It’s easy to see how buying property is a good investment for landlords or investors but is buying a house as your residential property truly a good investment? We definitely think so and we’re going to break down why and provide sources for our information.
Buying a house is a good investment because of appreciation
Real estate has historically been a great long-term investment and has remained remarkably stable. It’s also a great hedge against inflation.
There are three factors that influence home appreciation:
- Market demand – When there are more people who want to live in an area than there are homes on the market, property prices increase
- Economic indicators – Inflation, job growth, and interest rates all affect your home’s value
- Location – If your home is close to amenities, lots of jobs, or is in an affluent neighborhood it will be more desirable
Unmaintained homes with increased wear and tear or unfavorable market circumstances can depreciate property. However, as long as you maintain your home and property, the market has always bounced back for homeowners.
To calculate your home’s appreciation rate, you divide the market value of your home by the original purchase value and then multiply that number by 100 to get the percentage.
For example, let’s say you purchased your home for $250,000 and today’s market value says it’s worth $315,000. In this example, your value increased $65,000. So, here’s how you calculate your home’s appreciation rate: $65,000 ÷ $250,000 = 0.26 x 100 = 26%. Your home appreciated by 26%.
Buying a house gives you access to equity
Once you buy a house and begin paying down the principal balance of your home loan, your home begins gaining equity. This gives you some fantastic financial flexibility. Homeowners who have accrued equity can finance their mortgage and pull some of the equity out as tax-free cash that can be used for nearly anything.
It’s essentially a savings plan. When you sell you may qualify to exclude up to $250,000 ($500,000 for a married couple) of gain without owing any federal income tax.
It’s a good investment because of money savings on rent
One of the irrefutable arguments for buying a house as an investment is the savings on rent. Money that goes toward rent offers no return. If you were to put that same money toward a mortgage you’re building equity as we said in the previous paragraph. If you have a fixed interest rate, another benefit is that your monthly housing payment will always remain the same (barring you refinancing at any point) as opposed to your rent raising every time you sign a new lease.
Buying a house offers tax deductions
Although you will incur property taxes with your home, there are certain tax benefits that come with owning a home. If you itemize your deductions on your tax return, you can deduct mortgage interest and property tax payments on your taxes every year. Just make sure it makes financial sense for you to itemize your deductions. The standard deductions for the tax year 2024 were:
- Head of household: $21,900
- Single or married individuals filing separately: $14,600
- Married couples filing jointly: $29,200
Here’s all tax information for homeowners including what you can and cannot deduct.
Buying a house provides benefits worth investing in
Owning a home also provides lifestyle benefits worth investing in. According to a recent census, homeowners typically had more square footage than renters. In the 4th quarter of 2023, renters – on average – 1,050 square feet per unit. Homeowners had 2,365 square feet.
Buying a house is worth the investment
Buying a house can be a good investment investment, event when interest rates are high, for several reasons. That doesn’t always mean it’s the right move for you in your current situation. When considering whether you should buy a home make sure to review your finances, life goals, current living situations, and benefits outlined here.
