Buying a house is a great investment if you need a home.
Is a home an investment?
Many people don’t think of their home as an investment vehicle. Unless it’s a property you plan to rent out or fix–and–flip, you might think a house is just a place to live.
But the truth is, your home is an investment in many ways.
You’ll be putting a lot of money into the property – and its value can rise or fall with the economy. Plus, unlike renting, a house helps you build wealth.
Many experts believe buying a home is a great investment because it’s a fairly safe place to put your money, and home values generally increase over time.
However, the returns aren’t as large as you might see on other investment vehicles.
So, is buying a home the right financial decision for you? That all depends on your goals.
Is buying a house a good investment?
The short answer is that it depends what you mean by ‘investment.’
Buying a house versus investing in securities
If your main goal is to turn your money into more money, a home purchase likely isn’t the best investment you can make.
That’s because, when compared to stocks, bonds, and other investment vehicles, you’ll likely see lower returns on the money you spend on your home. Real estate has earned 3–4% per year historically, versus around 10% per year on stocks.
But when compared to alternative forms of housing – such as renting – buying a home is typically a much better investment if you can afford it.
Buying versus renting
“Purchasing a home is generally regarded as a good investment compared to renting because you can build equity. When you rent, all you do is pay someone else’s mortgage,” notes Annie Kou, owner of AK Luxury Properties and a contract attorney in Los Angeles.
“If this is where you intend to live for at least three to five years, it makes more sense than leasing in many markets,” she continues.
“Also, rent, unlike some homeownership expenses such as your mortgage interest and property taxes paid, is not tax–deductible in general.” Buying a home can have tax benefits such as deductions and even tax credits.
Of course, there are some cities in which renting is significantly more economical – especially for a one– or two–bedroom apartment – than purchasing a starter home, says Michael Fischer, director and wealth advisor for Round Table Wealth Management in New York City.
“But as with other investments, real estate ownership can be a great way to pass wealth to the next generation,” Fischer adds.
How a home helps you build wealth
Ask Nadia Evangelou, senior economist with the National Association of Realtors in Washington DC, and she’ll tell you purchasing a home is a smart investment.
That’s because your home’s value 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 last nine years,” Evangelou says.
“Especially for risk–averse people, purchasing a home is often a safe investment that has traditionally been a great inflation hedge to protect against a loss in purchasing power of the dollar.”
Put more simply, while homes and real estate can lose value (as they did during and after the Great Recession), home values have been on an overall upward trend throughout 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, U.S. housing stock gained about $2.5 trillion in value in 2020, per Zillow.
Data firm Black Knight reports that yearly home price growth has seen a 25–year average return of 3.9% (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,” explains Brian Koss, executive vice president of Mortgage Network in Danvers, Massachusetts.
Potential risks of home buying
Still, others caution that money put into housing can often yield better returns elsewhere.
“Too often, people make the mistake of spending too much of their income on a house and effectively crowding out other investment opportunities,” says Robert Johnson, professor of finance at Heider College of Business, Creighton University, in Omaha, Nebraska.
“These include investing in stocks and bonds and funding 401(k)s and retirement accounts, especially if doing so could earn a full match by their employers,” he continues.
Budgeting is crucial
Before buying, you should evaluate your cash flow and monthly expenses to make sure you can afford the payments on a home, while still making smart personal finance moves like contributing to retirement accounts and maintaining an emergency savings account.
Don’t forget – mortgage payments include homeowners insurance and property taxes as well as principal and interest due on the home loan.
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Ana speaks 3 languages (Portuguese, English, Spanish), Wife, Stepmom, Journalist, Event Director for the National Association of Hispanic Real Estate Professionals (NAHREP) Central MA Chapter.