An investment is something that we put money or equity into with an expectation of getting a return on top of our allocations.
Is our home an investment?
According to the National Association of Realtors, the median home sales price was up 16.9% for 2021. Highest on record. Home sales had the strongest year since 2006, with 6.12 million homes sold, up 8.5% from the year before.
Regardless of double-digit home appreciation over one year, many experts consider that owning a home is not an investment and it should not be classified in the same category with other investments.
I totally understand there are carrying costs of owning a home and we are not getting a return until the home is sold. And, as we all know the primary purpose of a home is providing us with a place to live, and at the same time it is not only that. Owning a home is like having a lifetime savings account with a much higher interest yield paid to the owner, in many cases it is a double-digit return, obviously it depends on how long the home is owned.
Besides all the advantages like owning a home gives us freedom on our home designs and upgrades, never worrying about lease expiration, and we truly feel at home, there are also financial benefits of that.
10 reasons why owning a home is a good investment:
1. Paying our mortgage instead of paying our landlord’s mortgage
By owning in the same area, a home, the mortgage payment usually is lower than the rent amount. Mortgage payment includes principal, interest, property tax, insurance, it can also include HOAs (homeowner associations), or other monthly dues directly associated to the property. By paying the mortgage, with every payment a portion of that goes towards paying down our loan amount, this means that this amount is set aside into our home equity which I consider it as a savings account, and with every payment this amount increases building more and more equity in our property.
2. Natural Appreciation
Even if some experts say the appreciation is the magic ingredient, it looks to work. Historically real estate prices on average tend to go up. Even if buying on top of the market, over enough time the value of the property will go up even more if the property is hold in a decent shape, with an exception if that market is in a declining pace.
3. Forced appreciation
By forced appreciation I mean that we can increase the value of our homes by improving it. According to Zillow, the ROI on a typical bathroom remodel is over 70%, I do not see an ROI like this in any other investment categories. We can improve the value by a light remodel like upgrading the kitchen, bathrooms, other spaces or even landscaping. Or we can go the hard route by adding additions like another bathroom, bedroom, garage, ADU and so on.
4. Pull out equity to reinvest or retire
Over time our homes will build enough equity that we can cash it out. While it can be pulled out in a few ways, smart is to pull it out with a purpose, that could be to reinvest, to upgrade or even to retire. Have we thought how our home equity can pay for our retirement?
5. Leverage up to 100% of our investment
The only one investment that will give us the opportunity to leverage up to 96.5% or even 100% of the investment. There is no other investment like this, that we can buy an asset with only 3.5% of our own money or even a zero down if we qualify for a VA loan. And when property appreciates, we get to get the benefit of the appreciation for the whole property value and not only for the amount invested.
6. Inflation hedge
Real estate can be a good hedge against inflation, because property values over time tend to stay on a steady upward curve. And another reason is the effect of inflation on debt. As along with inflation home prices are going up it lowers the loan-to-value of the mortgage debt. As a result, the equity on the property increases, but your fixed-rate mortgage payment remains the same.
7. Income and growth opportunities
Our homes can also be a source of income. For instance, a part of our property can be rented out, and not necessary to be the house we live in, it can be our back yard or some other space like a garage or barn. Of course, we can house hack a part of our house too, perhaps we own a multifamily like a duplex, triplex, or a quad, if not, we can build an ADU, convert a portion of the house to an ADU, or maybe we feel okay to rent some rooms in hour homes. These strategies ca be adjusted to any of our needs.
8. Tax benefits
As homeowners we have many benefits related to tax savings. A few of these deductions that will lower our tax bills are a part of the mortgage interest, real estate taxes, points paid, private mortgage insurance, tax credits, energy efficiency credits, even a home office deduction, and many others. (make sure to consult your CPA)
9. We control 100% of the asset
Even if we cannot have control over the economy overall, we have a 100% control over our asset, we decide how to manage it, but more important, we decide when and how we cash it out. And, if our asset is managed correctly, we will not have to sell it in a downturn, we can always hold a bit longer on it, and sell it in a more favorable time.
10. Net worth is 40 times Greater for Homeowners than Renters
If you’re a homeowner, chances are you’re worth much more than someone who rents, according to the Federal Reserve’s 2020 Survey of Consumer Finances.
Homeowners have a net worth that is more than 40 times greater than their renter counterparts, which reinforces the idea that owning a home is a smart financial move. Homeowners had a median net worth of $255,000 in 2019; renters had a median net worth of just $6,300.
But the advantage of homeownership is not just the property you own, but the financial mindset that helped you arrive there.
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