If you own a home in a real estate boom market, you are probably richer now than you ever thought you could be–on paper. Even if your house is in a real estate market that's rising more modestly, you may still be feeling pretty flush–on paper. But is it possible to "cash out" your paper wealth?
Assuming you're living in the home you own (if you own investment properties, stop reading this article now and just go talk with a real estate broker or investment advisor), you'll have to find new housing if you sell. That's the point where most people stop thinking about "cashing out" their home's equity. After all, if you'll just end up spending all that money on another house, why bother?
The reality is that most homeowners can, in fact, "cash out." For many homeowners, selling property really will be quite a windfall. Not selling now might be the biggest financial mistake of their lives. For some, selling would be an equally bad idea. How do you know which came you fall into? Selling Your Home: Three Options
If you sell your home then buy a comparable home in the same market, you'll simply be losing money on the costs involved in real estate transactions. There are, logically, only three scenarios in which it would be possible to actually sell your home and not lose your big money on buying another home–and all of them are better ideas than you might assume:
1. selling then renting new housing 2. selling then buying more modestly priced housing 3. selling then moving to a less expensive market
1. Selling then Renting New Housing
Have you checked what rents are like in your community? According to a recent New York Times article, in the most price-inflated housing markets–most prominently, the Bay Area of California, Boston, New York City, and Miami– renting is now an indisputably better deal, at least in the immediate future. When you add to the cost of buying a house such "hidden" costs as property taxes, interest on a mortgage, real estate transaction costs, and maintenance, owning can easily cost twice as much as renting.
In terms of investment value, housing prices would have to rise far faster than they are rising now for buying a home in an overheated market to be anything but a money-loser for about the next ten years, and possibly far longer. Given that buyers are now stretching themselves thin to buy homes in the current market, you have to ask: who will be left to buy homes if prices actually do double? In the long term, San Francisco, Boston, and Manhattan may compete directly with Hong Kong, London, and other highly desirable cities in a virtually limitless price war. For now, there aren't enough multi-millionaires in any of these cities to keep prices going skyward forever.
Of course, some markets are still good for buying your own home. According to the New York Times, the cutoff point when buying is more expensive than renting is roughly when it would take more than twenty years' worth of rent to equal the sales price. Chicago is the biggest market in which the Times says it still makes sense to own rather than rent, at least if you're staying longer than a few years. Meanwhile, if you're buying the property as a long-term investment and will be renting it out, the rent may very well be enough to make up for the costs of owning. 2. Selling then Buying More Moderately-priced Housing
In the stock markets, you can manage your risk by selling some of a high-performing stock in case it drops and keeping some of it in case it goes higher. With housing, the closest thing to hedging your bets is to trade down for a less expensive property. Housing prices don't always follow people's tastes exactly, so a less expensive house might actually be more to your liking than your current home. A "less convenient" street may also be less busy and therefore more quiet. Or, your home might owe part of its market value to its proximity to public transportation that you don't use anyway. 3. Selling then Moving to a Less Expensive Market
Moving to a less expensive market might seem like the least practical way to cash out your home's equity. But don't rule it out completely: you don't have to move to Nebraska, just to a nearby market. Particularly if your job isn't close to home now anyway, it might be easy to move from San Francisco to Sacramento or from Boston to Providence.
Depending on your lifestyle, you could even combine some of the options above. For instance, if you're retiring, you might sell your home, spend extended stays in faraway cities you always wanted to visit, and then return to rent or buy a smaller "empty nest" apartment.
Of course, there are intrinsic benefits to home ownership, such as the freedom to change the paint or have guests over whenever you wish without checking your lease. Just don't confuse those intangible benefits with economic ones. After all, you can't pay the mortgage with intangibles.
Joel Walsh writes for http://www.bayarearealestateadvisor.com about Bay Area real estate: http://www.bayarearealestateadvisor.com?%20bay%20area%20real%20estate [Publish this article on your website! Requirement: live link for above URL/web address w/ link text/anchor text: "bay area real estate" OR leave this bracketed message intact.]
