Is A House A Good Investment?
Ideally, your home’s value will increase after you purchase it. The hope is that this appreciation will be enough, and that you pay down enough of your mortgage loan, that when you sell, you’ll earn a solid profit.
Like all investments, a profit is not guaranteed. Home values usually appreciate over time. But, again, this is not guaranteed. If you buy your home when real estate values in your community are high, your residence’s value might fall after you move in. If home values fall by enough, you might have to sell your home for less than what you paid for it.
That’s why when buying a home, you should also consider the intangible benefits of ownership. These include putting down roots in a strong community, living near highly ranked schools, having enough space for a growing family. Because of these benefits, most people don’t look at homes as only an investment. Even if you don’t make a big profit when you sell, you’ll still enjoy the benefits of owning a home.
Because buying a home is such a big monetary investment, though, it’s important to be financially stable before you apply for a mortgage. This includes saving for a down payment, building a strong credit score, budgeting for the costs of owning a home and building enough savings to act as a financial cushion should you suffer a financial emergency.
The bigger your down payment and the higher your credit score, the lower the interest rate lenders will charge you. This could save you hundreds of dollars in mortgage payments each month.
Budgeting is important, too. You want to make sure that your monthly mortgage payment isn’t so high that you struggle to pay it each month. You also need to save up money to pay for your loan’s closing costs – which usually run thousands of dollars – and cover the costs of owning a home, including maintenance and property taxes.
A budget can also tell you if you should buy a house now or wait. If you don’t have enough financial leeway in your budget, adding a big monthly mortgage payment is a mistake.
If you’re financially ready, though, buying a house can be a good investment if you plan on living in your property for a long enough time.
Length Of Occupancy
The longer you live in your home, the more likely you are to earn a solid profit when you sell. That’s because you’ll build home equity as you make your mortgage payments.
Equity is the difference between what you owe on your mortgage and what your home is currently worth. If you owe $100,000 and your home is worth $200,000, you have $100,000 in home equity.
You can build equity in two ways: You’ll do it over time by reducing the amount you owe on your mortgage. You’ll build additional equity on top of this if your home’s value increases while you own it.
You can borrow against your home equity in the form of home equity loans or home equity lines of credit. You can then use the money from these equity loans for anything you want, from renovating your outdated kitchen to paying for your children’s college tuition.
When you sell your home, the equity you have in it helps determine how much money you take with you after closing the sale. Say you sell your home for $250,000 and you owe $120,000 on your mortgage. After paying off what you owe on your mortgage, you’d have $130,000 left over.
Some of that money will be eaten away by the commission charged by your real estate agent and any closing costs you’ll have to pay, but the more equity you’ve built in your home, the more dollars you’ll leave with after closing your home sale.
Your home is more likely to turn into a good financial investment, then, if you stay in it longer. The longer you stay in your home, the more years you have to see its value appreciate. Historically, people who stay in their homes for at least 7 years tend to see their property rise in value.
The key to earning money from a home sale is to pay down your mortgage, build equity and hope that you’ve bought in a neighborhood in which your home’s value will rise after you purchase it.
Opportunity To Make Your House An Investment Property
You can also invest in real estate by renting your home out, using the rent you earn to either cover or help cover your monthly mortgage payment.
You can use this investment method to lower your costs of owning a property while you wait for it to increase in value. Once the home has increased in value by a high enough amount, you can sell for a profit. Those monthly rent payments will help reduce your monthly expenses while you wait for your property’s value to rise.
You might also hold onto an investment property for decades. Then, once you’ve paid off your mortgage, those monthly rent payments will generate additional cash flow.
There are challenges here, though. It can be difficult to find good tenants who pay their rent on time. You might struggle in some markets to find renters, meaning you’ll have to cover the mortgage payments on your investment with your own money only. You might also buy a home that doesn’t appreciate, meaning that your investment might eventually lose money.