Turn Your Home Into a Money Maker You've got the house of your dreams ... now how do you make the investment work for you? NPR's Tony Cox talks with a home-buying pro and a homeowner about making the most of your home after you get the keys.
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Turn Your Home Into a Money Maker

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Turn Your Home Into a Money Maker

Turn Your Home Into a Money Maker

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TONY COX, host:

I'm Tony Cox, and this is News & Notes. Yesterday, we heard how the dream of owning a home has soured for some. Today, we're going to take a look at the flipside. After you've bought that new house, what can you do to maximize your investment, even in today's bleak economy? Joining me now are two people with distinct views on the subject, Eric Tyson, co-author of "Home Buying for Dummies" and author of several books on personal finance, and Sophia Edwards, a homeowner in Hartford, Connecticut who still lives in her first home. She bought it five years ago and presumably still enjoys living in it. Welcome to the both of you.

Mr. ERIC TYSON (Author of "Home Buying for Dummies"): Thank you.

Ms. SOPHIA EDWARDS (Homeowner, Hartford, Connecticut): Thank you.

COX: Sophia, let me begin with you. Very briefly, what do you think are the keys to smart homeownership? I mean, making the most of your investment.

Ms. EDWARDS: I think being smart and making the most of your investment is to have goals, and have dreams, and knowing that you have to educate yourself after purchasing that home and knowing that you want to keep that home, and that you cannot keep up with the Joneses. So for me, I have to live within my means and set my priorities.

COX: You know Eric, the word dream is often associated with home ownership and sometimes, many times, homeowners find that their dream house turns into a nightmare if they don't handle things correctly. What is the biggest mistake new homeowners make after they get those keys?

Mr. TYSON: Well, you know after you've made this significant purchase, you've got the financial obligation of the house, and sometimes folks who haven't run the numbers - been analytic about looking at how much house they can really afford, find that they're being pinched and squeezed, and, and, you know, they get in the house and they have desires to make it look better. So they want to paint some rooms. They want to go out and get new furniture, and you know, more changes lead to more desires to spend money. And before you know it, people are starting to run up credit card debt or have other financial problems. So I think one of the biggest problems that I see are folks that have trouble living within their means, given the significant change that occurs in their personal finance situation when they buy a house.

COX: But they certainly do want to improve their house to make it look as good, if not better than the other houses on the street or in the neighborhood. And Sophia, I am going to come to you about this because you say that you've done about 35,000 dollars worth of repairs on your property. Now, I understand that you live in an historic home located in a changing downtown neighborhood. You redid the exterior, pulled up the floors, laid new carpet, tons of electrical work which old houses almost always have. And yet, Sophia, you did it without spending a lot of cash. How did you do that?

Ms. EDWARDS: For me, I, first, we looked within ourself, and we stayed on our path, which was important. Some of the things that we did, we collaborated with, with other people that we felt that had - that share the same dreams and goals that we have, and not wanting to get in, you know, a lot of expense. So what we did is like to ask other people that, that goes to our church that, you know okay, we're doing this project, can you help me with this? Or negotiating with someone else.

I mean, negotiating with the contractor - like for example, one of the things that when we first came into the home, we needed to do the floor. What we did, we negotiated with the contractor by asking what about if we do the labor as far as taking up the carpet, taking up the nails, and whatever he needed to do? So therefore, we balanced it out with the time and money. We were the time. We put in the sweat equity, and then we had to, you know, pay him the money. But then, it really was less for us on our pocket because we knew what we were able to afford.

And we came to the table and negotiate - negotiated with him and said this is what we have, but what about if we put in this sweat equity?

COX: Now, you had already put money into buying the house, did you have to get a separate loan to pay for that even with the sweat equity that you provided?

Ms. EDWARDS: No, we had already had some funds at that time, and so that was what we had available to pay the contractor.

COX: Eric, how would you advise people who want to use home improvements as a way to increase the value of their homes. For example, when is renovation not a good thing?

Mr. TYSON: Well, one thing you certainly don't want to do is you don't want to make your home the most expensive home on the block. Generally speaking, that's not a good financial move. Also, you know, spend money on things that will help the maintenance and upkeep of your home - that not only make it look good but that will prevent future expenses down the road. If your, for example, if your roof needs replacing, don't continue to put that off year after year and then instead focus on cosmetic things, because if you put off the roof replacement - leaky roof can lead to other problems in the home.

And you can end up with a lot of mold, and mildew, and damage to wallboards and things like that. Also make sure you understand how the tax laws work. Now in Sophia's case, because she lives in a historic neighborhood, there are some tax breaks in the tax code which are generally not well understood, or known, that if you spend money on certain types of renovations in these historic urban neighborhoods, you may be able to qualify for some special tax deductions in credits.

COX: How important, Eric, is it to know how long you intend to stay in a house before you start spending on and for that house?

Mr. TYSON: Well it's, it's a good question because you know, again, you don't want to over extend yourself. You know, I generally advise that people need, ideally have at least a five-year time horizon when they buy a house. And the reason is that there are significant transaction costs involved in buying and selling a home - real estate agent commissions, title insurance, loan fees, all those sorts of things. And you know, if you look at the round trip transaction, the purchase of a home and then ultimately the sale of that same home, these transaction costs can gobble about 15 percent of the value of a house.

So therefore, you know, you really need to be in a home five, maybe as long as seven years, to get enough appreciation to recoup those costs. And as we're seeing in many, but not all, many parts of the country right now, housing prices can go through periods where the prices go down as well as go up.

COX: Well Sophia, how long are you planning to stay in your house, and does that have any bearing at all on what you're willing to do to it and how much money you're willing to invest in it?

Ms. EDWARDS: Well, I do love my neighborhood that I live in. I grew up in Hertford, although I am originally from Jamaica. I do plan on staying there because right now, moving or selling our home is not a priority right now because we have a senior that's going to be going to college in September. So we will be there for a while, and we do have an eight-year-old that, we feel that, I have a commitment to my community, and I want her to be able to grow up in the Hartford community.

COX: You know, Eric, Sophia mentioned something that's really interesting and important to our conversation, and I want to address it to you because, historically, African-Americans have found it harder to buy homes, in part because of discrimination, but also because of other issues. And that's changing nowadays, in some respects, because more blacks have financial assets to pass on to their children and to help them invest in real estate. What do you recommend to someone who is inheriting wealth and wants to put that wealth in to a home?

Mr. TYSON: Well, you know, that certainly is an excellent use of, you know, if you're in a family where your folks, or grandparents, or someone, benevolent uncle, is willing to help you out, I can't think of a better way to use that money - to invest the money. Over the long term, real estate is a terrific investment, and that's something that I think some people you know perhaps lose site of during a period like the one we're in right now.

Because if you're in an area where housing prices are going down, and, you know, they may have already gone down five, ten, fifteen percent, that's kind of depressing, you know, especially if you bought your home in the last couple of years. But it's important to remember that over your adult life, you're going to own a home for decades and over the decades, real estate is a proven winner. You know, the people who lose money are the folks that are forced into selling in a depressed market. And that sometimes happens. It's certainly happening with some of the foreclosures that are happening, but I think putting money into a home as a down payment, I think, is an excellent long-term investment.

COX: I'd like to follow that point up with you with this, and this is a little tough question I think, because housing in America is segregated generally by people who choose to segregate. And you have people who pick areas to buy homes based on a lot of factors, many of which have nothing to do with the house itself sometimes. My question is when buying a house, to what extent do you take into consideration who you're living with as opposed to how that house is likely to appreciate in value down the road, if it means taking you out of a neighborhood, or out of a community that you perhaps are comfortable with?

Mr. TYSON: Well, it's a good question, and you raise a point which sometimes people don't really think enough about or do enough research. And I think it's important in any neighborhood or community that you're contemplating living in to go spend time in those communities. You know, if it has a community center, go spend time there. Spend time walking around the neighborhoods. And sometimes people get so caught up in the process of shopping for a house that they become very house focused and not community focused.

And the people that you're going to be living with, that your children will be going to school with, will have an enormous impact on your satisfaction. And you know, you should be aware of what's out there and be thoughtful about, you know, what kind of community do you want to grow up in, do you want to raise your children in. If you have children, you absolutely should go visit the schools, spend time in the schools, talk to people there. You know, and spend less time, you know, shopping among dozens of homes and more time actually in the community thinking about these issues.

COX: So for you, Sophia, in terms of being in the house now and what you are investing in it and what you will invest in it in the future, how much does the community that you have chosen to live in, play a role in how much money you are willing to put into your house?

Ms. EDWARDS: I'm not sure right now because I know that although Hertford is being developed, but at the same time, if the tax continues to go up, I'm not sure if it's something that I can probably, we can probably financially be here. But I would have to see as, you know, as the economy - the forecast of the economy, so I'm not really sure where we will be with that, to be honest with you.

COX: All right Eric, you mentioned…

Ms. EDWARDS: But I just wanted to say, I think it's important, and I appreciate the gentleman saying something about more shopping for your community instead of your house, but I know that I live in Hertford, I was raised in Hertford, and if I am, for example, I have a master's in social work, but if I leave my community and everyone that is now professional leaves their community, what are we leave with? We're left with nothing. And so, I need to be a part of that to help to build up my community. You know, one family at a time can build a community. And for me, I am committed to that.

And that's why I love where I live at. Maybe, like for example, when we were looking for a home, it took about a year and a half. Some people said to me, Sophia, go to the suburb, but I know that I believe in my community, so it was okay for me to continue searching until I find the home that I wanted to live in. Right across from our home, it's a park. Down the street, there's a school. But to me, it was that I needed to be the person that was willing to build my community one family at a time.

COX: Well Eric, the things that she is mentioning, that Sophia's talking about, all have an impact on the value of a property, and you've mentioned that the current slump in housing values gives people who want an opportunity to trade-up a rare chance to do so. Trading-up - let's tell the audience exactly what that means, and why this is an opportunity right now.

Mr. TYSON: Well, you know, there's many potential buyers out there. There are the first time buyers and, and there's people who already own a home who you know, for example, maybe their first property they bought was quite small. Maybe they bought it when they didn't have any kids, and now they have a growing family. It's more important to them, for example, to live in a community that has a certain type of school system. So, you know, trading-up simply means that you're, you're in a financial situation where you could spend more money on a house, either in a community that has better schools or a larger home.

The trade-up market in many areas is more depressed than is the entry level mark, so for folks that are in the position - and look, a lot of people are, but for the people who are in a position financially to be able to afford to spend more money on a home, the depressed market provides an opportunity. And I think it also provides an opportunity for people who are renting, who are looking for an entry point, because not only have home prices gone down but so have interest rates. And those two things together are leading to pretty significant reductions in the cost of purchasing a home.

COX: Would you be in favor of home equity lines of credit for homeowners?

Mr. TYSON: Well, you know, once, once you're in a home and you have a mortgage on the property, you know, the question comes back to you, what can you afford? And you really have to look at your monthly spending, your monthly budget, you know, your future goals, whether it's saving for retirement or helping to pay for a portion of your kids college costs. And ask yourself, you know, can you afford to take out more debt on your house?

Some people, of course, have gotten into trouble doing that over time and used up the equity in their homes and ended up with too much debt. And in the worse cases, they've ended up with their homes in foreclosure.

COX: I'm going to bring the conversation to a close with you, Sophia, around this. In the introduction, I said you had been in your home about five years. And I said, presumably, you still like it. Do you?

Ms. EDWARDS: I still love our house.

COX: And can you say, you know, does ownership really feel that much different than renting? And is it a better feeling for you?

Ms. EDWARDS: Oh, yes! It is such a better feeling because living in Hertford, the area where I lived at, it was - we didn't have a backyard for our daughters to play in. And now that they're - that we have our own home, they can be able to play. They can ride their bike in the yard. They can see the beautiful landscape that we have really created and developed on our property, so it feels really great.

But I think one of the things that I really want to say is that for me, it feels good, but it also feels even greater for me to be disciplined and to continue in educating myself and ourself to making sure that we keep the home. Continuing education, for example, I attend the...

COX: I'm sorry, I've got to - I'm sorry to end you there, but our time has just run out. It was very interesting to hear it, and good luck with you and your property. Eric and Sophia, both of you thanks for coming on today.

Ms. EDWARDS: Thank you so much.

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