My very Uncommon Opinion: buying a house is a good investment
These days, it seems to be all the rage to tell people to “never buy a house.” Folks like Grant Cardone and James Altucher argue that buying a home eats up too much capital and never allows for a good return on investment. Well, to put this bluntly: They’re wrong, and I have the facts to prove it.
How much money are you really putting down?
If you’re an average millennial with decent credit, you’ll usually only be putting down 10% when you purchase your first home – far from some online arguments that assume a 20% to 40% down payment when arguing against home buying. That’s a big difference – $30,000 vs. up to $120,000 for a $300,000 home. Don’t rely on inaccurate assumptions; estimate what your down payment would be before deciding that buying isn’t for you.
People are overbuying on their first (or second, or third) house
When most people look at a mortgage offer from a bank, they purchase the most expensive house the bank will allow them to afford, which is a terrible idea. If a bank extends someone the credit to buy a $500,000 house, but a $300,000 home fits most of their needs, the less expensive home is a better financial and lifestyle choice. Remember, overextending yourself means you are actually buying a mortgage, not a house.
Many of the arguments against buying overlook making a sensible purchase, and use examples in which individuals are buying the most expensive home they can get their hands on. That seriously sways the numbers in favor of renting. Just because others are doing this doesn’t mean you have to – get a less expensive home so you can save and place more money into investment vehicles with a higher rate of return, or spend the difference on things you are passionate about.
Money spent on upgrading your lifestyle or yourself, such as traveling the world or finally firing up that great business idea, are a far better investment than a fancy address. Plus, you can always upgrade later, if you want.
Keep in mind, you have to live somewhere
One of the traditional arguments for buying a home is that you’re spending money on rent anyway, so you might as well invest it in something. This is still correct. As long as you make smart choices when you purchase a home, it’s better to invest in your own property rather than pay a landlord.
Think about it this way – you’re going to lose a lot of money renting over the years. If you lose less money over time by owning a house, you’ve made a great financial choice.
Homes nearly always appreciate in value, especially with maintenance and ‘smart’ improvements
If you let your home deteriorate and don’t maintain it, it’s a no-brainer that its value will decrease over time. However, if you maintain your home by investing in improvements that can increase its resale value, it’s likely to significantly increase in value over time.
Examples of improvements with a high rate of return include installing high-quality floors, maintaining bathrooms, and upgrading your home’s kitchen. Unfortunately, improvements to the backyard such as landscaping have low ROI, so you should avoid spending too much on them if you’re trying to maximize your home’s value.
Will I be stuck in my house forever?
Unlike what some folks say, buying a home doesn't chain you to one address for life. Unless you get really unlucky and purchase a place for well over its market value, you’re not going to get stuck for long – just sell the house and move into another. If you can’t, simply rent out your property and rent another somewhere else while you sort things out and wait for the original home’s value to increase.
Is this a good time to buy?
The housing crash of 2008 is still in recent memory and it has many first-time home buyers scared that they could overpay, only to see their residence quickly crash in value. So, to determine whether the housing market is overvalued (and thus headed for a bust) or if it still has a lot of room for stable growth, check out an analysis done by The Economist for a quick snapshot.
The magazine’s data team looked at two numbers: the ratio of price to income and price to rent, and found that houses in most American cities appear to be at fair value when compared to long-term averages. Some cities, however, like San Francisco, have homes that are extremely expensive compared to average incomes (meaning they could be destined for a fast fall), so it’s a good idea to dig into a city’s price-to-income and price-to-rent ratios before buying property there.
Profiting off of your home equity using “The Smith Manoeuvre” (for Canadian homeowners)
In the U.S., home mortgage payments are tax deductible (as long as it’s a primary residence), but in Canada, homeowners aren’t quite so lucky. However, Canadians can take out a home equity loan in order to invest money in income-producing entities (like dividend-paying stocks or rental property), and use the tax return to further pay down their mortgages.
It’s called the Smith Manoeuvre, and while it sounds complex, it’s a fantastic way for many homeowners to develop a sizeable investment portfolio and pay their mortgage at the same time. If you’re considering doing this, you should be confident in your investing skills – and be prepared with a Plan B if you need to move and the market goes down.
The bottom line: You should probably own a house
Should everyone go out right now and buy a house? Well, maybe not everyone. But if you're like most young people who earn a steady income and want to invest in their future, it’s absolutely the right move. If you still don’t believe me, run the numbers yourself with this calculator. It takes into account rent prices, mortgage rates, inflation levels, taxes, and variety of other factors to compare the long-term costs of renting vs. buying a residence.