Buying a home is a common way to invest money. It provides you with a place to live and may also grow in value if housing prices increase. Your long-term financial plan could include selling your home in the future to build your retirement fund or grow your wealth.
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How could buying a home fit into your investment plan?
Buying a home can be an important part of your financial plan. Like any investment, there are benefits and risks. It can be a valuable investment, but your home shouldn’t be the only part of your long-term financial plan.
You can reduce risk in your portfolio by making sure you have a number of different investments — diversification. That way, if one does poorly, others may do better. Owning a home can be part of that diversification.
Consider how purchasing a home fits into your whole investment portfolio by learning about the different types of investments. Your investment mix should be a good match to your long-term goals, risk tolerance, and time horizon.
In Canada, the cost of real estate has risen significantly in recent years but has also fallen in some years. Depending on where you live, it may make sense for you to rent rather than buy a house — and put your long-term savings towards other large goals.
How does buying a home compare to other investments?
There are a few differences to keep in mind between home ownership and other types of investments, including:
1. Planning for costs involved with a home can be difficult
Most investments have costs like commissions and fees. The costs to maintain a home are different, and include property taxes, utilities and maintenance costs. Improvements, such as renovations or upgrades to appliances, will mean additional costs. You’ll also pay interest on your mortgage. And interest rates can go up, making your home more costly to own.
If you decide to buy your first home, do your best to budget for the costs you can predict on a monthly and annual basis. Try to have an emergency fund so you can more easily manage unpredictable expenses.
2. It may be hard to get your money out if you need it
When you purchase real estate, you lock your money into that investment for the market price at that time. The real estate market can swing up or down. Your home may increase in value, but this can take years.
Other kinds of investments lock in your money, but you can usually pay a penalty to get your money out if you need it. Buying a home may tie up a large amount of your savings. In addition to taking on mortgage debt which you’ll need to pay off before you own your home outright. Turning the purchase into cash means selling or renting out your home — and that can take time and effort, depending on the market.
3. The value of your real estate purchase depends on many factors
Like many investments, the value of a home can be affected by the economy and interest rates. But it can also be affected by other factors, including:
- Location – the return on investment for homes in some areas is higher than it is in others.
- Size, age and condition of your home.
- The housing market – if you’re buying to rent, or sell later, ensure you’ve done research on the local housing market before committing.
4. Buying real estate means borrowing money
Most people make a down payment on a house and borrow money to cover the rest of the cost by taking out a mortgage. This means you take on debt when you buy real estate as an investment.
A mortgage is a long-term commitment for you to plan for. The amount you pay each month may change depending on the type of mortgage you have and the current interest rate.
Our mortgage payment calculator can help you plan your payment schedule based on your expected term and interest rate.
If you pay down your mortgage debt according to schedule, it can have a positive impact on your credit history — you will be considered credit-worthy.
Before taking on a mortgage or another kind of loan, consider these questions to ask yourself before you borrow.
What are the benefits of investing in a home?
The benefits of owning a home include:
1. As you pay off your mortgage, you accumulate savings and equity. With each mortgage payment, you own a little more of your home. You’re closer to owning the large asset that forms a big part of your financial plan. You’ll also accumulate home equity, which can allow you to borrow for future needs.
2. You’ll own a place to live. Everyone needs somewhere to live, whether they rent or own their own home. Depending on where you live, and the size of your down payment, your monthly mortgage payments may be similar to the amount you would have paid in rent.
3. You’ll own an asset which could increase in value. Once you pay off your mortgage, your home is an asset you will own outright. You could sell it or rent it out to earn income.
What are the risks of investing in a home?
All investments come with risk. The risks of home ownership include:
1. Housing prices can fall. You could lose money if you buy your home when prices are high, and then sell when prices are lower.
2. You’ll need to maintain your investment. Unlike renting, when you own a home you’re responsible for covering costs of repairs, upgrades, or any damages not covered by insurance. These can be costly and come at unexpected times.
3. Homes can get damaged. Owning any large asset usually comes with the need for protection, such as insurance. You may need to prepare for damage from water, fire, wind, or other safety concerns. Home insurance doesn’t always cover everything. When you buy your insurance policy, read the fine print to understand what you are and aren’t covered for.
As you weigh the pros and cons of home ownership remember you can get support from a financial advisor, mortgage broker or insurance broker. Consider including family members in the discussion too.
The value of your home can change over time. Your home’s value will be influenced by many factors such as its size, location, condition, age, and recency of renovations. Also keep in mind the broader influence of the housing market, the economy, and changing interest rates. You can estimate the value of your home by working with an appraiser or getting an estimate from a real estate agent. Also, check out the Canadian Real Estate Association for an estimate of current home prices in major Canadian cities.
Summary
Buying a home may be one of the biggest investments you ever make. It can offer you housing stability and become a valuable part of your investment portfolio. It differs from other types of investments in several important ways. Before you buy, make sure home ownership is the right choice for you. Consider:
- There are many benefits to home ownership, including owning a large asset and building equity.
- There are also risks of home ownership. You’re taking on debt, as well as investing.
- It can be difficult to plan for all the costs involved in home ownership.
- Returns on your investment are unpredictable. It can be difficult to get all your money out if you want to sell, depending on the housing market.
