What To Consider When Home Buying.
When it comes to when you want to buy a home there are several things to consider. If you are contemplating buying a home, you should know and review the advantages and disadvantages of this big step you are about to embark on. As a long term investment, it’s great to buy a home. It’s a great financial decision.
On an average, homeowners see roughly a 7% growth annually. In my opinion, buying a home is not a very good short-term investment because you’re going to pay anywhere from 2% to 5% of the purchase price, be sure to understand your closing costs. Consider a home investment as a long term asset that gains equity over a period of time.
The main reason why I believe home ownership is a good long term investment is that the longer you keep the asset (house) in good standing, you’re building equity. As you also pay off the mortgage on the property, your building equity as well. With less of your payment going solely on the interest of the loan but toward the actual price of the loan.
Some experts suggest habituating the home for at least 5 years to see an ROI. But if you’re going into real estate ownership to build wealth using this formula, there are a few things to consider while making this decision.
- Your Home is not an Asset
Assets are things which generate cash flow for you, while liabilities generate expenses, or negative cash flow. I’m sure you’ve heard that houses are assets because property values gradually appreciate over a period of time. In reality though, the only time your home will become an asset is when you decide to put the property up for sale.
Yes, you’re building equity by living in the home and paying the mortgage on the property. But, every month it’s something that takes money from you, not put money in it. Only when you can sell the property does it become an asset.
While owning the house, you have to pay for all the repairs needed to keep the home in good standing. So naturally, the longer you own the property, the more you’re going to spend on it for repairs. Not to mention the mortgage, HOA fees, renovations, general lawn care, utilities, home owner’s insurance and of course taxes. These are just some of the responsibilities associated with home ownership.
Here’s an interesting, realistic ideal situation regarding home ownership. Say you purchased a house 15 years ago for $200,000. You may be able to sell it today for $400,000. You’ve financed the whole amount with a 6% APR loan for 30 years. You will have spent $157,936 on interest and $57,902 on the principal of your loan for a total of $215,838. Plus, you still owe $142,098 to pay off the bank. Now look at the total when you add all of your other monthly expenses into the equation.
Even if you were able to sell the property for the purchase price. You would still be in the hole considering inflation and time value of your investment. The money you invested then doesn’t have the same purchasing power as it does fifteen years later. Your home is an asset, but your mortgage is the liability. Because a mortgage is debt, you’ll need to pay it off before your home is really considered an asset. Because you’re not paying for it monthly. The only expenses are the costs of operating the home and taxes.
Selling your home has advantages as well. Once being, a profit from your investment. Unfortunately, there’s a tax involved with selling you home. It’s called capital gains tax. Capital gains tax is a fee that you pay to the government when you are selling your home, or anything else of value, for more than you invested in it.
There are two types of capital gains tax associated with real estate; they’re called “Short-term gain and Long-term gains”. Short term gains are when you pay taxes on property owned for less than a year. These are generally higher because they are taxed at the same rate as ordinary income. Long term gains are when you hold the property longer than a year before deciding to sell a home. You’ll get a benefit of a reduced tax rate that usually doesn’t exceed 20%.
Buying a home is a great decision if you’re thinking long term. The longer you live in it, the more benefits you’ll be rewarded. For one, every time you pay your mortgage note, you’re building equity, which creates a higher value. Two, you’ll experience better tax benefits in the longer term whenever you decide to sell a home. In conclusion, think long term buying a home.