Is Buying A House A Good Investment? Risks And Benefits To Consider

A home is many things: It’s where you put down roots and connect with a community. It might be where you raise a family. It’s a retreat at the end of busy days. But is buying a home a good investment?

The short answer is: it depends. The long answer covering every factor to consider is below.

Buying a house can be a good investment that provides economic benefits and can help homeowners build net worth significantly compared to renters. By owning and putting money into this valuable asset, you can build equity for accessible credit and generate long-term savings.

Owning a home is also an investment of time and energy since any issue that arises requires your personal attention or additional funds to pay an expert to handle it. It is best to commit the time before buying to research when, where and how to buy a home that can provide the best return on investment possible.

There are several incentives that make buying a house worth the investment. 

You Can Save Money By Avoiding Rent

While renting a house requires less involvement than homeownership, there are some significant opportunity costs of renting. With each rental payment, you maintain the right to live in your house, but you miss out on the opportunity to build equity in your home. Rent prices are also less predictable than a fixed-rate mortgage since you don’t have control over whether your rent rises after your lease ends. If you get a fixed-rate mortgage, you can be confident that your mortgage payment will remain constant for the life of your loan.

You Have More Control Over Housing Costs

While they may take considerable effort, home improvements can pay off in the long run. When you pay for renovations in a home you own, you get the benefit of increasing your home's value which can cover the costs of the improvements when you sell your home. Taking advantage of this responsibility also allows you to craft a home that fits your lifestyle.

You're Excluded From Capital Gains

When you sell an asset that grows in value over time, you typically pay a tax on your profits at the time of the sale. This is called the capital gains tax. However, when you sell a home that grew in value, you may be able to exclude up to $250,000 ($500,000 if married filing jointly) of these profits from being taxed. Specific eligibility requirements exist to take advantage of this tax exclusion.

You Can Take Tax Deductions

Tax deductions are one of the key advantages of owning a home. They allow you to subtract the money you pay toward several home costs from your taxable income, decreasing your total income taxes. If you itemize your taxes, you can subtract the money you pay for mortgage interest, property taxes, mortgage insurance and multiple other expenses from your taxable income.

You Can Build Equity And Home Value Appreciation

Home equity is the crucial measurement to determine if buying a house is a good investment. Equity is the difference between what you owe on your mortgage and what your home is currently worth. So if you owe $100,000 on your mortgage and your home is worth $200,000, you have $100,000 in home equity. Your equity grows with each mortgage payment you make and as your home's value appreciates. The more equity you have when you sell your home, the larger the profit you receive.

You Have An Opportunity To Invest In Real Estate

You can invest in real estate by renting your home and contributing the rental income to your monthly mortgage payment. You can do this by renting a room in your primary residence or buying an additional home to rent out. If you can charge rent high enough to cover the mortgage payment and any other maintenance costs that may arise, you could make a consistent profit in the short term while building equity for the long term.

While it is possible for a home to earn you a solid profit, there are possible pitfalls. 

Your Budget Can't Afford It

Before you even start searching for a home, you need to determine whether the costs of homeownership fit your personal budget. Homeownership comes with significant upfront, ongoing and surprise maintenance costs that you need to plan for to determine how much house you can afford.

You Have Expensive Homeowner Costs

High recurring costs of owning a home can turn a good investment bad over time. 

• Maintenance: Maintaining a home is not cheap. Home-improvement experts estimate that owners should expect to pay from 1% – 4% of their home's purchase price in annual preventative maintenance and repair costs.
• Property taxes: Property taxes vary widely depending on your state, but the median property tax paid in the United States in 2021 was $2,971, according to the Census Bureau.
• Homeowners insurance: If you take out a mortgage loan, your lender will require that you pay for homeowners insurance. This insurance protects you if your home is damaged or destroyed or someone breaks into your residence and steals valuable items. The cost of this insurance varies depending on the age, location, value and size of your home.

You Have High Upfront Closing Costs

One of the significant expenses of buying a home are the closing costs. These are charges levied by your lender and other third parties for their work originating and closing your mortgage loan. Closing costs can vary, but you can expect to pay from 3% – 6% of your total loan amount.

Your Home Has Potential Depreciation

Like all investments, profit from buying a home is not guaranteed. If you buy your home when real estate values are high, the value might fall after you move in. If home values drop by enough, you might have to wait to sell your home until it exceeds your purchase price.

You're Having Difficulty Timing The Market

You could consider many specific factors when timing the market, from the best day of the week to the best year to put in an offer to buy a home. While these specific considerations may come in handy, timing the market can always be difficult, especially when considering circumstances outside your control. For example, if you have to move for a new job when housing prices are high, you may not have the option to time the market like an expert.

Owning a home has traditionally been one of the best ways for Americans to build wealth. However, building wealth through homeownership isn’t automatic. Several factors can affect home value, so it is essential to research the most important ones.

Location

Where your home is located in the U.S. is a key factor in determining whether and how much your home appreciates over time. To help your research, check out the chart below showing how each census division's housing prices have grown over recent decades. The chart, ranked by the current housing price index of each region, shows how the highest-priced regions of today were not always the highest-growing regions.

Home Prices Over Time

Your home's potential to increase in value also depends on when you buy and sell. As you can see from the chart below, home prices usually increase year over year. Still, selling your home during a rare down year could change your financial goals. Similarly, buying a house after a large increase in prices that is followed by a dip could extend the amount of time it takes to turn a profit by several years. This chart shows the median sales price of houses sold in the United States and the percent changed from the previous year (appreciation), 2010 – 2022.

Real Estate Market Conditions

Studying real estate market trends will benefit your home buying process, especially if you are looking for an investment property. Even if you are not currently looking to purchase a home, becoming familiar with typical trends will allow you to recognize when a house comes on the market that is an unusually good deal that you could pounce on right away. Without consistently educating yourself on market conditions, you may not know what to look for when you’re ready to enter the market.

If you’re asking yourself if a house is a good investment, asking yourself some more specific and important questions may show you the answer. 

• Do you have a stable income?
• Do you know how much you can afford to spend on a home?
• Do you feel confident managing debt and budgeting for repairs?
• Do you plan to settle in one area long term?

Here are some of the most common questions about buying a home. 

What are the costs associated with buying a house?

There are several upfront and ongoing fees when buying a home. Upfront costs that you will pay one time when you buy a home include the down payment, prepaid taxes and insurance and closing costs. Ongoing costs include your mortgage payments, property taxes, homeowners insurance and utility fees.

When is it smart to buy a house?

The best time for you to buy a house depends on your budget and financial situation. It also depends on the status of the national and local economy, so make sure to do your research on factors such as interest rates and the economic status of your local market.

What are the tax benefits of buying a home?

As mentioned above, there are several ways that buying, owning and selling a home can reduce your tax burden. One of the most popular avenues involves excluding up to $250,000 ($500,000 if married filing jointly) of the profit from selling your home from capital gains taxes.

Are rental properties a good investment?

Rental properties can be a good investment in the short and long term. If you can charge a price higher than the monthly mortgage payment to rent out a house, you may make a profit in the short term on a rental property. If the property increases in value over time, you can sell it for a significant profit in the long term.

Is buying a house worth it?

Buying a house can definitely be worth it if you make a purchase within your financial limits. However, keep in mind that it may take several years to pay off.

Buying a house may be one of your largest financial decisions, so make sure to take the time to consider all of your options. If you have studied your local housing market, have adequate savings and are ready to hold onto your new home for several years, your investment in real estate could pay off.

Ready to buy a home? Start the mortgage approval process today.