To Buy or Not to Buy
Purchasing a home is a major emotional and financial decision.
Often times, people want to buy a home; however, emotionally
cannot afford to commit to the home-buying process. They are, in
fact, afraid. “My payment will be too high” or “What if I lose
my job,” are some of the “excuses” which I often hear. People do
not realize that they are able to meet all the commitments over
their life span.
In any event, when everything is said and done, here are some of
the major advantages of buying a home:
1. Quality of Life. Home-buying and living in your home affects
the quality of life. It adds to your confidence, giving you a
sense of pride and satisfaction. You have a sense of emotional
well-being as well as peace of mind.
2. Tax Deductibility of Mortgage Interest. The entire mortgage
interest payment is tax-deductible and the “net” cost of the
mortgage payment actually puts money in your pocket.
3. Tax Deductibility of Property Taxes. Similarly, the property
taxes are due and payable twice a year and may seem like a lot
of waste of money. Typically, property taxes are $1.10/$1,000 of
your purchase price. However, the property taxes are also tax
deductible and you get it back in the form of tax savings.
4. Appreciation Potential. Typically and historically,
nationwide property values have gone up in value at 7% per year.
In California and some other states, properties have, in certain
good economic times, appreciated at the rate of over 20% per
year. At 7% conservative rate, the property doubles up in value
in 10 years. So, a property worth $500,000 will be worth
$1,000,000, equaling a gain of $50,000 on a yearly basis. For an
average person, it is difficult to save that kind of money.
5. Deferred Capital Gain Treatment. Real estate investment
capital gains can be deferred by exchanging the property for
like-kind property. So, when the property appreciates and you
decide to sell it and do no want to pay the capital gains tax,
you can buy another property of like-kind and avoid capital
gains tax. This allows you to switch properties when required,
for example, an area might be facing downturn or you might be
moving, etc.
6. Once in a Lifetime Exclusion. Upon the sale of a personal
residence, the IRS allows an exemption and one does not have to
pay taxes on a gain of $250,000, if single and up to a gain of
$500,000, if married. For example, if you’re single and buy a
property and live there for five years and the property
appreciates by $250,000, you can sell the property and not pay
any taxes at all.
7. Principal Accumulation. This is strongly tied to appreciation
in the property value. Payments made toward the mortgage payment
help you accumulate principal which essentially helps you
establish a reserve savings account which you can later tap into
by obtaining an equity line of credit or getting an equity loan,
if needed.
8. Pride in Your Home. It is fun to invite people to “your” home
and feel good about it. It also instills confidence in your
family, your children and makes them more confident individuals.
9. No Landlord. You are in-charge and do not have to deal with a
landlord who might not make repairs or maintain the property as
you would like.
10. Leverage. Where else can you buy this size of an investment
with 0-5-10% down. You can buy a property for a personal
residence for as low as zero down or an investment property with
5-10% down, if your credit is good, and watch the investment
grow. This, in turn, allows the net investment return to be much
higher (than the actual appreciation rate on the value of the
property). To follow up on the example earlier, if the property
grows at 7% and doubles in value, since the amount invested in
buying the property might be only $50,000 (at 10% down payment),
the actual return is much higher on $50,000 investment.
11. The Real Cost of Renting! At $700 per month, with a 6%
rental increase per year, you will pay $110,719 over a 10 year
period. If the rent is higher, you can count on paying much more
and not getting any return or tax benefits at all.
