Whether the Economy’s Booming or Busting…
It’s home sweet home, but it’s also one of the most powerful investments a person can make.
Buying a house has key financial advantages, compared against investments like a portfolio of stocks and bonds, or a wallet of digital currencies.
Whether it’s about planning for retirement, leaving the rent cycle, or getting a starter home with profit in mind… Here are 4 top reasons a house can be a great financial move.
1. A House Is a Safe Investment That Keeps Appreciating.
Buying a house to build wealth is always a popular idea. Why?
Usually, buying a house comes with low risk, compared against the potential upside. It’s fair to say that the value of real estate is predictable — especially when considered against the volatility risks of, say, tech stocks or crypto assets.
As a safe, reliable asset, real estate can’t be beat. The steady climb in value of the typical home also helps smooth out the bumps and bruises sustained by an investment account in a slumping stock market. Real estate has so far passed the test of a global pandemic, while many other assets have behaved erratically or lost value.
Over the years, if the homeowner keeps their primary residence, all those monthly payments gradually lighten the mortgage and put equity into the owner’s hands. Ultimately, the borrower makes the final mortgage payoff. And then, what’s the best position to be in? To have the house, plus other investments that have grown too. So a home is still just one part of an owner’s varied set of assets.
How much of a whole set of assets should the house make up? According to UpNestTM, somewhere in the 25-40% range.
2. It’s a Hard Asset and a Store of Equity.
A house is a hard asset. Hard assets are physical things that generally hold their value and tend to be owned for a long term.
For a homeowner, cashing out is not too easy, and it’s certainly not quick. There are a lot of costs and fees involved, and there’s the real estate agent’s commission, too. So owners, by default, will hold onto their homes long enough to experience a rise in equity (that’s the home’s value, minus the mortgage debt).
As homeowners continue to make their mortgage payments month by month, they bring down their debt while building up that all-important home equity. Of course, homeowners have to cover their carrying costs: property taxes; homeowner’s insurance; homeowner association fees (if any); plus home maintenance. But when they can manage these costs without running into cash-flow problems, they can upgrade their homes, increasing the value of their assets even more.
For all of these reasons, the house is the sturdiest retirement asset most homeowners have. And it’s more than just a hard asset. A home is a possession its owner can use and enjoy, every single day.
3. It Brings Tax Advantages—And Some of Them Support Business Income.
Property tax goes up as a building’s value rises, but homeowners can get a deduction for the mortgage interest they’ve paid all year, and may be able to claim depreciation tax breaks for investment properties. Among other tax advantages, there is also the 1031 exchange. That’s a tax deferral for like buying a more valuable investment property with the proceeds from a previous one.
A part of a primary residence used as regular and exclusive office space becomes another way to make a house purchase work at tax time, when a percentage of the owner’s home-related expenses can be deducted. Homeowners should consult with their accountants to make sure they itemize optimally.
Finally, there are tax advantages to be had when passing real estate to heirs.
And it’s never too late. Buying the right home at any life stage can boost a person’s financial strength and options.
4. It Puts Inflation to Work for the Patient Owner.
An investment in a home typically builds a steady return, although those rewards are not immediate. The real estate pros suggest buying a home only if you can hold onto it for at least five years, to break even on the investment. The big hurdles are all the costs and fees we talked about in section 2 above, and because moving from one house to the next takes resources. But the homeowner who patiently holds on to the house for a stretch of years is likely to weather the ups and downs of the market, and steadily gain equity. Inflation will do the work, by pushing the home’s market value up.
To finance the investment, a home buyer can get a fixed-rate mortgage. The loan will make it possible for a buyer to own an asset that’s likely to appreciate — at a fixed cost of borrowing.
But as mortgage rates keep going up, does this wisdom still hold? Just step back and look at the long-term trend in interest rates. In the 1980s, people were willing to take out mortgages with as much as 17% interest! So the present mortgage rates are reasonable…considering.
Got It. A Home Is a Smart Investment. So, How Do I Do It?
Today’s real estate market is a tough nut to crack. Hopeful investors who face challenges getting a mortgage might have options, though.
Some buyers look for condos when they’re just starting out. In the midst of the current housing shortage, homes for sale do exist — and many of them are in condo associations.
Other buyers go for freestanding houses, but rent out parts of them, or a cottage out back. They might even buy with the expectation of advertising short-term rental space on platforms like Airbnb. First, they need to know that’s allowed in the area. They also need to be sure the area will draw short-term guests.
☛ Thinking of buying a house, then earning rental income from part of that house? Here are four thoughts to keep in mind.
Some people are putting their heads (and their financial accounts) together, and making shared investments, by buying as tenants in common. Still other buyers are joining the house hacking crowd by buying a primary residence that they’ll rent out to others in order to cover the monthly mortgage payments. They might be eligible for a loan from the Federal Housing Administration (FHA). A home loan borrower may buy a property of up to four units, and rent out one or two units while occupying the other one or two!
These are just a few ways to take on the market. Ultimately, it’s up to potential buyers to know what they can reasonably handle. And as we’ve seen, markets can change a lot — for better or worse. We have no crystal ball, and we’re not financial advisers. But we do like to keep up with the market, and share what we find for our readers’ general knowledge.
Supporting References
GetNews via Digital Journal: Why Real Estate Beats All Other Investment Avenues (Jul. 26, 2022).
Deeds.com: How Much of Your Overall Wealth Should Your Real Estate Be? (Dec. 3, 2021).
Deeds.com: Buying a House to Save Money? It’s a Tried-and-True Method (Jun. 22, 2020).
And as linked.
Photo credits: Picpedia (Nick Youngson; CC By-SA 3.0); and Olya Kolbruseva (via Pexels).