Owning a home has long been a core component of “the American Dream,” and for good reason.
Today, roughly 65% of Americans own their home. According to the National Association of Realtors (NAR), homeowners amass significantly more wealth than renters, which is just one of the benefits of owning real estate.
Let’s explore five unique benefits of homeownership.
1. Your home is your own
There’s something comforting about walking into a home that’s your own. You have the freedom to renovate, decorate, and do with it what you will (excluding anything unlawful). Want to customize your closets or paint a giant mural on your ceiling? Go for it! Home movie theater with a built-in soda fountain? Why not! When you own your home, you’re the one in charge.
2. You get to enjoy certain tax benefits
If you’re a homeowner, you can claim tax deductions on several expenses, including mortgage interest and property taxes. Another noteworthy benefit of homeownership is the Internal Revenue Service (IRS) capital gains tax exclusion. As long as you own your home and occupy it any 2 of the last 5 years, you can exclude up to $250,000 of capital gains tax ($500,000 if married and filing jointly).
If you’re unclear about how that works, here’s a quick real-world example.
You buy your home for $300,000 and live in it for six years before selling to move into something larger. You sell the home for $450,000, which is $150,000 more than you paid for it. Ordinarily, if you buy a house (or any asset, like stocks or precious metals), and sell it for a profit, you’ll pay capital gains tax. However, when the home you own serves as your primary residence, you can simply exclude up to $250,000 of that gains tax and maximize profit when selling your home. That would translate to a savings of up to 20%, which in this scenario, would be $30,000.
3. You build equity
Every month you pay your mortgage, you contribute to the actual portion of the home that you own. This method of forced savings can help you build long-term wealth, and in fact, a study from the National Association of Realtors (NAR) shows that homeowners have a net worth that’s 40 times higher than that of renters.
Another benefit of home equity is that you can tap into your ownership interest in your property without selling it. For example, if you want to make some home improvements, you can borrow against the value of your home by taking out a home equity loan or a home equity line of credit (HELOC).
4. Your payments are more predictable
As a renter, you’re at the whim of your landlord when your lease is up for renewal. Some landlords might not increase the rent in a given year, while others may impose a 5%, 10%, or even 20% price increase. When you rent, you have no way of knowing whether or not the costs will increase in the future.
When you have a fixed-rate mortgage on your home, your principal and interest payments remain the same (though the taxes and insurance may vary). That means what you pay for your mortgage in 10 years will be exactly the same as what you pay now (unless you refinance, recast, or modify your mortgage). In a way, you could even argue that the cost of your mortgage decreases since inflation makes assets more expensive, but your mortgage payments can remain the same throughout the life of your loan.
5. Real estate tends to appreciate in value over time
As an asset class, real estate is generally regarded as a relatively safe investment. While there are never any guarantees, real estate is attractive because the world’s population is constantly growing, and there are a finite number of homes. In other words, there is a limited supply and growing demand.
Another one of real estate’s unique qualities is that, unlike stocks and bonds, it’s a tangible asset — real estate is real. Historically, residential real estate and equities (i.e., stocks) have performed similarly, posting gains of around 7% annually. But, as I always like to say, “you can’t live in your stock portfolio.”