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Is Buying a House a Good Investment?
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Buying a home is a good investment and a solid foundation for building wealth if you’re ready for the long-term financial commitment and ongoing expenses. However, there are important drawbacks worth considering if you’re trying to answer the question: Is buying a home a good investment?
7 reasons buying a house is a good investment
- You own an asset that may increase in value. According to data from the National Association of Realtors (NAR), the median national existing home sales price rose 17.2% from March 2020 to March 2021. That works out to about $48,400 of extra equity in just one year.
- Your monthly payments build home equity. Home equity is the difference between your home’s value and the outstanding mortgage balance. When you pay rent, that money builds equity for the owner of the home you rent. When you own a home, you make principal and interest payments on the mortgage. Each month the principal portion chips away at your loan balance, which means you’re building equity without even having to think about it.
- You may benefit from homeownership tax breaks. Homeowners who itemize their taxes may be able to write off mortgage interest, state and local taxes, and even energy-efficient upgrades. Rent is not usually tax-deductible.
- You own the shelter you live in. You don’t have to worry about renewing a lease with a landlord or yearly rent increases. You can stay there as long as you want because the property is yours.
- You can improve the home as your needs change. Whether it’s a room addition or a swimming pool, you can make improvements to your home without asking a landlord for permission. And when you make improvements, it increases your home’s value and could build even more equity. Even better: You may be able to finance the upgrades with a renovation loan that allows you to roll the costs into your loan based on the estimated value of your home after the improvements are made.
- You can use the home equity as your family’s needs change. Building equity in a home is a good thing because you can use it to pay for major life changes and events. For example, you could use a home equity loan to help pay the cost of college tuition or a home equity line of credit (HELOC) to cover unexpected medical bills or vehicle repair costs.
- Your home may help you age in place. Homeowners 62 years of age or older may be eligible for a reverse mortgage, giving them access to home equity with no monthly payment. Reverse mortgage borrowers can receive funds in a lump sum, a line of credit or in monthly installments.
6 reasons buying a house is not a good investment
- You don’t receive a return on your investment until you sell. Your home equity isn’t converted to cash in your pocket until your home is sold.
- You can only borrow against equity while you own your home. There is no way to convert your equity to cash without taking out a loan while you’re living in a home. You’ll pay closing costs of 2% to 6% of your mortgage in most cases, and ongoing interest charges that cut into your budget and home equity over time.
- Your home value could drop. Many people who owned a home during the 2008 housing crisis learned this lesson the hard way and ended up with underwater mortgages — stuck in homes worth less than the balance of their outstanding mortgage. However, there are mortgage programs that give current homeowners a safety net to refinance to a lower interest rate even if they have no or negative equity.
- You are responsible for paying ongoing costs like property taxes and insurance. Even if you don’t have a mortgage payment, as a homeowner you have to pay property taxes and homeowners insurance. Most homeowners pay these costs in their monthly payment as part of their escrow account — which acts like a savings fund for lenders to pay taxes and insurance when they come due.
- You are responsible for maintenance and upkeep costs. When the air conditioning breaks down or the sink clogs, it’s up to you to get it fixed. The cost of repairs and upkeep comes out of your pocket. A good rule of thumb is to budget $1 per square foot of home per year for maintenance costs.
- You can’t liquidate your investment quickly. Unlike stock or retirement funds, you have to market your home, find a buyer, go through inspections and typically wait one or two months for the sale to close. In addition, you’ll have to find someplace else to live and pack up all your belongings to move before you sell your home.
When should I buy a house?
You should buy a home when you have all your financial ducks in a row and have a plan to stay in the home long enough to recoup the money you spent to buy it.
You’re probably ready to buy if:
- Your credit score is at least 620 and you haven’t had any major credit issues the past two years.
- Your income is stable and growing.
- You’ve saved up enough for a down payment.
- You’ve built up a healthy emergency fund with extra money set aside for unexpected home repairs and regular maintenance costs.
Why buying an investment property before your first home might be a good idea
If you’re not quite ready to purchase a home on your own and want some extra income to offset your monthly mortgage payment, you may want to buy a multi-family home. The Federal Housing Administration (FHA) backs loans for borrowers who purchase two- to four-unit homes with as little as 3.5% down and allows them to use the rental income on the units to qualify.
There’s a catch though: You have to live in one of the units for at least a year as your primary residence. If you don’t mind having built-in neighbors and the responsibilities of both homeowner and landlord, this can be a great first home investment.