A Home As An Investment

A Home As An Investment

uying a house is a good investment for most people. It offers decent returns at moderate risk, and has the added feature of providing shelter. But not every house, and not for everybody.

Building equity in a house
Your investment in a house is sometimes called your equity, to distinguish it from the "rest" of the house which belongs to the lender until you pay off your mortgage.

You build equity in a house when:

You make a down payment
You pay off some of the principal of the mortgage
The property appreciates in value

Down payment
When you first buy a house, your equity is equal to the amount of your down payment. This is the amount of the house that you bought.

Example


$100,000		selling price
-	20,000	down payment

$20,000		or 20% equity.

Mortgage payments and equity
As a home owner, you pay off your mortgage slowly. Each month you make a payment which includes both principal and interest. And the check you send in repays a bit of both.

The monthly interest charge is the cost of the loan for that month. The principal is what actually repays the loan and increases your equity. Unfortunately, most of your payments for the first 10+ years will go towards paying off the interest.

Appreciation
If your house increases in value, your equity rises as well, since the mortgage is now a smaller percentage of the home's worth. So, if your $100,000 house appreciates by 5 percent and is now worth $105,000 you would now have $25,000, or 23.8%, in equity.

Appreciation isn't guaranteed (in real estate or in life), but if you choose your property carefully, you will usually see an increase in value over time. Click here for more details.

A Long term investment
Buying a home is a relatively long term investment since you make a large up-front cost and it can take years to get a good return. For example, the transaction fees of buying and selling a property can add up to roughly 10 percent of the selling price.

Even if we can save you money with Guaranty's discounted transactions, it will still cost 7-8 percent. It takes a lot of appreciation to make up for these transaction costs.

Liquidity
Unlike a stock, selling a house takes a bit more than a phone call. And it takes at least weeks, and sometimes months, to complete the deal. If you need to access the value of your assets quickly, real estate is not the right investment for you.

Capital gains taxes
The profits you make on a home are tax deductible, or deferrable, under certain circumstances. For many people, this is a prime motivation for making the investment. Click here for more details.