Houses or Apartments

The Pros and Cons of some Basic Investments

Houses or Apartments

Buying a house or an apartment is the most profitable purchase most people ever made. 

A house has 2 big advantages over other types of investments:

• You can live in it while you wait for the price to go up, and
• You buy it on borrowed money.

Houses have a habit of increasing in value at the same rate as inflation.  On that score, you're breaking even.

But you don't pay for the house all at once.  Typically, you pay 20% up front (the down payment), and a bank lends you the other 80% (the mortgage).  You pay interest on this mortgage for as long as it takes you to pay back the loan.  That could be as long as 15 or 30 years, depending on the deal you make with the bank.

Meanwhile, you're living in a house, and you won't get scared out of it by a bad housing market, the way you might get scared out of stocks when the stock market has a crash or a correction. 

As long as you stay there, the house increses in value, but you aren't paying any taxes on the gains.  And once in your lifetime, the government gives you a tax break when you do sell the house.

Some mathematics

If you buy a $100,000 house that increases in value by 3% a year, after the first year it will be worth $3,000 more than what you paid for it.

At first glance, you'd say that's a 3% return, the same as you might get from a savings account. 

But here is the secret, that makes the house such a great investment.  Of the $100,000 it takes to buy the house, only $20,000 comes out of your pocket.  So, at the end of year one, you've got a $3,000 profit on an investment of $20,000.  Instead, of a 3% return, the house is giving you a 15% return.

Along the way, of course, you have to pay the interest on the mortgage, but you get a tax break for that, and as you pay off the mortgage, you're increasing your investment in the house.  This is a form of savings that people often don't think about.

Fifteen years up the road, if you've got a fifteen-year mortgage and you stay in the house that long, the mortgage is paid off, and the house you bought for $100,000 is worth $155,797, thanks to the annual 3% increase in price.