Real Estate 2024: Will Buying the More Expensive House Now Make You Richer in 10 Years?
Many people view real estate as an investment, with potentially high returns. And while this is sometimes the case, there are no guarantees that you’ll see specific returns or that the property you purchase today will soar in value in 10 years.
Historically speaking, the stock market has seen higher returns than real estate. Whereas the stock market has offered an average of 8% to 12% ROI, residential real estate saw an average annual increase of about 8.6% (from 1980 to 2023).
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Real estate could still be a good investment, but there are a lot of factors to consider — not just how much it costs right now or how the market has done over time. If you’re considering purchasing a more expensive home now, here’s what you need to know:
The Housing Market’s Volatile But Prices Have Leveled Off
The real estate market has been particularly volatile over the last few years, but prices are leveling off. Barring any other major changes, the more expensive home you buy now is likely to increase — but perhaps not as much as you’d hope.
“Real estate has traditionally been a ‘holder of value’ more than a high-return investment. The exceptions to this occurred in the real estate boom/bust where easy money drove speculative behavior that blew up on the investors and the U.S. economy. Covid-19 demand and historically low interest rates made a second round of outlier behavior in residential real estate,” said Glenn Phillips, CEO of Lake Homes Realty.
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“That said, prices have generally leveled off now as have mortgage rates. Housing always follows ups and downs, and the timing is almost impossible to accurately predict,” he continued. “We advise our clients to recognize the purchase as an investment but the exit could be difficult to manage. Buy the house you can realistically afford and, if you have the means, that pleases you the most. Then, in time, be prepared to sell when the market times best for sellers.”
Recouping Your Initial Investment After a Decade
It’s unclear how much your expensive home will appreciate over the next 10 years, or whether it’ll appreciate more quickly than lower-priced homes. Housing prices are easier to predict when they’re only a few years out, but a lot can change in a decade.
“It will be difficult to predict returns on residential real estate more than a couple of years out. In a decade, so much can change, both good and bad. And these changes may be local or nationwide,” said Phillips. “It is just as likely one could recoup higher upfront costs in a decade, but equally likely that those costs will not be recoverable. The more expensive the cost, the greater the opportunity and risk. Not that different from deciding how much money to put into the stock market.”
You Make Money On the Buy, Not the Sell
If you’re buying a more expensive property hoping it’ll increase rapidly in value, you might want to reconsider. The property’s price is only part of the bigger picture.
“In buying property as an investment, the old adage is true. You make money on the buy, not the sell,” said Phillips. “What does that mean? Finding a great deal to buy is a much safer, and likely higher return, than buying at a typical price and hoping you can get more for the property in the future.”
And don’t forget about inflation as that’ll impact your potential wealth-building, too.
“It is also important in real estate investing to consider the time value of money. Selling real estate a decade after you buy it may get you more money but has inflation over that decade eroded that real return?” Phillips said. “You might sell for 10% more than you paid, but if inflation over that time is 12%, then you effectively lost 2%.”
Factor In Other Costs, Too
Buying an expensive house is about more than the listing price. You’ll also need to consider things like property taxes and homeowners insurance — things that tend to increase with the appraised value of the home.
“If you opt for a pricier property to sell it in a decade, it can be worthwhile if you manage to recoup the initial high costs through potential built-up equity in the long run,” said Ebony J. Howard, a CPA and consultant from Atlanta, Georgia, and an expert contributor for Annuity.org. “However, other factors such as property taxes and homeowners’ insurance, which may increase annually, can add to the overall cost.”
Don’t let the dollar signs — the ones you see now or the potentially larger ones in the future — distract you from making a smart financial decision. If possible, keep your housing costs to 30% or less of your gross income to avoid becoming, “house poor.”
It Usually Takes At Least 5 Years to Recoup Your Initial Costs
“Typically, it takes at least 5 years to recoup the costs of buying a home,” said Howard. “Higher upfront costs mean more money out of your pockets initially.”
If you’re not planning to sell for at least 10 years, meaning you could see some serious gains when you do — but it all depends on the housing market.
“Holding onto the house and selling it in a decade, depending on the performance of the housing market, can result in increases in equity over time, compensating for the higher upfront costs,” said Howard.
Take time to determine your budget and calculate the potential returns and losses per the real estate market over time and in your area. You might find that buying a more expensive house now and selling it in a decade is the best financial decision, or you might find that a less expensive home is better.
Bottom Line
“If you buy a pricey home and keep it 15 years before selling, about 70 percent of those sellers will either lose about 6 percent or earn about 16 percent,” said Omer Reiner, a licensed Realtor and President of FL Cash Home Buyers, LLC. “Based on those numbers, buying an expensive home when you know you want to sell it in 10 years seems pretty risky.”
But of course, many factors can affect the outcome of selling your expensive home. For example, the property’s location, condition, and the market rates when you decide to sell can all influence your returns.
“As far as buying a less-expensive home instead, that again has variables such as location, condition and upfront [costs],” said Reiner. “Smaller doesn’t always mean cheaper, just as larger doesn’t always mean more top dollar. In most areas, larger and lovely homes can be found for less money and give you a better chance at making money down the line.”
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This article originally appeared on GOBankingRates.com: Real Estate 2024: Will Buying the More Expensive House Now Make You Richer in 10 Years?
