All of the talk about changing tax laws has many people wondering if they’ll still recognize tax savings from home ownership. Truth be told, many people won’t need to deduct their mortgage interest beginning in 2018 due to the increased standard deduction, but there are many other reasons why owning your home, and owning real estate in general, is still one of the smartest financial moves you can make.
I think all reasonable people will agree that real estate appreciates over time. There may be ups and downs along the way, but over the long run, the value always increases. I think we can also agree that your housing expense is one of the largest monthly expenses you have, if not the largest. That said, it’s easy to see why owning your home is much more advantageous than renting.
When buying a home, most people take out a 30-year mortgage with a fixed interest rate. Let’s assume that you never borrow money against your home by refinancing that mortgage (when to use the equity in your home is a subject for another article.) Since inflation is a fact of life, we know that the price of expenses such as gas, food, and clothing will increase, but if you own your home, your house payment won’t.
For example, let’s use the scenario of someone who bought a house and someone who started renting a similar house in 2000. Let’s assume both families still live in the same home. For this example, we’ll use an average 4-bedroom, 3-bathroom Chino Hills home in the Butterfield Ranch area that sold for $257,000 in 2000. With a minimum 3.5 percent down and the higher interest rate from that time period, the house payment would have been approximately $1800 per month, including principle, interest, property taxes, and homeowner’s insurance. The same home rented for $1800 per month back then, so in the short run, the cost was the same.
Now fast forward to 2018. The same house now rents for $2500 per month, but the family who bought it back then still has a payment of $1800 – that’s $700 per month they get to keep. Let’s look at the value of this home in 2017. The same floor plan sold for $625,000 in October 2017, giving the family who bought the home a nest egg of $368,000. The family who’s been renting all these years is now paying $2500 per month and has no nest egg at all. I like to explain this by saying, “Renting is still paying a mortgage – it just means you’re paying someone else’s mortgage, not your own.”
But there are additional reasons to be a homeowner. There’s the security of knowing your mortgage expense is fixed, as well as feeling confident your landlord can’t refuse to renew your lease, forcing you to move, like it or not. How about the freedom that comes with home ownership? Flooring, wall colors, window coverings – these all make a home more beautiful and reflect your personal style, but these are also things that renters rarely get to choose. How about the family pet? Many landlords won’t allow pets, and even if they do, they may require an increased security deposit and possibly higher rent, which may mean giving up your dream of having loyal family dog Fido.
Here’s something you may not have considered: What are you leaving your kids when you die? If you own a home, you’re leaving an asset they’ll benefit from whether they keep the home or sell it. If you rent, you’re leaving them with bills, expenses, and the drudgery of cleaning out your rented home as quickly as possible so the landlord can rent it to someone new.
So now we can probably all agree that owning a home has definite advantages. But if you want to really build wealth, it’s not the home you live in that will help you do it, it’s your second home – the one you rent out, with rent that increases every year even though your mortgage payment stays the same. This is the home that builds equity while someone else pays the mortgage. Sound familiar? It’s the flip side of how this article started. Instead of renting and paying someone else’s mortgage, now you have someone else rent from you to pay your mortgage – a much more pleasant thought, don’t you agree? And the best part? The tax advantages to being a landlord were not affected by the recent tax changes, and with depreciation rules, you can definitely benefit on your tax return by being a landlord.
You should always consult with your own tax advisor who’s familiar with your specific situation to confirm the advice I’m giving you. If you don’t have a tax professional, I can refer you to one. Real estate is complicated, and so are taxes. If you have additional questions, feel free to call me. I can help you navigate this new climate of real estate and tax laws so you can start planning your future in real estate investing today.
Valerie Pestana has a degree in accounting and spent 15 years in tax preparation before becoming a realtor