Homeownership as an Investment

Homeownership as an Investment

  • 07/5/23

Homeownership as an Investment: Evaluating Today's Rental and Home Ownership Markets

Deciding between renting and buying a property involves considering various factors, and it goes beyond simply comparing current rent to the initial monthly cost of owning a home. The fundamental aspect of this decision revolves around the total cost over time and how it contributes to building household wealth. To make an informed choice, it is important to understand the dynamics at play in today's rental and home ownership markets.

Historically, long-term, fixed-rate loans, the ability to refinance, and home-price appreciation have been the biggest game-changers in the rent vs. buy calculation. These factors can significantly impact the financial outcome of homeownership. However, buying a home is not solely a financial decision but also combines personal considerations such as quality of life, life planning, and priorities. Ultimately, it would be best to weigh these factors according to your circumstances and projection of the future.

Comparing the exact financials of renting vs. buying over time can be challenging due to the need to predict complex and often volatile economic factors. These factors include rental-cost appreciation, potential returns on alternative investments if the downpayment is not used for buying a home, total home price appreciation over the ownership period, inflation, and mortgage interest rates both at the time of purchase and in the future.

While rent vs. buy calculators are available, it's important to note that these calculations rely on making assumptions about future trends. Recent years have shown that economic factors can change quickly and dramatically, making it challenging to predict the future accurately. Therefore, consulting qualified financial, mortgage, and real estate advisors is highly recommended to gain valuable insights tailored to your situation.

Considering today's rental and home ownership markets, reviewing current economic and market conditions is crucial. Understanding trends in real estate appreciation rates over the past 10 or 20 years can be useful, but remember that the future may not replicate the past. Economic assumptions in rent vs. buy calculators are open to debate and can be adjusted as you run different scenarios. Even small changes in assumptions can lead to substantially different results.

When assessing homeownership as an investment, it's worth noting several reasons why it has often been a good investment historically:

  1. Long-term home-price appreciation trends: From January 2000 to December 2022, national house prices appreciated approximately 197%, surpassing consumer-price inflation rates. However, appreciation rates vary between different markets and periods.

  2. Leverage: Financing a substantial portion of the purchase price can amplify returns on cash down-payments if property values increase.

  3. Stable mortgage payments: With a fixed-rate mortgage, a major portion of housing costs remains stable throughout the loan term, while rents typically increase significantly over time. Refinancing into a lower-interest fixed-rate loan can further enhance the financial benefit.

  4. Forced savings effect: Monthly mortgage payments gradually increase home equity as the loan is paid down, resulting in a significant financial asset.

  5. Potential tax-deductibility and exclusions on certain homeownership costs and capital gains.

  6. The option to convert your home into a rental property in the future while maintaining a long-term, fixed-rate loan.

It's important to approach the home-buying process cautiously and consider additional factors. Ensure that the home you purchase meets your current housing requirements at an affordable monthly cost. Maintain a reserve fund to handle unexpected developments. Longer-term ownership is generally safer as an investment while buying and selling over shorter periods carry greater risks and different amortization costs.

Consider refinancing into new, fixed-rate loans when significantly lower rates align with your expected ownership timeline. However, avoiding using your home as an ATM for non-essential expenses is advisable during times of appreciation.

Beyond financial considerations, homeownership offers other benefits. Reach out to a team member to discuss your options as a buyer in today's market.

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