Generation after Generation, Home Ownership has always been the Pinnacle of The American Dream! Time and time again, owning a home has been believed to be a right and something to do no matter what! But is buying a house always a good investment?
As time goes on, some Americans are starting to disagree with that sentiment. Millennials are at the forefront of this change in perception. With the student debt crisis, buying a home for some might not be a good investment after all.
Another thing to consider is, an investment by definition is something that makes you money. Does buying a house as an investment make you money? Maybe not.
In this article, we will explore whether or not buying a house is a good investment.
Is your house an investment?
By definition, your house is not an investment. An investment or an asset is something that generates income. Unless this house is a rental property, then your house is technically not an investment.
One could argue that properties appreciate over time, thus making them an investment. However, you only realize appreciation once the house is sold. During that time of ownership, you don’t receive a single dollar from owning it.
The appreciation and equity you have in that house is locked up in the house. Unless you sell it or borrow your own equity, with interest, the equity is just money on paper. Not really income generating now, is it?
So, using that definition, how’s does not generate income and thus it is not an investment.
When is the right time to buy a house?
For this question, it is no one-size-fits-all. It all depends on your personal goals and your financial situation. However, I will do my best to answer this one.
For the most part, it is highly recommended that you take all the following boxes before purchasing a house:
- You have paid off all your high-interest credit cards
- You have paid off all personal loans
- Your debt to income ratio is under 20%
- Your income is secure
- You have a credit score of 720 or higher
Now I know some of you reading that list find it impossible to reach those goals before buying a house and feel that I might be unreasonable. Again, it really completely depends on your own personal goals and financial situation.
If you check all the boxes above, you will have the best chance of not regretting your purchase. On average, 44% of homeowners regret their purchase! That’s almost 1 in every 2 people! Yikes!
The second, and equally important thing to consider, is your reason for buying a home. Are you looking for freedom and security? Or are you just annoyed by your landlord?
You must take a second and really contemplate on your reasoning why you wants to buy a home. A home is probably the most expensive purchase you ever make in your lifetime, so it’s not a decision to be made lightly.
So make sure you fully understand why you want to buy a home.
How about an Investment Property?
Well jeez, if your own house isn’t an investment, does buying a rental property make a difference? Is that an investment?
Yes! The biggest difference between your house and an investment property is that your tenants are making your payments for you!
The rental income is what’s used to pay the mortgage, some utilities, taxes, HOA, and even maintenance costs. Your cost is the down payment and the tenants pay everything else for you. And if you have money left over at the end of the month, you get to pocket that!
Without a doubt, one of the best ways to build generational wealth is investing in real estate. By acquiring rental properties, you now own an appreciating asset that is being paid for by your tenants.
Advantages of buying a house
Not all hope is lost! Buying a house also has its great advantages. Although a house is objectively not an investment by definition, there are some great advantages of owning a house
Equity is the difference between how much you still owe on your mortgage and the value of your home. As I mentioned above, real estate to appreciate over time, that’s making you wealthier over time.
According to the Federal Reserve’s Survey of Consumer Finances, the average homeowner has a household wealth of $231,420. The average renter has a household wealth of merely $5,200.
This is a significant difference! By owning a home, he significantly improved the chances of building serious wealth over your lifetime. The numbers prove it.
It’s also important to note that, the length of time you have your home is a big factor on how much Equity you can manage to build. If you sell your home after living in it after only a few years, you actually might end up losing money.
The longer you live in a home, the more Equity you build and the more you pay down the mortgage. You also realize more appreciation as you own the home or longer.
When you buy and own a home, you also get to enjoy some tax benefits. The United States government rewards those that own real estate by giving them tax breaks.
By owning a home, you can deduct certain expenses like mortgage interest and real estate taxes that you can write off when it comes to tax time. This is especially true when it comes to rental properties.
When you own rental properties, you can deduct expenses such as maintenance cost, making your taxable income that much lower.
If you also take out a home equity line of credit (HELOC), the interest charged on those loans is also tax-deductible if the funds used to you improve your home substantially. My alarm, you can deduct as much as $10,000 in state and local taxes, including property taxes!
Disadvantages of buying a house
Now that we’ve gone through a couple of advantages, its equally important to talk about the disadvantages of buying a house.
High upfront costs
Unlike renting, buying a house is very expensive.
When you rent an apartment, you usually pay an application fee and a security deposit. An application fee might be something like $40 and your security deposit is equal to one month’s rent, on average. That’s not too bad.
When buying a house, it’s going to get very very expensive very quickly. Here are some upfront costs that you probably would need to consider:
- 5-20% Down Payment
- Inspection Fees
- Titling Fees
- Insurance Premiums
- Potential Repairs
- Appraisal Fees
- Mortgage Points
- Origination Fees
- Recording Fees
- Survey Fees
To name a few. The only way to really recover these costs is to live in that house would least five years. Over that period, your home would have appreciated and you would have paid down some of your principal loan and build up some equity.
Unlike other Investments like stocks that can be sold within a matter of minutes, homes are much harder and slower to sell.
If you want to turn your house into Cash, you have to go through the process of moving out of your home, potentially staging your home, getting it realtor to list it, and hoping someone buys it.
When someone does buy it, you are also slapped with realtor fees and some closing costs as well. All the money that is in equity is trapped and is not easily accessible.
One other way of accessing it is by getting a Home equity line of credit (HELOC), but you are limited to a certain percentage and typically can’t get access to all your equity.
Is Buying a House a Good Investment?
Like most things when it comes to personal finances, there is no one answer for everyone. Depending on your situation in your own personal goals, you simply need to understand your personal reasons for wanting to buy a house.
When I bought my first house, my personal reasons were:
- I wanted the freedom to do whatever I wanted
- I wanted to build wealth over the years
- It was a cultural expectation of me to do so
- I wanted to buy young so I can retire without a mortgage
- I wanted to get my wife a home so she can have freedom
- I could afford it
These were my own personal reasons, and they were good enough for me to buy my first house. They don’t have to make sense to anybody else, but they were good enough for me.
The same applies to you. Before you start rounding up your tax returns, saving up for that down payment, and getting pre-approvals, make sure you understand your reasoning for doing it and make sure it’s financially smart to do so!