Back in 2014 I had a interesting conversation with my son about his home’s value. He told me that if he sold his home and moved, that he would rent instead of buy. As a Real Estate agent and investor I was surprised. Further discussion gave me insight into his thought process.
He bought his starter home in 2003. While most Tampa homes had recovered their value by 2014, his value had been held down due to a large number of foreclosures and short sales in his community. Even without the distressed sales, he had little equity in his home, and after paying closing costs and professional real estate fees he would have little to put down on another home.
I could understand his frustration, but I think he was only looking at his net at closing and not taking into consideration his long term benefits of ownership.
Here’s the benefits I asked him to consider:
- Little Change in Monthly Housing Costs – Monthly mortgage costs had changed some due to insurance and tax expenses, but in general his payment had stayed relatively flat, while rental rates in Tampa have increased significantly.
- Reduction in Federal Taxes – He was able to reduce his taxable income for those 11 years of ownership by writing off his mortgage interest.
- Freedom of Ownership – He was able to paint his home and make home improvements during ownership.
- Recapture of his down payment and more – When you rent it can be difficult to get your deposit back and to my knowledge you never have the opportunity to walk-away with additional cash in your pocket.
In my opinion, there are many advantages to owning Real Estate and those mentioned above are just a few. I believe leverage is a key aspect to owning Real Estate and creating wealth.
Even if my son didn’t make anything on the sale of his home, he didn’t spend much of his own money to buy the home so his risk was minimal. He used a down payment assistance program and was able to own an asset worth $97,000 for only $1500. If the value only increased 10% during his ownership he would have made 650% on his initial investment!
Fast forward to today and his home value is $160,000 – $185,000. Without taking into account that he still has his original mortgage which is substantially less, he has gained $63,000 – $88,000 on his tiny $1500 investment.
That is a 4200% – 5860% on his $1500 investment in 15 years. In my book that is a fantastic investment!