Owning a home is often referred to as the “American Dream.” But in addition to owning your dream home, home ownership is a great investment opportunity.
I personally enjoy the benefits of homeownership. Over the last decade, I have taken advantage of the investment opportunity created by real estate.
As a member of the military, I am moved around from duty location to duty location. This affords me the opportunity to own homes across the country.
The strategy that I use is as simple as this. I understand I am not buying my “forever home,” but instead I am purchasing an investment home that I will live in temporarily. I have no desire to return to the houses I own to live in them.
Additionally, I have already thought about my exit strategy for when Uncle Sam tells me that it is time to move. My exit strategy for when I leave the house as my residence is to convert it into a rental. Even though I don’t want to live in them, someone else will.
This removes my need of trying to sell the home. If the home loses value, you don’t lose anything because you have not sold the property. Even though houses have a temporary value drops, rents remain the same or go up.
I know you are thinking, “wait, this isn’t going to make me rich quickly!” Well, you are right. This is a get rich slowly technique that I have developed from reading The Weekend Millionaire’s Secrets to Investing in Real Estate: How to Become Wealthy in Your Spare Time.
The authors, Mike Summey and Roger Dawson, advocate a buy one house at a time approach. Since you can only live in one house at a time, it seems like an excellent approach for those who move every few years.
The following are the three ways that homeownership has increased my net worth.
Appreciation in Value
When you buy anything for an investment, we are hoping the value of that item will increase. This is referred to as appreciation in value.
Over the last several years, the average price of a home has increased by about 5% a year. That means a home worth $250,000 is increasing $12,500 in value this year.
Now 5% might not seem like a great return on investment when the stock market averages 12.25%. But this is only a partial truth in terms of finance calculations. Let me explain.
Homes are expensive, and if you are reading this site, you probably don’t have all the cash needed to buy a home outright. Therefore you need a loan, called a mortgage, to purchase the house.
If you plan on using your VA loan, the best way to lower your VA loan fees is to have a 10% down payment on your house. I know you don’t need a down payment on a VA loan, but doing so does reduce the fee you incur.
So, let’s agree with this scenario that you put the 10% down, or $25,000, toward the $250,000 home. When the price increases this year at 5%, or $12,500 the return on investment this year is 50%, which is 4 times better than had you put it into the stock market that earned an average of 12.25%.
How did I do the math to get this number? Simple, take the amount your home increased in value and divide it by the amount you have invested in the property. Then like every percentage calculation, multiply the result by 100. So, $12,500 divided by $25,000 gets you .5 which you then multiply by 100 to get 50%.
(Increase In Home Value / Down Payment) * 100 = % Return on your Home Investment
Now, as we mentioned earlier, you don’t need to have a down payment on a VA loan. Therefore, in theory, you could have made $12,500 with nothing invested into your property.
Personally, I don’t recommend the 0% down on a home as it leaves you with nothing as a buffer in the first several years.
Now many of you are thinking about the housing bubble that occurred over 10 years ago. Yes, houses lost an average of 1/3 their value. But, if you did not sell your home, did you lose anything?
I buy homes to own them for a long period of time to take advantage of the other two methods in which homeownership increases your net worth. Therefore, if I owned a home prior to the housing crash I would not have lost anything. Since the crash, homes have not only increased in value, but in most areas have surpassed the pre-crash prices.
Just as you would not have lost anything if you did not sell your house at a lower price, the US Government doesn’t consider you making any money when the price increases and you do not sell.
The appreciation in value in your house creates an additional hidden tax advantage of investing in real estate. The previously mentioned gains are all tax deferred until you sell your house. That means the growth you enjoy each and every year is not taxed until some future date that you chose.
The first house you ever buy will probably be for the purpose of living in. But an amazing thing happens to those who are the in the military, the Government tells us to move.
Some Soldiers find the constant moving scary for homeownership. They are crippled with the fear of how will they be able to sell their home when it is time to leave. As such, they continue renting.
One man’s fear is another man’s investment opportunity. Since there are so many people in the military that would rather rent than own, you can easily rent your home for their money.
You may be thinking, well it would be really hard to manage a house from so far away. And this is a valid argument. But there is an equally valid solution, hiring a property manager.
I have used property managers in all of my homes after I move on to a new duty location. They screen tenants, sign contracts, coordinate repairs, show the property, and just about everything related to keeping your house up and running to pull in money every month.
Ideally, you want to buy a property right to take advantage of the wealth growth of your rental income. Let’s face it, we probably didn’t have rental income in mind when we were looking for a house to live in.
As a result, rental income may not be really big at first. But unlike the principle and interest payments of your mortgage, the amount you charge for rent changes. This means you pay the same amount to your bank, while your tenants pay you more.
To put that in numbers, suppose you charged $1,500 per month in rent last year. The average increase in rents across the nation was about 3%. That would mean this year you would charge about $1,545 a month this year.
The $45 a month increase may not sound like much but over the course of a year that is $540 more than you received last year. And it doesn’t stop there. The next year, you can increase your rent again.
As you can see, rental income from a property starts out as a little trickle. But given time, that trickle will grow to a stream, then to a raging river.
Any chance you are currently living in a home that is bigger than you need? Why not start renting now with these two ideas.
The first house I bought was massive when you consider at the time I was single with no children. I was willing to rent out one of the bedrooms. As my Basic Allowance for Housing, or BAH, easily covered the cost of the mortgage, this income was all profit.
These allow you to set your daily price, allow tenants when you want them, and basically be a business owner of your house.
In addition to earning rental income, you can also write off expenses incurred from your rental activities on your income tax. That means lawn care, repairs, maintenance, and anything else you paid for while you house was a rental can be deducted from you rental revenue come tax time.
Debt Pay Down
As mentioned earlier, you probably have a mortgage to assist with your home buying. It is standard in the United States for a mortgage to be amortized. This means each time you make a monthly payment, a portion of the payment goes to the interest. But more importantly, another portion goes to paying down the loan.
In doing so, you own a little bit more of your home each month. I use to joke with my wife that every month we became the proud owner of a few more tiles in the kitchen.
I know you are probably reading this and you are thinking debt pay down was completely obvious. Additionally, paying down the debt doesn’t inspire you to buy a house. I mean let us face the alternative, should you stick with renting you would never have the mortgage debt in the first place.
But consider this, if you receive BAH you are going to be paying for a place to live somewhere. If you own the house, a portion of your BAH is actually yours to keep when you pay down your debt.
Should you instead choose to rent a place to live, you are actually paying down the debt for the owner of the property. That’s right, instead of you keeping a portion of your BAH, your landlord is keeping a portion of your BAH. And trust me, they are thanking you for that decision. I know I am thankful for my tenants.
In the previous section, we discussed the idea of renting your home once you move out of it. If you were not able to make any additional money from the rental income, you are still increasing your net worth by having a tenant pay your mortgage off.
With a 30-year mortgage, each monthly payment for a single family house would increase your net worth by several hundred dollars. If you went with a 15-year mortgage, each monthly payment could up your net worth by over $1,000.
I know each month I would much rather have $1,000 coming back to my pockets instead of giving away $1,000 for someone else to enjoy.
Obtaining a mortgage to purchase a home is often a necessity. The US Government, who are the same people that kindly gave you the housing money to pay for your mortgage, will give you tax breaks for having a mortgage.
Some of these tax benefits are writing off the fees charged against you to originate the loan, the points you paid for to obtain the loan, and the interest you pay each year on your mortgage. With each of these items being several thousand dollars, you could help decrease your tax liability to the government.
This last week I was talking with someone about purchasing their first home. They felt rather overwhelmed by everything that is needed to buy a home. It truly is mind-blowing how much goes into purchasing a home.
But great news, you do not need to do it alone. There are professionals out there called Realtors who can assist you in buying your first, second, third, or however many homes you want.
You know what the best part about a Realtor is? They help you buy homes for free. That’s right, free. As in no money is given from you to them.
So, you can leverage their knowledge of markets, prices, negotiation, and have someone to hold your hand to guide you through the process for free.
I know you are thinking this is too good to be true. But here is the trick, the seller of the property is the one who pays for your Realtor. So take advantage of what they are already planning on paying and get yourself a Realtor on your side.
Also, if you plan on having a mortgage, the better your credit score is the lower the interest rate. Unfortunately, incorrect information on your credit report can lead to negative credit scores. You may be interested in reading how you can correct mistakes on your credit report which may prevent you from buying a house.