Home: Real estate investment or place to live?

The unusual thing about your home is that it is has aspects of being an investment but it’s also a place to live. While you can expect it to appreciate in value over a long period of time, to realize a return you also have to be willing to sell it or extract equity.

Most people fall somewhere in a continuum between two ways of thinking about their home, says Cynthia Holmes, a professor of real estate management at Ryerson University’s Ted Rogers School of Management. At one extreme, they may look dispassionately on it as something they would sell to maximize their return when the price is right. At the other extreme, they might be so attached to it that they wouldn’t sell or touch the equity under any circumstances. But the common view is “that there is equity sitting in the home that can be realized at some point,” Holmes says.

There are lots of options to realize value, she points out. Many people do that by downsizing and relocating. Others sell and often use the proceeds when it becomes time to move to a retirement home. But if you want to stay in your home, you can also extract equity using a reverse mortgage or Home Equity Line of Credit.

Housing has historically yielded around a 6% return on average over many years in many countries, says Holmes. But house price movements are difficult to predict and vary dramatically by location and even by neighbourhood, she adds. Investments in the stock market have historically enjoyed higher returns over long periods of time but also have experienced greater price volatility. Homes also carry costs for maintenance and property taxes that other investments don’t generally bear.

It’s a good idea to be diversified by having money in other assets besides housing. “Many families over invest in their family home when they consider their total wealth,” argues Holmes. So if you have done well in the housing market so far, that doesn’t necessarily mean it’s a good idea to move up to a larger house if you haven’t built up much in financial savings. “That might be the point where you decide now is a good time to diversify your portfolio by building up savings instead.”

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