe your house sits on the market longer because you have to find a buyer who's willing to buy your house, and then they're going to want to have to make the investment to upgrade the kitchen. So it's a legitimate concern. It has to do with the sentiments of different buyers look for different things. Some people, like you said, want turnkey. Others want to buy something a little bit lower and make the investment and sort of flip it. And others just want to— they're DIY enthusiasts. They like buying homes that are older because it just gives them projects to do for the next 10 years.

Yeah, and there's a lot of people too that like to buy homes that haven't been remodeled Because they get to choose to remodel it themselves. But going back to our initial question, an investment into a property dollar for dollar does not normally pay out necessarily unless all the other conditions are in alignment.

Yes.

Yes. And the other thing too, and we've talked about this because we're talking about properties as investments, but also there's an expense component. And we talked briefly about these improvements, but let's go back to— I've heard from some of our real estate friends that if there is a lot of deferred maintenance or there have been homes that have not been cared for, then those homes will also sit a little bit longer than some of those that have been Done regular maintenance. A lot of people are also saying that buying a home, you have to pay for maintenance on a regular basis, and that's why it's not an investment. Now, we went back to this earlier on and saying you're also living in it, so you need your home healthy and safe, and maintenance is required for a healthy and safe house. I'm just saying that to everybody out here, just I am. But why do you think— so let me just ask a different question. Do you think that maintenance acts as an expense or an investment into a home?

Another great question. Generally speaking, it's an expense, right? You're having to clean your gutters and you don't want to do it yourself. And you're out, you're wanting to clean your windows and you're wanting to dry clean your carpets. and your air filters and all those kinds of maintenance things on your house. Generally, those things I consider expenses. And again, I'm not giving personal tax advice. Your tax attorney would probably also consider, in the tax code, consider those things as expenses and not investments. Mm-hmm. However, it does have a, have a connection to the point of when you decide to sell your house. If you've never dry cleaned your carpets and they look really old and worn out and you're trying to sell your house for this, somebody might go, I'm not willing to pay you that. They're going to counteroffer with something less because they're like, oh my God, I have to replace all the carpets in the house and the gutters are broken and I have to break that. So that, that deferred maintenance that you didn't do and you were still wanting and you're still okay living in the house with all of these things that are slowly deteriorating. may have an impact on what you're going to get in the market when you choose to sell it, because some buyers are going to try to lowball you on price because of— there's all that deferred maintenance.

Correct.

So it has an impact on the home value when you decide to sell it, but during the process of writing the checks for the maintenance, it's really an expense.

Yes, but so here's the other I'm gonna take a different side to this a little bit because one, I do maintenance because yes, I want to take care of my house. I want to make sure it's healthy and sound and safe for anyone who's visiting or staying with us or just us in our house. But also, I want to preserve the value of my equipment, my appliances, the house itself, the structure of the house. For the long term. Because I'm of the philosophy that I'm a steward of my property, and someday it will belong to somebody else. And so I believe that even though maintenance is an expense, it adds value to my bottom line because I can elongate the length and extend the length of my equipment and appliances. And people are stunned when they have to replace something and it's 25 years old. They're just like, they can't believe it because, man, you've really taken care of things. Or I want to just make sure that the house is operational for the next person that will be in it. And so I look at maintenance personally as an expense but has an investment component. to the well-being of the people that are at my house or who will take over my house someday.

Yeah, I mean, you absolutely— I 100% agree with that perspective as well, which is why maintenance is kind of a nuance depending on what the maintenance is. My example was carpet, but your example is HVAC. So quick example, let's say you bought a house that was 7 years old and it was already 7 years old when you bought it, but you're spending $500 a year on HVAC maintenance to make sure it's operating well. Right. So from, from year 7, your year 1 is year 8 of the life of the house. Correct. So for the next 10 years, your HVAC may be operating great and you don't have to replace it. But if you didn't spend that $500, then at year 15 in the life of the house or your year 8, all of a sudden your HVAC stopped working because you neglected all that maintenance. Now you have a $10,000 bill to replace your HVAC unit.

Unexpectedly.

Unexpectedly, in the middle of the summer or the winter where it's really hot or really cold outside.

And I'm— and the HVAC companies are gonna jack up my price to install it.

Yeah.

Because it's when we need it.

So that makes us cost—

Tip to everyone out there, tip to everyone out there, if you need things repaired, do it on off-seasons.

Yes, absolutely. Off-season, you can get way better prices. But you hit the nail on the head. If you spend a little bit of money on those maintenance things, you extend the life of those building materials, equipment, appliances. Yes. And essentially, by extending the life, you're avoiding the replacement cost of that item, and therefore that's an expense that you're not having to pay because you're extending the life of those things. And you may get to a point where, again, you might sell your house. Again, now your house is 20 years old. A buyer sends an inspector in and looks at your HVAC unit. They're like, wow, this is 20 years old, but they still run great. Okay, yeah, we're willing to buy the house. Or, wow, this thing is 20 years old and this thing is about to go out tomorrow. I'm gonna now not offer you full price. I'm gonna offer you full price less $20 grand because I have to replace the HVAC units the day I move in.

Yeah, no, totally agree. Now, because we're talking maintenance and because we're talking the impact of lifestyle, I believe that maintenance and improvements impact the lifestyle that we have in our homes. Yes. And some may consider them investments into the overall asset. Some may consider them, um, expenses. Some may consider them requirements for whatever reason. But let's talk about the lifestyle return on the home as it relates to, I guess, the investment strategy of a home.

Absolutely. This is one of the key topics that I like to talk about when it comes to talking about real estate and homes as a financial investment. It kind of goes back to what you said before. I'll compare it to your stock and bond portfolio. Your stock and bond portfolio does not have a bed for you to sleep in, or a kitchen for you to cook, or a yard for you to play with your kids. So your home is both a financial asset, but it's also an ongoing lifestyle asset. Yes. Because you need to sleep, you need to eat, and all these other kinds of things. And so It's one of these things that it's absolutely a financial asset, but it's also a— maybe that kitchen remodel was important to you because you've suddenly found a passion at becoming a gourmet cook and you really enjoy cooking and you enjoy entertaining. There's all this sort of lifestyle value for you and your family and your friends and people that want to come over. And you're, you know, you're using your home as relationship investment, for lack of a better term.

Yeah.

Both with your family and with your other people that you invite to your home, that creates enjoyment in many people's lives. And there's many, many people that are super, super passionate homeowners because of all the things they get to do, right? We've got friends who have a golf simulator in their basement or a media room, or even if it's a 2,000-square-foot home, whatever, they've got an 80-inch TV and Everybody comes over on the weekend to watch football, right? And you've got a great kitchen and that creates that kind of lifestyle value. So it was important to remodel that kitchen and that living room because of that lifestyle value.

Yeah, touché. I mean, I built a party house. I love to cook, so I have a nice kitchen. And you need a nice kitchen if you want to have a lot of parties. And I will make that investment for myself and I will take care of that. And spend money to take care of that because that adds to the lifestyle of my house. In fact, you know, we did a slight remodel on our house that isn't necessarily going to pay back the expenses we made in the remodel, but it was a nice change for us, and we got to change out a room to be something more usable. As we transition from one phase of our life to the next. And I thought that was fabulous. And I wouldn't— I don't regret doing that, that remodel. And I spent some significant money for it, but I also, um, know that it's not going to pay back when we sell the house.

Yeah.

That, that money is not going to pay back. No. It's just not. But I appreciate the new look and feel of a particular room that we updated to do something different for us and for all of our guests that come over.

And back to your point about— I think you made this about 10 minutes ago— about the furnishings in your house are also added investments.

Yeah.

Um, that you're, you're spending on your house. Like, I remember when I bought my first house, I had an air mattress and lawn furniture as my furniture. So imagine if you had air mattresses and lawn furniture, your guests who came over wouldn't probably have a very good time.

They wouldn't come back. They wouldn't come back. They're not going to stay longer.

But some people are like, I'm okay living with my air mattress and lawn furniture because they want to put all of their money in some other liquid investment or, you know, crypto or whatever. But other people are like, no, where I live and the comfort and the comfort creatures of living in my house are important to me and my family and friends. Therefore, I'm going to make those investments in both the financial as well as the lifestyle investment.

Yeah, like a bed is going to be important. Mattresses are very important depending on who you are. So funny. So, okay, so we talked about lifestyle investment, we talked about equity, we talked about maintenance. We talked about projects because there's a lot of confusion with that. So suppose, suppose we've owned a home for 10 years, which we have, and we've owned several. How would you actually conduct an investment analysis of it? So this would be our homes, it would be for anyone else, for anyone, for all those who are listening. You may want an investment analysis of your home. Where do we start? What does it look like, and what do we examine to make the best decisions for our own personal lifestyle? And this is a very broad category because everyone's lifestyle and home is different.

Yeah, so there's probably, I'd say, about 7 to 10 financial metrics that I think are important if you're going to do a pure financial investment analysis of your home. And I also think it's important to do this Regardless of whether you're deciding to sell the home or not, it's just an important, important sort of thing to understand. Sure. Because you're essentially planning for your financial plan, especially as if your home is growing in value and your equity is growing because your mortgage is going down. You need to periodically do that. I'd say probably at least 4 times a year just to kind of check in, to kind of do those things. But to answer your question specifically, The first thing is always have your documented purchase price. What did you actually buy the home for? Because that's your starting point. And what month, year did you buy it? That's also your starting point. The second part of a financial analysis is back to that piece, which is what do you think the current market value of your home is? So there's lots of places to get current market value. There's a lot of real estate listing sites that give you market value. Even our application HomeZada does it inside the application as well. And, and that is essentially saying you're starting with the assumption of if I were to sell my house today based on what the current estimated market value is, what was my investment analysis? So you're using the purchase price and the purchased year versus the current market price in the current year And you're essentially now doing lots of calculations between those 2 numbers and those 2 time frames.

Yes.

That is essentially your starting point on the investment analysis. Now, to drill into those 2 endpoints, you have your starting point and you're assuming today's endpoint. The next thing to do is, okay, it's not just the current market value of your price, because if you were to sell your house, you have closing costs as the seller. So closing costs are— you might choose to sell your house with a real estate agent, and that real estate agent may want a commission to sell your house. And you may have other title and transfer costs that are associated with selling your house, and you may end up having to do some deferred maintenance to fix up the things as part of a condition of closing. So—

After the inspection comes through. Yeah.

Correct. So you might have to estimate what your estimated closing costs are going to be. And then you're going back to what is the balance on your current mortgage? Because if you sold your house outright for, let's say, $700,000 or $500,000 in my previous example, bought the home for $250,000, sold it for $500,000, but I ended up spending $35,000 in closing costs. So that's $500,000 minus $35,000 in closing costs. And now the cash has now dropped from $500K to $465K, but I still owe $200K on my mortgage, or $150K. So I have to write a check to my mortgage company to completely pay off the mortgage. Mm-hmm. So that's another part that you have to do. And now you're basically left with, what is the remaining cash value that I have if I actually sold my house? That's the high-level investment analysis. However, there's 2 other things that I can get into if you want, which is you have to also assess your tax issues, and you may want to assess your returns. Would you like me to go into those 2 things as well?

Yeah, so let's talk about both of those because I think they are relevant to the analysis of any property. Whether it's a rental property, whether it's a primary property, whatever the case may be, all of these are real financial talking points for you to either sell or even buy a new home.

Correct. Okay, so I'll talk about the tax implications. Again, it starts with the purchase price. In my case, I bought the home for $250K, but let's assume that I did spend that $50K on the kitchen remodel. Now, because the tax code considers that type of project an investment in the house, I've essentially increased the tax basis in my house from $250,000 to $300,000 because I made that additional $50,000 investment in a kitchen remodel. Now again, I'm not a tax attorney, but if you replace carpets or paint your house, that would probably not be considered a step-up in tax basis. And the reason why the tax basis is important is at the end of the day, you have to calculate what did your house sell for, $500,000 minus the tax basis. So because if it was $500,000 less the purchase price, it would be $250,000. But because I spent the $50K on the kitchen remodel, it's $500K less $300K. My taxable gain on the house is only $200K. Which means, again, I'm not a tax expert, that amount of gain would probably be— the, the federal tax code would say that is tax— not taxable. Because I think it's like if you're over $500K, I think if you really had a high appreciation, then you're going to have to pay taxes on the delta, which means you're always trying to avoid those taxes if you've made those additional investments in your house after the purchase price.

So this takes on a whole other consideration on investments into your house. So whenever you're considering doing a remodel or what have you to your home, talk to your tax accountant if you've got one.

Keep track of the tax basis in your house. If there's one takeaway— maybe there's 5 takeaways, but one out of the 5 would always be keep track of your purchase price and the tax basis in your house. Based on the investments that you've made.

Knowing the projects that you have performed on your house are critical to understanding, and when you did them, to understanding the tax basis when you're ready to sell.

Yes. And then the third category is just kind of, uh, financial engineering over trying to calculate the percentage return that you got on your financial investment, right? So you bought the house for $250,000, You spent $50K on the kitchen remodel, $300K, you sold it for $500K. You could say, oh, I made $200K. $200K divided by the $300K, your return was, let's say, 40%. But that is a percent return from the year you bought it to the year you sold it.

Correct.

Now, what a lot of analysis wants to do is, what was my annualized return? Because you lived in the house for 8 years, it took you 8 years to see that level of return. Appreciation. Now, a different return is not a 40% return. It was 40%— a lot of calculated math. I'm just not— I'm gonna make it simple. 40% divided on straightlining it over the course of 8 years, maybe your return per year was only 5 or 6% on an annualized basis.

Correct. And then you have to— so I'm gonna make it even more complicated, but then you want to minus your maintenance and any other type of repairs or what have you that you did during that period of time, during those 8 years, and that may bring it down even more. Correct. But remember, the investment— your investment, the home as an investment, is more than just the financial picture. The financial picture gives you an analysis of When do you want to sell it? How you want to treat it as an investment asset? And what does it mean to you?

Yep.

There's a lot of people that when they buy their house, going back to the lifestyle, it's really important that they live there forever and they want to share this home with their grandchildren. So they may not ever sell the property because it is a pure lifestyle investment for a generational family location where people build memories.

Correct. And the other thing I like— again, not a financial advisor, but I'm just generally speaking— whenever we as consumers look at all the different places that we can make investments It goes back to what I said. Yeah, I can look at it as how much return am I going to get, but there's also the risk profile. Generally speaking, buying a home is relatively low risk as it relates to losing your investment completely.

Correct. As long as you're living within your means. Yes. As

long as you're living within your means and your home— you can't— you, you stop paying your mortgage and your bank forecloses, then that's a bad thing. You've lost your house.

Yes.

But as long as you're okay with that, Real estate and homes generally have a low risk profile. And I'll just use my other example. Had I gone to Vegas and spent my $40,000 down payment, I could have considered the roulette wheel an investment. And in 30 seconds, I could have lost it like that.

Totally.

And then, or I could have won.

Same thing with blackjack.

Right. So, the return in that 1 minute was either 0 or 100%.

Correct.

That's the level of risk-return. It goes literally from losing it all to doubling it literally in one decision.

Let's just remember, in Vegas, the house always wins.

The duration was less than a minute for that wheel to spin and choosing black or red, right? Choosing to buy a house that's worth $250K that I put $40K down that I lived in for 8 years The odds of that house going to zero the day after I bought it is pretty slim to none.

Yes.

Right. So that's the part that I think a lot of people sort of in today's, um, today's social media world of like sound bites that only last for like 10 seconds, everybody talks about how a home is a bad investment because they can make so much more somewhere else. What's completely missing from that 10-second Snippet is analyzing the risk factor over what that other investment is. Yes, you could absolutely make more, but you could actually lose a lot more as well. And none of those other assets provide you a place to sleep, eat, and entertain.

Yeah, the livability— the livability investment part is missing as well.

You're still stuck in your apartment on an air mattress and lawn furniture with noisy neighbors.

And you don't have enough room to invite friends over to hang out, to drink beer or play games and cards. So, so when we talk about all this, you know, let's talk about going back to the financial investment details. What documents or information do we need to actually gather to get this information? Where can we find this?

Yes, that. So remember how I went through those 7 to 10 metrics? Mm-hmm. That is the challenging part for a lot of homeowners, even people that are super smart, because the data is scattered everywhere. You got to go to one place to find out what you think your home is worth, then you got to log into your bank or your bank statement to see how much your mortgage is, then you got to go to your spreadsheet to figure out how much did you spend on that kitchen remodel 5 years ago because you forgot to document it. How about the maintenance on that HVAC unit? So therein lies the challenge is doing this investment analysis. All those metrics require you to gather the data from all these disparate sources. And that's where many homeowners, candidly, most homeowners, they don't do it because it's too much work for them to go gather all that data up. But I think it's extremely important to do it and to have a system to put that in place. And candidly, this is why many customers love Homesata. We make it so easy to put it in there and all those 10 metrics get calculated for you in 30 seconds.

Yeah, no, that's— that I think is brilliant because it helps people understand how to assess the financial aspects of their home and how to gather the data as efficiently and as quickly as possible. And to make better decisions as it relates to their particular investment strategy, as it relates to their properties.

Yes. Now, there's a lot of people that are well organized and have spreadsheets and documents, and they sort of aggregate all that stuff, and they could probably do those calculations pretty quickly on their own. Again, it's advice number 2 is— advice number 1 was keep track of your tax basis. Advice number Number 2 is create a system, whatever it is, that actually documents all these sort of things that I talked about— the purchase price, the purchase year, keep track of your current value, your mortgage balance, your tax basis, all these things. And you can manually figure out these calculations and essentially try to give yourself a task of doing them, you know, 2 to 4 times a year, because you'll be much smarter and better at planning out the rest of your financial life because it's always changing.

Yeah. So could understanding your home's investment performance influence decisions about remodeling, whether to sell, whether to downsize, whether to bring in renters, or even whether to consider buying another property? I remember in the previous— one of the previous podcasts, I was interviewing a woman on reverse mortgages and There's some nuances, but you could actually potentially use the equity to buy another property, like a vacation home for family or whatever. So the question is, by understanding all of this, does understanding this, the home's investment performance, help us or influence us on all the other decisions we need to make, whether to remodel, downsize, sell, et cetera?

Absolutely. And that's why I recommend people to try to at least look at this 2 to 4 times a year, because the market value of your home is changing, the equity in your, in your house is changing. But more importantly, it goes back to exactly what you said. Maybe lifestyle circumstances have changed and your kids have moved out, but you could rent out a room to, you know, a friend or family, and you generate more income by partially renting out a room. Or it's the, uh,

you got a promotion,

right? I got a promotion, or my kids are out of college, I don't have to pay tuition anymore. Now I actually have the money to renovate my kitchen. Or it's going back to another huge thing on this, which is part of why the investment analysis isn't so important, which is should we sell or stay in the home? Now granted, that decision is not purely financial. It's probably actually more emotional and lifestyle-oriented. I like my neighborhood, I don't like my neighborhood, I've always wanted to live here, I love this place, I never want to leave. All of those factors. However, doing the investment analysis of your home will help you make those decisions. Again, because I go back to the— let's say you bought a brand new home 25 years ago. It was literally brand new from a builder. Mm-hmm. You bought a, whatever, 3,000 square foot home from a builder, and now you're 25 years into it. And you know what? You did a great job at managing your roof and your gutters and your HVAC, but now no matter how good you are, those things are going to need to be replaced.

Yes.

Now you're, you're facing that $15,000 to $30,000, $50,000 bill on replacing your HVAC. Perhaps you want to replace your roof. So now you're having to sort of think about the— if I stay in this house for the next 10 years, I'm going to have to find money to make those investments to stay in that house because we love the neighborhood and the family and I'd never want to leave this place. Or you might go, huh, maybe we should sell it now and let the subsequent next buyer actually have to deal with that. And we may be able to find a different home that has less investments that need to be made in the structural and equipment system. Yeah.

Or even less maintenance.

So,

you know, some people can't handle big yards.

Doing that financial analysis on your home a couple times a year helps you with all of these sort of things because it gives you that instant data set to add to the lifestyle emotional component of the decisions that you need to make.

So if people— if— because we— I like to leave tips for everybody every end of every podcast. What are the 1 to 3 tips that people, or actions, tasks that people can take today to go review this information? And let's just say it's whiteboard session sessions with John, right? Because John's a huge whiteboard person. So if there was a whiteboard here, what are the 1 to 3 tasks that people could take today to go determine How to evaluate their home to meet their best needs?

Yeah, step one— yeah, step one is to go back and aggregate all the data that exists somewhere, which is your closing docs of how much you paid for the house.

So the financial details.

The financial details. And then go back and resurrect any of the big projects that you've actually actually invested in the house. Try to find out what your house is currently worth. Find out exactly how much your mortgage balance is. All of these sort of things you got to get from 3 or 4 different places. Bring them all together and then learn the basics over kind of doing these— the calculations is step 2 on the tip, is the calculations to calculate if you sold your house, What would your cash be? Because you're going to have closing costs and you're going to have to pay off your loan. What would that cash value be? And then the other part of that is, how old is your house? And if you stay in the house moving forward, try to forecast when you might see some of these big-ticket items that you might have to replace. I guess the third tip is, are there any lifestyle projects that you guys just absolutely want to invest in? Like you've lived in your house 10 years and you really want a pool. Or you really want that new kitchen. You have to put that on your list of sort of things to assess and analyze in the context of sort of doing that financial analysis on your house.

Yeah, and personally, once again to what John just said, I would also bring in all of this data, meaning all this financial data, evaluate it, but also taking not only the lifestyle projects but taking the lifestyle needs that you have. If I had a whiteboard, I'd write down all of your lifestyle needs and whether or not your current house provides it, or if you're going to find it in another house. And a good example of that is, we're just going to bring up a couple friends of ours. They were living in this wonderful house. It was amazing. They loved it, but they realized they were 30 minutes from all their friends and family. And they also realized that they were spending more of their time, and although they were retired, they were spending more of their time on outdoor maintenance, and it was prohibiting them, along with the location, from visiting their friends and family as often as they preferred. So they chose a smaller house with a smaller lot where they have to put their own pool in because it didn't come with a pool, so they had to spend and, um, spend that money on a pool and dealing with backyards where their dogs can't go outside temporarily and they got to take them for walks and everything else without a doggy door, just FYI. Mm-hmm. And so they had to deal with that inconvenience for a short period of time because the lifestyle that they wanted of being closer to family and friends, the convenience of it and the smaller yard was really more important to them than the previous home they had. And they loved it. They loved it. But they realized their lifestyle dynamics changed. And that's what put them in a position where they decided to sell the previous home that they absolutely adored and find one that was smaller, less maintenance, and make the investment of putting a pool in their backyard on their own. The inconvenience and making some of those trade-offs. To do that. So from my perspective, when you're evaluating all these tasks that John is saying to do, which I agree with him, but also take into consideration your lifestyle needs. Truly take into consideration, because over time our needs change. Mm-hmm. And we just need to be honest about that and decide, okay, what's next for us? And that is with anyone. out there who are in their homes, and some people will stay in their homes forever. I know families that have stayed in their homes forever, and it has been a generational property where people come together and they love working the land because that's what they do, rather than traveling and doing all these other things. So everyone is very unique and everyone is different, but lifestyle does play a critical role. into whether your home is an investment vehicle or not. Any last thoughts, John?

Uh, no, I think we've hit all the major— covered a lot of ground as it relates to why it's important to periodically do an investment analysis of your house, both financially and lifestyle-wise. And it's, uh, I think we're both passionate about that. We want all homeowners to take these things into account to improve their lives financially or personally. And so it's fantastic. So yeah, I think we covered all the bases.

So at the end of the day, your home is unlike any other investment you'll ever own. It's a financial asset, it's an expense, and it is a lifestyle asset. So be very specific about how you choose to use it. It is a And no one person is the same. So if your neighbors are telling you something or your family's telling you something, tell them to go. You know what, I'm going to do it my way, whatever that way is. But thank you so much for being here with us on Be a Smarter Homeowner podcast. We hope that this conversation today gives you a different way to think about your home, and we invite you to share this episode with another homeowner that you think may find value in this conversation. And until next time, stay proactive, stay organized, and remember, peace of mind starts at home. Have a great day.

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