Investment is a complex subject that most people feel totally insufficient to understand. Of course, all of us want to make more money, to be secure when we get older, and to be able to be generous and spontaneous with our lifestyle. But we don’t understand how to get there. I’m about to argue that real estate, specifically the purchase of your own home, is still one of the the best ways to invest your money. Because of the housing bubble of several years ago, people are still spooked at home ownership. They may not even understand why, but the idea of buying a house seems like too great a commitment. They think that somewhere in those dark financial waters, beyond what they are able to see and anticipate, there is some danger lurking that will make them regret the purchase for the rest of their lives. I’m here to convince you that, if you’re smart, it doesn’t have to be like this.
The Financial Reality. Let’s say you buy a $200,000 house today. Not everyone is able to do this, but you have worked hard to have steady employment and save the $40,000 you wish to put in as your down payment. Houses appreciate at about 4 to 5% annually, though some markets will change a lot more than this. If your house grows at 5%, this is not a bad return on your investment. Sure, you could have achieved better investing in the stock market. But this isn’t the full picture. Appreciating 5% in that year, your home would have gained $10,000 in value, a shocking 25% increase on your initial investment of $40,000. You are making other payments, of course, but your property tax and interest are both tax deductible, making these costs essentially government subsidized, locking in your 25% equity return. This is a better ROI than you can do almost anywhere. To learn more about these ideas, read up on some of the top finance blogs, or talk to a financial professional. These numbers may be out of your league, but if you could afford a cheaper house, or one with a lower down payment, you could be setting yourself up for similar, or even greater, returns. This all begs the question, “why does the government subsidize home ownership in this way?”
The Social Reality. Home owners, traditionally, make good citizens. They are long term residents, committed to the communities they have a financial stake in. They form a steady tax base. They are less financially exploitable than renters, and their children tend to be better off financially as the decades go by. This last point has to do with wealth, as opposed to income. By achieving equity, an individual or family has wealth that they take with them wherever they go, wealth that a renter, even one with the same income as the owner, passes on month by month to a landlord. In many demographics and eras, it has been demonstrated that the grandchildren of homeowners do much better than the grandchildren of people who do not own their homes.
I could go on and on, but this is the essence of my argument for home ownership. Even if home buying is out of reach for you in your area, there is a market where you could afford a house. For many cultures, home ownership is the “end all”, a sign that you have arrived. While I don’t want to make too much of the home as a status symbol, it is clearly a stabilizing force for many people, one that also builds wealth better than almost any other technique.
Jeremy Biberdorf is a website marketing professional who took up blogging in 2012. He writes at Modest Money where he helps people learn how to control their finances by breaking down his own mistakes, and sharing the lessons he’s learned while trying to get his financial life back on track.