The economy ebbs and flows, markets change, and home prices go up – and eventually come back down to earth a bit. Those are some of the certainties we’re faced with in our financial lives. But through it all, home ownership is still THE best investment you’ll make in your lifetime.
In fact, 94% of millionaires say that real estate ownership was a significant part of how they obtained their wealth. And statistics show that the average homeowner’s net worth is 34 times that of a renter, and 77% of homeowners say owning real estate helped them achieve their long-term financial goals.
So why does real estate always rule? Here are nine fundamental reasons:
1. Leverage.
The huge advantage of owning real estate is that you can leverage other people’s money – i.e., the bank’s – to acquire an asset. For instance, you may only have to put 20% or even 10% or less of your own money down to acquire a whole asset. We even have loan and down payment assistance programs that allows you to put only 1% down! Yes, you will have to pay interest for the privilege of using the bank’s money (a mortgage),
but you still benefit when it appreciates or cash flows.
2. Control.
You can also control your own destiny with real estate by putting in the work to find the right property, negotiate the right price and terms, and otherwise make good decisions that benefit your value. You can even positively impact your neighborhood (and therefore the neighboring home values) by being active with community programs, local politics, schools, and crime watches.
3. Add value with sweat equity
If you buy a stock, bond, or other investment, there’s usually not a whole lot you can do to protect and even improve its value. But with real estate, you’re free to fix up your property, enhancing the value once you own it. You can do maintenance, redecorate, improve your landscaping, or even add an addition on your own time and dime, which all adds value.
4. You pay it off.
Even if you use a mortgage (most people do) to acquire your real estate, you can pay it off to reach the point where you own the asset outright. In fact, you can accelerate payments much faster if you wish, by adding extra towards principal or just paying the whole thing off earlier if desired.
5. Tax benefits.
Owning a home will allow you to get mortgage interest write-offs: you can deduct the interest on up to $1.1 million in mortgage indebtedness on your primary home, you can also sell your primary home for tax free profits up to $250,000 for singles and $500,000 for married couples (if you’ve lived in the house for the last two of five years). And if you own rentals, all expenses associated with managing and improving your rental properties are also deductible towards your income. Of course, consult a CPA or tax professional for tax advice.
6. Real estate is local.
If you own a home in California, so what if the real estate market crashes overseas, or even if homes are losing value in Atlanta? It doesn’t affect your investment at all. In fact, real estate has regional, local, and even micro markets that are largely independent. So, by purchasing a good house in a good neighborhood, you’re ensuring your investment.
7. Opportunity Cost (you have to live somewhere!)
I come across many articles and blogs about investing in real estate v. stocks, written by brilliant economists and analysts. But the one thing they’re often missing in the debate is a tangible reality for everyone: you have to live somewhere. That means that if you don’t purchase your own real estate to live in, you’ll have to rent. So unless we’re talking about buying rental properties or commercial real estate, there’s an opportunity cost if you don’t buy real estate and have to rent to live.
8. Rental demand is surging.
It’s a strange paradox, but even though the economy is bustling and interest rates remain favorable, homeownership rates remain low. In fact, The U.S. homeownership rate is currently about 63.7%, the lowest it’s been since 1990. Homeownership was at an all-time high of 69.2% in 2004, well before the credit bubble burst in 2008. In many cities – and especially the Sacramento metro area – there’s more rental demand than ever. Demand is also extremely robust, as they’re not building new apartment buildings or entry-level rental housing. The result is that there’s extreme upward pressure on rental prices – which is bad news if you’re a renter, but fantastic news if you’re a landlord or someone who’s invested in real estate.
9. You can buy-and-hold AND get a better loan!
If you plan on flipping properties for a quick profit or betting on appreciation in the coming months and years, you may be playing a risky game. But for most people, simply buying a great property in a good area and holding on to it for the long haul is the best and safest strategy. That way, your home value will go up (as it always has over any 10-year period), you’ll accrue equity as you pay the loan down, and you won’t be subject to the ups and downs of market cycles (you only realize a profit or loss when you sell.)
However, even though you are keeping the home for the long term doesn’t mean that you don’t have flexibility with the loan. In fact, most people end up refinancing, taking advantage of lower interest rates, a better loan, or other benefits. So you can buy-and-hold AND potentially refinance into a cheaper mortgage – the ultimate win-win!