With intentional approach, your home is one of the largest assets in your entire portfolio. It is more than a place to live, your home has the potential to provide accessible equity, cash flow, and up to $500,000 of tax-free gains upon the sale of it. Your home can be a 3-dimensional asset – especially when you recognize and treat it as such.
The people who are most successful with real estate plan their mortgage payments and home improvements, and they leverage favorable market conditions to time the sale of their property. Timing is leveraged to upgrade as well as to downsize.
Home equity increases and decreases with the economy. While we have witnessed a significant rise in property values over the past 5 years, we have also experienced a quick and drastic decline during the banking crisis (and other historic economic moments). Positive equity can be accelerated by paying extra money on the mortgage per month and/or year. You should aim to track your home equity with the same attention you give to your credit score. A homeowner can take 7 years off of a 30-year mortgage by simply paying the monthly mortgage payment bi-weekly or sending in just one extra mortgage payment per year.
Another way to create home equity is to make smart improvements that immediately boosts the resale value of your home. If you’ve ever watched shows like Love It or List It on HGTV, you know what I’m talking about. If you are pondering a pricy home improvement, your best resource to help you decide if it’s really going to improve the value of your home is by speaking with a reputable listing realtor in your area.
Most home improvements cost in the tens of thousands of dollars. It’s important to leave emotion and impulse out of your decision making. Taking 401k withdrawals and loans is one of the most expensive ways to approach home improvements. When you access your retirement funds prematurely, not only are you forfeiting creditor protection on that asset, but you are also disrupting the compounding benefit of your future retirement income; even if you repay a 401k loan. One of the biggest lies we tell ourselves is “I’ll put the money back later…” I can assure you that after 20 years of financial planning, I can count on one hand how many times a client has actually put the withdrawn funds back where it came from. The intention is there, but other priorities and emotions often interfere.
It is far wiser to use a home equity line of credit (HELOC), savings (cash on hand or brokerage), and/or 0% interest offers to pay for home improvements. As a financial planner, I love 0% offers when available; then use a HELOC to pay for repairs. The HELOC helps rein in spending as there is a safety limit imposed by the bank on the spend. It also properly assigns debt to the asset it is improving. Using the net equity of your home to specifically improve the home is authentically using and leveraging that asset after paying off all debts attached to it. When HELOC’s are used for true home improvements, the interest is tax deductible.
You should make and keep a “home improvement” file for your property. Keep a dated record of all improvement and maintenance as well as the receipts in that file. This simple habit helps keep track of your cost basis. It will provide value when you go to list the property and will be useful at mitigating capital gains taxes for yourself or estate (beneficiaries).
I have owned several fixer-uppers. The urge to rush through all improvements as quickly as possible is financially and energetically exhausting. Rome was not built in a day. Take a healthier approach. Sit down with a piece of paper and make 2 columns. On the left side, list known necessary maintenance (Needs). On the right side, list your desired improvements (Wants). Estimate a cost for each and plot a desired timeframe for each. Add 20% to the cost as a buffer. Gather multiple estimates. Take the time to ask questions from contractors and vendors. Ask how they would do or approach the same project if it were their house. I have found their input when asked this way to be invaluable. Write down what you learned from your interaction, so you don’t forget. Ask to have the estimate locked in for a year, then decide the best timing around your schedule and ability to pay for the project.
The last part of successful property ownership I’d like to address is when to sell. Selling should always be an option on the table – and executed when it physically and financially suits you best. This means selling:
- when you have enough equity to upgrade to another home without increasing what your current housing expenses are
- downsizing when you can drop your housing expenses significantly, or become mortgage-free
- recognizing when your home is becoming too much to physically and financially maintain, and cashing out the equity while it is highest – even if that means moving into a rental
Other times to consider selling include but are not limited to:
- having less physical and financial responsibility in anticipation of a job relocation or job loss
- becoming widowed or divorced is a time to critically review what is financially sound for the changed financial circumstances
- planning for aging by seeking single-level housing or age-restricted retirement communities
- When the kids leave the nest, and you don’t need so much space
You are allowed to make a tax-free profit of $250,000 if you are single and $500,000 if you are married if you live in a property for 2 years and declared it as your primary residence. Some of the most financially successful people I know have taken advantage of this tax code provision more than once.
A savvy investor checks in with their professional team before making investments. This includes your financial advisor, CPA, banker/lender, attorney, and real estate professional. We love to see our clients succeed more than we love to intervene in crisis situations that could have been avoided by seeking out good advice from the start.