Home Ownership Investment: Risks and Benefits

Homeownership has constantly been part of the american english Dream. Because of that, many people accept owning a home as the correctly, even obligatory, matter to do without considering the benefits and the risks .

If you are contemplating buying a home, you should know and review the pros and cons of the investment you are about to make—as you would any investment decision—before sign language on the dashed lineage .

Key Takeaways

  • Be aware of and review the advantages along with any potential risks before you buy a home.
  • The benefits of investing in a home include appreciation, home equity, tax deductions, and deductible expenses.
  • Risks of investing in a home can include high upfront costs, depreciation, and illiquidity.
  • A home can be a good long-term investment but building equity is key.
  • Real estate appreciates not just because of the home itself, but the property it sits on.

attractive Long-Term investment

admiration represents the increase in home values over time. real estate prices are cyclic, and homeowners should n’t expect the place ‘s value to increase drastically in the brusque terminus. But if you stay in your home long enough, there ‘s an excellent likelihood you will be able to sell your home for a profit because of appreciation late .

Buying a home is one of the best long-run investments you can make. Despite dramatic dips such as the 2008 Housing Crash, residential real number estate tends to rise in measure. median home prices in the U.S. rose from $ 298,900 in the fourth quarter of 2014 to $ 346,800 in the one-fourth quarter of 2020—a more than 16 % addition in value in six years. Go back a ten, when the medial sales price was $ 219,000 ( Q4 2009 ), with a 42.7 % increase. That ‘s not a bad return on an investment ( ROI ) that provides you with a place to live .

Consider Property Value

real estate of the realm appreciates primarily because of the estate on which the home sits, while the actual structure depreciates as time goes by. So the expression “ location, localization, placement ” is not good a veridical estate of the realm catch-phrase but a critical consideration when buying a home. The neighborhood with the amenities it brings—school districts, parks, condition of roads, etc.—and the city where the home plate is located all factor into the property ‘s admiration .

Consider a summation home, neglected to the point that it ‘s uninhabitable. The land underneath the home plate may still be worth a meaning measure of money—more than the residence, in this case. A seller may consider selling it as is ( with the structure still intact ) or spending a little extra to demolish the home and sell the kingdom at a higher price on its own .

taste is the change in the value of your home over clock, while home equity is the dispute between the balance on your mortgage and your home ‘s commercialize value.

build up equity

Home fairness represents the difference between how much you silent owe on your mortgage and your home ‘s market price or value. Home equity and admiration may be considered together. As celebrated above, your home probable would grow in marketplace prize over time. Your equity besides grows as you pay down your mortgage, with less of your payment going toward pastime and more toward lowering the balance on your loan .

Building equity does take some time because it takes time to lower the principal balance owing on the mortgage loan—unless, of class, you make a large down payment or regular prepayments. Keep in judgment that the distance of time you have your home is a significant factor in how much fairness you build and the appreciation you can realize. The longer you keep it, the more equity you obtain .

home and Equity Appreciation

As you pay down your mortgage and reduce the measure you owe, without realizing it, you are saving as the value of your home is increasing—just as the prize of your savings account increases with concern. You probable would get back every dollar you paid out and more when you sell, assuming you stay in your house long enough. Over prison term, the average 6 % return ( interest rate ) on your savings should more than cover your spending .

Another plus is that base equity provides flexibility to get a loanword tied to the amount of your home equity. many investors follow their home equity and home admiration simultaneously. If an investor believes their home value is greatly appreciating, they may put off a home equity loanword to have a better opportunity to realize a seller ‘s appreciation .

mortgage lend discrimination is illegal. If you think you ‘ve been discriminated against based on rush, religion, arouse, marital status, use of public aid, national beginning, disability, or long time, there are steps you can take. One such tone is to file a report card to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development ( HUD ).

localization, Location, Location

While paying down your mortgage works the like no matter where you live, market-value growth varies with location. According to the Federal Housing Finance Agency ( FHFA ) House Price Index ( HPI ), real estate of the realm prices rose an average of 51.85 % over the five-year period ending Sept. 30, 2021, in the U.S. overall. however, prices in the Middle Atlantic census division rose by 43.73 %, and prices in the Pacific census division climbed by an average of 55.45 % .

To see how this might affect prices where you plan to buy, check out the broad FHFA chart below :

Percent Change in U.S. Home Prices, Period Ended Sept. 30, 2021
Division Ranking
Since Q1 1991
18.49 4.21 51.85% 246.92%
Mountain 1 25.01%  5.83% 73.74% 411.59%
Pacific 2 20.90% 5.51% 55.45% 255.75%
South Atlantic 3 20.14% 1.02% 36.39% 177.94%
New England 4 19.39% 3.71% 50.37% 224.04%
East South Central 5 18.25% 4.81% 51.17% 217.35%
West South Central 6 17.51% 4.47% 44.96% 255.957%
Middle Atlantic 7 15.93% 2.92% 43.73% 205.10%
East North Central 8 15.37% 3.12% 47.47% 180.70%
West North Central 9 14.82% 2.83% 44.17% 231.53%

source : FHFA U.S. House Price Index – 3Q 2021 .

capital Gains Exclusion

finally, you will sell your home. When you do, the law allows you to keep the profits and pay no capital gains taxes. Well, not necessarily all the profits. The Internal Revenue Service ( IRS ) allows a tax-exempt net income of equally a lot as $ 250,000 for single homeowners and $ 500,000 for married couples—for your main residence merely, not for a irregular dwelling or vacation property .

You need to meet a few requirements to qualify for this exception. You must own the home for at least two years—24 months—within the last five years up to the conclusion date. The residence necessity dictates that you should have lived in the home for at least two years during the five-year period leading up to the sale .

The final necessity, the look-back necessity, outlines that you did n’t profit from selling another primary residence during the biennial menstruation leading up to the most late sale .

tax Deductions

After appreciation, the profit of homeownership that is cited most often is tax deductions or savings. When you buy a home, you can deduct some of the expenses of owning that home from the taxes you pay to the government. This includes mortgage interest on both your chief residence and a second gear home, which can amount to thousands of dollars per year .

sake on home-equity loans, or home-equity lines of credit ( HELOC ), is besides deductible if the funds are used to improve your home substantially. You can besides deduct $ 10,000 in state and local ( SALT ) taxes, including property taxes .

The Tax Cuts and Jobs Act ‘s effect

The Tax Cuts and Jobs Act made solid changes to the parts of the tax code that have to do with homeownership. Unless a future Congress amends the police, all provisions will expire after Dec. 31, 2025. But for now, changes in that jurisprudence have reduced the value of owning a home. The law limits mortgage concern deductions to $ 750,000 of total mortgage debt, including for a first and second home plate and any home-equity or HELOC loans. however, the higher limitation of $ 1 million in mortgage debt still applies for obligation incurred before Dec. 16, 2017 .

The law besides set the SALT subtraction limit to $ 10,000. other raw provisions include restrictions on claiming casualty losses except for federally declared disasters. The travel expenses deduction no longer exists, except for the active-duty military move for influence reasons .

All these changes have lowered the value of owning a home—including the fact that, with the approximate double of the standard subtraction ( another have of the Act ), fewer people will have adequate deductions to file Schedule A rather of taking the standard deduction .

So the fact that you are eligible for a tax subtraction does not mean that it will be utilitarian to you. The austere limiting of the SALT deduction will be particularly damaging in lowering available deductions for people who live in highly taxed states .

high Upfront Costs

The monetary value of investing in a home can be high—there ‘s more to your expenses than the property ‘s betray price and the interest rate on your mortgage. You can expect to pay anywhere from 2 % to 5 % of the purchase price in conclude costs, for starters .

Some of the most common close costs include an application fee, appraisal fee, lawyer fees, place taxes, mortgage policy, base inspection, freshman homeowner ‘s insurance premium, title search, deed policy, points ( postpaid interest ), initiation fee, recording fees, and view tip .

Experts say you should plan to stay in your house for at least five years to recover those costs .

electric potential depreciation

not all homes grow in respect. The caparison crisis of 2008 resulted in many homeowners being subaqueous, which means owing more on your mortgage than your home is deserving. It doesn ’ t take a caparison crisis to stagnate or drop home prices. Regional or local economic conditions can result in home plate values that don ’ thyroxine keep up with inflation .

Remember that the actual social organization you live in will depreciate over time. This can result from wear and tear on the property or a miss of maintenance and repairs .

Pride and Financial Responsibilities

One often-cited benefit of homeownership is the cognition that you own your little corner of the populace. You can customize your house, remodel, paint, and dress without the motivation to get license from a landlord .

possession comes with responsibilities, however. You must pay your mortgage or risk losing your home plate and the fairness you ’ ve built. alimony and sustenance are your responsibility. You can ’ t call the landlord at 2:00 ante meridiem to have a blabbermouthed water pipe repaired. If the roof is damaged, you must repair it—or have it repaired—yourself. Lawn mow, bamboozle removal, homeowners policy, and liability indemnity all fall on you .


Unlike lineage, which can be sold within days, homes typically take much longer to unload. The fact that you might have access to $ 500,000 in tax-exempt capital gains doesn ’ t mean that you have ready access. meanwhile, you still must make mortgage payments and maintain the house until you sell it .

Is Buying a Home a Good Investment?

Buying a home is an investment but whether it is a good investment depends on a few factors. If you need a home to live in, it ‘s a good investment. Monetarily address, there are high upfront and ongoing costs associated with your home. If you build enough equity and sell when the real estate market favors sellers, you will likely make a good fall on your investment due to appreciation. But if the market is weak, or you have little fairness in the home, or you have to sell besides soon, you may lose money .

What Is an Advantage to Owing a Home?

There are many advantages to owning a home. For starters, there are tax benefits granted to homeowners. You can besides build fairness in your family, which in turn, may act as a long-run salvage account. Some landlords have specific rules about how a tenant can renovate their apartment. If you own your base, you have the freedom to renovate. If you have a 30-year or 15-year fixed mortgage, you can anticipate what you will pay for your family year-over-year. A landlord, once a lease is up, could decide to sell your home, or raise the lease higher than you are able to pay .

What Are the Tax Benefits of Buying a Home?

The Tax Cuts and Jobs Act reduced the value of owning a home. so, while there are tax benefits to owning a home, the jurisprudence limits mortgage sake deductions ( up to $ 750,000 of total mortgage debt ). Another hit to homeowners, the SALT subtraction limit was capped to $ 10,000. however, even with these changes, homeowners silent do benefit at tax time versus renters, and these laws are set to expire in 2025 .

The Bottom Line

A home is an investment that comes with many investment benefits and risks, which makes it an investment that is not for everyone. Weighing the investment benefits against the risks is essential. A rational comparison of pros and cons can help you decide whether to put your money into a home investment or potentially find better returns elsewhere .

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