Wondering if you should invest in homeownership or not? We discuss the pros and cons of owning a house to help you make financially productive decisions.
You would have seen people investing in various assets. Some invest their money in stocks and cryptocurrencies, while others play it safe by investing in bonds and saving accounts.
But those are not the only options investors have. As the times are changing, there’s an industry that is doing well and earning great profits for its investors, the real estate industry. Or, to be more precise, investment toward homeownership.
Of course, there are pros and cons of owning a house. There’s no guarantee that you’ll get high profits overnight. But what can help you make fruitful decisions is knowing the market challenges and opportunities it possesses.
That’s exactly what we’ll do here. We’ll touch upon some of the pros and cons of owning a house to decide whether renting a home is better, or becoming a homeowner.
Let's begin
In our series of pros and cons of owning a house, let’s first talk about the positives of homeownership.
When you rent a home, it would look like that you only have to pay your rent. The amount would be significantly less compared to your home purchase price. But as you pay the rent, what are you buying other than one month in your home? The answer is nothing.
When you become a homeowner paying your mortgage, you’re building your home equity. This will be the tangible asset that will appreciate over time. That means it can bring your great financial returns in the future.
For example, if you’ve lived in a home for a long time. Now, you can sell it at a profit and see achieve a massive return on investment.
Among the various pros and cons of owning a house, you also become eligible to take benefits of various tax deductions. When you’re paying your property tax, sales tax, home improvement tax, or others, homeownership allows you to save a large chunk by itemizing your deductions.
But before you run off to your accountant for itemizing your deductions, here’s something you’d want to know.
We have some standard tax deductions that Internal Revenue Service (IRS) offers. All US citizens are eligible for these deductions, people having homeownership is not necessary.
These are the people eligible for tax deductions.
Head of household - $19,400
Single taxpayers - $12,950
Married taxpayers filing jointly - $25,900
So, before itemizing your deductions, confirm whether they’re higher than the standard IRS deductions. This will tell you whether it’s worth making the effort and itemize your tax deductions.
When you hear the word investment, it’s not always about numbers and money. When you list down the pros and cons of owning a house, one of the biggest advantages of homeownership is the ability to live your preferred lifestyle. It gives you the much-needed sense of calmness to improve your life quality.
When you’re renting a home, you’re living on your landlord's terms. Usually, your landlord won’t approve of you making changes to the home. These include repainting the walls, adding solar panels, changing the furniture, or similar other alterations.
Homeownership helps you escape these challenges and make your desired changes, having a landlord looking over you.
Remember, you’re not only improving your own life quality. You’re investing to raise your family in a pleasant and conducive environment.
We’ve seen recessions and depressions inflict massive damage on various industries, including the real estate industry. But what’s different between the real estate and other industries? While other industries take a long time to recover, the real estate industry was up in very little time.
Real estate investment requires patience. If you’re in the same house for a long time and are unfazed by the decline in the market, there’s a great chance to sell your home for a profit. You just have to wait for the right time for your property appreciation to spike up.
If you aren’t impressed by all pros of owning a house that we’ve discussed, here’s the good old-fashioned “home for rent” option. Homeownership allows you to be a landlord and rent out a portion of your home for an extra income stream.
What can you do with the money? Well, you can spend it wherever you want, but here’s an idea to think about. How about you offset your mortgage payment? Confused about what that means? Don’t worry, we’ll explain.
You can create an offset account and link it with your mortgage. The rent income goes to your offset account. So, the next time you’re paying your mortgage, you just need to pay the difference between the monthly mortgage amount owed, and the funds in the offset account.
Let’s look at an example for people with homeownership, looking to take advantage of this idea. Suppose your monthly mortgage is $20,000 and the monthly rental amount paid by your tenant is $5,000. So, the mortgage amount you’ll pay your lender is $15,000, as the rest is paid through your offset account.
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In our journey of telling you the pros and Cons of owning a house, we’ve discussed the advantages. Now, here are some potential drawbacks involved with homeownership.
The cost of homeownership isn’t limited to the home purchase price. Once you’ve finalized the deal and moved into your home, there will be tons of home expenses waiting for you.
As a rule of thumb in the real estate industry, 2% to 4% should be your homeowner’s budget. So imagine you’ve bought a house worth $500,000. That’s not the only amount you’re investing. There will likely be yearly home maintenance expenses of $10,000 - $20,000.
Your homeownership expenses may include things like appliance servicing, pest control, vent cleaning, and more. And these are only the regular expenses. You may also have emergency home repair expenses, for which you need to budget accordingly.
And no, don’t think like “I don’t want to do so much home maintenance.” The consequences can go far beyond living in hardships in a damaged home. Your home value will not appreciate and it will make it difficult for you to sell your home at profit.
Discussing the pros and cons of owning a house, we’ve already talked about how it’s only a matter of time before your home value will appreciate.
But people with homeownership are confused about identifying the right time to buy or sell their property. You’d want to buy a home when the market is down and sell it in a good economy when the real estate demand is high. In such a situation, you’ll have more buyers willing to pay a premium price.
But when such a situation arises is a difficult question to answer.
As we’re talking about the pros and cons of owning a house, we can’t miss talking about another major expense in addition to the home purchase cost, closing cost.
When you seal the deal and are ready to move into your home, there are various legal and tax-related formalities to be done. This can be 2% to 4% of the total home purchase price. This percentage varies as per your home location, purchase price, property types, and more.
Once you’ve bought a house and made a massive investment, it can be difficult to diversify and invest in other assets. Why? Because you may have a lack of cash available. You’ve put all of your finances in one asset and are expecting returns from it.
If the market declines and your property value decreases, you might cause a dip in your net worth. When this happens, you need to wait for your property value to climb again and the economy to stabilize.
Apart from that, you’ll not be able to relocate and experience different lifestyles because you’ve made a massive investment. You need to spend time in the house to increase equity and sell your home at a profit.
You might get stuck in the debt trap, if your lender decides to raise your interest rate on your mortgage payments. This fluctuation can impact your mortgage affordability and might delay your mortgage repayments.
What this can do is your home at risk of foreclosure.
In such a dire situation, one option is to apply for another loan, which can be difficult to have approved. Remember you’ve already taken a mortgage loan that you’re yet to repay. Your credit score will already be low and lenders will see a risk give you another loan.
If you know the advantages and downsides before investing, you’re likely to succeed and mitigate the risk. These pros and cons of owning a house can assist in making better investment decisions.
And if you’ve decided to take up homeownership, HAR can be your partner to start your journey in the right way. Connect with our real estate agent, today.
Home equity is the portion of your home's value that you truly own. It's the difference between your home's market value and the money you owe on your mortgage. Building home equity occurs as you pay off your mortgage, and it represents a valuable asset that can appreciate over time.
Homeowners can enjoy certain tax deductions, such as deductions on property tax, sales tax, and home improvement expenses. These deductions can help reduce taxable income, leading to potential tax savings.
Homeownership provides the freedom to make changes and improvements to your property according to your preferences. You have control over customization, which can enhance your quality of life and create a conducive environment for your family.
Real estate investment often requires patience. Home values can appreciate over time, even after experiencing market fluctuations. Waiting for the right time for property appreciation can lead to profitable returns on your investment.
Homeowners can rent out a portion of their property to generate rental income. This income can be used to offset mortgage payments or as additional disposable income.
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