Owning a Home - the Investment of a Lifetime
When recently asked by the Nelson Daily News to contribute a weekly column I was initially concerned that there would not be enough to write about. That notion lasted about three hours until I had considered a seemingly endless supply of topics. So now where to begin. A column about real estate should start with the obvious. " Owning a Home - the Investment of a Lifetime."
If you expect to become wealthy from bank savings, dream on. The effects of inflation and income tax sabotages any potential real growth in the common savings account. Real estate, on the other hand, provides a good opportunity to accumulate wealth for the future. Almost everything else you buy today - automobiles, appliances, furniture - starts to depreciate once you buy it. But real estate has historically outperformed the rate of inflation.
Sure, during bad economic times, house prices may fluctuate, but most well-located properties will appreciate in value over the long term. And even though the house you find today may seem to have an outlandish price tag, the cost will likely be much higher in the future. You've heard it before: "I could have bought this house 10 years ago for half what it costs now." Where investment in real estate is concerned, it is never too late.
For most people, owning their own home is the single biggest investment of their lifetime. For many retirees, a paid-off home can mean a comfortable retirement. In Canada 63 per cent of all households own their own home according to the 1991 Canada Census. And with today's low mortgage rates, more and more home buyers are seizing the opportunity to enter the housing market.
Advantages of Owning a Home
For starters, owning your own home is a sound investment. Your property will most likely increase in value and you will be able to sell it for a profit. Your equity (the cash difference between the market value of your home and the amount you still owe on your mortgage) will grow as the value of your home grows thus making owning a home a steady and secure investment for you.
The surge in prices in North American real estate has been phenomenal. Inflation is not the only factor that has accounted for these increases. Other factors include the growing population, which requires housing and the limited supply of land, which results in an increase in the cost of land.
I don't mean to dwell on the past but I would gladly repay the person that bought my Granny's house on Stanley Street the $14,000 they paid in 1973.
A great time to buy a home is prior to or in the early stages of a housing boom since new home construction costs go up at these times and drive the prices of existing houses upwards.
Furthermore, in real estate, not only do you profit from your own savings but also from the borrowed money of others. Without leverage (the use of financing to allow a small amount of cash to purchase a large property investment), it is difficult to earn a reasonable return on your investment (not that many people can afford to buy a home today without the assistance of borrowed money).
For example, suppose you purchased a $100,000 house (hard to find but great as an example) with a 10 per cent down payment using 90% leverage ($90,000), and one year later, the value of the house increased by 10% to $110,000. Because it appreciated $10,000 and the investment was $10,000 the return on investment is 100%. On the other hand, if you purchased the same house for $100,000 cash, the return on the investment would only be 10%. Therefore, getting as much leverage as you can when purchasing real estate offers you a much greater yield on invested dollars.
Finally, there is also the pride of owning your own home which can give you and your family a feeling of security. Owning your own home offers you more privacy, usually more living space, and more flexibility to make alterations to the house and grounds.