How Home Ownership Saves Money
***This post contains information pertaining to tax law and the US Tax code. We are not CPAs and this is not tax advice, but merely information deemed accurate to the best of our knowledge based on tax codes as of the date of original publication - May 16, 2017 --- for tax info, always consult a tax professional***
Many a millionaire will offer advice on becoming a millionaire, and many a millionaire's advice will start with "buy real estate". At face value, that's a pretty basic phrase. Anyone who "bought real estate" in 2005-2006 might disagree with that assessment, as the investment didn't pan out so well. My advice for anyone considering buying a home and considering a home as anything aside from a place to rest their head, is to "buy real estate if...".
If you are familiar with local markets, schools, economies, and are networked with contractors, real estate professionals, and you have a book of knowledge that will help you navigate the marketplace, then buy real estate. Rental properties can help accumulate a ton of wealth through both direct rental income, and property appreciation.
If you're buying something long term, to raise children, retire, or just a home you love enough to call it 'forever', then buy real estate -- even those folks who bought in 2005-2006 have mostly gained back their lost equity, and along the way have saved money through tax deductions that renters don't have the luxury of writing off.
If you have roots and can see yourself living in an area for a long period of time, but real estate. Buying isn't always the best option for everyone, but for most people it's a move that will save and earn them money.
How does it work?
To understand how real estate ownership can build wealth and help save money, it's important to remember that buying a home is both a very real venture, and a symbolic one. To encourage the American dream, the American tax code is very friendly to home owners. Just buying a home in itself is a tax break, as some of the up front costs such as real estate taxes, prepaid interest, and some others are deductible for many people*. Those real estate taxes will be deductible year after year of ownership, amounting to large sums of money.
If a mortgage is used to purchase, the interest is often deductible, and can add up to a huge annual savings when compared to renting. For example, a $200,000 30-year mortgage at 5% rate equals an interest payout of a little over $10,000 the first year. That's a huge deduction when compared for the comparable deductions for renters - which is $0.
For buyers short on a down payment (no, you DO NOT need 20% down to own a home), PMI payments are also deductible for many people. So while it's an addition to a monthly payment, tax time brings about the one bright side for PMI, the deduction.
And one of the biggest ways home ownership is the path to wealth is the appreciation of home values. That is, the longer you own a home, the more it will be worth. While the 2008 housing crisis put a dent in this theory, long term home ownership has still proven to be a tremendous way to build wealth, even in slowly growing markets of 2-3% appreciation.
Over the years, coupling appreciation with tax savings gives home owners a monetary savings that renting a living space just can't compete with. That doesn't mean buying a home is better than renting, because there are many situations where renting is safer and makes more sense. However, as a tool for building wealth, buying, owning, and deducting year after year many times adds up to a huge financial advantage for home ownership.
This article touches on just the basics, and does not dive into financial perks and opportunities in real estate investing, property management, or other tremendous financial benefits that the real estate market can offer (these can fill books). If you have any questions, or would like to see how much owning a home costs (hint: it's cheaper than you think!), feel free to give us a call or reach out to us using our "ask an expert" page for a quick reply!