Homes in the US are viewed as a signs of success for those who own them… you buy a home and you’ve made it. Those reading this website know that just because you signed a contract with a bank it doesn’t mean that you are suddenly wealthier.
A home has the potential of saving you money on rent, saving you money on moving every few years and it could even make you a little bit of money if used properly. In the past I purchased 2 other homes and they were more luxury goods… high cosmetic function and low practical function. I chose my current condo because:
- it saved me money in comparison to paying rent
- it had low overhead (prop. tax, HOA dues)
- good location (library, public transportation, grocery stores)
- good rental income potential
When you invest money into the stock market you can expect that it will generate some sort of profit. If you are a dividend-investor then maybe you’re getting 3-5% of return. If you are doing passive index investing you might be in the 3-4% range. If you are day-trading or options trading then possibly 8-10% and higher. A house can be viewed the same. If your home is paid off then it will save you however much you were going to pay on rent.
So if you paid $250k for your home and were paying $2,500/mo in rent previously then your $250k investment just saved you $30k/yr. So this ‘investment’ has a rate of return of 12% which is pretty fucking sweet.
I bought my condo for $142k in cash. I was paying around $800/mo for rent previously which is $9.6k per year. That means my condo investment is having a rate of return of 6.7%. Of course my condo has HOA fees and property taxes and it also has some miscellaneous maintenance costs. Those add up to around $350/mo. Let’s not make it too complicated however, you get the point.
So you need to decide what kind of home you will buy. Will you buy the big, gas-guzzling Range Rover that’s overpriced and useless for real off-roading? Will you buy the Porsche because all your colleagues have one? Or will you buy the used Kia with good gas-mileage, low maintenance costs and cheaper upfront cost?
Don’t assume that you can’t have it all. Your needs and goals are different from others. Most people want the biggest home they can get for their money in the nicest neighborhoods and the best “school district”. School districts are bullshit and subject to change… that’s a whole different topic that you’ll just have to research yourself. Safety is important when it comes to neighborhoods but due to high news consumption by the American public our “safety gauge” is quite distorted.
If you pay cash for your home and you decide to rent it out it should allow you a rate of return of somewhere around 3-4%. It needs to be in a neighborhood where people are willing to rent. Too upscale and everyone will buy, too ghetto and it’s all rentals which may mean a lower standard of living.
A $300k house should return at least $10k per year after you account for HOA dues, property taxes, maintenance costs, property insurance and vacancy or property management fees. If it’s an investment property the rate of return should be much higher, but since it’s a place you going to live in for a while that rate can be lower.