Do you want to stay in the big city, or in a small hamlet? There are many questions to consider when deciding where and how to live, and much has nothing to do with money, as we saw in What is a financial investment?
Financially the big question is, of course, “to buy or not to buy?”
Is a house an investment?
House prices generally go up, although some years may show much better growth than others.
On average, over the long term, this growth is very close to inflation. This is to be expected. Houses are constructed from bricks and mortar and other materials, all of which become more expensive, in line with inflation, as years go by. And the wages of builders and architects, as well as the land on which a building stands, also tend to go up with inflation.
A home then,
which grows with inflation, but also requires some maintenance, is not a
financial investment. As a rule, property is only a financial investment when
it is rented out.
people, the best strategy is this: Buy the cheapest property in which you can
live comfortably. Invest the rest of your available funds in assets that
actually beat inflation.
Some advantages of owning your home
- Most people need a loan to buy a house. Any extra money you have can now be paid into this loan account. This is a very good financial strategy because the interest you are charged on your loan is usually a lot higher than the interest you earn when depositing your money at a bank.
- If you lack the self-discipline to save every month, then paying off a loan is a well-structured way of making sure that you save some money every month.
- There is a real tax advantage to staying in your own place. If you buy a house and rent it out, then you have to pay tax on the income, even if you use the money to rent a place for yourself to stay in. However, if you stay in your own house, then there is no tax to be paid. You are effectively renting the house from yourself, but without having to pay tax.
- You can maintain and improve your house while you stay in it. If you do this in a cost-effective way, you may add real value to your property.
Some disadvantages of owning your home
- A house is not a very liquid asset. The time and money involved in acquiring and disposing of a house usually mean that you have to keep it for a long time.
- You might live in an area where renting is very cheap. In such a case you should rather rent a house and invest the remainder of your money elsewhere. Ideally, you should live in the kind of property which you can rent out to others at a good return if you do decide to leave.
How to decide on whether a property provides good rental income, is next week’s topic.