We’re going to go back to the future – or is it the past – with this idea. Now that we’ve experienced the mortgage meltdown and the real estate collapse, maybe it’s time to re-examine the whole concept of home ownership. I’m going to make a radical proposal here: the next time you’re looking to buy a house think seriously about buying a house with income potential.
This is of course the exact opposite of how people have purchased homes for nearly a human lifetime. Most houses today are purchased based on three primary characteristics:
- Location (desirability of the community, quality of schools, proximity to employment/public transportation, etc.)
- Features of the home (size, layout, room count, etc.), and
- Potential for price appreciation (the likelihood of being able to sell it at a higher price in the future)
Notice that Reason #3 is also the only one that is economic in nature. And yet it is the key to the entire housing market. Now that we know that house prices can fall as well as rise, we may have to look for a different economic reason to own a home. If we do, we already know what that alternative is – it’s buying a house with income potential.
And it is not a new idea.
The idea of a house as strictly shelter is a relatively recent concept
If you think that buying a house with income potential is an idea that is either new or radical, it’s actually the way people bought property for most of human history.
Since World War II houses have become more like trophies than assets in the business sense. We’ve seen the mass production of millions of often nearly identical tract homes, none of which having any economic capacity other than the promise of future price appreciation. But here’s a news flash: prior to World War II – and certainly World War I – people didn’t buy tract homes; they bought tracts!
Tracts as in land. Land were you could grow crops, raise livestock, cut timber, mine for metals or fuels, run a shop out of, or partially rent out to either tenants or travelers. Traditionally, families conducted business out of the same place they lived. The property not only provided shelter, but also a means of earning a living.
We’ve long since gotten away from that entire concept. In fact, most people don’t even believe it’s desirable, if they think that it’s even possible. We simply can’t have the type of economic opportunities in our homes today that people commonly had up until the early part of the 20th Century.
Or can’t we???
Now that price appreciation is hardly a guarantee, we may need to come up with some new economic reasons for owning a home that will give it more lasting value than room count or a location close to public transportation will.
Here are some ideas relevant to our time on how to buy a house with income potential – in addition to providing shelter…
A property with rental income potential
This is the simplest and most obvious income potential for a property. You can either buy a house that has two or more living units, and you can live in one unit and rent out the other(s). Or you can buy a home that has potential to rent out individual rooms. In days of old, these were referred to as rooming houses or boarding houses.
One of the problems with this strategy today is that much of suburbia has the zoned out these kinds of property, especially boarding houses. In general, they are considered bad for price appreciation, which is largely what the suburbs are all about. (My feeling has always been that there’s a strong racial/socio-economic component as well, but I digress.) If you want to buy a property with rental potential, you’ll have to move to a community where such dwellings are allowed.
I don’t have any statistics on this, but I’d be willing to bet that few owner-occupied 2 to 4 family residential properties were among the millions of foreclosures that have taken place in the past few years. Having rental income effectively lowers – or even eliminates – your house payment. And once the house is owned mortgage-free, the house itself actually provides a steady income – no price appreciation is even necessary.
A property with a business use
A few generations back this could have meant owning a property with a storefront on the first floor and a living unit on the second. You ran your business out of the storefront and lived upstairs. It could also have meant a property with a house and a separate shop where you could run a business, such as a repair shop or even a small foundry.
While this kind of property is available in some downtown suburban areas, they’re more common in cities and rural communities. However, today’s home businesses typically don’t require a large, dedicated space. With computers, the internet, cell phones and fax machines, you can run a business out of a typical suburban home . The only modification requirement might be that the house have an extra room to run your business out of.
However if you would like to run a business that is not a “clean business” – meaning one that does require specialized equipment, inventory and other items that may be considered an eyesore in a suburban neighborhood – you might want to consider buying a mixed-use property. That’s actually a real estate term that means the property can be used for both residential and commercial purposes.
This of course would require purchasing a house in a part of town, or in a community, where such properties are common. But if you do, you’ll be both living in the property and earning your living there. That will give the home far more economic value than just the hope of future price appreciation.
At a minimum, I think most of us could make this happen with a “clean business” – in just about any home in any type of community.
A property where you can produce or grow food
OK, with large-scale agribusiness, most of us are not going to become farmers. But that doesn’t mean that you can’t grow your own food. There are rural communities and exurban areas on the edges of large metropolitan areas that still have agricultural uses. If you want to grow your own food, and maybe even raise some chickens and a dairy cow or two, you can buy a house on a few acres and have at it.
You will be living in the property, but also producing much or maybe even all of your food, which is definitely an economic use. This seems to be a growing trend since the recession began, but is also becoming more popular as a way to grow food organically.
The social impact of buying a house with income potential
Not many of us think about the social impact of the house that we are buying. At the same time, we’re often quick to bemoan the loss of community where we live. But what caused that lack of community in the first place?
In the past five or six decades, with the disappearance of economic use as a factor in the purchase of the family homestead, the only financial real estate play is price appreciation. That shift has effectively turned the typical home into a commodity. Much like stocks, we’ve come to see a house as an asset to be traded at opportune moments. And we might trade them every few years as a way of buying a higher priced unit and building up our wealth.
That may be good for our bank accounts, but it is a disaster for communities. There can be no community where people are moving every few years.
If people buy their homes with a greater emphasis on the economic value – that is the ability of the property to generate an income – they’re more likely to stay in the property for a lifetime. People who are living in their homes for decades are far more likely to take pride in the community, to do what’s necessary to improve it, and to develop the kind of relationships that border on family.
I don’t know if this is important to you, but I see the idea of buying a house with income potential as addressing three needs at the same time: shelter, income, and community.
That looks like a concept we seriously need to revisit.
Do you think that the time has come to reconsider the concept of buying a house with income potential? It may be radical to today’s thinking, but it’s hardly a new idea.