Is My House an Investment?
Question: It’s a known fact that the assessed values for properties in Quezon City were adjusted upwards af-
ter many years of being stuck at low levels. A quick look at my tax declaration shows that the market value of the lot on which my house is built jumped by almost 7 times? Can I consider that increase in market value a good measure of how I am growing my net worth?—asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph, Facebook and SMS.
Answer: The best way to measure the meaningful growth of our net worth is to see if we have growing savings that are reinvested in assets, particularly earning assets.
Let’s break down investments for a moment.
The value of any investment is the sum of its acquisition cost plus any accrued returns or losses. In addition, those investment returns or losses are the combination of actual cash flows from earnings or losses and the revaluation of the investment itself based on what the investment would sell for at the present time.
In other words, an investment is meant to be sold to realize the gains (or losses).
So, here’s the thing, while a jump in the valuation of your real property may give you a psychological boost, if you have no intention of selling the property because it is what you consider your home, then that added value is, as far as preparing for a brighter future for you and your family is concerned, meaningless.
Now don’t get me wrong. A house is an asset, unlike what some would have you think. It’s just that a house is a non-earning asset. If you are still focused on providing for a brighter future for your family, your funds will be better off being invested in productive or earning assets such as financial securities, commercial real estate, and even businesses.
The foregoing also partly explains why the saying that, “instead of renting, you should just use the money for rent as the monthly amortization on a housing loan because you at least end up owning the house that appreciates in value”, is not totally accurate.
Remember, if we are talking of the house that you will live in for the rest of your life, you will probably not sell it—because you do not want to leave your “home.”
That alone prevents your home from being classified as an investment or earning asset.
Your home does bring you unquantifiable benefits in terms of rest, pleasure and the confidence in knowing that you will have a place to rest your weary head at the end of the day and recharge for the next day’s challenges. Sure, you can see where your money went when you buy or renovate a house. And a house certainly gives you more than mere memories as compared to an expensive vacation trip or the fleeting exhilaration from a depreciating asset like a car.
But because such benefits from owning a house are non-quantifiable, we need to classify the house as a non-earning asset.
Ideally, you would not sell your home to fund your children’s education or your retirement. Remember, you don’t say to your family, “Come house.” You say, “Come home!”
So, be content with a modest home that you will maintain and renovate over the years. But allocate more of your hard-earned savings for financial assets from which earnings and value appreciation can be quantified, cashed in and enjoyed for a brighter future.
Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines. He is best selling book author of Pwede Na! (A Complete Guide to Personal Finance) in 2004, and is the chairman and president of the Personal Finance Advisers Philippines Corporation.
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