“Can the Home purchased for self use be considered as an Investment”?


  1. Reasons To Own Real’s Estate

Investment in realty is done for two main reasons:

Primary use (residence, office, or factory; main objective is self-use or ‘consumption’ is

The main objective)

Secondary use (main objective is investment)

2.Ownership for Primary Use

When we take up the study of real estate which is for primary use, two questions (inter-related) arise :

1. Should primary use (residence or business-office/factory/etc.) be classified as investment in the portfolio of an end user?

2. Does he/she become an end user and an investor at the same time (or remain an end consumer only)?

Let us analyze the questions above in details to arrive at an appropriate answer.

3.Primary Use Property – Arguments against Classification as investment

Consumption: The home, office or the asset purchased is for self-use. There will also be an ‘investment’ in decorating or add-ons after the purchase which cannot be termed as investment. The property is essentially taken for self-use, like ‘consumption’.

Return on investment: We never estimate returns when we buy a residence or an office or a retail space.

Illiquid asset/blocked funds: When a property is bought for self-use, the assumption is that only something bigger or better will be bought in future. In this sense, the money is always blocked and it resembles a consumed commodity, unlike an investment where investor can liquidate the investment and unlock the funds.

4.Primary Use Property-Arguments for classification as Investment

The following can be arguments for classification as investment, of any primary use property:

  • Implicit/opportunity cost-by way of rent saved
  • Addition source of income may be possible-rental from unused portions
  • At time of buying another asset, it substitutes all/ some money or gives extra money
  • Provides tax breaks
  • Useful at time of need

As we see here, there can be arguments in favor/against both these points of view and conclusions vary, depending on personal outlook. However, it can be safely concluded that when we take a large enough time-horizon (say 10 years and upwards) the self-use purchase also makes its significance felt as an investment. After all, house owners do keep a track of the value of their houses now and then. They will never do this for their home furniture!

 

Disclaimer: The article contains data collected from various sources & the use of same is at reader’s discretion.