Published October 2003

Don’t count on your home as a ‘growth’ investment

If you’ve owned your home for many years, the chances are pretty good that it has increased in value — perhaps substantially. However, even if that’s the case, beware the assumption that it will continue appreciating to the point where you can count on it to support your retirement and other long-term goals.

It can be quite tempting to look at your house as an investment (and a positive one, at that). In fact, on average, American homes have appreciated slightly more than 6.3 percent a year from 1968 through 2002, according to the National Association of Realtors.

Of course, to a large extent your home’s value depends on the neighborhood in which you live. But even if your home has more or less tracked that 6.3 percent figure — certainly a decent return — there’s no guarantee you’ll make steady gains in the years ahead. Throughout our nation’s history, plenty of “hot’’ real estate markets have gone cold.

Unfortunately, many people view their homes as their chief “growth’’ vehicle for the future. Toward that end, they pour a lot of money in big remodeling projects, assuming they will greatly increase the value of their homes. But the fact is that, with many home improvements, you may not even recoup the costs, much less add to the sale price of your house.

If you are going to invest money in your home for the purposes of adding to its value, you’re probably better off by taking care of the “basics’’ — applying a new coat of paint, fixing the roof, etc. — rather than adding “luxury’’ items such as a hot tub or swimming pool, which may not be desirable to prospective buyers.

Still, you shouldn’t totally ignore your home as a financial resource. For example, if you need either a lump sum or liquid source of funds, you might want to consider taking out a home equity loan or line of credit. (Before you take on this type of debt, though, make sure that you can handle the payments, because you’re using your house as collateral.) You can usually find competitive rates on home equity loans and credit lines, and the interest may be tax deductible. And by using the equity you’ve built in your home to help meet short-term cash needs, you can avoid dipping into your savings and investments.

Those investments — stocks, bonds and other securities — are the key to your future. How you choose to spread your dollars among these assets will depend on your risk tolerance and your time horizon. As you invest, you may face short-term volatility, but over time, a diversified portfolio of high-quality investments may reward you more than “hoped for” gains from the future sale of your home.

If you want to increase the enjoyment you get from your home, go ahead and make whatever improvements you want. If you need greater liquidity, use your home as a “bank’’ from which you can borrow. But don’t assume that your home frees you from the need to invest. It doesn’t. Ultimately, to get the growth and income you need to help you achieve your long-term financial objectives, you’ll have to look past your front door.

Eric Cumley is an investment representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 8,000 locations nationwide.

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