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The Best Investment
As a fairly general rule, homes appreciate about five percent a year. Some years will be more, some less. The figure will vary from neighborhood to neighborhood, and region to region.
Five percent may not seem like that much at first. Stocks (at times) appreciate much more, and you could earn over six percent with the safest investment of all, treasury bonds.
But take a second look…
Presumably, if you bought a $200,000 house, you did not pay cash for the home. You got a mortgage too. Suppose you put as much as twenty percent down – that would be an investment of $40,000. Your annual “return on investment” would be a whopping twenty five percent.
Of course, you are making mortgage payments and paying property taxes, along with a couple of other costs.
Your rate of return when buying a home is higher than most any other investment you could make
Stable Monthly Housing Costs
When you rent a place to live, you can certainly expect your rent to increase each year, or even more often. If you get a fixed rate mortgage when you buy a home, you have the same monthly payment amount for thirty years. Even if you get an adjustable rate mortgage, your payment will stay within a certain range for the entire life of the mortgage and interest rates aren’t as volatile now as they were in the late seventies and early eighties.
Imagine how much rent might be ten, fifteen or even thirty years from now? Which makes more sense?
Forced Savings
Some people are just not good at saving money and a house is an automatic savings account. You accumulate savings in two ways. Every month, a portion of your payment goes toward the principal. Admittedly, in the early years of the mortgage, this is not much. Over time, however, it accelerates.
Second, your home appreciates. Average appreciation on a home is approximately five percent, though it will vary from year to year, and in some years may even depreciate. Over time, history has shown that owning a home is one of the very best financial investments.
Freedom & Individualism
When you rent, you are normally limited on what you can do to improve your home. You have to get permission to make certain types of improvements. Nor does it make sense to spend thousands of dollars painting, putting in carpet, tile or window coverings when the main person who benefits is the landlord and not you.
Since your landlord wants to keep his expenses to a minimum, he or she will probably not be spending much to improve the place either.
When you own a home, however, you can do pretty much whatever you want. You get the benefits of any improvements you make, plus you get to live in an environment you have created.
There are two related factors that make home ownership financially attractive in comparison to other investments: “leverage” and “capital gains exemption”.
When a relatively small amount of your money controls a much larger asset, it is called leverage. For 25%, 5% or as little as 0% of a home’s purchase price, your hard-earned cash can be used to acquire a house worth hundreds of thousands of dollars. The more your money is leveraged in this way, the greater the financial return on your initial investment (down payment) as the value of your house increases. Few other major investments can be purchased with as little as 0 – 25% of your own money.
The increase in a home’s value (and almost any other type of investment) is called a capital gain. When the value of most investments such as stocks or term deposits increases, you pay tax on the capital gain. However, the government allows Canadian taxpayers to be exempted from paying capital gains tax when their principal residence increases in value.
If you live in a home that increases in value by $50,000 over 10 years, you pay no tax on the $50,000 capital gain. By contrast, you would owe thousands of dollars in tax for the same $50,000 capital gain in the stock market or other type of investment.
So, not only can a 0 – 25% down payment be used to leverage your home’s purchase, but the government also lets you keep more of what your investment earns.
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