November 28, 2023

Searching the internet for whether homeownership is actually valuable will leave your head in a daze. Major players in the real estate investing space will argue that you shouldn’t own a primary home, while others will argue that you shouldn’t take on any debt, and many more will encourage you to accumulate as much real estate as possible. So many varied opinions pulling in every conceivable direction only adds to an already overwhelming decision and leads to the inevitable buyer thinking: “Am I making the right decision?”
Let’s explore. To understand why you should be a homeowner, we need to identify the many benefits of homeownership, primarily focusing on the financial benefits of homeownership: debt paydown, appreciation, and tax benefits. If it were an investment property, there would be even more: rental income and rental property depreciation.
To best understand the financial benefit of homeownership, let’s walk through a hypothetical scenario of a couple looking to buy in Santa Cruz:
Buying in Santa Cruz, CA:
Using a 30-year fixed mortgage at 5% interest rate
Married: Filed Jointly
Cumulative Income: $350,000
Purchase Price: $1.5M
Down Payment: $300k
Mortgage Amount: $1.2M
Monthly Payment: $6,441.86
Let’s assume this couple (referred to as Jack and Jill) are first-time homebuyers who plan on starting a family soon. They are both successful in the tech industry, love the lifestyle of Santa Cruz and now have the benefit of working from home. With Santa Cruz being 30% cheaper than Silicon Valley, it becomes a very attractive choice. As they commit to the 5-year plan, they are weighing the decision to Rent or Buy.
An ideal 3-bed-2-bath rental just came on the market for $5,000.

If they rent for 5 years at $5,000 per year, they will have paid $300,000 to someone else.
NOTE: This doesn’t even account for the potential of continually rising rents.

The monthly payment with principal and interest in this scenario is $6,441.86. You also have additional costs such as property taxes, utilities, and repairs/maintenance. Adding property taxes to the equation the monthly cost expands to $7,979.36.
At first glance, renting seems like the obvious choice but let’s dig deeper.
One of the benefits of owning is that instead of paying off someone else’s mortgage, you are paying off your own. The Principle Paydown is the portion of the payments that go toward actually paying off the house. With an amortization schedule, the majority of the early payments are going toward interest on the loan but as you pay it off over the years, more goes toward the principle. This allows you to build equity in your home. After five years, the equity built from debt paydown is $98,055.21.
Another huge benefit for homeowners is the tax benefits. The interest that you pay on your mortgage is tax-deductible as is the property tax (although the property tax deduction is capped at $10,000 per year). After five years, the cumulative tax benefit is $142,667.04.
Historically, Real Estate prices go up over time so it’s safe to predict the value of your home will continue to rise after purchasing. We assumed a highly conservative 3% annual growth rate. For reference, the Cumulative Annual Growth Rate (CAGR) in Santa Cruz County since 2010 is 7.6%. After five years, the value added from appreciation is $238,911.11.

After 5 years:

In the example above, homeownership would pay these potential homeowners about $80,000 a year!
In conclusion: should this couple rent or own?
If Jack and Jill rent, they are paying $300,000 over 5 years. They have built no equity, paid down no debt, nor experienced the pride of homeownership.
If Jack and Jill own, their monthly payments are significantly more expensive. However, they are receiving the benefits of homeownership in principle paydown, tax savings, and appreciation. Their cumulative benefits exceed their monthly total expenses. This means they are building wealth by just owning the home. Add to that they aren’t paying rent and are experiencing the NET value of homeownership, the overwhelming answer to the question is:

Homeownership > Renting
NOTE: if you’d like to plug in your own numbers on the sheet I created, click HERE.
Wrapping up, analysis and data help us sort through the noise to make high-quality decisions. The data makes a couple of things crystal clear: homeownership is extremely valuable, while renting is not. Homeowners have the opportunity to create and add value. If their vision is right, they can add significant forced appreciation to the home. It just so happens that, monetarily, it’s also an incredibly sound financial decision.
So, buyers: if you are asking yourself, “Am I making the right decision?”, the answer is a resounding YES!

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