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Why Buying a Home is a Smart Investment

Posted On January 13, 2021

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When people think of investments, they normally think Wall Street and stockbrokers. And while stocks can be a great investment, many experts recommend diversifying your investment portfolio to reduce risk and maximize returns.

The National Bureau of Economic Research says that returns of homeownership in a normal market are strong – “typically outperforming the stock market and an index of publicly traded apartment companies on an after-tax basis.” However, stocks and real estate investments are often compared as ‘apples and oranges’ – offering two very different paths.  

Stock investments  

When you buy stocks, you invest in a tiny portion of ownership in a certain company. Typically, you make money from stocks by value appreciation and dividends. Value appreciation is when the company’s stock increases and dividends are cash payments made on a per share basis from the company to the shareholder. Buying stocks can be a smart investment if you pair that purchase with a benefit that can boost your returns like a 401(k). Plus, it is highly liquid and requires less initial capital than real estate, in general. But stock values can be very volatile and may not offer high-yield investments without diversification.

Real estate

When you buy real estate, you invest in ownership of a property or piece of land. Real estate investors typically make money from rent collection (or imputed rent, if you live in the home), and home value appreciation. Collecting rent payments from people living in your home is a way many investing homeowners create a stream of income. However, if you are living in the home you own, then you would simply calculate imputed rent – or the estimated value you would be willing to pay to live in your home. Buying real estate is an appealing purchase for many investors because it's a tangible asset that can be controlled and it can help with portfolio diversification. Additionally, homeowners have the opportunity to take advantage of tax benefits. Make sure you do adequate research before buying a home – it’s not an asset than can be easily liquidated. Plus, you'll have to handle all maintenance and repairs.

A study by the fintech company Betterment showed that the return rate of buying a home is 8% – 10% per year. Rather than simply investing in real estate or stocks, investors should consider doing both. A variety of asset classes can help reduce your portfolio’s risk and increase its diversity. With inflation-adjusted home prices and low interest rates, homeownership returns are expected to remain strong.

If you would like to strengthen your investment portfolio, we would gladly help you look at your real estate investment options. Individual situations may vary, and different investments may not be right for everyone. Make sure you talk to your financial advisor before making any large financial commitments.

 

Sources: Investopedia, Seeking Alpha