Why is Purchasing Real Estate a Good Investment
We all know that buying real estate is a good investment, but many of us don’t understand the details as to why. Even in bad economic times homes appreciate over time. On average homes can be expected to appreciate about 5% annually, some years more and some less, but this is a general rule. While there are other safe investments, such as treasury bonds and if you are lucky stocks, consider the following. You purchase a $200,000 house, place twenty percent down, that’s $40,000, and get a mortgage for the remaining $160,000 which you pay monthly installments on.
The general appreciation rule says that in the first year your home will increase in value $10,000 with your $40,000 investment you have grossed a 25% return on investment. Even though you are making monthly payments, property taxes and other homeowner costs, but the interest on your mortgage and property taxes are tax deductible, making the government responsible for subsidizing these expenses. Everything considered, your home has become a safe investment with a higher return on investment than many alternatives.
As mentioned above, the government is effectively subsidizing the purchase of your home allowing the mortgage interest and property taxes to become tax deductible. These costs are deducted from your gross income reducing your taxable income at the end of the year. Take an example of your loan balance being $150,000 and an interest rate of 8%. During the first year of payments you will pay $9969.27 in interest alone. Assuming your first payment was made on January 1st your taxable income would be just under $10,000 less and saves you all the taxes on that amount of money for your annual tax return.
Unlike renting, where each years lease results in an increase in rent, due to inflation and other expenses for property owners, your mortgage, assuming you have a fixed rate, will remain exactly the same for thirty years to come. Consider an annual increase on a $1,000 monthly rent of 10% per year, the second year your rent would be $1,100 per month, the third $1,210, and incremental increases would continue for 27 more years making your final rent in year 30 $14,416.17 per month or at total of $172,994.05. While it is unlikely that rent would be this much higher in just 30 years, there is no doubt that paying rent is throwing your money into someone elses pocket, month over month, and year over year.
As your home’s value increases and the amount of your loan decreases, your home is accumulating equity, and that’s money that can, over time, become substantial. In the future, as your equity grows you can take a loan out, or a second mortgage, against the current value of your home, and used for any number of items.