The decision to buy a house is one of the most significant financial decisions you will ever make. The purchase price can be equal to or greater than an average person’s entire net worth, so you must have enough saved for your down payment and closing costs before you proceed with the purchase. In addition, you will need to have enough funds on hand to maintain your property after it has been purchased. As a result, if you are looking for a significant return on investment quickly – buying a house may not be for you because appreciation rates tend to be low and take time.
- Is Buying a House an Investment?
- Real Estate Takes Time to Appreciate
- Maintenance Costs Can Add Up While Owning a House
- Calculated Real Estate Appreciation
- Final Thoughts on Real Estate Appreciation
- If You're a Spender, a House Can Force You to Save
- Renting vs. Buying
- Limited Freedom and Flexibility to Invest
- Timing The Market Is Difficult
- Unexpected Expenses
- You Can Have Three Servings of Dessert
Is Buying a House an Investment?
A house can be considered an investment if you are looking for a long-term investment with little risk. However, most people do not buy houses to invest in them and instead purchase one because they want shelter.
A house is an asset that will appreciate over time if you maintain it well and the area becomes more desirable or necessary due to changes in population growth. If this happens then, your house will appreciate over time.
Another way to look at it is if you are looking for a significant return on your investment, then buying a house may not be the best option because appreciation tends to be low and takes time. You can also consider renting out your home as an alternative form of income which some people choose over investing in stocks or bonds.
Real Estate Takes Time to Appreciate
When owning a home as your primary residence, appreciation will typically take a lot longer than it does for rental properties. It is more of an expense until you sell your house, so be sure that your goal in buying a house is to earn a reasonable return and live there.
Maintenance Costs Can Add Up While Owning a House
Ongoing maintenance costs associated with homeownership can sneak up on you and cost thousands of dollars. You must factor in all of the expenses that go along with owning a home, including landscaping and exterior maintenance, as well as any upgrades you may want to do inside your house. When buying a house, you also need to consider the renovation projects you want to complete, as these projects will need additional capital to be set aside.
If you are purchasing a new home as a primary residence, you must consider any upgrades or customizations that you may want in your new home. These upgrades can help increase your home’s value in the future, but they can increase your monthly mortgage payment. Home prices are rising across the country, and many homebuyers have been priced out of the market. Be aware of how much your upgrades will cost and how those costs will impact your mortgage payment.
Calculated Real Estate Appreciation
Real estate appreciation is the increase in your home’s value over a specific period and will help determine if buying a house was a good investment or not. Just like when you invest in the stock market, your home purchase has to be lower than your selling price. Buying a home can fluctuate just like stocks do. Be patient and know that your investment property can pay off in the long run.
However, remember that this number does not include any of the money spent on maintenance costs, renovations, upgrades, or other expenses(property taxes, homeowners insurance, mortgage insurance)to your home during the time you owned it. The cash flow from a rental property can be a great source of income, especially for those who want to use their investment as a way to reduce their housing expenses.
How long you will receive cash flow from your property depends on how much expenses are against your rental income and what type of loan you have.
Purchasing a home is a long-term investment, but one that does not always pay off for everyone who buys land or real estate with the idea of selling it at a later date to make money. It would be best if you considered all costs associated with taking out a mortgage before making this financial decision.
Final Thoughts on Real Estate Appreciation
Historical appreciation in the US housing markets has hovered between 3.8% and 9.8% per year. Past performances cannot be guaranteed future results. Purchasing a home is like the stock market, and you want to buy low and sell high. Real estate is an investment, but it is not the only investment you should be making. Mutual funds, long-term investment options, and sound financial wealth advice will help you achieve your financial goals.
If You’re a Spender, a House Can Force You to Save
If owning a home will be a good investment for you, then saving money can help. Many homebuyers who choose to purchase a house spend more than they expected because of how much renovations and upgrades cost.
If your goal is to buy a home and make it a suitable investment property, you need to consider the expenses associated with owning an investment property.
-Down payment and closing costs
-Mortgage Payments & Homeowners Insurance
-Ongoing maintenance on the house
-Renovations to increase the value of property
If you have plenty saved, then buying your dream home is an excellent investment opportunity. Just like most investments, understand that there will be some risks involved with making this financial decision.
Renting vs. Buying
When you rent, you do not build equity like when owning a home. Renting can be a good investment for you if your finances are not in order. If you have tried to qualify for a home loan and have not been successful, renting is a good option. If your credit score is poor and you would like to improve it, this may be the best route for you.
Homeownership is not for everyone. If you are not financially prepared, it could be a wrong decision for you. So before buying a home to live in or as an investment, there are several personal finance topics you should keep in mind:
-Credit Card Debt
-Savings account(For down payment, closing costs, and property taxes)
-Prequalify for a mortgage (Mortgage payments)
-Mortgage interest rates
-Housing market trends
Limited Freedom and Flexibility to Invest
Purchasing a home is not a liquid investment like stocks or other commodities. Buying a home one day and selling it the next day for a profit is very rare. But with how crazy the housing market has been, nothing is impossible. With that being said, the home purchase you make would have to be in a scorching housing market. And if you are buying a home to flip it like a stock trade, you will be disappointed in your ROI on your property.
Just know buying a home is a long-term investment and should be treated as such.
Timing The Market Is Difficult
Many people consider buying a home as a good investment. And they feel they can make some money by buying and selling homes. But, timing the market is difficult because of the complicated factors that influence prices. So, before you buy a house, consider these five points:
-Work with a local Realtor
-Look at different neighborhoods
-Understand your monthly costs
-Keep your eye on interest rates
-Commute times are crucial
To summarize, if your goal is to make significant returns on investment, it might be better not to buy a home but instead invest in other places that might offer higher returns. On the other hand, if your goal is to have a place that can shelter you, then it’s okay to buy one. Just make sure you know what buying a home entails and how much money you will need for ongoing financial expenses(property taxes, insurance, monthly payments)!
Closing Costs are around 2-5% of the purchase price. The 1% maintenance rule says that homeowners should set aside 1% of their home’s value. For example, if your property is valued at $200,000, you should put aside $2,000. Suppose you can place your monies into an investment that makes you a few bucks a month. And if your costs are less than what you have saved, then let that cash keep earning interest! Make sure they are liquid, and you can withdraw your funds without any penalty at any time.
You Can Have Three Servings of Dessert
If you still can’t decide whether to buy a home or an investment property, three options will allow you to get the best of both worlds.
You get all the intangible aspects of homeownership with all the financial advantages of a rental property right now or in the future.
Because you’ll be living in the house for all three choices, the mortgage interest rate will be lower than the interest rate on an investment property.
Option 1 – Purchase a new house, live in it for a few years, then rent it before buying your next new house.
Option 2 – Purchase your first property and utilize the extra rooms to rent out to your pals, allowing them to cover all of your monthly expenditures.
Option 3- Purchase a multi-family property (duplex or triplex), live in one of the units, and rent the others out to cover your expenses.
These alternatives are not only a great way to buying a house and diversify your assets through rental income, but they’re also some of the most cost-effective methods.
There are also opportunities for first-time homebuyers to learn essential house maintenance skills and be a landlord that you can apply to your next home purchase.
Buying a house is not an investment. If you are looking for large sums of money or significant returns, it might be better to invest in other things that will give you more financial freedom and flexibility. An investment property may also be the best option if your goal is to make investments with higher return rates than what can typically be found on residential properties. Buying a home should only happen after considering all of these factors- whether they’re tangible (like monthly payments) or intangible (like how much time it takes before seeing any appreciation).