Why do people buy houses they don’t plan to pay off? Most people don’t spend their entire lives paying off one house, so what is the financial benefit of getting a “starter home”? I’m new to the economics of real estate and I’ll take any wisdom offered.
In: Economics
The point is that landlords don’t work for free so by owning a home and renting to yourself, you can absorb whatever profit landlord usually gets.
Being your own landlord also means you have rent control and decision over additions, paint, maintenance and improvement.
Buy house.
House increase in value.
Sell house for more money.
Bank gets what you borrowed and you get the rest (i.e. More money than you had).
Repeat.
You have 2 dollars and want to buy a house for 10,the bank gives you 8 dollars.
Now you have 2 dollars worth of a house and with your recurring payment you pay 1 dollar of interest (cost of the loan) and another 1 dollar as paying off the loan.
So after a year you will pay 2 dollars and own 3 dollars from your house, the bank will own 7.
This does not sound good, except there are two additional things happening. You don’t have to rent and inflation is affecting the loan.
You probably save a dollar on renting, so it’s not more expensive. Additionally if the price of the house increases to 15 dollars, the bank still own only 8 dollars, so now you have 7 dollars worth.
The generic advice is that you should always pay back the loan as soon as possible, because house price inflation is rarely higher than interest rates.
Houses sit on land. Land is a commodity that is not increased. Outside of UAE, they ain’t making anymore. The demand will increase while the supply remains fixed, making it a safe investment.
A starter home is unlikely to cost more than rent for that particular size home, but rather than you just paying to live there, you will very likely get the money back if you move after some time.
A home gives you more options.
There’s utilizing the equity you build.
Rental potential.
Leverage opportunities via government subsidies.
Credit line diversification.
…and you have somewhere to live.
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