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The Smartest Investment You Can Make in Your Lifetime

By: David Bach  |  Last Updated: October 22, 2020
Financial Expert & 10x New York Times Bestseller
IN THIS ARTICLE1. Owning a home forces you to save money
2. You get tax breaks as a homeowner
3. Interest rates are historically low
How to take the next step and become a homeowner

The smartest investment you can make has nothing to do with stocks or mutual funds — I strongly believe that it’s buying a home. Homeownership is an escalator to wealth. I know because I’ve lived it. But don’t just take my word for it: Statistics show that the likelihood of you becoming rich as a renter is low. According to The Federal Reserve’s most recent Survey of Consumer Finances, the median net worth of renters in America is a little more than $5,000. For homeowners, it’s about $200,000, or about 44 times more.

So yes, real estate works — and one of the first things you should be saving for is a home. People’s homes are often the most valuable asset they have when they retire. 

If you’re still renting, have a stable job and aren’t planning on moving cities anytime soon, now may be the right time to consider homeownership. 

After all, you have to live somewhere for the rest of your life, so you might as well invest in a home that you could own permanently. 

 

Think about it this way: Say you spend $1,500 a month on rent. Over 30 years (without any rent increases), you will spend $540,000 — and at the end of that time period, you don’t own anything. To live somewhere, you will have to continue paying rent every month. 

On the other hand, if you took out a 30-year mortgage with the same $1,500 payment amount, you could buy a home at roughly $250,000 — and you’d eventually own it free and clear. Not only will you own your home after 30 years (and hopefully much sooner than that if you can pay your mortgage off quicker), but you won’t have to make any more mortgage payments.  

The renting path leaves you with a recurring monthly expense, no asset, very little savings and reduced financial security. Your landlord profits because your rent payment goes toward buying their building!

The ownership path leaves YOU in control of a significant asset, more wealth, better financial security and no more rent payments! 

Not convinced yet? Here are three more reasons why buying a home could be a great move for you right now.

1. Owning a home forces you to save money

If you buy a home with a standard mortgage that pays down principal and interest, you’re “forced” to save because you have to pay your mortgage if you want to keep your home.

The reason homeowners have a greater net worth than renters is because over time they pay down their mortgages, which in turn builds equity. At the end of your 15- or 30-year mortgage, you own a home that you can sell. People who rent, on the other hand, will just be resigning a lease — they own nothing and have to plan to save and build equity without real estate. As the stats show, they won’t save as much, if at all.

2. You get tax breaks as a homeowner

One of the biggest tax breaks for homeowners right now is that they are allowed to “deduct” the mortgage interest from their taxable income. How much you can deduct depends on when you took out the mortgage:

  • If you took out your mortgage on December 16, 2017 or later, this deduction applies on the first $750,000 of the home loan. 
  • If you took out your mortgage on October 14, 1987 through December 15, 2017, this deduction applies on the first $1 million of the home loan.

Let’s say your $1,500 monthly mortgage payment includes $750 per month of interest charges. That means, you can deduct a total of $9,000 in taxable income ($750 for each of the 12 months of the year) on your tax return, so your effective payment is actually less than $1,500. 

You get zero deductions for rent.

Plus, if you sell your home and make a profit, you may qualify to exclude up to $250,000 of that profit from your income. If you’re married and file a joint return, you can make up to $500,000 tax-free.

You can’t do this in the stock market. You can’t legally avoid taxes on any normal investment gain the way you can on a home purchase. Plus, you can add any home improvement costs to the basis of the property so your gains are calculated above what you invested in the property.

I have made millions over my lifetime tax-free by simply living in my primary residence, having its value go up and then selling it. Then, I do it again. And I’m not alone. Many people have done exactly what I have done. Many have been able to retire just off the gain of their home’s value.

3. Interest rates are historically low

Rates have never been as low as they are today, due in part to the global uncertainty around the Covid-19 pandemic. That means that you can take out a loan for an insanely low cost, which makes owning your home more affordable than ever. Not only does that save you money now, but with a fixed-rate mortgage, you can lock in that low rate for up to 30 years. 

I recommend a fixed-rate mortgage, preferably a 15-year fixed mortgage if you can afford it. This way, you can take advantage of even lower rates and be out of debt faster. With a 30-year mortgage, you will pay a slightly higher rate, but have a smaller monthly payment. If you go this route, I recommend setting up a biweekly payment plan, which is a super simple way to pay off your 30-year mortgage early without feeling cash-strapped. 

Under a biweekly plan, instead of making the monthly mortgage payment the way you normally would, you split it down the middle and pay half every two weeks. When you make a payment every two weeks instead of once a month, over the course of a year, you will make 26 half-payments. That’s the equivalent of 13 full payments, or one more payment than there are months in a year.

Whether you choose a 15- or 30-year mortgage, now is a historically great time to get in the game of homeownership if you’re still renting.

How to take the next step and become a homeowner

As a homeowner, you’re in control, meaning you will have way more options for your future self. Yes, you will need a down payment — and yes, that may take time to save up for — but you may also qualify for a low down payment option.

If you’re convinced that now may be the right time for homeownership for you, the next step is figuring out how much house you can afford and starting the mortgage lending process. Getting the financing right is one of the most important steps in the homebuying process, if not the most important. You can start the process today with any of the reputable mortgage companies that I recommend to all of my readers below.

And remember — if you already own a home, NOW IS THE TIME TO REFINANCE.

I put that in caps so you can’t miss it. You want to act on this today.

Still on the fence? Learn more with me: I partnered with Money.com to create The First-Time Homebuyer Challenge, which is a free, five-day course designed to help you learn the five critical steps of the home-buying process. 

If you’re still renting, it doesn’t hurt to complete the challenge and be better prepared to buy when the time is right for you. Your first home may be closer than you think!

Check out my top recommendations for mortgage lenders

Read next: Why Right Now Is the Best Time to Refinance Your Mortgage