Why Home Ownership = Millionaire in the Making
Do you want to create real wealth? Well you may already be on your way– that is, if you own a home. Studies show that owning real estate is foundational to wealth-building. In fact, 97% of millionaires own their own home, versus 62% of the general population. And that’s no accident! People who have a wealth-building mindset understand the critical role real estate plays.
So how exactly will home ownership help your ship to come in? Below are seven key ways real estate helps build wealth. And to bring those seven points home (pun intended), I’ll use an example of owning a $185,000 house in the Charlotte, NC area. This price represents the median home value in Charlotte and is very close to the median U.S. home value of $188,900:
- Oftentimes, your mortgage note on a house will be less than rent for a similar house. But even if it’s the same, home owners are still in a much better position because rental values increase over time, whereas fixed rate mortgage payments stay the same. So, if the average rental value in Charlotte is around $1,400, and rents increase on average 3% per year, by buying that same home with a mortgage payment of $1,400, you save $23,978 over 30 years.
- Secondly, paying a mortgage versus paying rent allows you to build equity in the home, a home you will eventually own once the mortgage is paid off. Renting means that you are helping your landlord build equity instead. So, in our example, that’s another $185,000 of wealth.
- You’ll enjoy appreciation— that is, the rise in value of the home over time. On average, home values increase 5% per year, even factoring in recessions. So, after 30 years, your $185,000 purchase will be worth a phenomenal $799,559! The actual appreciation is $614,559.
- Mortgage interest is tax deductible. Less taxes owed Uncle Sam means more money in your pocket! The amount of savings here depends on your tax rate, but let’s just use a 20% tax rate for our example. At 5% interest rate, you will pay $162,810 in interest over 30 years. Your savings from the tax deduction? $32,562 over 30 years.
- Owning your own home means that you can rent it out for additional income, unlike many rental arrangements that forbid subleasing. You can choose to rent out your home temporarily, say, on Airbnb or when a special event comes to town and temporary housing demand rises. Or you could choose to lease out a room or entire floor. So, if you rent out a room for even just the first 5 years at $200 a month– or rent out your home during that 5 years through Airbnb for two weeks for $1,200 a week, that’s a nice, cool $12,000. What’s more, if after the fifth year, you place that money in an investment yielding 11% annually, that’s another $151,025 at the end of our 30 year period!
- Once you have built up equity in the home, you may then be able to take out a home equity line of credit (“HELOC”) or fixed-rate home equity loan. This gives you access to cheaper financing than traditional personal loans and you could save money on interest if you use it to, say, buy a car or pay for college (as compared to PLUS loan rates). Or you could even use it to buy your first investment property and begin fast-tracking to financial freedom. (Look for a post next week on how investment properties can build real wealth very quickly as compared to other traditional investment vehicles). Oh, and just like your mortgage interest payments, the HELOC and home equity loan interest is tax deductible. Because of the variable nature of this home ownership benefit, I won’t include any numbers in our example.
- One last benefit is that homeowners who have lived in their home at least two years of the five years immediately before the sale do not owe taxes on the sale proceeds. This can present a great opportunity to do what I like to think of as a long flip—buy a fixer-upper for below market value, fix it up over two years, then sell it tax-free. Rinse and repeat. I won’t run numbers for this scenario because our example assumes a 30-year hold time, but just know that this is a path to relatively quick wealth (more on this in next week’s blog post).
So, after 30 years of home ownership, you would have a whopping $1,019,124 in equity, tax savings, and rental income. And if you were savvy and invested your savings just like the rental income, you’d have even more. Now, I understand that that $1M+ is in today’s dollars and does not factor in inflation. But, hopefully it’s still clear that owning a home, especially if you’ve made smart moves in buying the home (see my prior post on this topic here) is a cornerstone in building wealth.
Read next week’s blog for more detailed information on investment properties.