You may have heard that real estate has created more wealth for more people than any other asset class but you may not be clear on how and why. There are those that invest in real estate and hold onto the property for both positive cash flow and property appreciation. Such investors may own multiple single family homes for those reasons and for some that’s their full time job. But you don’t have to be a real estate investor to take advantage of the benefits home ownership provides. Real estate investors charge more than enough rent to pay for all the expenses of owning the property including the mortgage payment, property taxes and insurance plus all maintenance costs. If you’re ever heard the phrase “let your tenant pay your mortgage for you” that’s what it means.
When you send your rent payment each month in return you get a place to live. But that’s a negative cash flow and an expense. You don’t get anything in return when you mail your rent check other than a roof over your head. Yes, that’s certainly important but owning rather than renting builds wealth. How so? Two reasons.
First, each time you make a mortgage payment, part of the payment goes toward interest (tax deductible, by the way) and part toward your loan balance. As you pay down your loan your equity in the property increases over time doing nothing more than paying what you already would do by renting.
Second, property values increase over time. The difference between the current market value of the home and the loan balance also belongs to you and the longer you own the home the more wealth you create. If for example your loan balance is $100,000 and your home is valued at $150,000, your equity in the property is $50,000. Five years later your loan balance might be $85,000 and the value at $185,000 so your equity is $100,000. Again, all you did was make your mortgage payment.
This is how and why real estate creates wealth for home owners. The property belongs to you as well as the equity in the home. We’re not really suggesting you should buy a home as an investment, you should buy for a host of reasons, but as long as you need a place to live, why not create wealth while you’re at it?