What makes real estate such a great investment? In one word, leverage. The opportunity for anyone to purchase an asset worth six figures for as little as $0 cannot be found in any other form of investment that we're aware of. You don't need past experience buying or selling real estate or a business plan to get pre-approved for financing to purchase your first, second or 10th home. All you need is decent credit, a reliable income and minimal debts relative to your income. For anyone who is lacking in any of those areas, there's always the possibility of having a co-signer on your loan.
What are the financial benefits of purchasing and owning your own home? Let's say you were to purchase a $200,000 home and own it for 10 years and the real estate market in your area was to appreciate 3% per year (just enough to keep up with inflation), your home after that 10 year period would be worth $268,783. That may or may not seem like a great return over a 10 year period depending on who you ask. If you asked a stock broker, he might say that's nothing compared to the 7% return you could expect investing your money in a stock of mutual fund, in which case, he may be right. But keep in mind, your 3% annual return is based off of $200,000, not the amount you would have personally invested if you used any form of a mortgage to cover the majority of the cost of your investment. If you used a traditional conventional loan with 5% down when you bought the home, you would have needed to bring $10,000 to closing (assuming the seller covered your closing costs). Based on that investment your $68,783 profit over those 10 years (which does not include your initial $10,000 investment) is the equivalent of earning compounded interest on your money of just over 22.9% and your total return on your investment would be 687% or an average of 68.7% per year. If you qualify for either a traditional FHA mortgage (3.5% down) or even a down payment assistance program (0% down), your rates of return would be even greater.
In addition to the appreciation you could realize with your home's value, over that 10 year period you would also be paying down your mortgage balance to $149,689 (assuming a 4% interest rate on your loan) adding an additional $40,311 to your equity ($190,000-$149,689) for total equity in your home of $119,094 ($268,783-$149,689).
One more financial benefit that will again add to your net worth is the tax deductible interest you'll pay on your mortgage every year which in the first year alone would likely be around $7,500 as well as your property taxes. The amount of financial benefit you'll realize from these deductions will depend on your person financial situation which your account can help advise you on further.
Bottom Line: Everyone has to live somewhere and whether you choose to rent or buy your home and take advantage of these benefits is up to you.
Posted by Matt Caren on
Leave A Comment