Sunday, July 11, 2010

Your Home - One of the Best Investments You'll Make!

After I published my last post I had a discussion with a friend. She said that she was now worried about buying a place to live since she always thought that purchasing a home was a good investment. My last post stated that Robert Kiyosaki author of Rich Dad Poor Dad did not consider a home as an "asset" since it does not generate cash flow. Because of this Kiyosaki believed a home is more of an expense than an asset. Without getting into details about how Kiyosaki defines an asset, I think that my friend is right and that your home is one of the best investments you will ever make.

First of all no matter what happens in life we all need a roof over our heads. When we rent a house or apartment money goes into the pockets of landlords. You can claim a bit of it on income tax but most of the money is loss. When you purchase a home however, whether it's a house or a condo, money is paid to the mortgage every month (given that you did not pay for it all upfront). With each mortgage payment a portion goes to the bank as interest and a portion goes to paying the principal of the loan. The interest portion is loss and is known as the cost of borrowing. The portion that gets paid toward the principal becomes yours and is known as home equity.

Now the reason Kiyosaki thinks that a home is not a good asset is that you only access your profits on the home when you sell it. Typically it is not a good idea to buy and sell your home over short periods of time since it doesn't have time to appreciate. With little time to appreciate your profits will be eaten up in real estate, lawyer, land transfer taxes, moving expenses etc... . So it's usually a good idea to own your place for a while before you decide to sell it again.

That being said there are other reasons why owning a home is good investment besides providing you with a place to live. Owning a home with multiple rooms can allow you to rent out some rooms to help pay for your mortgage which ends up as home equity. If you have a separate entrance to a separate basement apartment, even better! Another reason is that if you own a small home business you can expense part of your mortgage. Finally, owning property gives you incredible leverage. Leverage is the ability to take a home equity loan with your home as collateral. Banks will lend you money at a very low interest rate when it is backed by your property. If you default on payments however you can get your property repossed.

Why would you want to take a large loan out on your home? If you have any other debts that may be charging higher interest rates it would be best to pay them off using money from your home since the interest will likely be less. Also if an investments yields a higher rate of return than the interest you're paying on the home equity loan than you may as well be using money from that. Sometimes the bank will not loan money to finance a business idea or anything else you may want money for, if the bank thinks it's too risky. In this case a home equity loan is a no questions asked low interest loan. So with all those reasons to own what are you waiting for? Stop renting!

5 comments:

  1. Ahha, now it works! Great article reynold! I definitely agree with you! I will start hunting for a house whenever I make enough money :)

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  2. Very interesting article. Can't wait to read more.
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