Seeing houses as an investment rather than just somewhere to live.
Owning a home has the appeal as being a place to call your own, raise your family, share with your friends, and feel safe and secure. Although, your home can be more than an address; it can be one of the largest investments you make.
When you look at appreciation and principal reduction with leverage, it's possible to build a case that a home is definitely an investment:
Most mortgages apply a portion of home payments toward the principal amount owed in order to pay off the loan by the end of the term. This acts like a forced savings for the homeowner because as the loan is reduced, the equity grows which in turn increases their net worth.
The other contributor to equity is appreciation. While you own a home and take on home improvement projects, the value of your home often increases. Most homeowners don't realize the increase in value until they sell the home or do a cash-out refinance, but the increase is real and part of their equity.
The table on the picture above shows that even a modest amount of appreciation combined with the amortization of a loan can cause a substantial rate of return on the down payment and closing costs. This example assumes a 3% acquisition costs on the home with a 4.5% mortgage rate and the resulting equity at the end of five years. The larger down payments lower the yield because it decreases the amount of borrowed funds.
If a borrower buys a home that appreciates at 2% a year with a 3.5% down payment on a FHA loan for 30 years, the down payment and acquisition cost factored by the equity will produce a 28% return on investment each year during the five year period.
You may also considering investing in rental properties. You can purchase a house using leverage to increase potential return; leverage is the ability to control a larger asset with a smaller amount of cash using borrowed funds. It has been described as using other people's money to increase your yield and it applies to homeowners and investors alike.
Owning rental properties allows you to hustle for greater returns in a business where demand is constant and risk is low, and where you get to directly manage your investment and see where your money is going. Additionally, once your property is rental-ready, you can hand over the reins to a company like American Realty who handle all aspects of maintaining and filling your rental home with pre-approved tenants.
A home can be many things including an investment. You can use this Rent vs. Own calculator to see the effect that appreciation and principal reduction can have on a home purchase in your price range. I have experience with being a home owner, seller and rental property owner, and if you have any questions, I'm just a phone call away at (616) 334-3113.