Although the legendary investor calls homeownership a lousy investment, buying a home is still a smart money move for many households .
In addition to tangible financial benefits, homeownership offers worthwhile personal benefits for many. Let’s explore both sides of the argument.
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Why homeownership can be a lousy investment
Before we understand why homeownership can be a wise financial decision for many, it’s essential to understand why many, including Warren Buffett, consider homeownership a lousy investment.
For starters, when you own a home, you’d have to sell the property to realize your investment gains unless you are willing to borrow against the value of your home. The lack of liquidity is a major turn-off for many investors.
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Investment (Disadvantage)
Beyond the inability to tap into cash quickly, investing in a home often requires a significant upfront investment. Plus, homeownership has ongoing costs beyond the mortgage.
Many homeowners quickly find out that caring for a home is very expensive. Every dollar spent on maintaining or upgrading the house could have been invested in another asset.
For example, you can build an investment portfolio of stocks that offers higher returns and more liquidity.
Commitment (Disadvantage)
Homeownership also involves transaction costs and typically requires a long-term commitment. Unlike renting, leaving a home you own behind isn’t as simple as paying out the remainder of your lease.
Instead, you may need to sell the home or become a landlord if you decide to rent out the property to offset some of the costs associated with the property.
Homeownership might not be the right fit for anyone who values the flexibility of regularly changing their living situation with minimal headache.
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1. Appreciation (Advantage)
When you buy a home, the property's value may increase over time, called appreciation. Although real estate doesn’t always increase in value, many homes do.
Between 2000 and 2023, homes in the U.S. increased in value by an average of 6% per year. Of course, buying a home doesn’t automatically mean the property's value will increase, but the possibility of appreciation is appealing.
2. Equity (Advantage)
When you own a home, a portion of every mortgage payment you make will build equity in your home. Instead of spending money on rent each month without gaining equity, homeownership allows you to capture a portion of your housing costs through equity.
3. Tax deductions (Advantage)
For homeowners who itemize their deductions, you may be able to deduct the interest you pay on your mortgage, property taxes, and other homeownership costs.
If you want to take advantage of your tax possibilities, discuss the details of your financial situation with a tax professional.
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4. Predictable housing costs (Advantage)
When you lock in a mortgage payment, your housing costs can still fluctuate. But your mortgage payment likely won’t fluctuate as much as rental costs could.
When mortgage costs change, you’ll often have a heads-up months in advance to adjust. For example, if property taxes increase yearly, you can expect that in your budget.
In contrast, renters tend to have less predictable housing costs, which can put extra strain on your budget.
5. Personal freedoms (Advantage)
When you own a home, you have the final say on everything. If you want to upgrade the kitchen or repaint a room to suit your needs, you can make adjustments without talking to the landlord.
Or you might finally get the pet you’ve always wanted without dealing with the landlord’s restrictions or pet fees.
The personal freedoms that come with homeownership are ideal for anyone who values the freedom to completely control their own space.
6. Stability (Advantage)
When you own a home, you are often more likely to stay in that residence for a long time. You can focus on other things without spending time and effort moving around regularly.
For example, you might be able to build out a side hustle or push your career further if you’ve locked in a place to call home.
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Bottom line
As with most major financial decisions, homeownership has advantages and disadvantages. Before making a home purchase, weigh out both sides of the equation and work to prepare yourself financially .
In some cases, locking in a home purchase makes sense. In other cases, you might be better off renting for now.
Money tips that can work for everyone
No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.
Focus on paying off your debt. Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.
Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.
Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).
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