Investing in real estate in North CarolinaOwning a home is still a great way to build wealth. During the Great Recession of the not-too-distant past, home values fell to unprecedented lows. Unfortunately for a lot of people, a large portion (or all) of their net worth was tied up in their homes. As the values fell, their net worth plummeted. Luckily, the real estate market has recovered, and then some. The national housing market has been on the upswing for almost two years and shows no signs of stopping. This significant recovery shows us that home ownership still makes sense as the cornerstone of a wealth-building strategy.

Home ownership can serve as a type of forced savings.

Although Americans in general have become better savers over the past several years, setting aside funds for retirement is still tough for many. When you own a home, a portion of each mortgage payment goes to pay down the principal, thereby increasing your equity. Not so with rent payments. When it comes time to sell, that equity will be money in your pocket. There is one very important caveat: the equity isn’t actually yours until your loan is fully paid off. If you default on payments and end up in foreclosure, your forced savings will be lost.

Home ownership protects against inflation.

A home can be a hedge against inflation in many situations. For the most part, real estate has a proportionate relationship to inflation (as inflation occurs, housing costs and rents increase as well). This is especially true if you have a fixed rate mortgage. You are financing the home in today’s dollars, but paying the loan back in future dollars (which, because of inflation, are worth less). I am simplifying things here, but if you own an asset that is inflating, then inflation is a good thing! However, keep in mind that this is a long-haul phenomenon. Most property values appreciate at a rate that outpaces inflation over a period of 20 years or more. In the short run, property values fluctuate (as we’ve just seen with the recent recession).

Owning a home as an investment property can be a great investment—if you know what you’re doing.

Purchasing investment properties can be a great way to create passive income, but there are definite risks for the uninitiated. A lot of effort needs to go into researching and finding the right property, and to finding the right tenants that will be paying you rent (and paying down your equity). In this case, a real estate agent well versed in analyzing investment properties is going to be indispensable. If you’re considering real estate as an investment, take a look at my post A Beginners Guide to Investing in Real Estate here.

I’m not saying that your entire retirement should be dependent on the value of your home. Building wealth shouldn’t be your sole factor in purchasing. Any investment comes with an element of risk, and purchasing a home is no exception. Each buyer should carefully consider his or her lifestyle, family, and social reasons for wanting to purchase before moving forward. However, home ownership makes sense for many different reasons, and it usually makes a lot of financial sense.

Posted by Larry Tollen on
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