Many years ago, conventional wisdom said, it made a lot of practical sense to buy a house as soon as you can because it’s a great investment. If you were newly-married, you also needed a nice home to raise a family and establish your roots.
In the last decade or so, this pre-conceived idea has been turned topsy-turvy because the economics of owning a home have changed significantly. Take a close look. Then, the decision on whether to rent or own, mostly had to do with living in an apartment or a house. This is not true anymore. The situation has changed. Condos nowadays allow ownership of a multi-family residence. At the same time, opportunities to rent a stand-alone house in various places are greater now than ever before.
If you’re fancying moving from your small apartment and buying a house, you can expect this to be naturally more expensive. You are, after all getting more area per square foot and a yard.
But, Can Buying A Home Still Be A Good Investment?
Surveys say that since 1980, the average appreciation of real property was 3.0% annually. After adjusting for inflation, the experts say it’ll just be a hairline that will separate it from zero. In an investment-oriented scenario, stocks meanwhile has had a long-run average return of almost 10% including dividends.
During good times, a house purchase would seem like a smart idea. It’s pretty much leveraged. With a … say … 20% down payment and a price increase of only 3%, the equity of the owner turns into a 15% increase (you can do some math with a hypothetical US$100,000 home). The downside happens when there’s a, say … 20% price drop in the real estate market where the same 20% down payment, can mean a major loss in an owner’s equity. And this is not an exaggeration as was seen in some cases from the price decline in the recent housing bust.
Interest on home loans are tax deductible. Great! This deduction though doesn’t erase the fact that you’re still paying interest to somebody. It’s an outright expense and outweighs any reductions from your taxes.
The Real Dividends
The true dividends coming from a home purchase is that you can live in it without paying rent. You can do with it what you want. You can have your bathroom designed in purple, have your daughter’s bedroom walls painted with Brad Pitt murals or even have a rainbow-colored gazebo set back in the backyard. Owning a home also allows you flexibility. When extra money comes in from work, you can put in a hot tub. Renters do not have that option. In fact, if you’re a renter, you should remember you don’t have much say on your housing situation. If the landlord decides to sell the property, off you go. If he decides to raise the rent, either you go along with it or you start looking for a new place to stay.
On the other hand, you don’t have to worry about taxes, maintenance, insurance and sometimes utilities. The landlord takes care of all that. When you buy a house, you’ll have to crank your head when the roof leaks or when the water heater needs to be replaced… things you don’t really want to be concerned about while pursuing your pressure-heavy career.
Some people may see the advantages of renting and unless you and your family plan to live for a real long time in a “dream home”, purchasing one may not be the best option. What do you think?