If you've ever been house shopping, you've probably heard some version of this phrase from a real estate agent: "This will be the best investment you make!"
A lot has been said about buying a home as a real estate investment. But is your home a true real estate investment? Will it actually provide you with big returns down the road? While it's certainly possible that it will pay off, the reality is that the home you live in probably isn't a true investment -- at least in terms of financial returns.
What are the Costs of Owning a Primary Residence?
Before you decide that owning a primary residence allows you to come out ahead, it's important to consider how much you spend on it. You're not just buying a home for $200,000 and hoping you can sell it for $500,000 down the road. You also have to consider the costs involved.
The biggest expenditure you make when buying a home with a mortgage is the interest. If you buy a home for $200,000 at 3.92 percent, you'll end up paying $140,427 in interest if you keep the home for 30 years. And don't forget the other costs that come with buying a home:
-- Property taxes.
-- Homeowners insurance.
-- Any upgrades or remodels.
-- Landscaping and yard care.
By the time you add up everything over the course of a couple decades, even if you do sell the home for more than you paid for it, there's a good chance your profit will in actuality be rather small.
Don't count on tax breaks to make up for it, either. You have to itemize to claim the mortgage interest deduction -- and fewer people are doing that due to recent changes in the tax law. In fact, only 10 percent of homeowners paying interest are likely to benefit, according to a White House report. However, even prior to the 2017 law, just over half of those paying interest on their mortgages benefited from the deduction.
Location, Location, Location
Where you live matters, too. If you live somewhere that housing prices explode over time, there's a good chance you really can make a healthy profit when you sell your home. Those places are few and far between, however. Many of us live in markets where annual home appreciation is more likely to keep just ahead of inflation rather than offer dazzling returns on par with annualized stock market returns.
And, of course, you can't forget timing. What happens if you want to sell, but the real estate market crashes just before you planned to sell. If you don't ride out the downturn, you could end up locking in real losses.
Does Your Home Produce Income?
While there is a case that long-term appreciation can be considered a type of investment, one of the real tests of a true real estate investment is whether you can get income out of it. Unfortunately, when you live in the home you bought with a mortgage, you're probably not bringing in income. Instead, it's all outlay for keeping the house in good shape -- unless you're making some money by renting out a room.
When you buy a home that you plan to rent out, the story changes. For some, real estate investment is more about establishing cash flow, instead of hoping that they'll see appreciation down the road. A rental unit can be one way to make money from real estate investing. You have expenses to pay, yes, but the income you get from renting out the property can offset those costs -- and even provide you with regular income.
Before getting caught up in the idea that your home is going to offer an amazing potential return, take a step back. Chances are that your home alone isn't going to be enough to set you up for wealth. Depending on the situation, you might not even come out ahead when all's said and done.
But that doesn't mean your primary residence doesn't offer something in the way of a return.
A Home Can Still be Valuable
Just because your home doesn't offer you an income stream, and even if you don't actually end up with a real profit by the time you've paid interest, insurance, taxes, and more over the course of years, it doesn't mean you aren't getting value. Here are some of the potential advantages of homeownership:
Forced savings. When you do sell, it can feel like you've made a profit because you end up with a large chunk of capital. You can use that capital to invest and fund your lifestyle, downsize, or make some other decision.
An asset to call on later. Even if it costs you, the fact that you have an asset that can be tapped for various purposes has value itself. A home equity loan or line of credit can be helpful down the road.
Lifestyle perks. Many people enjoy the lifestyle perks of homeownership. You can do what you want with the home, put down roots in the community, and provide a safe place for your family.
Retirement housing. As long as you have a way to keep up with property taxes and insurance, a paid-off home can provide you with low-cost housing during retirement.
The key is to decide what you want out of your home. If you're looking for a true real estate investment, maybe a primary residence isn't the answer. But if you want returns beyond just money, buying a home has much to offer.
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