Is Buying A House A Good Investment?
A home is many things. It’s where you put down roots and connect with a community. It might be where you raise a family. It’s a retreat at the end of busy days. But is a home also a good financial investment?
It could be. Several factors, including how long you live in a home, how much you pay for it and where it’s located, influence how much of a profit you’ll earn when selling.
And sometimes a home’s value is outside your control: If your local housing market is struggling and prices are falling, you might not make a profit when you sell, no matter how well you take care of your property.
The key is buying a home because you love it and it’s a good fit for you and your budget. And if your home ends up being a good investment, that’s a bonus.
Why Is Buying A House An Investment?
Is buying a house an investment? It is, and not just of money. Owning a home is also an investment of time and energy. You’ll spend plenty of hours maintaining your lawn, repairing leaking roofs, shoring up sagging foundations and replacing broken-down appliances … or pay others to do so.
A house is also an emotional investment. For many, owning a home remains a key part of the American dream. Your home might become the place where you watch your children grow up. You might indulge in your creativity, decorating your home in your own style. And when you’ve had a long, stressful day, your home can become your refuge, the place where you recharge.
So, yes, buying a home is a huge financial investment, the biggest purchase most people make. But an investment in a home extends far beyond just the money you send to your mortgage lender each month.
Is A House A Good Investment?
Ideally, your home’s value will increase after you purchase it. The hope is that this appreciation will be enough, and that you pay down enough of your mortgage loan, that when you sell, you’ll earn a solid profit.
Like all investments, a profit is not guaranteed. Home values usually appreciate over time. But, again, this is not guaranteed. If you buy your home when real estate values in your community are high, your residence’s value might fall after you move in. If home values fall by enough, you might have to sell your home for less than what you paid for it.
That’s why when buying a home, you should also consider the intangible benefits of ownership. These include putting down roots in a strong community, living near highly ranked schools, having enough space for a growing family. Because of these benefits, most people don’t look at homes as only an investment. Even if you don’t make a big profit when you sell, you’ll still enjoy the benefits of owning a home.
Because buying a home is such a big monetary investment, though, it’s important to be financially stable before you apply for a mortgage. This includes saving for a down payment, building a strong credit score, budgeting for the costs of owning a home and building enough savings to act as a financial cushion should you suffer a financial emergency.
The bigger your down payment and the higher your credit score, the lower the interest rate lenders will charge you. This could save you hundreds of dollars in mortgage payments each month.
Budgeting is important, too. You want to make sure that your monthly mortgage payment isn’t so high that you struggle to pay it each month. You also need to save up money to pay for your loan’s closing costs – which usually run thousands of dollars – and cover the costs of owning a home, including maintenance and property taxes.
A budget can also tell you if you should buy a house now or wait. If you don’t have enough financial leeway in your budget, adding a big monthly mortgage payment is a mistake.
If you’re financially ready, though, buying a house can be a good investment if you plan on living in your property for a long enough time.
Length Of Occupancy
The longer you live in your home, the more likely you are to earn a solid profit when you sell. That’s because you’ll build home equity as you make your mortgage payments.
Equity is the difference between what you owe on your mortgage and what your home is currently worth. If you owe $100,000 and your home is worth $200,000, you have $100,000 in home equity.
You can build equity in two ways: You’ll do it over time by reducing the amount you owe on your mortgage. You’ll build additional equity on top of this if your home’s value increases while you own it.
You can borrow against your home equity in the form of home equity loans or home equity lines of credit. You can then use the money from these equity loans for anything you want, from renovating your outdated kitchen to paying for your children’s college tuition.
When you sell your home, the equity you have in it helps determine how much money you take with you after closing the sale. Say you sell your home for $250,000 and you owe $120,000 on your mortgage. After paying off what you owe on your mortgage, you’d have $130,000 left over.
Some of that money will be eaten away by the commission charged by your real estate agent and any closing costs you’ll have to pay, but the more equity you’ve built in your home, the more dollars you’ll leave with after closing your home sale.
Your home is more likely to turn into a good financial investment, then, if you stay in it longer. The longer you stay in your home, the more years you have to see its value appreciate. Historically, people who stay in their homes for at least 7 years tend to see their property rise in value.
The key to earning money from a home sale is to pay down your mortgage, build equity and hope that you’ve bought in a neighborhood in which your home’s value will rise after you purchase it.
Opportunity To Make Your House An Investment Property
You can also invest in real estate by renting your home out, using the rent you earn to either cover or help cover your monthly mortgage payment.
You can use this investment method to lower your costs of owning a property while you wait for it to increase in value. Once the home has increased in value by a high enough amount, you can sell for a profit. Those monthly rent payments will help reduce your monthly expenses while you wait for your property’s value to rise.
You might also hold onto an investment property for decades. Then, once you’ve paid off your mortgage, those monthly rent payments will generate additional cash flow.
There are challenges here, though. It can be difficult to find good tenants who pay their rent on time. You might struggle in some markets to find renters, meaning you’ll have to cover the mortgage payments on your investment with your own money only. You might also buy a home that doesn’t appreciate, meaning that your investment might eventually lose money.
What Makes A House Not A Good Investment?
While it is possible for a home to earn you a solid profit, either when you sell or when you rent it out, there are possible pitfalls. It’s not inexpensive to buy or maintain a home. If you spend too much, or if you buy the wrong home, you might struggle to earn a solid return on your real estate investment.
One of the big expenses of buying a home are the closing costs that lenders charge. These are charges levied by your lender and other third parties for the work they do in originating and closing your mortgage loan.
Closing costs can vary, but you can expect to pay 3% – 6% of your total loan amount. If you are buying a home that costs $150,000, you’ll typically pay $4,500 – $9,000 in closing costs.
You’ll have to factor in these costs when determining whether a home is a good investment. The higher your closing costs, the more home equity you’ll need to build to earn a profit on your real estate investment.
The Price Of Being A Homeowner
The costs of being a homeowner don’t end after buying your residence. It takes money to own and maintain a home, which can cut into the investment value of your property.
Property taxes: As a homeowner, you must pay property taxes each year. How much you pay will depend on where you live, as these taxes are higher in some states and lower in others. The Tax Foundation says that the average annual property tax bill for homeowners in the United States is $2,787.
Maintenance: Maintaining a home is not cheap. Home-improvement experts estimate that owners should expect to pay from 1% – 4% of their home's purchase price in annual preventative maintenance and repair costs. If your home cost $200,000, you can expect to pay $2,000 – $4,000 a year to maintain it.
Homeowners insurance: If you take out a mortgage loan, your lender will require that you pay for homeowners' insurance. This insurance protects you in case your home is damaged or destroyed or someone breaks into your residence and steals valuable items. The cost of this insurance varies depending on the age and size of your home, but the 2021 National Association of Insurance Commissioners report said that the average U.S. homeowner pays $1,249 a year in homeowners insurance.
Home Value Appreciation Isn’t Always Guaranteed
Another challenge with investing in real estate is that there’s no guarantee that the home you purchase will see the kind of price appreciation that you want.
It’s important to study real estate market trends before buying a home if your goal is to purchase real estate as an investment. By studying trends, you can determine if home values have been on the rise in a neighborhood and for how long.
The Bottom Line
Should you consider the home you plan to buy an investment? Maybe. But you might not see much profit when selling if you pay too much for your residence upfront, move too early or aren’t ready for the responsibilities of owning a home.
If you’ve studied your local housing market, have a sizable amount of savings and are ready to hold onto your new home for several years, your investment in real estate could pay off.
Ready to buy a home? Start by connecting with a real estate agent.