Typically, the purchase of a home is one of the largest financial transactions of one’s life. Owning a home has many aspects beyond the financial including security, control, independence, pride of ownership, the ability to make changes and improvement according to your own tastes and needs. But, it is also a financial investment, and has often been a very good or even spectacular one, especially over the longer term.
7 Reasons Real Estate is a Spectacular Long-Term Investment
1. Long-term economic, demographic and home-price appreciation trends
January 1990-December 2021, the national house price appreciated 264% according to the S&P CoreLogic Case-Shiller Home Price Index, vs. a consumer-price inflation rate of approximately 120%.
The option to finance much of the purchase price can supercharge the return on one’s cash down-payment and closing costs if value increases.
3. The ability to lock in your mortgage payment
With a fixed-rate mortgage, a major portion of one’s housing costs remains stable for the entire period of the loan, while rents typically increase significantly with inflation (or rates higher than inflation). As the years or decades pass, this can add very substantially to the financial benefit of owning vs. renting.
4. The “forced savings” effect
Beside potential appreciation gains, paying one’s monthly mortgage increases home equity as the outstanding loan is gradually paid down, an effect that accelerates over the life of the loan. While rents are basically money spent and gone, mortgage payments can quietly turn into very large, equity-based, financial assets.
5. The tax deductibility of certain costs of homeownership
6. The $250,000/$500,000 exclusion on home-appreciation capital gains taxation
7. The option of turning your home into a rental property
Some Other Thought For Consideration
The home you purchase should work for you now – at minimum, fulfilling your basic housing requirements at an affordable monthly cost. (A major factor in the post-2008 crisis was tens of millions of households buying or refinancing homes with loans they couldn’t afford after so-called “teaser” rates expired.)
Keep a reserve fund in case of the unexpected developments that can come up in life.
Buying for the longer term is generally safer as an investment: Though it can be profitable, buying and selling over shorter periods often carries greater risks and amortized costs.
Refinance your existing mortgage into new, long-term, fixed-rate loans when significantly lower rates makes this sensible per your expected timeline of ownership. (This can be an enormous financial advantage.)
Avoid using your home as an ATM in times of appreciation, especially for non-essentials: If possible, let your home equity grow over time, like an untouchable savings or retirement account.
Perhaps more than any other decision, buying a home combines deeply personal, quality of life issues and substantial financial considerations – which only you can weigh according to your own circumstances, plans and priorities, and your projection of what the future holds.
If you’re thinking of buying or selling, we’re here to guide you through the process. Call us today at 415-725-1911 or email us at [email protected].