Why Is Your Home The Best Investment
Well, I should really qualify the title of this, by 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.
- 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 less amount of cash to take control of a much bigger amount of asset with debt. If the asset goes up in value, then you are rewarded with extra returns.
- 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 wage gets inflationary increase. $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.
- 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. Possibly you can deduct your usage of home as home office. The property tax is deductible too. And the best thing is that the capital gain on the home is usually tax-free under $250K for singles, and $500K for couples.
That is why real estate is often touted as a good investment because it is really true, with the following assumptions:
- You didn’t buy it in a bubble.
- You have sufficient positive cash flow to carry you through enough years for inflation to increase your return.
- 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.