When I do a retirement projection for a client, I put together an evaluation of his or her total investments. Nearly every client says to me, “Just a minute! You forgot something. You didn’t include my house.”
I say, “That’s true. I didn’t include your house. Your house is a roof over your head. It’s not an investment.”
When I told this fact to one couple, they looked surprised. “But it’s a two bedroom rambler,” the wife protested. “And it’s in a nice neighborhood. Its assessed value has risen steadily for the past six years. How can you say it’s not an investment?”
“Do you plan on continuing to live there?” I asked.
“Yes. We’re not moving any time soon.”
“Then unless you plan on ultimately selling it and then downsizing to a smaller, less expensive house—and living off the proceeds of the gain—it is not an investment. It’s just a roof over your head.”
Some clients say they plan to live in their house for about five years, and then sell it to buy a bigger house. That’s fine, but if the real estate market has risen, increasing the value of your home, then the prices of all the other homes in the area have risen as well. Your gain will be swallowed up by the increased price of your new home. You will not be getting ahead.
You buy a house for $300,000 and ten years later you sell it for $600,000. On paper, it looks like you’ve made a lot of money. But the only way you will realize an investment gain is to sell your current house, then downsize to a less expensive home or live in a rental and invest your profits from the sale.
Some clients tell me that they do intend to downsize—especially after the kids graduate from high school. But few truly do so when the time comes. Or if they do, depending on where they want to move, they find that even a smaller house is as expensive as the larger one they currently own. Smaller does not necessarily mean less expensive. Land costs may be higher in a new area or the new home may be outfitted with expensive extras, such as an outdoor whirlpool or higher-grade appliances and cabinets.
A couple who came to me for counseling always planned to move back to California after their kids graduated from high school. They wanted to sell their home, a large multi-bedroom house in an upscale Seattle neighborhood. They intended to find a smaller home in a warmer climate.
“What kind of house are you looking for?” I asked.
“Well,” the wife said, “one of those really nice beachfront condos.”
I talked to them for a while and asked them how large this place might be. Did the husband need an area for an office? How about a two-car garage? Did the wife want a garden? When we researched how much such a place might cost them, it turned out to be greater than the value of their current home.
We have this notion that when we retire we’ll downsize and live in a smaller place—that things will be different. We’ll find that little paradise cottage on the ocean or in the mountains and have all this excess money to live on from the sale of our old house. Far too late, we find out that reality is very different.