Is buying a home to live in a good investment?

Anecdotal evidence suggests that in some markets investors are buying foreclosure properties at bargain prices. These properties are located in areas that appear to have good growth potential, and they generate enough rental income to at least offset the holding and maintenance costs. The deal needs to make sense financially regardless of whether there is a big run up in appreciation. The plan is to hold the property for the long term.

There was a time not long ago when investors bought condos and houses even if they didn't produce enough cash flow to cover the carrying costs. Prices were rising so quickly, they could afford a little negative cash flow. The holding period was short and the appreciation payoff was big. According to Standard & Poor's/Case-Shiller 20-city home-price index, prices increased almost 75 percent between February 2000 and February 2008.

In most housing markets, it's not possible to count on appreciation now. The market could be bottoming out in some places, according to some economists. Or prices could move lower before leveling off. It could be years before significant appreciation is again part of the housing picture. With this in mind, is buying a home to live in still a good investment?

Just as the lenders are moving back to basics in terms of qualifying borrowers for mortgages, home buyers should examine the fundamentals of home ownership to determine if they are good candidates.

HOUSE HUNTING TIP: The equity in your personal residence shouldn't be used to pay for vacations, education, new cars and credit-card debt. Many homeowners who participated in serial refinancing when rates were low and money was easy found they had no equity left when the credit crunch hit in August 2007. A good portion of these repeat refinancers now owe more than the current value of their home.

Along the same lines, it's risky to look at your home as a retirement account. It's not a good idea to rob your pension plans in order to purchase a home. This money should be kept for retirement. Some financial advisors suggest that you don't consider the equity in your home as part of your financial portfolio. After all, you will always need to live somewhere. Most people will always need to budget part of their net worth for housing.

Buying a residence hoping for appreciation to increase your net worth is dicey. You may earn appreciation. Nationally, home prices have tended to rise over the long term. But, this doesn't mean that your home will appreciate during the time period you own it.

However, there are plenty of good reasons to buy your own home, if you can afford it. The government subsidizes the cost of home ownership by permitting taxpayers who itemize deductions to write off some or all of the mortgage interest and property taxes they pay. Restrictions do apply. So, check with your tax advisor before making a purchase.

Owning your own home gives you a sense of security. You can choose the community in which you live. You're not at the mercy of a landlord who might issue an eviction notice. If you buy with a fixed-rate mortgage, you know how much you'll be paying over time. Rents, in most places, are subject to increases. It doesn't make sense to spend money fixing up someone else's house so that it feels like yours. And, most landlords will have a say in what you can and can't do -- even down to paint colors.

THE CLOSING: But, if you own it, you can redecorate to your taste and possibly add value by doing so.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.

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