You may have heard that real estate has created more wealth
for more people than any other asset class but you may not be clear on how and
why. There are those that invest in real estate and hold onto the property for
both positive cash flow and property appreciation. Such investors may own
multiple single family homes for those reasons and for some that’s their full
time job. But you don’t have to be a real estate investor to take advantage of
the benefits home ownership provides. Real estate investors charge more than
enough rent to pay for all the expenses of owning the property including the
mortgage payment, property taxes and insurance plus all maintenance costs. If
you’re ever heard the phrase “let your tenant pay your mortgage for you” that’s
what it means.
When you send your rent payment each month in return you get
a place to live. But that’s a negative cash flow and an expense. You don’t get
anything in return when you mail your rent check other than a roof over your
head. Yes, that’s certainly important but owning rather than renting builds
wealth. How so? Two reasons.
First, each time you make a mortgage payment, part of the
payment goes toward interest (tax deductible, by the way) and part toward your
loan balance. As you pay down your loan your equity in the property increases
over time doing nothing more than paying what you already would do by renting.
Second, property values increase over time. The difference
between the current market value of the home and the loan balance also belongs
to you and the longer you own the home the more wealth you create. If for
example your loan balance is $100,000 and your home is valued at $150,000, your
equity in the property is $50,000. Five years later your loan balance might be
$85,000 and the value at $185,000 so your equity is $100,000. Again, all you
did was make your mortgage payment.
This is how and why real estate creates wealth for home
owners. The property belongs to you as well as the equity in the home. We’re
not really suggesting you should buy a home as an investment, you should buy
for a host of reasons, but as long as you need a place to live, why not create
wealth while you’re at it?