What is Over-Investing in Real Estate?

I am in a  group called Classy Homes on Facebook, everything about this group exudes “class”, the Facebook page, the people in it, the ‘rich’ conversations and the homes that are showcased. There is nothing that I don’t wish to emulate and when I am in this group, I have my make up on, my nails nicely polished, sit straight up and chest out and even my conversations go a notch richer than the normal me (all this is imaginary of course, but I imagine that’s what my avatar would do), Facebook is something I do in bed, at the end of the day. This group discusses homes, mostly residential properties that people own and how to adorn the homes in a classy manner.

So the other day, a topic was raised which went like, “Is it an over-investment to build yourself a mansion with all the extras in a high density suburb?”. As a finance practitioner, this topic was right up my lane and I felt I could raise my social bar a bit and participate. The conversations were wide and varied but they were mostly biased along the lines of it being an over investment. Obviously, I didn’t agree with this for the following reasons;

1. I felt the basis of the argument was wrong as long as we are talking about property that the owner lives in, that is not an investment, it’s residential real estate which does not make you earn more money in any way. It really doesn’t matter where the house is built, in the low density ‘posh’ suburbs or in the high density low-income areas, none of the owners are getting money from this property other than luxurious accommodation for the former and noisier neighbours for the later.

2. Then there is a residential property that the owner builds for business with the clear intention of getting rental income. This is an investment property and the mantra for property that says, “Location! Location! Location! then would be undisputed that you are putting too much money for a neighbourhood where the rentals will not go above a certain threshold, so don’t waste your money.

3. When you build a property for yourself, the idea of investment falls off, it becomes a subject of utility, how much satisfaction one would derive from the property built. If it’s a property that one is building for themselves and their family then by all means build a mansion and load it with the extras, no matter the location, be it in the rural areas, the high density areas or the suburbs. There is more satisfaction here.

The basis of the above observations is a study I did in Investment in Real Estate.

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