Why Buying a Home Can Be A Good $$ Investment

Buying a Home Can Be Very Good Investment

In today market, we are once again seeing homes appreciate in value yearly. Some suggest that even at 4 or 5% , it is not all that much. I disagree.

Let's assume you are purchasing a home of $500,000 with an annual appreciation of just 5%. Obviously some markets are appreciating more and others less. But for this example let's assume that you purchase this home with a 20% down payment. In this scenario, while the home might have appreciated only 5%, your investment earned approximately 25% interest in equity or $25,000. But wait, the interest on the loan has to be deducted from that amount to get any real sense of the actual gain on investment. With the cost of the purchase money at the current very low rates, deducting the costs of the annual interest you are paying on the $400,00 loan you needed to borrow for the purchase, you are looking at approximately * $14,400 interest and approximately $6700 in paid equity on a 30 year fully amortized loan in the first year. With that amount of interest decreasing each year. On a fixed rate loan of approx 3.7% APR, that also means that as the amount of interest being paid drops each year, the paid equity part of the payment increases. Deducting the cost of the interest paid on the loan from the earned equity on a 5% annual appreciation would then indicate approximately $10,000 yearly gain with a home appreciation of just 5%. The yearly appreciation will necessarily go up and down with the market. But over the course of the loan, the example is for a 5% annual appreciation.

If your net gain on the investment is approximately $10,000 for your $100,000 down payment you are netting approximately a 10% annual return on your initial investment. Even at half that amount or 5% annual return, buying a home is still a very good investment. Made even better before prices continue to increase and with very low financing rates. 

*These are rounded out numbers and loan rates and annual appreciation rates are assumed. To get an example of what your home purchase might actually look like, it is a good idea to sit down with your lender,CPA or tax adviser and work out this scenario for yourselves. I think you might be very surprised that your numbers might look even better than the example used above.

There is also this caveat that like all investments, there is always risk involved. For example, we saw the housing market crash in 2006 and there was a dramatic loss of equity for many homeowners. Even with that caveat, I strongly believe in the principle of real property ownership to create wealth. And a great place to start is with your first home purchase.

If you are Buying, Selling or Relocating to San Diego and  need help from a professional REALTOR®, give me a call or visit my San Diego Real Estate website and 
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William Johnson, Certified Residential Specialist  

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