Should I Buy?
The big benefits of home ownership
There are a lot of other good reasons to own a home. One of the best, financially speaking, is the opportunity to benefit from appreciation as the value of your home rises through the years. In fact, if you’re like most people, buying a home can be the smartest financial decision you’ll ever make.
Your Home creates wealth in two ways
Equity Built up over time: Mortgages require you to pay down your balance over time, creating a form of “forced savings.” Even if your home never appreciates at all, you gradually build up more equity over time with your payments.
Appreciation: Of course, most houses in Jamaica do appreciate, averaging about 20% a year over the past 10 years. And thanks to your mortgage, you get to take advantage of that appreciation using leverage. That means using a little of your own money, plus a lot of someone else’s money (in this case, the mortgage lender’s) to make even more money.
Here’s an example
Here’s how it works. Say you purchased a Quad in Greater Portmore in 1991 for $90,000 and they have been appreciating at an annual rate of about 23%. In 2005, your house would be worth more than $1.6m. That means your down payment — $9,000 — would have grown to equity that equals $1,519,000. The growth in your home’s value represents a return of 275% per year on your original investment.
Even if you take out maintenance costs of 2% of the home’s value each year and throw in another 1% for Peril insurance and utility bills, you’re still looking at a return of more than 200% a year.
But this calculation also comes with caveats:
- If you sell your home within 3 years you won’t get all of the benefit. Every time you change homes, you lose about 20% of the value to selling and moving costs.
- Out-of-control spenders can still lose. If you drain off every dollar in appreciation through home equity loans and lines of credit, you aren’t building wealth — you’re destroying it.
- Home prices don’t always appreciate. Sometimes they plateau or even decline. There have been periods in our real estate market where you would have been better off renting and investing your down payment in the stock market.
Overall buying a home is the best alternative for most persons, as it carries great benefits for you and your family, but, you must be ready for this commitment to find the required deposit and closing costs, noisy neighbors and sometimes, unexpected expenses.
Home ownership as we have discovered, is not a ‘one size fits all’ it must be seen as part of our wealth creation strategy and we must choose the option that best suits our particular circumstances in life.