Is a House an Investment?
Many people do not see their home as an investment vehicle. Unless it's a property that you want to rent out or repair, you might think that a house is just a place to live.
But the truth is that your home is an investment in many ways.
You will be putting a lot of money into the property – and its value can go up or down with the economy. Unlike renting, a home helps you build wealth.
Many experts believe that home buying is a great investment as it is a fairly safe place to put your money and home values generally increase over time.
However, the returns are not as high as with other investment vehicles.
Is Buying a Home the Right Financial Decision for You? It all depends on your goals.
Check your eligibility to buy a home (May 11, 2021).
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Is Buying a Home a Good Investment?
The short answer is, it depends on what you mean by "investment".
Buy a house instead of investing in securities
If your main goal is to convert your money into more money, buying a home is probably not the best investment to make.
This is because you are likely to get lower returns on the money you spend on your home compared to stocks, bonds, and other investment vehicles. Real estate has historically earned 3-4% a year, compared to around 10% a year for stocks.
Compared to alternative forms of living like renting, home buying is usually a much better investment if you can afford it.
Buy versus rent
“Buying a home is generally considered a good investment versus renting because you can build up equity. When you rent, all you have to do is pay someone else's mortgage, ”notes Annie Kou, owner of AK Luxury Properties and contract lawyer in Los Angeles.
“If you want to live here for at least three to five years, it makes more sense than leasing in many markets,” she continues.
"Also, unlike some home ownership expenses, such as mortgage interest and property taxes paid, rent is generally not tax deductible." Buying a home can have tax benefits like deductions and even tax credits.
Of course, there are some cities where renting – especially for a one- or two-bedroom apartment – is far more economical than buying a starter home, says Michael Fischer, director and financial advisor at Round Table Wealth Management in New York City.
“But like other investments, owning real estate can be a great way to pass wealth on to the next generation,” adds Fischer.
Check your eligibility to buy a home (May 11, 2021).
How a home helps you build wealth
Ask Nadia Evangelou, a senior economist with the National Association of Realtors in Washington, DC, and she will tell you home buying is a smart investment.
This is because the value of your home is likely to increase over time, which in turn increases your wealth.
Financial Benefits of Buying a Home
"Consider that the typical home has appreciated nearly $ 150,000 in the past nine years," says Evangelou.
"For risk-averse people in particular, buying a home is often a safe investment that has traditionally been a great hedge against inflation to protect against a loss of purchasing power in the dollar."
To put it more simply, while houses and real estate (like during and after the Great Recession) can lose value, real estate values have seen an overall upward trend in recent history.
"While home values can go up or down, they are generally much less volatile than the stock market" – Brian Koss, executive vice president, Mortgage Network
In fact, in 2020, the U.S. real estate portfolio appreciated about $ 2.5 trillion per Zillow.
Data firm Black Knight reports that annual home price growth has produced an average return of 3.9% in 25 years (not bad for a low risk investment).
"While home values can go up or down, they are generally much less volatile than the stock market," said Brian Koss, executive vice president of Mortgage Network in Danvers, Massachusetts.
Potential Risks In Home Buying
Still others warn that money invested in housing can often bring better returns elsewhere.
"Too often people make the mistake of spending too much of their income on a home and effectively crowding out other investment opportunities," said Robert Johnson, professor of finance at Creighton University's Heider College of Business in Omaha, Nebraska.
"That includes investing in stocks and bonds, as well as funding 401 (k) s and retirement accounts, especially when that could lead to full employer compliance," he continues.
Budgeting is crucial
Before you buy, evaluate your cash flow and monthly expenses to make sure you can afford the home payments while still taking smart personal finance measures such as buying a home. B. Contribute to retirement accounts and maintain an emergency savings account.
Don't forget – mortgage payments include homeowner insurance and property taxes, as well as principal and interest payments on the home loan.
You can use a mortgage calculator or speak to a lender to find out what you can afford.
When is it Smart to Buy a Home?
The argument is simple: you need somewhere to live all day anyway. So why not own a house instead of “borrowing” it in the form of a rent?
"Based on the latest data, the net worth of a typical homeowner was $ 255,000, compared to just $ 6,300 for the average renter," says Evangelou. "That's 40 times the net value."
In addition, owning a home can bring long-term social benefits to homeowners, including cultivated friendships with neighbors.
“Homeowners tend to stay in their homes much longer – the median length is 10 years – than tenant households,” adds Evangelou. "This residential stability offers a number of benefits to the homeowner and the wider community."
Also, keep in mind that monthly housing benefit payments on a fixed-rate mortgage will remain the same even 30 years after you buy a home.
“This gives you more financial predictability and control than renting, as rents generally increase gradually, if not suddenly, over time,” Koss points out.
After all, home equity can be a huge asset. If the value of your home is above the purchase price at the time of sale, you can make a big profit.
And even if you're not ready to sell, you may still be able to cash out home equity for renovations and other large expenses.
Borrowing against the value of your home at a low mortgage rate can be a much cheaper way to access large sums of money than paying with a credit card or personal loan.
Check your eligibility to buy a home (May 11, 2021).
When is a house not a good investment?
This does not mean that home ownership is the right strategy for everyone.
Many first-time buyers are being priced out of their local real estate markets today. Some are unable to afford the large down payment, closing costs, and monthly mortgage payments.
"Prices for single-family homes rose in all metropolitan areas in the final quarter of 2020, while 88% of metropolitan areas saw double-digit price increases," says Evangelou.
The silver lining to these stats is that homeowners have rapidly accumulated equity over the past few years and sellers are receiving tremendous rewards. Today's potential buyers can also benefit from these benefits over time.
"Buying a home should be first and foremost about meeting your space, community and family needs, and secondly about adding value or reselling it." – Michael Fischer, Director and Investment Advisor, Round Table Wealth Management
However, Johnson reminds readers that home equity can quickly dissolve, as it did during the financial crisis over a decade ago.
"Real estate in general is very illiquid – which means that it can only be easily converted into cash if you use your home's equity," he says.
“Since real estate is not actively traded and the market is relatively illiquid, many investors assume that real estate values do not fluctuate significantly. Homeowners convince themselves that the value of their home is more stable than that of stocks, but this concept is illusory. Property prices can fall steeply, as history has shown. "
Fischer says a house might not be a good investment if you don't plan on staying in the house or renting it out for at least five years, or if the local housing market has grown significantly in recent years.
If the latter is true, "you may be better off looking at a nearby market that has not yet been appreciated," he adds.
What about investment property?
Real estate investments – buying rental apartments and investment property – are a whole different matter.
If you are buying a home to rent out through long or short term rentals, or if you plan to fix and flip the home, it is easier to see the home as a real investment tool.
Unlike a primary residence (the house you live in), investment property is designed to generate cash flow through rental income. Thanks to the low real estate rates, this can be a relatively inexpensive and stable way of generating passive income.
However, this does not mean that you cannot lose money on this endeavor.
“Rentals can provide a permanent source of income for their owners,” says Evangelou. “But choosing the right property and location is just as important as choosing the numbers. You need to first calculate the profit that you may be able to make from the net income generated compared to your expected operating costs. "
These costs can include administration, maintenance, and servicing costs.
"If you don't enjoy collecting rents, handling repairs in person, or paying a third party to operate and maintain your investment property, owning investment property may not be for you," says Koss.
Should you buy a house?
There are both risks and opportunities associated with buying a home.
Homeownership can pay off provided you have done your homework and:
Understand the seriousness of this financial obligation. Qualify for Mortgage Financing. Have a reliable job and a stable source of income. Can you afford the monthly payments, taxes, and ongoing maintenance that come with home ownership
Ultimately, "owning a home should be viewed as independent of your investment goals," suggests Fischer.
“Buying a home should be first and foremost about meeting your space, community and family needs, and secondly about adding value or reselling it. As an investment, it's not as preferred as owning stocks, mutual funds, or exchange-traded funds. "
The final result? If you are solely looking for investment opportunities, buying a home may not be your best option.
However, if you need an apartment, a home could be the smartest investment you will ever make.
Check your new plan (May 11, 2021)