Is investing in a home a secure investment? Not always, no investment is totally safe, but if you purchase within close proximity to a developing city or major a metropolitan area, the chances are greatly in your favor that over time your house will appreciate in value. The current downturn in real estate values has severely damaged the financial well being of many Americans and consequently their confidence in real estate as an investment vehicle. We’ve had these downturns before but not as severe as the present one. There’s absolutely not any point in belaboring the numerous mistakes that led to the debacle but hopefully they won’t be replicated. Is this a great time to buy? There are differing opinions but to some degree, it depends upon where you live. Homes in certain locations have recently started to show increased sales costs while other places may be years away from any substantial recovery. As they say “timing is everything”. In spite of all the downturns, appreciation in real estate has been considerable over time. Although there are lots of financial contributors, appreciation in home values is governed by two principal factors; inflation and supply and demand.
Inflation – It only takes a good look at your checkbook to understand that the price of products and services continues to innovate. As the expense of labor and materials rises, so does the cost of building a home. Only the various manufactured products which are included in the construction of a house seem endless.
Supply and demand – In a developing market, the demand for conveniently situated housing is very likely to exceed the supply. Our population continues to grow but we can’t create more land on which to build. Because of this, competition for properties with reasonable access to employment centers, shopping, and entertainment drive home prices to higher levels.
Over time, as you see the value of your home increase through appreciation, the equity in your house is compounding because you’re simultaneously lowering your mortgage balance. As time goes by, you might be amazed by how much this forced savings account has increased in value. Lets’ proceed to the immediate benefits of purchasing versus continuing to lease.
There are lots of benefits to investing in real estate in comparison to other traditional investments. To begin with, you’re buying an appreciating asset using other people’s money. Leveraging the actual estate investment by means of a mortgage provides a maximum “return on the invested dollar”. Borrowing money to invest in stocks might not be logical because of the possibility of carrying a whole loss. Your house and the land it’s built on will always have value consequently there’s always the prospect of regaining lost equity. For instance, Lets’ say you fund 95% of the cost with an FHA insured mortgage. With a down payment of 5 percent and assuming closing prices of 2% on a house purchase of $250,000, your entire cash first investment will be 7 percent or $17,500. If your house appreciates 6 percent ($15,000), you realize that an 86% return on your investment. If your house appreciates 6 percent during the next year, the profit will be on $265,000 or $15,900 raising the value to $280,900. To put it differently, your admiration is compounding. The return on your first investment following the next year could be a whopping 176%.
Every month you make a payment toward the principal and interest but if you continue to lease, you’re contributing a similar amount to your landlord’s future. The clincher for most homebuyers is that unlike other investments, mortgage interest, taxes, and certain closing costs are tax-deductible if the property is your main residence. The above example requires a monthly payment in the area of $2000.00 but is reduced to $1450.00 following your interest and tax deduction if you’re in the 28% tax bracket. If cash flow is a problem and you’re a salaried employee, you can raise your take-home pay by asserting additional exemptions. This is a compelling motivation to purchase as opposed to rent but be ready for the”long haul”. In most places and in the current real estate environment, 6 percent appreciation might not be an immediate reality but even considering that the downturns, inflation, and demand have fostered appreciation rates well over 6 percent on well-located properties in metropolitan areas.
Homeownership isn’t an exclusive club. You may be surprised by how easy it’s to get in and just how cheap it can be. Rents are nearly certain to escalate in the future but when purchasing a home financed with a 30 year fixed rate loan, payments are steady. Only the actual estate tax and homeowner insurance may increase. Interest rates are at their lowest level in forty years. Low-interest rates together with reasonable property values have generated an exceptionally fluid purchasing environment making owning a home more affordable than ever before.