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an investment perspective on a home

an Investment Perspective on a Home

Do you desire an investment that will turn your $10,000 into $80,000 in seven years? Wait, is this too good to be true? AND, you can live in it every day for the next seven years! Will that make it even better?

Today, if you purchased a $300,000 home with an FHA loan it would require a down payment of $10,500. If we are conservative and appreciated it at 2 percent annually, less than the U.S. average, in seven years the value of the home would be $344,606. Your unpaid balance on the mortgage loan would be $256,350 with normal amortization and give you an equity amount of $88,256.

The annual compound rate of return on the down payment would be 35%.  This number sounds so large, that you might start doubting the credibility of this example.

If we look at some of the alternative investments like a ten-year Treasury note that currently pays 1.73 percent. You will earn 2.1 percent on a ten-year certificate of deposit (CD). If you are good at playing the stock market and can pick a good stock, you might earn 7-10 percent. But that is not guaranteed.

There really is no alternative investment that can earn the return that an owner-occupied home can offer while giving you the ability to live and enjoy the home during the holding period.

Even if you could find an investment that paid a good return, when you realize the gain, you’ll be required to pay income tax, either at long-term capital gains rates or ordinary income.  However, a person who has lived in a home for at least two of the last five years can exclude up to $250,000 of gain from their income if they are single and up to $500,000 of gain if the owners are married, filing jointly.

A home can certainly be a place of your own to feel safe and secure, to raise your family, share with friends and build memories.  A home could be considered an emotional investment and one that pays big dividends.  A home is also a financial investment not just for the reasons mentioned above but also because the equity can be accessed by doing a cash-out refinance or a home equity line of credit.

If you have any questions regarding renting vs. owning, give me a call at (703) 303-4010. For financial questions, I can refer you to one of my qualified vetted professionals.

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