In recent decades, owning real estate has provided millions of people with an opportunity to create and retain personal wealth. For most, their home is their largest asset. That’s why considering homeownership as part of a long-term financial plan—and treating a home as an investment—may make sense.
Here are some key considerations to factor into buying a home and seeing it as an investment.
Rate of Return
In recent years, borrowers have been able to secure home loans at relatively low interest rates, making homeownership more affordable. As the price of their home has risen, many have experienced a positive rate of return.
Since most homes are bought with borrowed money—a mortgage—they represent an automatic savings program of sorts. Each monthly payment adds to the home’s equity- the difference between the mortgage balance owed and what the home is worth. Generally more interest is paid at the beginning of the loan and later, more of each payment goes toward the principal. That means, without any increase in out of pocket expense, more is being contributed to the equity/savings as time goes on.
Ownership Equity vs. Rental Expense
For renters, housing is just another monthly expense. There are no savings unless the rent payment is less than a mortgage payment would be —and you put the difference away. While renting may be appropriate early in your adult life, once you settle into a place, owning typically offers the better long-term financial benefits. Housing expenses are usually predictable with a mortgage, as with a Fixed Rate loan, whereas living in rental property is unstable due to unexpected increases. With a mortgage, you are in control of your expenses – not your landlord.
Homeowners with mortgages are typically able to deduct all or most of the interest portion of their monthly payments at tax time. This can trim thousands of dollars from their tax bills over the life of the loan. Depending on local tax laws, any property tax that is paid may also be deductible, while certain home improvements may earn tax credits, further reducing tax bills.
Also, under current tax laws, a home’s appreciation in value is tax deferred. For many homeowners, even after they sell, that gain may be realized without tax consequences.*
Homeownership has historically provided an accessible steppingstone to personal wealth. Borrowers at various income levels can purchase a sensible home for their situation and generally, over time, the home’s value appreciates and provides the homeowner with equity. As the years go by, this equity builds and can become a substantial portion of a homeowner’s net worth.
Invest in You
Homeownership provides you more control over your space, allowing for more creative expression and personalization over the place where you reside. Compared to renters, homeowners are happier, healthier and have better self-esteem.
Invest in Your Family
When you buy a home, you have more control of your family’s environment. Not just inside the home, but you can research to find the best schools in the safest areas and then buy in that area. The most desirable areas frequently offer fewer rental living options.
Invest in the Community
Buying a home generally leads to pride in homeownership, allowing a buyer to settle into a community and establish long-term ties in their area. Stronger ties typically mean more interest in the community, more civic involvement and better neighborhoods overall.
With the multitude of benefits to owning a home, it makes sense to look at it and treat it as both a financial and personal well-being investment.
* Borrowers should always discuss any potential deductions with a licensed a tax professional.