What Makes a Home an Investment?

What factors should you consider when buying a home that can make it an investment as well as a place to live? Let's assume you've made the decision that home ownership is the right choice for you and you've also done the preparatory financial work--you have figured out what you can afford taking into account the down payment, mortgage payment, real estate taxes, and maintenance. You have also gone through your financing options and, if you need one, have been pre-approved for a mortgage. You've also considered the needs of yourself and your family in narrowing down what you're looking for in a home. We encourage you to also consider the following information concerning investment value when you're ready to buy your home.

We know you've heard this before, but it bears repeating; location is the single most important factor in home value. Location is inseparable from other important factors bearing on the value of a home. It's no coincidence that many people are clamoring to live in one area while you can't give away homes in other areas.

Tip The importance of location is what lends credence to another popular home buying adage that is often repeated, but nonetheless true. This adage is that if you want the best return on the value of your home investment, buy the worst house in the best neighborhood you can afford rather than a bigger and better home in a neighborhood that isn't quite as desirable.

What makes one location more in demand than another? The following features commonly define a desirable location:

Safety. By safety we mean a low crime rate, doormen in apartment buildings, gated communities, paid neighborhood security patrols, etc. Safety is of primary importance to just about everyone, whether they are male or female, young or old, single or married and usually of particular concern to those with children.

Quality of public school system. Statistics for schools, such as how many children graduate, how many go on to college, scores on standardized tests, special academic and athletic programs and the like are available on a local, state and national level. The disparity in the value of similar homes in different quality school districts can be substantial, particularly if all the other home characteristics are similar.

Warning Maybe you don't have children now and don't plan on having them while living in this home or at all. Should you disregard the quality of the school system as a factor in your home choice if this is the case for you? The answer is a resounding "no." Remember, this may be an important factor to a prospective buyer when you are ready to sell your home. Therefore, for investment purposes, obtain the school district information for the area where you are looking at homes.

Commuting and transportation. Homes in areas that offer ease of commuting are often in high demand. For example, if you work in New York City, but live in a suburb of Long Island, how close you are to the Long Island Railroad and the length of your train trip into the city is a huge influence on the price you will pay for your home. In the same vein, if there is an industrial park in your area that employs a large majority of the population, a home's close proximity and easy access to the highway leading to that industrial park will increase its value. Recent surveys have shown that easy access to a highway is more important to homebuyers than living on a lake or having some other sort of view.

Scarcity and desirability. Some areas are desirable as well as scarce. For example, in some areas, demand for waterfront housing is so high and the availability so low, that waterfront homes don't have to be in great condition to command a larger price tag. In these sorts of cases, the regular rules of a home as an investment don't always apply. Again, using our waterfront example, there may be a small waterfront section of an area that is highly desirable, but the area is not located within a particularly noteworthy school system. Due to the high desirability of the waterfront homes in this area, buyers may be willing to incur the expense of private school for their children and still pay top dollar to live in the waterfront area.

Type of home. Another factor to consider is the type of home you're buying. Are you looking at houses, condominiums, or cooperatives? As a very general overall rule, houses tend to be the best bet as a home investment. However, as you've probably gathered, this general rule doesn't apply to all geographical areas, particularly certain urban areas where houses are not the norm and condominiums and the like are in demand.

Finally, please keep in mind that the future, particularly the distant future, 10, 15 or 20 years from now, is difficult to predict. When you are ready to sell your home or leave it to your heirs, your great school district may have gone to seed, the neighborhood may not be as secure as it once was, or maybe the town's major employer closed down and home owners haven't been keeping up with the maintenance on their homes. For these reasons and more, we urge you to buy a home for the purpose of your needs and comforts and never solely for investment purposes. A home that meets your needs and expectations is the best home investment you can make.