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There are many ways to make your money grow and increase your wealth over time. You can invest in the stock market. You could put your money into bonds or high-yield savings accounts. Or you can put the money to work for you via real estate by purchasing a home, either to live in or to rent out.
But is buying a house a good investment? That depends on many different factors, including your short- and long-term goals. It’s smart to think carefully about the pros and cons and set realistic expectations for your return on a real estate investment. Here’s a deeper look.
Why buying a house is a good investment
It’s easy to think of real estate as an investment if you are a pro investor, a landlord seeking to rent out the property or a house flipper hoping to upgrade and relist it quickly. But what about those who plan to actually live there? Should they think of a home purchase in this context as an investment — and is it a worthy one? Here are some reasons why homeownership is a good investment.
“It’s hard to argue against the long-term financial value of homeownership,” says Martin Orefice, CEO of Rent To Own Labs. “Real estate usually appreciates over time in the long run. While there are economic boom and bust cycles that can make real estate a losing investment in the short run, over 10 years or longer, buyers will usually come out ahead.”
Appreciation is the increase of your home’s value over time, and home values have increased dramatically in recent years. In fact, CoreLogic’s most recent U.S. Home Price Insights report states that February 2023 marked the country’s 133rd straight month of home price growth — that’s 11 consecutive years of growth.
Purchasing a home can be regarded as a better use of your money than renting, investment-wise, because with the latter you don’t build any home equity. Your monthly rent payment goes directly to the landlord, with no ownership stake being built over time. “Owning a home can be a great way to build equity, which can be used to finance other investments,” says Zach Larsen, co-founder of Pineapple Money.
“Homeowners who have accrued equity can refinance their mortgage and pull some of their equity out as tax-free cash that can be used to pay for home improvements, consolidate debt, fund a major purchase or other goals,” says Phil Greely, a broker with Realogics Sotheby’s International Realty in Seattle.
In addition, property ownership allows you to potentially earn rental income by becoming a landlord. If your municipality allows it, you can rent out a portion of your home, which can help pay for some or all of your mortgage and other ownership costs. “For example, buy a home with a mother-in-law apartment in the basement or above the garage. Then, rent out that space and offset your mortgage payment,” says Greely. “Or, purchase a duplex, rent out one side, and live in the other.”
You have to live somewhere, right? But you can’t live in a stock fund or savings account. A home, on the other hand, can be occupied as your primary residence.
“A home can be an investment as well as provide tangible benefits,” says Bruce Ailion, a Realtor, real estate attorney and investor in the Atlanta area. “Say your home appreciates 5 percent a year; your alternative may be, for instance, a bond that also pays a 5 percent return. However, you can’t live in a bond.”
Why a house may not be a good investment
On the other hand, real estate purchases aren’t guaranteed to always be a good investment. Here are some of the downsides to buying a home.
- Appreciation is not a sure thing: “The value of homes in a given area depends much on the overall economy of that area,” says Orefice. “Look at Detroit, for example, to see the effects of urban decay on real estate values.”
- Homeownership costs can increase: If you have a fixed-rate mortgage, your monthly principal and interest payments will remain unchanged over the life of your loan. But other associated homeownership costs — including property taxes, maintenance expenses and insurance premiums — usually increase over time.
- Renting offers more flexibility: As a renter, you can easily pick up and relocate anywhere you choose from one lease to the next. But it’s not as simple a process to sell a home. Also, homeowners tend to have a lot of money tied up in the home — this means you have less liquidity, and less available cash to spend on other needs or emergencies.
Should you buy a house now or wait?
Home prices and mortgage rates are both fairly high right now. But regardless of the current market climate, buying now versus buying later depends heavily on your financial circumstances.
If you have good credit, steady employment and enough savings for a down payment plus closing costs, it may be worth buying now rather than trying to wait out the market.
“Purchasing now is a good option if you want to keep pace with the rate of inflation and the rising cost of living,” says Michelle Mumoli, a broker with Compass in Hoboken and Jersey City, New Jersey. “You can always choose to refinance to a lower interest rate in the future if rates come down.”
However, if you’re not extremely financially stable at this point in your life — if you could benefit from some time to build up more savings or improve your credit score, for example — waiting could be your best bet. Prices are starting to come down, albeit slowly, and real estate experts don’t foresee a housing market crash anytime soon. “If you can wait a year or two, I think you’ll find the market to be much more favorable,” says Orifice.
Determined to purchase a home — and hopefully grow your money? Getting preapproved for a mortgage is a good place to start. This shows you how much a lender will be willing to loan you. Bankrate’s new-house calculator can also help you figure out how much house you can afford. Finally, enlist the help of a knowledgeable and trustworthy real estate agent who can guide you through this process.
The decision to put your money into real estate versus other types of investments will depend on your financial health, risk tolerance and short- and long-term goals. Real estate does tend to increase in value over time, but appreciation is not a guarantee. You may get a better return on your money by investing in bonds or the stock market, although the value of these investments can fluctuate more dramatically.
When you purchase property, you benefit from appreciation (the amount the home increases in value over time), accruing equity and the ability to earn rental income. You may get tax breaks in some instances as well. And, of course, having a place to live is a big benefit.
In general, the spring and summer months tend to be the most active homebuying times of year. However, if you are seeking the best deal, consider house-hunting in the winter months, when fewer buyers tend to be active. That can give you more negotiating power with sellers, who may be more motivated to lower their price than they would be during the peak season.