Investing in your home
The money that most Barbadians put into acquiring a home represents, more often than not, the largest investment they ever make during their lifetime. Over 90 per cent of such investments are initiated by way of a mortgage. This article highlights ways of trying to maximize this significant investment.
A capital gain is earned after purchasing real estate at a particular price, it is later sold at a price that generates a higher amount of money from the proceeds of the sale net of all fees and selling costs. Even if the property is not actually sold, unrealized capital gains can be imputed to it by estimating the net proceeds of the potential sale at the prevailing market value.
There is no tax on capital gains on real estate, unless the taxpayer makes a significant part of his income from speculating in real estate. This makes the growth of capital gains on real property one of the most critical factors in accumulating wealth and equity. It is like a silent bonus.
The equity in your home is that part of the principal loan that you have repaid at a given point in time. It represents your ownership portion of the property you are acquiring through the mortgage process.
In choosing to invest in your home, the potential for capital gains is the one of the most critical considerations. The rule is to choose the property with the most likely potential for greatest capital gains. This is easier said than done as a property’s potential can be easily wiped out or significantly enhanced by unforeseen circumstances and events.
With a view to maximizing capital gains, choosing the best location is the key. This approach is the time-tested rule of many real estate moguls. For a would-be homeowner, this would mean choosing a site on the best street that they could afford, where the surrounding homes are of the standard they expect to maintain or better, where the current homeowners maintain their homes and their surroundings, and where there is likely to be complementary real estate development continuing in the neighbourhood.
Some homeowners have earned significant benefits through capital gains by getting into some developments in the early stages. With an astute choice of location, a homeowner may be able to impute capital gains on their home that exceed a 20 per cent return or higher.
Carefully managing any debt is another way of maximizing the investment return from your home. If a mortgage loan is the source of financing, remember to minimize the loan amount, to minimize the interest rate, to minimize the repayment period and to negotiate downwards any fees or potential penalties. Every dime saved by minimizing a mortgage is a dime earned and available to be invested otherwise.
To capture the essence of this difference, project your finances into the future as an annual balance sheet. With a large mortgage, your state of affairs will be improving marginally, held back by a significant barrel of debt and debt servicing. Without a smaller mortgage, your statement of affairs can be improving aggressively like a shotgun with the barrels (investment pool) blazing.
Furthermore, with a thrust towards saving and investment in order to minimize the amount of the mortgage, the saving discipline and any investment savvy learnt and reinforced would be invaluable personal assets. Yet, given this approach is more unorthodox, it takes a special and brave individual to listen to the beat of a different financial drum and to trek the road less travelled.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.