For generations, real estate has been at the core of wealth for people, families, and organizations. Today, a home is the most valuable asset owned by most people in the U.S. middle class. It’s the largest investment and a central retirement asset for most of the population.
Of course, a home should be a safe, comfortable space to enjoy life. At the same time, buying a home in a popular area can help the buyer attain a more comfortable financial life. Here, we explain how.
Buying a Home Means Putting Inflation on Your Side
An investment in a home can pay off in just a few years. Real estate values do fluctuate, but have steadily moved up through the decades. Why? When you buy real estate, inflation is actually working for you, not against you.
While the ordinary course of inflation tends to push a home’s market value upward, the mortgage loan payments remain stable over time. This is why some people speak of mortgages as good debt. Mortgage loans allow the homeowner to obtain an asset that’s likely to keep appreciating — and to leverage a low-rate loan to make it happen.
So, while there are many pathways to wealth, the decision to buy a home is one of the best. Even in the midst of a global pandemic, U.S. real estate has shown its remarkable resilience and enduring strength.
How “Forced Equity” Makes Homeownership an Easier Way to Save
Homeownership offers an important insight into the psychology of saving. Once you’ve bought a home as your primary residence, your main tendency, if you’re like most people, is to nest! With your money invested in a home, you have to consider the mortgage a top priority. In a volatile economy, people who feel unable to save in other ways still take great pains to keep up with their mortgages. Ultimately, this means they keep building equity in their homes.
In better times, when homeowners have the bandwidth to make home improvements, they bolster their property values still further. Some buyers do this from the outset, by finding a fixer-upper to renovate. Many homeowners force equity in other ways — perhaps by adding bathrooms, refinishing basements, or purchasing solar energy systems.
Unlike appreciation, which involves being in the right market at the right time, the concept of forced equity allows home buyers to take actions that increase a home’s market value.
Does Buying a Home Make Sense for Young People?
Buying the right home early in life leads to lifelong financial well-being. Granted, everybody’s situation is unique. And in some markets — take New York City as a prominent example — you might find that it makes better financial sense to rent. Also, houses are costly to maintain. The biggest regret young buyers report involves the extra costs that come along with the house. These costs include:
- Insurance.
- State and local taxes.
- Tools and general maintenance costs, or association fees to cover the maintenance — both inside and outside the house.
- Costs of realtors, mortgage specialists, recording fees, and transfer taxes.
Generally speaking, millennials do think ownership will be expensive, and that’s why they have put off buying for longer than previous generations. Over time, a home’s market value might rise — but will it rise enough to cover all those taxes, fees, and maintenance costs? It’s a big question.
In theory, if you decide not to buy that house and put that same investment into the stock market, your returns will be greater over time. Yet stocks bought with an app or held in self-directed retirement fund can be reached and moved with the tap of a finger, so people do not always hold their stock long enough to weather the ups and downs of the market.
Many people won’t risk large sums of money in stock trading in the first place. They’d prefer to invest in a home. Although millennials have faced headwinds when trying to enter the home market, they make up a rising percentage of first-time homebuyers, and this is a good trend. Those who buy homes by the time they’re in their late 30s are better prepared for later life, as research has shown. The key reason? They will have paid off most of their mortgage loan by the time they reach retirement age.
One strategy for jumping into the market is to choose a condo property in an area of high demand. Buy modestly, and try to keep your mortgage payments down to under a third of your earnings.
It’s Your Prerogative: Paying Off the Mortgage Early
Whether you borrow funds to buy real estate, your earliest monthly payments will be directed to the interest on the mortgage. As the years pass, mortgage payments are less about the interest, and more about the actual loan principle. But if you want to, you can start paying extra toward the principle immediately. You might chip in an extra $100 each month, directing the extra to the loan principle. Or deliberately make a lump-sum payment — perhaps the equivalent of a month’s worth of mortgage payment — at the end of the year. Your tax professional can let you know how much to pay to reduce your taxes optimally, if you are deducting certain expenses related to your home.
Paying down your mortgage principle faster (if you can comfortably afford it) may save you tens of thousands in interest dollars. On your mortgage lender’s portal, look for an option to deposit extra payments on the principle. Do this regularly, and you can shave several years off a mortgage over the long term.
Of course, you do not have to do this. If you have credit card debt and other debt with higher interest rates, then it’s almost certainly best to pay those bills first.
One Step Beyond: Building Wealth From Investment Properties
Real estate investing can also be a business strategy. There are two ways to do it: buy stocks in the real estate market, or buy a building to rent out. Buying stocks in real estate is a topic for another day, but let’s take a moment to look at the financial impact of becoming a landlord.
Buy a rental property, and you borrow money from a bank that you’ll reimburse with income from the rental. Any profit is yours. As long as you don’t have to stretch your finances too far to obtain that loan, you are in the enviable situation of creating a cash flow while steadily paying off a mortgage. If the cash flow is strong enough, you can pay a professional property manager to interact with the renters so you don’t have to.
Now, at the same time the building’s value is going up, you can work with your tax specialist to claim rental property depreciation. A physical building is subject to weather damage, and the wear and tear of time. Depreciation is a tax break you couldn’t get on the property you buy as your primary residence.
Speaking of your primary residence, if you use part of your home as your regular and exclusive office space, you’ve found yet another way to make a real estate purchase work for you. A portion of your total home-related expenses, from renovations to electricity bills, can be written off through your annual tax return. Consult with a tax professional to get every break you’ve earned!
Where the Heart Is
As long as home values hold up, to own a house is to build wealth, gain financial strength, and provide for your future. And because a home offers shelter, comfort, and beauty, it transcends entries on an account statement. A home you love is an irreplaceable kind of affluence. May you find it and treasure it — and always keep your deed in a safe place.
Photo credit: Photo by Tina Dawson on Unsplash.