Is a house a good investment?

Few investments offer the stability and growth potential that real estate does. If you’re looking to buy a house for more than just a roof over your head, it’s important to understand the advantages and differences of home investments compared to other options before making a large financial commitment.

Unlike rent, which can go up every year, a fixed-rate mortgage offers you a stable expense throughout the loan term. This helps you budget, save, invest and plan for retirement more effectively.

As you pay down your mortgage and your home’s value grows, you increase the amount of ownership you have in your home; this is called “building equity.” You can borrow against this equity–often at a lower interest rate than credit cards–to pay for things like home improvements, tuition or high-interest debt.

A home investment may offer several tax benefits that other investments, like stocks or bonds, might not. These benefits can improve your return on investment (ROI) and boost your net worth.

As an investor, it’s crucial to consider fees and expenses related to the transaction because they can significantly impact profitability. Buying a home involves large upfront expenses like closing costs, real estate fees and inspections, which can reduce your home investment’s value, especially in the short-term.

Certain factors that are out of your control — like economic downturns, neighborhood changes, environmental factors or new zoning laws — can impact your home’s value. When a home depreciates, it can reduce your profit when selling.

Regular upkeep like fixing leaks, painting and replacing worn-out systems is an ongoing expense that ensures your home stays in good condition. Neglecting maintenance can lead to bigger problems including higher repair bills or reduced property value.

When wondering, “Is a house a good investment compared to other investment tools?” its vital to make informed decisions based on your goals and risk tolerance. Historically, each investment type carries its own sets of challenges and rewards. Let’s take a closer look.

Simple savings: When it comes to socking away your money, savings accounts are safe and provide easy access to your cash, which can benefit your short-term goals and needs. However, simple savings may lead to loss of purchasing power over time due to inflation erosion, meaning that the same amount of money buys fewer goods and services as prices rise.

This chart shows how inflation reduces the purchasing power of your savings over a seven-year period, assuming 2% annual interest and 2% annual inflation:

In contrast, a home investment usually offers higher returns through appreciation and may pay off significantly in the long term.

Individual stocks/mutual funds: While the stock market and mutual funds can offer significant rewards, be prepared for many ups and downs. Events like the Great Depression, the 2008 financial crisis and the COVID-19 pandemic demonstrate the risks involved in these forms of investment. On the other hand, real estate offers you a safer option if you’re looking for relative long-term stability without sacrificing growth potential. Over the past twenty years, average home prices in the US have risen from around $140,000 to $340,000, despite occasional market fluctuations.

Bonds: You may have heard investing in bonds is generally safe and predictable but there are issues to consider. Bonds can face credit and default risks, meaning you might not get paid at all if the issuer fails. They’re also sensitive to interest rates changes. For example, in 2022, when interest rates climbed, bond values plummeted while home prices kept rising. This shows that bonds can sometimes be more volatile compared to the relative long-term stability of a home investment.

401K/IRA: To achieve your long-term financial goals, retirement accounts are a crucial investment tool, but they come with some drawbacks. There are limits on annual contributions, and withdrawing funds before retirement age can result in steep penalties and taxes. Additionally, qualified distributions are taxed as regular income. In contrast, selling your home can offer tax benefits, like tax deferral and potential tax-free gains under IRS guidelines. Including homeownership in your investment plan can diversify your portfolio and potentially increase your returns over time.

Savings bonds: Since 1935, US savings bonds have been a safe investment tool for Americans to store capital. However, they don’t offer as much growth potential as real estate. You’re also limited in the amount you can invest annually and there are capital gains taxes on the interest. Real estate, with its appreciation and tax advantages, may offer you more potential to build wealth over the long term.

Tangible assets: Investing in tangible assets like precious metals, art or other collectibles can sometimes protect against economic uncertainty but lacks many of the long-term benefits of homeownership. Plus, you can upgrade and enjoy your home, making it a more versatile investment. While tangible assets may hold value, they can be volatile due to market changes, and they’re taxed at a high rate when sold. Therefore, while they may offer perceived financial security, they offer less stability and potential wealth growth versus homeownership.

Owning a home provides benefits beyond financial returns. It can also offer stability, peace of mind and a sense of belonging in one’s community, making a home investment an incomparable choice for many people and their families.

If you’re ready to take the next step on your path to homeownership, it’s important to work with a partner who will consider your financial situation and long-term goals to help find the right home loan program for you. Connect with a loan officer at a local branch to get started.