As a real estate agent, I get asked a lot of questions by prospective homeowners. One that stands out is “Why should I buy a home?”. Asked another way, “What are the benefits of homeownership?”. As of the first quarter of 2020 the homeownership rate was 65.3%. At the same time in 2019 it was 64.2 and in the first quarter of 2018 it was 64.8%. Historically, the homeownership rate has remained fairly stable, fluctuating but holding steady around 65%. However, given the benefits of homeownership, why are we not closer to 100%? Some of the reasons we hear often are, low wages, high rent prices, student loan debt, and the 2008 financial crisis but we can explore that further in a future post. For now, let’s just walk through some of the benefits of owning a home.
What are the Benefits of Owning and Investing in Real Estate?
Here are the primary benefits of home ownership. Below I’ll explore three in more detail.
- Portfolio Diversification
- Equity Building
- Hedging Against Inflation
- Generating Income
- Alternative Savings Vehicle
- Tax Deductibility
- Maintained/Improved Community
Diversification simply means to not put all of your eggs in one basket. When investing it’s prudent to spread your eggs (money) across multiple baskets. By baskets I’m referring to asset classes. Common asset classes are stocks, bonds, cash and real estate. When one asset class is performing poorly, hopefully the other asset class’s performance is better. Better enough to more than offset the negative performance of the other asset class. While asset classes are becoming more correlated in that the performance of one impacts the other there is still enough of a difference between real estate and other assets to warrant investing in real estate while investing in others to increase diversification.
When purchasing a home most people take out a loan to pay for the home and then make monthly payments toward the loan. Included in each mortgage payment are four key components, principal, interest, insurance and property taxes. Of the four components three are tax deductible, meaning you can deduct the amount paid from your taxable income to lower your adjusted gross income. The three are interest, insurance and taxes. When combined, especially earlier in the loan term, these three can account for a large portion of the entire payment. So much so that when annualized the monthly payment is probably much closer, if not less, than the average rent in your area. This is important because this means that for the amount you pay in rent you could also be building equity for future use.
Alternative Savings Vehicle
As mentioned above a portion of each mortgage payment is applied to the principal. As the principal is paid down, the difference between what is owed and the value of the property is equity. We can then use the equity in our homes as collateral to borrow against or keep upon sale. So, owning/investing in property and building equity allows us to use our home as a savings vehicle that we can pull from to fund other financial needs such as college tuition, retirement savings and investment opportunities or entrepreneurial pursuits.
Now I know there are challenges to being approved for a mortgage and some are hesitant to commit to a 15- or 30-year mortgage. But, given the above benefits, if your income/employment prospects are stable, your credit is good (640 or better) and you have adequate savings (down payment and closing costs) it makes sound personal and business sense to own a home. Whether it be one you live in or rent out. Why not both?