Your Home: An Investment with Benefits
By Chris Crock, MBA, PFP

My wife and I bought our first home in Norcross 9 ½ years ago. There were many factors that went into the decision to buy instead of lease a home or apartment. As a young couple, we primarily felt that buying a home was the best way to plant our roots. We had always heard that buying a home was a great long term investment, but weren’t really sure exactly why. With a little time and perspective under my belt, I now know the details of why the American Dream of homeownership is truly an investment with benefits.

Leveraged Investment

There are different schools of thought on whether the best financial plan would include paying off a mortgage or leveraging this large asset with a mortgage. With literally hundreds of mortgage products available for consumers in the marketplace, individuals can choose to buy a home and pay cash or pay little to no money at closing. Using the leverage of using the mortgage lender’s money to buy the home can create a powerful investment tool for consumers.

To put the power of a leveraged investment in perspective, consider the following example. A qualified borrower buys a $500,000 home in Duluth and only puts 10% ($50,000) down at closing. Assuming a 6% rate of appreciation, the home would be worth $555,700 in just 2 years. A mortgage in this scenario accomplishes several things. For the borrower that couldn’t pay cash, it allows them to own a $500,000 home and take full advantage of the appreciation of that property. A borrower that could pay cash or make a much larger down payment is able to invest the money that they didn’t put in the home into other investments.

Inflation Hedge

One of the biggest retirement killers is a silent slow drain on your assets called inflation. We have all heard it before….A dollar today will not have the same buying power as the same dollar in the future. When developing a financial plan to meet retirement goals, inflation is one of those big unknown variables that makes a big difference in how much money you will have to save to meet those goals. Most investment advisors would consider a home to be a great inflation hedge. An inflation hedge is an investment that will increase in value at a faster rate during periods of high inflation and at lower rates during low inflationary periods. This phenomenon is why it isn’t too uncommon to have people sell their home for 10 times what they paid for it after living there for 30 years. A large portion of that gain is due to the home riding the inflation wave over time. A home’s natural inflation hedge benefit is one of the main advantages of owning versus leasing a home.

Tax Benefits

Under the current tax code, the government has the ability to influence tax payers’ spending decisions. Some of the greatest tax breaks are those regarding homeownership. Policy makers know that consumers drive our economy and that homeownership makes up a large percentage of consumer spending. One of the greatest tax breaks is the capital gains exemption up to $250,000 for individual filers and up to $500,000 for those who are married. This exemption is available for a home that was owned and used as a primary residence for at least two of the past five years. Another great tax deduction for people that qualify is the mortgage interest deduction. For example, a person that has paid $15,000 in mortgage interest and is in the 25% tax bracket would save approximately $3,750 in income tax. To throw in an added bonus, there are deductions for origination and discount points paid on your mortgage in the year that you obtain the loan. Be sure to check with your CPA or financial advisor regarding your specific scenario and eligibility for these tax benefits.

Personal Pride and Enjoyment

A home is more than just a financial investment. We often have strong emotional ties to the place where we raise our families and create memories. It is hard to get as much enjoyment out of a quarterly investment portfolio statement as you can out of your own home. Whether you buy a 40 year old fixer upper with charm or a brand new home with all the modern conveniences, there is a sense of pride that comes with calling it your own.

I always recommend that you seek advice from the appropriate professional advisor before making big financial decisions. With any investment, there is risk. With risk, there is an opportunity for reward. I believe that if you don’t take calculated risks in life, then you are taking a big one!