A Word on Investing in a Home

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Buying and paying a mortgage on a home is the most common way of investing for most American families. It is seen as a safe bet, because the value of property tends to increase over time, and people rarely leave their homes before five or 10 years.

Financially, buying a home is an investment if in the long run it either reduces a family's living expenses or increases the market value of their capital. This cannot be settled by merely comparing a month's or a year's expenses incurred under renting versus owning.

A careful comparison calls for drawing up a home-owning budget estimate, say for ten years ahead, and considering such questions as these: Assuming the continuation of mild inflation, what will be the trend in rental charges, as compared to all the costs of maintaining an owned home? Will the necessity of paying off a mortgage cause our family to save more money than we would if we rent? Instead of putting our money into the house, can we get better results by investing elsewhere? Federal income-tax rules favor home owning over renting. In this way, Uncle Sam is quietly helping to finance the millions of new houses out in the suburbs, in addition to the assistance he renders by making it easier to obtain a mortgage and perhaps cheaper.

Owning real estate, whether it is one's home or not, is an equity form of investment. Real estate is the only form of equity for many savers, all the rest of their capital being in such fixed-dollar items as bank deposits and life insurance. Because home ownership is an equity, if the owner sells he may receive either more or less than he paid for the place. With a home that is unusual in any respect, an owner desiring to sell is apt to have difficulty in finding a kindred spirit who is willing to pay what the place cost. But where the design of the house and its location are of a popular sort, the market price of a house may rise for several years, at least until it goes out of style. As long as inflation continues, the cost of building a new house keeps rising, and this naturally tends to increase the price of older houses.

Also, a growth in population tends to raise the price of building lots in metropolitan areas. If nearly all of the building space within easy commuting distance of a metropolitan center has been filled, so that only a little unused land remains for sale in that area, then obviously the price of building lots, and also of houses already built, goes up. Now let us turn to the debt side of the picture.

Most families, when buying a house, cannot possibly raise cash enough to pay the cost; so the only way the deal can be financed is by borrowing on a mortgage. In general, the writer is skeptical of the wisdom of borrowing money in order to buy an investment, especially of the equity type, because if plans are upset, the necessity of paying off a loan at the wrong time may wipe out a man's savings, and even turn them into a minus quantity. But the modern real estate mortgage has queer aspects that may well justify its use by a cautious investor, even though he is not compelled to borrow.

In general, real estate is considered a "good" investment, and if a person has land in the family from past generations, all the better. Land (in most cases) doesn't "go away," and barring a serious natural disaster will not be significantly altered over the course of many years. It might be advisable to buy a piece of land and hold onto it, especially in an area of high development. This kind of investment can become a real treasure in the event of an emergency or a child's marriage and the investor would do well to consider land as an option.

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