I’d like to share a “tool” we use when making spending choices for our home.
We usually know what kind of house we want to live in. And we know the kind of neighborhood we want, too. But we don’t often think about how the investment choices we make for our house can either work for or against the kind of neighborhood we’d like to live in.
And sometimes the impacts can be counter-intuitive. Here’s an example of well-meaning investment with a negative community impact that can be observed in my neighborhood, and other neighborhoods in the Kalamazoo core:
Over-investing. The most common problem caused by over-investing is “displacement.”
“Gentrification” is a buzz-word with very controversial implications. Some people blame neighborhood investment for destroying communities and making housing scarce for the poor. But I like to separate the idea of investing in a neighborhood from the idea of displacement, because investment CAN build stronger, more diverse and resilient communities without displacement–when it’s done the right way.
There are many who actually value diversity and believe in the benefits of a diverse neighborhood. We don’t want to live isolated lives, disconnected from the supposed “problems” (but also the richness) of diversity.
But the same people, by over-investing in such a neighborhood can end up “pricing out” the diversity they valued in the first place.
But displacement caused by gentrification isn’t the only problem caused by over-investing in a home. It is just as likely to cause neighborhood destabilization and decline.
Down the street from us is the finest example of an urban micro farm I’ve ever seen and it’s attached to one of the most beautifully restored Victorian homes I’ve seen, too. This couple lovingly and tastefully restored the walls, floors, trim and many period touches, without “remuddling” or adding inappropriate, cheap “updates.” At first, this seems like a great “gift to the neighborhood.” And it is… for now.
But everyone moves.
In fact, this couple just moved out of state to be with their children. And they discovered the problem here: they can’t sell their beautiful home because they have too much money locked up in it and no one will buy it for that price in our neighborhood. Now they’re renting it out to a group of college guys and they’re worried that all the loving touches and careful restoration will be ruined.
And, if you look around our neighborhood, they’re right to be worried. Because you can see the negative impact of this pattern repeated over and over again.
These over-invested homes that can’t be sold get passed on to future generations who live far from the neighborhood. Out of sight, out of mind–this is the pattern that has turned many beautiful homes into slums as children inherit homes they can’t sell and start milking any value out of them as rental properties.
Homes that were once the pride of the block slowly become the homes that tear down values on surrounding properties, foster crime, and cause other home owners to move out.
The solution: Match your home investment to your neighborhood. Basically:
The highest home sale price in your neighborhood – what you bought your house for =
how much you can invest.
You don’t want to own the most expensive house on your block because nobody will want to buy it at that price. So look at the highest recent sale in your neighborhood. Hopefully, you bought your house for less than that, because that’s the highest price you could feasibly sell your house for some day.
If a house on your street sold for $120K, and you bought yours for $80K, then you know you that the MAX you could put into your house and easily get a return is likely to be $40k.
If you put in more than that, expect to lose it. But more importantly, understand that while you may be making your “dream home,” you may be paying to create a “nightmare neighborhood.”