Our lives are marked by a few significant milestones—such as graduating from college, starting a career, or getting married—and buying a first home is certainly one of them. However, before making such a significant purchase, you must answer several preliminary questions, otherwise, you risk being overwhelmed by the process. Unfamiliarity with the home buying process can cause someone to make a series of poor decisions. The result may be a person purchasing an unsatisfactory property (in which they will be shackled for the foreseeable future).
The best way to avoid such a fate is to approach the process of buying your first home as if you were investing. But the majority of people do not consider their homes as investment vehicles. Unless you intend to rent it out or fix-and-flip it, you may view a house as nothing more than a place to live. The truth is, your home is an investment for many reasons.
It does not mean that you should base your decision to buy on the possibility of appreciation alone, even though it is an important consideration. Rather, you should see the purchase as a life investment as well as a financial one.
Consider what type of property best suits your needs. What would be more beneficial for you: to rent indefinitely or to buy? If you decide to purchase a home, when will you be able to recoup the costs? Furthermore, can you comfortably afford the type of property that interests you? You can safely conclude that the American Dream is not about stressing out over late mortgage payments, or working 24/7 to avoid being consumed by debt!
Debt shouldn’t deter you from investing in a home, especially if it’s your first home. So, here are some great reasons for purchasing a home.
Top Reasons Purchasing a Home Is a Good Investment
Homeownership is more than just having a place to sleep, grow a garden, and display family photos. For most people, a house is a major portion of their net worth. If you are thinking about investing in real estate, you are about to embark on one of the most rewarding investment journeys of your life. Here are the top reasons you should consider investing in real estate, even if you've never done it before.
You Can Save Money By Cutting Rent Out Of Your Budget
A big advantage of owning a home is that you save money on rent each month. When you pay rent every month, you lose that money forever. When you put that money toward a mortgage, you're actually building your net worth.
Factoring in rent, statistics show that the return on investment in your home is 8%–10% per year. A return like this would be similar to what you'd receive if you invested in stocks. Obviously, this won't be true in all situations, and your return on investment will depend on the city you live in.
You Can Force Appreciation
Unlike stocks or bonds, you can force your home’s value to appreciate. Sounds crazy, but it can be done.
The first thing you should know is that real estate appreciates naturally. A house appreciates 3%–5% a year on average without you doing anything but maintaining it. However, you can increase the appreciation rate if you make renovations or repairs.
Not all renovations are equal. So, if you're renovating to increase its value, talk to a licensed appraiser or agent to find out what the best (most valuable) renovations would be.
You won't get a dollar-for-dollar return on your investment, but some renovations can return up to 90% of your investment.
It doesn't have to be a major renovation either. Adding a room or completing the basement will add more value than simple cosmetic changes, but even minor kitchen and bathroom renovations can dramatically affect a home's value.
You’ll Get More Tax Breaks
Your mortgage interest is deductible from your income taxes, lowering your share of taxes paid to Uncle Sam. In addition, homeowners are usually not subject to capital gains taxes when they sell a primary residence if the property value increases by less than $250,000 and if they've lived in the home for more than two years. This is a benefit that outweighs any IRA or other tax-deferred retirement plan.
You Can Earn Regular Cash Flow
Let’s say the first home you bought no longer fits the growing needs of your family or lifestyle. Why not earn a monthly cash flow by renting it out—that way you’re not just getting an ROI from owning the real estate, but from the monthly rental income.
There is always the risk that tenants will default on rent or vacate the apartment early, but there is a risk with any investment. There can be no reward without risk.
You Can Supplement Your Retirement Income
Millennials who are considering buying a home should consider the future. A home will serve as a storehouse for retirement funds, and will likely be paid off by the time they retire, allowing them to use home equity to finance retirement. Millennials will be able to supplement their 401(k) and IRA accounts, which will become more important as the U.S. struggles to fund Social Security.
You Can Use the Equity to Increase Your Real Estate Portfolio
Real estate investing is a great way to use the equity from an investment property to grow your portfolio. Let's say you have $50,000 equity in your home. You can refinance the mortgage and use the $50,000 as a down payment on your next property.
Depending on the value of your existing properties, you may even be able to pay cash for future properties, which will enhance your portfolio's equity even faster.
The Takeaway
Diversifying your investment portfolio with real estate can be a great idea. You can reduce the risk of high-risk investments, such as stock market investments. Additionally, if you invest in rental properties, you can enjoy the cash flow while the home appreciates, giving you significant capital gains when you most need them—in retirement.
Whether you're buying your first home or planning for retirement, McLellan Team is here to help you decide which option is best for your next big step. As a full-service mortgage banker, we offer a wide variety of mortgage loan products. When you mortgage with McLellan Team, we'll get you the best loan at the best rate as well as the quickest funding, giving you the competitive advantage in multiple offer scenarios. Contact us today to get started or apply for a mortgage to get started.