Owning a home has long been part of the dream many people have for their lives. Whether it is an on-trend condo in the city, a white picket fence in the suburbs, or some gorgeous land out in the country, many of us have dreams of owning a home. Depending on the folks you surround yourself with, you may have heard that owning your home is a great investment or you may have heard that it is a risky investment. Let’s jump into the realities of home ownership as investment so that you can make a well-informed decision for yourself.
One of the distinct advantages of owning a home is the stability that it brings to your life regarding your housing expenses every month. Let’s compare Amanda and Bart: Amanda bought her first home ten years ago and still lives there today while Bart has been renting the home next door for those same ten years. When they first moved in, Amanda was paying $1000/month for her mortgage and Bart was renting his house for $1000/month. Amanda’s mortgage is still $1000/month today, but Bart’s rent has climbed to $1500/month to match market rates in the area. Amanda has the advantage of knowing far in advance what her housing expenses will be and she can plan accordingly when it comes to her budgeting for investments, whereas Bart is at the whim of his landlord and how the market shifts with time to determine what his housing expense will be and how much he has left over to invest.
The stability brought by owning your home can actually protect your future earnings. Let’s go back to our friends Amanda and Bart to help us understand: Amanda and Bart are both postal service workers. Ten years ago, they each had an annual salary of $48,000, which is a monthly salary of $4000. This means that each of them was using 25% of their monthly income to go towards their housing expense of $1000. Over the last ten years, they have each received raises and now they both have an annual salary of $60,000, which is a monthly salary of $5000. That means that Amanda is now only using 20% of her monthly income towards her housing expense of $1000, whereas Bart now must allocate 30% of his monthly earnings to cover his housing expense of $1500. In this example, we see that Amanda has protected 10% of her income by stabilizing her housing expenses when compared to Bart. She now has the opportunity to use those additional funds, $500/month in this case, to invest however she sees fit. Although she did not know it at the time, when Amanda purchased her home ten years ago she was in fact protecting her future income and giving herself a substantial increase in her discretionary spending funds.
Owning your home also means that you are in possession of an asset that increases in value over time, which is called appreciation. While most items we purchase become less valuable over time, like clothes, furniture, and cars, real estate almost always becomes more valuable. This can be of substantial advantage over time because you can sell your home for more than you purchased it. But you do not have to wait until you sell the home to take advantage of the appreciating value: one little-known opportunity that comes with home ownership is that it gives the homeowner relatively easy access to their own funds at low interest rates. Let’s say you came across an investment opportunity that will pay 10% returns and suddenly need a lump-sum of cash. When you own your home, you have the opportunity to borrow money against the equity in your home through either a cash-out refinance or a HELOC (home equity line of credit) at relatively low interest rates. So if you are able to borrow those funds at a 3% interest rate and you can earn 10% on your investment, then you are profiting 7% total and don't have to miss out on the opportunity to invest.
The last thing to consider when you think of your home as an investment is the risk that will be involved, though it should be said that each and every investment has associated risk. Risks of home ownership include unexpected repairs or a dip in the real estate market that causes your home value to drop. Some folks must also address the fact that home ownership as an investment will likely have more emotional implications than other investment opportunities because it involves your place of residence. If you brave the risks of home ownership, you can access the protection of future earnings, the stability of fixed housing expenses, and the flexibility to access your funds all in order to help you on your investment journey.