When embarking on the endeavor to build your custom house, you have to be aware of an important thing – the future residence will not be just a new place to dwell, you also have to view it as your largest investment that can be a future source for making money.
Every time you consecrate an amount of money into its structure, you need to ponder on any related movement such as how to leverage the use of funds and how to maximize the compensation. Thus, the theme of the article is how to make money out of your new house.
In order to really understand how a home can function as a way of making money in the future you should research and consult experts like certified public accountants, loan officers and real estate agents. Thus, you will be able to make the proper decisions regarding your custom home, which will later pay off by making money through an increased investment return.
Making Money in the Long Term
In general, the reward for taking risks with your money on your house comes through appreciation, the value that your home receives on the real estate market. In this respect, one can typically expect to witness a rise in the value of one’s home of at least 3 to 5 percent per year. However, if you intend to obtain a higher investment return, you may resort to leverage. This strategy involves that you use fewer liquid financial resources for gaining the same profit and it depends on how much cash you tie up in your house.
Consider the following example. James and Carrie are a couple owning a house worth 400,000 dollars. Their home is free of any liabilities such as mortgage and appreciates by 5 percent in a year. This means they have earned $20,000 or a 5 percent return on their $400,000 investment.
On the other hand, their neighbors, Tom and Lara, have a house with the same value of 400,000 dollars. However, only 100,000 dollars of the overall net worth is equity, the remainder representing a loan. The $300,000 cash has been invested in a diversified stock portfolio. Their house appreciates by $20,000 in a year as well. But when compared to the first couple’s case, the 20,000 dollars in appreciation represents a 20-percent return on the second couple’s $100,000 home equity. Furthermore, Tom and Lara have also the liberty to make varied investments with the available cash.
Having a custom house implies that you enjoy a residence which has been built in accordance with your wishes and imagination. However, you might want to tone down the uniqueness of your home because its “singularity”can make it less appealing to others. Consequently, the property’s value might suffer a decline.
Since a residence’s appreciation is based on supply and demand, the more people like and want to buy your house, the bigger the bidding price will be. Hence, don’t exaggerate with the customization and construct a house that would appeal to different tastes, otherwise you won’t be able to give it away. This principle is called making your home marketable.
In order to ensure a good value and marketability degree, you need to have these aspects in mind:
- location – the place where your custom house is situated plays an important role in the establishment of its value; avoid busy streets or the vicinity of big commercial buildings because these might drive potential buyers away;
- conformity – although you want to be special, your custom home should however “blend” into the landscape and create the impression of conformity. If it is smaller or considerably bigger than the rest of the neighborhood houses, then it may be less desirable;
- design – choose a design for your house that would inspire functionality and accessibility. People in general like practical houses, and a castle with a moat might be romantic, but wouldn’t fit in an urban “scenery”.
Of course, one usually builds a custom house out of the impulse and desire to create a sort of “nest”, hoping to spend as much time as possible in its intimacy. However, there might come times when one would be forced or want to sell it, and ensuring its marketability in the first place helps the owner to give it away sooner, making money in the process. It is like a warranty for one’s future financial security because the residence would appeal to a larger cross section of people, which leads to a better bidding price.
Making Money from Home Taxes
In some countries, such as the Unites States, home ownership involves a series of benefits. If you move to a custom house and make it your primary residence, then you enjoy a series of things that are tax deductible:
- property taxes;
- interest on the land and the construction loan;
- points (loan origination fees) on the land and construction loans;
- interest on your permanent loan.
It also should be mentioned that the US Internal Revenue Service does impose a limit on the amount that one could borrow. It allows only deductions on a loan amount of $1 million or less, but you receive the permission to deduct the interest and points on an additional credit line of $100,000 beyond the $1 million. Be careful however because you may have to repay the savings if you claim these deductions while you build the custom house and then sell it as an investment.
A constant counseling from a professional certified public accountant or tax preparer will help you gain a wider insight into the state of affairs and educate you in the process of decision making. Before taking any major action, stop and analyze all the facets of the problem, especially if it is about financial choices to be made before the end of the construction project. Examine the consequences of delaying a certain decision, trying to answer these questions (with the help of your adviser):
- How much do I risk with this decision?
- When will I have all the facts for sure?
- What is the worst scenario that could happen if I guess wrong today?
- Is there any possibility to avoid/protect myself against the worst case?
- What does it take to enjoy that protection?
- Is it worth it?
- What course of action will be best to follow?
All in all, you must always consider your home’s potential of making money in the future and plan for such a situation.