There's a phrase that's often thrown around that states "your home is your best investment". While owning property can certainly help you build wealth, your primary residence (aka the one you live in) doesn't produce additional cash flow so can it be considered an "investment"?
Yes and no. Yes, because you can see price appreciation of your property over time, which will be nice should you wish to sell and move on some day. No, because you're paying to live there and not producing any income from the property (unless you're house-hacking, but that's a separate topic).
In this post we aren't going to cover whether your primary residence is a good investment or not. Instead we're going to look at 5 benefits - some financial and some non-financial - of owning your own home.
1. It's your home! No landlord to kick you out
Renting a home can certainly have it's advantages, like the freedom to move around when you want and not being tied to one house through a mortgage. However, when you rent you will have a lease term which states how long you've committed to pay for the place you're in. Most commonly, the lease term will be 12 months. What happens after the 12 months is 100% up to the landlord and they could choose not to renew your lease even if you wish to stay there for longer.
This can be a big stress for a lot of people who are seeking a bit of stability in the place they're living, and they'd prefer to have full control over where their head hits the pillow every night.
When you purchase your own home, the thought of a landlord kicking you out disappears because you are the landlord! As long as you don't default on the mortgage repayments, you have the luxury of staying in the house for as long as you wish.
2. You build equity
Hands down, the number one argument against renting is that you aren't building equity in the place you're living in. For some, this is the only reason they prefer to buy rather than rent. But what exactly does "building equity" even mean?
Your home equity is the portion of your home that you own, calculated by subtracting your mortgage balance from the home’s market value.
So if your home is worth $500k and you owe $400k on the mortgage, your equity would be $500k - $400k, which equals $100k.
As you pay down your mortgage you are essentially "building equity" because you are decreasing the amount you owe. When you're renting you can't do this because you don't own the property and therefore you don't own its value.
There is another way to build equity in your home, and that is through price appreciation. Price appreciation simply means the value of your house is trending up over time. Price depreciation -while not common - is the exact opposite, where the value of your home decreases over time. Not a good situation to be in.
Say your $500k home rises to a market value of $600k over 3 years and your mortgage is at $400k, you would have $200k in equity.
So if your house appreciates over time and you continue to pay down the mortgage, you will be building equity both ways.
This can be beneficial should you wish to sell and move on at some point, as it could mean you'll sell the home for more than you've paid for it. The sale price less the total repayments you've made and selling costs could result in a profit for you. Just remember that total payments needs to include your mortgage, insurances, maintenance, renovations, property taxes or any other cost you've incurred due to living there.
Where this can also be useful is if you’re looking to take out a home equity loan or line of credit. Generally, the more equity you have, the more money you can borrow. Usually up to 80% of the loan value, known as LVR (Loan to Value Ratio).
One final point on equity to consider: if you never sell or borrow against your home, equity doesn't really mean much. However, if you live in your home forever and leave it to your kids or grandkids, they may choose to sell it and cash in on all that unused equity that's built up over time.
3. Your home is a stable place to raise a family
How many of you have rented a place before and crept around on eggshells because you were afraid of scuffing the wall with a dirty boot, or had no art hanging in the house because you weren't allowed to put any hooks on the wall?
I know that feeling and it can be especially daunting if you have little rug rats flying around the house. Those terrors wreck everything!
As kids grow, the house grows with it. Figuratively of course. The toddler outgrows their crib and soon it's time to repaint the room to reflect their current stage in life. The teenager decides to take over the second bathroom all to themselves and before you know it, the home has several years of memories embedded in the walls, most of which you'll never forget.
If you own your home, those little terrors can treat it as their own, and so can you, because it's yours. Homes are where memories are made and often you will have a special connection to your childhood home, for various reasons. Having that stability and familiarity is often part of the reason why that connection exists.
4. You can do anything you want with your own home
So you want to knock down a wall or remodel a bathroom? Go for it. You have free reign to make it what you want. Just don't pummel that load bearing wall in the kitchen or your house will collapse in front of you.
Jokes aside, this is why a lot of people buy a home. To make it their own. You can repaint every wall or extend the patio for a killer entertainment area. The options are limited only by your imagination, and your budget of course.
5. Owning your home can have some tax benefits
It's well known that if you're a property investor, there are some pretty good tax deductions you can claim. To a lesser extent there are still tax benefits even if you're an owner-occupier. This will differ depending on which country you live in so it's best to check your local tax rules for clarity on what tax benefits are available.
If you have a home office set up and are using that space to run part or all of a business, you could be able to claim a tax deduction for the costs of running that business. Costs such as electricity, insurance, maintenance costs and even mortgage interest could be claimed as a deduction. Best to check with your accountant for the specifics for your situation though.
Got a spare room you're not using? Rent it out! When you rent out a room you could potentially claim the same tax deductions as a property investor. In Australia, the tax law treats your rented room the same way it would any investment property. How much you would be able to claim is calculated on the floor space of the rental room compared to the property's floor space as a whole. It's worth noting that you can only claim for the periods in which the room is rented though.
The Wrap Up
There is always going to be a heated debate between those who prefer to buy the place they live in, and those who prefer to rent. Both sides have valid points of view and there is no "one-size-fits-all" solution. For some, renting will make more sense. For others, buying will be the better choice for their situation.
Regardless of which option you choose, there are pros and cons of both. When it comes to buying a home to live in, there are the benefits listed here today and undoubtedly plenty more. So next time someone asks you what are some of the advantages to owning a home you live in, you'll be more than ready to fire 5 things their way to consider.
Blake - FIRE with a family