My First Home Was the Best First Investment I Could Make
Growing up, I never imagined that I'd one day buy a house. It seemed like a very grown-up decision and a huge responsibility, nothing I wanted to worry about even in my mid-20s. If you've read some of my other posts, you know that I basically hit rock bottom at about that time, financially speaking. I had to work off a lot of debt that I racked up from several years of bad financial decisions. When I finally eliminated that debt, I was in the habit of working hard and saving. Now that I had no more debt payments, I wanted to use those habits to create wealth, not just kill debt. So I looked for ways to turn this money I was saving into more money.
After doing a lot of research and saving for a year, I decided to buy a house. There are many good reasons to do this, but it all came down to three realities that dawned on me all at once. I'll use some numbers from my life to explain how buying your house can be the best financial move you've made in your life. It was for me, and it made me more free to make other good investment decisions later on.
1. Equity Is Amazing
After moving out of my mom's house after high school, I rented for eight years before I bought my first place. Depending on where I was living, where I was working and whether or not I had roommates, I paid between $300 and $700 a month. Let's say for simplicity's sake that I spent two years paying $300, four years paying $500 and two years paying $700. That amounts to $48,000 out of my young wallet over the course of eight years.
When I was renting, this was all just second nature to me. But one day I started researching how to buy a house, and I realized just how powerful equity is. Had I bought a house at 18 (not that I could have, but let's imagine, shall we?) and paid that $48,000 on my mortgage, that's money that would have stayed with me as equity. I would have owned it.
I guess I always knew that this is how it worked, but at 26 the reality of it kicked me in the teeth, and I knew I had to buy a house. In many ways, it's free to live in your house once you buy it, because you don't lose any of the money you put into your mortgage. Of course, you're still paying interest, but this is made very low for first time homeowners. More on this later.
2. Well-Chosen Houses Appreciate in Value
On average, homes increase in value by 4 percent to 5 percent a year. In some locations, appreciation far outpaces this rate.
As a young person hoping to buy a first house, it's not terribly difficult to identify areas within cities that are preparing for updates, development or other features that are desirable for other homeowners. I talked with my first real estate agent about this kind of property, already knowing for sure which city I wanted to live in but not caring exactly where. I looked at six houses seriously and settled on the one I live in today.
In my first year of owning this home, its value increased roughly 9 percent. I've never had my home appreciate that much in a single year again, but all told, I estimate that my home has increased in value about 32 percent since I bought it six years ago. You can think of this as a return on your initial investment -- in this case, your down payment. Because down payments can often be very small, often less than 10 percent of the home's price, this increase in value may represent a yield in equity many times larger than your initial investment.
3. Many Aspects of Home Ownership Are Subsidized
The federal government wants you to buy a house. Uncle Sam wants this because homeowners tend to be reliable citizens. They're a strong tax base, they obey the law, that kind of thing. So the government makes the interest you pay on your mortgage -- as well as your property taxes -- tax-deductible. Plus, the interest rate you pay on your loan is going to be much lower than you'll get for any other loan in your life. That doesn't make it free, but it does make it a lot easier.
The government knows that buying a house can be hard. It's difficult to save up the money you need; there are unique challenges to being a homeowner; and not everyone has the credit history to qualify for the mortgage. But if you can do what it takes to buy, the government will help you out a lot.
Yes, There Are Some Downsides
Of course, being a homeowner has its downsides. I have had to pay for major roof work and fix my own appliances when they break. I'm also not very free to move, like I was when I rented. I'm not saying that this move is for everyone, or that everyone in every situation will benefit from it as much as I feel that I have. But I would say that the vast majority of homeownership's influences on me and my finances have been overwhelmingly positive. My mortgage payment is lower than what I usually paid as a renter, my personal credit is much stronger -- and it'll all be paid off in another seven years.
This isn't about a chance to brag. These realities can be true for anyone buying their first house. Homeownership is the primary wealth-building tool for normal people. It is this way by design. I would say that buying your first home should be one of your main financial goals. Once achieved, you'll have a foundation from which to better your financial situation in many other ways.
Also, studies show that home ownership's benefits can be seen for generations, in the financial well-being of your children and and grandchildren. It really is a powerful thing, and I hope I've encouraged you to pursue it as a worthy and achievable goal.