One of the primary benefits of home ownership is financial. Buying a house is an investment. According to Wikipedia, “Investment is putting money into something with the hope of profit.” I appreciate the honesty of this definition. There is some hope involved. Most investments are not a sure thing. Let’s take a look at the basics of a real estate investment.
For a first time home buyer, equity may be one of the most exciting and fulfilling aspects of the investment. A renter will have nothing to show for the thousands of dollars spent on rent annually. Plus, rent is increasing. A home owner must pay interest on their loan, but they will also make payments on the principal and therefore, build equity.
It is easy to calculate the amount of equity that you will build over time, especially if your loan has a fixed interest rate. Amortization schedules show the amount in principal and in interest that will be paid each year over the course of the year.
Historically, the value of property has increased over time. When the value of real estate increases, it is called appreciation. For example, in 1998, the average home in Denver cost about $150,000. Five years later, the average home in Denver cost about $240,000.*
Since then, we have seen the reverse as home values are dropping. Some experts will say that the prices are bottoming out now, making it a great time to buy. Buying when home values are low and expected to raise means that you could see a great return on the investment.
But, appreciation is certainly not a sure thing. I personally believe that home values will rise again, that real estate is cyclical, and history tends to repeat itself. But, no one knows when they will, or can say for certain that they will, so appreciation is where the hope comes in.
Interest paid on a residence is tax deductable. Depending on other deductions, interest rate, and income tax level, the amount of savings varies.
These are a few of the important elements to a real estate investment. If you are interested in buying a home, your exclusive buyer’s agent can discuss your investment in more detail. Find an Agent that specializes in your neighborhood.
* Data from Colorado Home Buyer’s Guide, by Vicky S. Porter written in 2005.