Is Buying A House A Good Investment? Risks And Benefits

Is buying a house a good investment? Or should you stick with renting? In many situations, the advantages of owning a home outweigh the perks of renting – but that isn't always the case. Renting has its place in many situations, too.

Let's walk through the risks and benefits of both owning a home and renting so you can make the right decision for your situation.

Advantages Of Owning A Home

Is buying a home a good investment? Here's one answer to that question: Homes tend to gain value over time, and many people see a return on investment when they buy a home and later sell it or borrow money from it. Because of this, buying a home is often a good long-term investment for many people.

We'll expand on the other potential advantages to owning a home, below.

Consistent Monthly Housing Costs

Rent prices can always go up, but the monthly bill on a fixed-rate mortgage tends to stay the same.

For example, Kris purchases a home for $250,000 and put down 20%. A loan term of 30 years with an interest rate of 6.5% means they would pay a principal and interest total of $1,264.14 every month for the full loan term – no surprises.

Why do renting costs increase? They often rise because landlords raise the rent or because of economic trends.

Less Money Spent On Housing

Depending on your situation, sometimes a mortgage is cheaper than rent.

That might initially surprise you but according to data from Rent.com, the median monthly rent price increased 2.25% over last year, to $1,981 per month.

Homes Tend To Retain (And Gain) Value

Housing prices tend to trend up over time, and you can use a formula to determine how much your home could retain and potentially gain in value:

Future value = Current value x (1 + Annual appreciation rate) ^ [number of years]

For example, if you were curious about how your home might gain in price in 30 years, doing the math would look like this:

Future value = $300,000 x (1 + 0.03) ^ 30

Future value = $300,000 x 2.43

Future value = $728,178

In this scenario, your house will appreciate by $428,178 in 30 years.

Here's an overview of how a $300,000 home might be valued if you bought it between 2013 – 2023 with an annual appreciation rate of 4%.

Be sure to do your research on the home value appreciation of homes in your area to come up with the most accurate estimate for you.

Ability To Leverage Equity

Home equity is the amount of home you own, or the difference between what your home is worth and what you owe your lender. When you make house payments, you reduce the amount you owe and build equity.

You can use equity to your advantage in several ways:

• Gain equity: As you continue to make payments, you gain equity until you finally own your home at the end of your loan term.
• Borrow from your equity: You can also borrow from your home equity, which means you access the money you have in your home such as through a cash-out refinance (you get a new mortgage at a higher loan amount), home equity loan (a second mortgage on your house) or home equity line of credit (HELOC), which allows you to draw from a line of credit when you need it.
• Remove private mortgage insurance (PMI): If you don't put 20% down to buy a home, lenders will likely require you to purchase PMI, which protects your lender. You can cancel PMI when you build enough equity once you reach 20% of equity in your home.
• Debt consolidation: You can consolidate debt with your equity as well. For example, home equity loan interest rates are much lower than interest rates for other types of loans. Consolidation can simplify your payments and you could also save on interest.

Tax Deductions

You could save money on tax deductions as well. For example, when you have a mortgage on your home, you can use the mortgage interest deduction to lower your taxable income. You can deduct up to $750,000 as a single filer or a married couple filing jointly. If you are married and filing separately, the deduction limit is $375,000 for each party.

You may also be able to deduct home equity loan interest and discount points, which lower your interest rate on the loan – one discount point equates to 1% of the mortgage amount. You can also deduct property deductions, necessary home improvements, home office expenses, PMI and capital gains, which come into play when you sell your home for a profit.

Aesthetic Freedom

You also have aesthetic freedom to tailor your home to your specific needs and tastes. In other words, you can decorate and landscape how you want, choose the color of the exterior paint (within the guidelines of your homeowners association (HOA), if you have one) and more.

Risks Of Investing In A House

On the flip side of the advantages to owning a home, what are the risks of investing in a house? We'll look at some of the other risks – home repairs, initial costs, taxes or insurance, needing to sell if your needs change and depreciation.

Home Repairs

Owning a house can come with high costs related to preventative maintenance and repairs. According to the latest survey by the National Association of Home Builders (NAHB), maintenance costs $950 per year on average.

Initial Costs

In many situations, choosing to rent versus own comes down to the cost. For example, homeowners may not be able to come up with the money for a down payment, so they continue to rent.

Potential homeowners will also face closing costs and paying for homeowners insurance, which protects you if your home gets damaged or destroyed due to disasters or other situations, such as someone breaking into your home and stealing valuable items.

Taxes Or Insurance

The cost of taxes or insurance may be a disadvantage to homeowners if they are not able to cover those costs. For example, you must pay property taxes, which is an assessed fee based on the value of your property. Average cost of taxes came a bit under $3,700, according to the NAHB survey, but depend on the assessed value of your property and your local tax rate.

Potentially Needing To Sell If Your Needs Change

Needing to sell a home could be a disadvantage if you suddenly need to move. For example, if you change jobs, need to move to take care of aging parents or experience major life changes that require you to downsize, you may find yourself needing to sell your home quickly. Unfortunately, that takes time – it takes an average of 54 days to sell a house.

It's often easier to cut a rental situation short – you might be able buy your way out by paying a termination fee, switch to a month-to-month agreement or explain the situation to your landlord.

Potential Depreciation

Homes can gain value over time, but they may also decrease in value. Profiting from buying a home is not guaranteed. If you buy a home when real estate values are high, they might fall after you move in, which means you might have to wait for the opportune time to sell later.

Is Owning A Home Right For You? 

Owning a home is a personal decision, but it's worth asking a few questions before you decide on the right home for you:

• Do you have a stable income?
• Do you know the amount you can comfortably afford to spend on a home?
• Do you feel comfortable with the amount you may need to spend on repairs?
• How long do you plan to stay in the area where you'd purchase your home?

It's worth asking yourself these questions so you arrive at the right decision about buying versus renting. Carefully analyze the answers, and note that as a general rule, home buyers shouldn't spend more than 33% of their monthly gross income on housing.

FAQs About Investing In A Home

Why is owning a home important?

Owning a home is important to many people, financially and personally. They can have consistent monthly mortgage payments, the potential to increase in value, an ability to leverage equity, tax deduction options and the freedom and flexibility to do what you please with the home. Finally, at the end of making your mortgage payments, you also have a fully paid-for home.

Is it financially smart to buy a house?

It can be a financially smart move to buy a house depending on your financial situation. For example, if you plan to stay in the home and build equity, you could sell the home for an increased amount later down the road. As you can see in our chart above, a $300,000 home you bought in 2013 might rise in value to $461,836 in 2024.

Is it better to save money or buy a home?

You need to save money to buy a home, so saving money could be your priority before buying a home. You will need to figure in down payment, closing costs, insurance and other miscellaneous costs when you purchase a home, so do your best to understand all of these expenses before you make a decision.

Is owning actually better than renting?

There are pros and cons of owning versus renting, and it's a personal choice – there's no "one is better than the other" option. The disadvantages of renting include possibly inconsistent monthly housing costs, no ability to build equity, no mortgage interest tax deductions and no freedom to do what you please with the property.

However, there are benefits to renting, including not having to pay for home repairs, no initial costs or taxes and no insurance payments. You also don't have to worry about home values or selling a house if your needs change quickly.

Can I afford to buy a house?

The answer to this question will also be different for everyone. If, after evaluating your finances, you decide you can comfortably afford to make payments and handle the extra costs, such as down payments and ongoing maintenance fees, you may be able to purchase a home. However, many other factors might go into this decision, including how the housing market and home prices are trending, so talk to your lender about all your options.

The Bottom Line

Is a house a good investment? It's important to understand that homeownership isn't for everyone, but it offers a great solution for many Americans.

Weigh the pros and cons of purchasing a home so you know exactly what you're getting into – it can impact your financial future and your personal situation for years to come. 

Are you a first-time home buyer ready to get started with the home buying process? Connect with an agent today.