Individuals and families have used homes as tools to build significant wealth for decades. But in our economy's current state, many homeowners are losing significant money on their homes. Many experts believe that homes won't be good investments again for many years. If you're a first time home buyer, what should you do? Is it worth it to invest money into a home for financial reasons? Are there other reasons to invest in a home?
A home provides two primary returns on your investment.
In order to evaluate whether or not a home is a good investment, we must determine whether these same returns could be earned more efficiently elsewhere.
The literal return on investment, the first return mentioned above, is surrounded by controversy. The real estate industry is full of stories of individuals who have gotten rich by simply buying homes, waiting for the property values to increase, and then selling them at a profit. It can be done. Depending on the local market, however, this can take a very long time, and even then, the return may be minimal or nonexistent. It may be significantly smaller than the return you could have earned with a mutual fund or a stock portfolio. Historically, homes are a very secure investment, in that they will almost always increase in value over a long enough timeframe, but the returns over that same timeframe are typically about the same or less than the returns you could get by investing your money elsewhere. At present, returns are actually in the negative for real estate in many areas. The return you get for your money, therefore, is not high enough to justify using a home as an investment tool in every case.
But consider the second return mentioned above. A home provides you and your family with a place to live. "A place to live" is typically one of the major expenses in an individual's budget, whether he or she owns a home or rents one. You're going to have to pay for it either way. Monthly mortgage payments are generally higher than monthly rent payments, but not by much in most cases. The difference is that with a rent payment, your money isn't simultaneously being collected and stored with the potential of an additional financial return. This makes purchasing a home a much more cost effective investment than renting one.
With the help of specialized mortgage programs, such as the FHA mortgage, the VA mortgage, and others, buying a home is an investment that many individuals have access to. It doesn't require an advanced degree in finance. It doesn't require a business license.
A home provides you with two services for the price of one. You get a return on your money, though this return is admittedly a bit less than other investments might offer, and you get a place to live. A stock portfolio doesn't provide you with a place to live, and renting doesn't provide you with a return on your money. If you buy a home, you get both. This makes a home purchase a good investment.
Didn't find the answer you wanted? Ask one of your own.