Why is Your Home the Best Investment?

This article is a guest blogger submission written by ‘frugal’ and first published at 1stMillionAt33. If you like what you see, why not subscribe to his RSS feed?

Well, I should really qualify the title of this to specify not buying the home in a bubble. Whether our current housing market is a bubble or not is debatable. Under normal circumstances however, buying a home is usually your best investment. And the reason is inflation. Historically, housing price tracks inflation fairly well. Since inflation is seldom zero, or negative, buying a home is a financial transaction that has two very big advantages, assuming that you acquire the home with some amount of mortgage.

1. Leverage: A leveraged transaction means that your return (or loss) is magnified by the amount of leverage that you use. In a leveraged transaction, you use a lower amount of cash to take control of a much bigger asset with debt. If the asset goes up in value, then you are rewarded with extra returns.

2. Inflation: Your home value is almost guaranteed to go up in value in a very long term perspective (I’m talking about 10+ years) because of inflation. Since you repay your mortgage debt by cash gradually, the debt burden actually goes down as your wages experience inflationary increases. $100K owed now will be less burdensome 10 years later, even if you have not paid down a cent in principal. Inflation is the best for debtors, but worst for creditors.

3. Tax: At least in the United States, federal tax laws clearly have a preferential treatment for homeowners. You can deduct mortgage interest which is also AMT-deductible. You can also (possibly) deduct the use of your home as a home office. Property taxes are deductible, too. And the best thing is that capital gains on the home are usually tax-free under $250K for singles, and $500K for couples.

Thus, real estate is often touted as a good investment because it is really true, with the following assumptions:

1. You didn’t buy it in a bubble.

2. You have sufficient positive cash flow to carry you through enough years for inflation to increase your return.

3. You can take good care of the home or property.

I have constructed a Rent vs Buy calculator for you to experiment the outcomes of the two choices.

Published on July 3rd, 2006 - Leave a Comment
Filed under: Real Estate
email this article email this article - bookmark it

About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

Related articles...

» Leverage: Home Appreciation vs. Investment Perfomance
» Playing the Percentages: The Effect of Gains and Losses
» From the Archives (July 1st – July 7th)
» Weekly Roundup – Broken Xbox Edition
» Weekly Roundup – Combining Miles Edition
» Save Energy, Cut Your Taxes
» Buying a Foreclosed Home
» More Thoughts on Paying Off Your Mortgage Early

Was this article useful? Please sign up to receive our content via e-mail:

You will receive only the daily updates, and can unsubscribe at anytime.

Comments (scroll down to add your own):

None so far - share your thoughts and be the first!

Leave a comment

Subscribe without commenting

  1. < $10,000
 

Disclaimer...

The terms of third-party offers referenced on this website are subject to change without notice. While we strive to maintain timely and accurate information, offer details may be out of date. Visitors should thus verify the terms of any such offers prior to participating in them. Please see our terms of service for additional details.