Benefits of Home Ownership

The fact remains however that real estate is a sound investment over the long term, and often returns more than many other investments without significant risk. Unlike stock in a company that can go belly up, the land will be there long after we are gone. In part, the return is due to the appreciation in property values, but also because real estate is a leveraged investment and the yield of an investment in a home (principal residence) is boosted by the tax advantages of owning real estate.

In the video above, Ozzie Jurock is right about real estate being a leveraged investment, but his numbers are not quite right. The return on an investment needs to be figured over a period of a year, not the 20 year total return he uses. So, let's take a more realistic look at the returns on an investment in a home.

Typically, home buyers will put as much as 20% of a home's purchase price down, but the down payment can be 0% down for a VA buyer and 3% for an FHA buyer. Though the returns would be even more spectacular were we to look at the effect of leverage on the last two categories of buyers, the example would be a bit more complex or unrealistic for most home buyers.

Assuming then that a buyer puts 20% down on a home valued at $100,000, we are looking at an out-of-pocket investment of $20,000. Now, let's add closing costs of $1,800 to that, bringing the total initial investment to $21,800.

At this point, we need to consider an argument. Since the alternative to buying is renting, we should not count the mortgage payment as part of the investment. Everyone has to live somewhere, and it is an expense that more than balances out in a home owner's favor every April 15, as we will see.

During that five years, the home appreciated at a rate of 5% annually, and was sold for $127,500. Less the 6% broker's fee and another $2,000 in closing costs, and less the remaining balance on the loan ($73,652), the seller's net proceeds from the sale comes to $44,198. This is not the bottom line though.

The interest on a home owner's mortgage payments and property taxes are both tax deductible. In effect, the government is subsidizing the home purchase. You might equate this to a premium earned on the investment.

Over that five years, the buyer would be able to claim a deduction of approximately $5,000 in interest payments and another $2,000 in property taxes each year. Assuming the buyer earned $45,000 per year and was in the 17% tax bracket, that's an annual premium of $1,190 on the investment ($5,950 total over 5 years)—almost a 5.5% annual rate of return before the home is ever sold.

That's only the icing on the cake though, and the cake is exquisite.

The $5,950 in tax savings, combined with the net on the sale, $44,198, gives our hypothetical home owner an annual rate of return of 18.125% on the $21,800 invested. Investing in real estate is not for everyone, but the financial rewards of home ownership is something that nearly everyone can enjoy. They are not the only benefits though, nor are they necessarily the most important to some people. Home ownership also instills a sense of pride in many. It also affords many with a great deal more space for growing families than they could afford in rental payments, and the freedom to adapt their environment to suit their tastes.

In many markets, San Antonio for one, increases in property values are out-pacing income. Putting off buying a home should not be considered as an option. For most people it means lowering their expectations when they think they are ready, and foregoing the benefits until they do.