Your #1 investment
Buying a home is the biggest investment most individuals will ever make. When it comes time to retire, a home is usually the single biggest asset available to fund a long and financially secure lifestyle. Very often, a home is the biggest asset passed onto the next generation.
When it’s time to cash out, a major factor determining your home’s value is how well it’s been maintained and upgraded. With a well thought-out plan, you can make hundreds of thousands - sometimes even millions - when you sell your family home.
In this inaugural issue of The Wealthy Home Owner, we’ll explain why buying a home should be the Number One investment priority for everyone.
Next month, we’ll tell you about 6 easy-to-do upgrades that can increase the value of your home investment, while simultaneously enabling you to live a more comfortable lifestyle.
Ron Hume, Publisher
Ron has been teaching real estate investing for over 30 years. More than 120,000 individuals in the US and Canada have enrolled in Ron’s self-study program, “Successful Real Estate Investing”.
6 reasons why buying a home should be your Number 1 investment priority
YOU are always in control.
With stocks and bonds and security-based investments, you have no control over their day-to-day management. Even when you invest in “blue chip” companies, the money you invest can go down the flue because some CEO makes a poor decision.
For generations GM, Chrysler, Lehman Brothers, and Merrill Lynch were considered ultra-safe investments. But over a two-year period all of these companies filed for bankruptcy. Why? Poor management. Imagine sustaining these investment losses when it wasn’t you who screwed up! When your invested capital is in your home, you are always in control.
Use other people’s money to build your net worth.
Here’s how the numbers crunch when you make a down-payment of 20% on a home and take out a mortgage to fund the balance of the purchase price.
Assuming the home’s value increases in lockstep with an inflation rate of 3% over a 6 year period, you will generate a 15% ROI on your down payment … and more than double the equity in your home investment. Not too shabby!
How does this compare with other investment opportunities? Well, the average return on mutual fund investments ranges from 8%-10%.
Taxation is probably the single most important point to consider when deciding where to invest your hard-earned money.
In the US, you can deduct the interest – up to $1 million in mortgage costs – on your primary residence. And, you can sell your primary home and make tax-free profits. If you’re married, you can claim a capital gain of $500,000 after living in a home for two years. For singles, the capital gains exemption cap is $250,000.
In Canada, you pay no capital gains when selling your principal residence. This is a completely tax free profit.
Let’s look at a real-life example over a 30-year period. In 1987, the average cost to buy a home in Toronto was about $200,000. Today, that same home would sell for $750,000. In other words, if a couple had invested in a home when in their mid-twenties and sold it when they retired 30 years later, they’d have a tax-free profit of $550,000 to fund their retirement years.
Enjoy the benefits of owning a tangible investment.
When you buy shares in Apple or Google, you don’t automatically get the latest version of the iPhone or a new laptop. When you invest in Ford, you don’t automatically get a fully-accessorized Ford vehicle.
But when investing your money in a new rec room or bedroom, two things happen simultaneously: the value of your investment goes up, and your lifestyle improves.
To learn how home improvements generate a meaningful return on investment for home owners, just hit reply and I'd be happy to help you out!
Protect your invested capital during periods of market volatility.
Stock markets and real estate markets both go through phases of volatility, sometimes severe. As a savvy investor, you have to accept this reality. (The good news: over the long-run, both stock and real estate markets go up steadily.)
As a homeowner, however, you have more options available to deal with ups and downs than when you are invested in securities. Should you lose your job during an economic turndown, you can always cut back on your everyday living expenses, or rent out space in your home to cover the mortgage payments. Eventually, your home investment will recover its original value … and probably grow.
When you’ve borrowed money to invest in security-based investments, the options available to deal with a market meltdown are limited. When you get a margin call from your investment dealer because markets are in free-fall, you’ve got to come up with cash almost immediately or your securities will be sold off to cover the money you’ve borrowed. And you can’t “rent out” your securities while waiting for the markets to rebound! You’ll be forced to sell your stocks at the lowest point in the business cycle. Disaster!
Real estate is the world’s most secure investment.
Mark Twain was right on the mark when he said, “Buy land – they aren’t making any more of it”. Think about it: of all the investment opportunities in the world, real estate is the only one based on a permanent asset that will exist as long as the world exists. And it will become increasingly valuable because the population goes up while the supply of real estate is fixed.
A word of caution
Before taking out a mortgage, take a close look at your current financial situation as well as your future plans and lifestyle. It’s important to determine how much debt you can comfortably handle.
What happens if your job falls through? Will you be able to continue making your mortgage payments? Consider how the payments will affect your spending and your ability to deal with sudden or unexpected financial needs!
Savvy home owners will have a Plan B they can turn to, if they run into unexpected financial difficulties.
Real-life case study
Here are real-life facts and figures showing how one couple secured their financial future using the investment strategy detailed in this article. To keep their financial affairs a private matter, we’ll refer to the couple as Patricia and Ron.
In 2002, this savvy couple purchased a detached, 3-story, 4-bedroom house in the West end of Toronto. The house had not been upgraded for years, so Patricia and Ron got it for $450,000. At the time, this was a very good price for the neighborhood.
Upon moving in, they began investing in a series of upgrades and renovations, rather than investing in other available options. With each upgrade, they enjoyed an improved lifestyle. Over the years, they invested approximately $400,000 in these home improvement projects.
After living in their home for 15 years, Patricia and Ron decided to cash out on their property investment. At this point, the combined purchase and upgrading costs totalled about $950,000. They sold in March, 2017, for $1,800,000. This represents a tax-free capital gain of $850,000, or an annual after-tax ROI of 12%.
They also enjoyed the following benefits, which wouldn’t have been possible if they’d placed their money in security-based investments:
- Their personal life style improved with each home improvement project.
- They had full control over their invested capital. Some of their friends who’d invested in what - at the time - seemed like sure-fire winners didn’t do so well, buying shares in Blackberry and Nortel.
To learn current rates on mortgages:
In Canada visit: https://www.ratesupermarket.ca/rate_pulse/mortgages
To see current trends in home prices:
In Canada visit: http://creastats.crea.ca/natl/index.html
Managing editor: Micah Munro
Staff writer: Michael Caplan