Suppose I told you about a spectacular investment -- something that was low-risk, but delivered strong returns year after year, with almost no down years and tax advantages that no other investment vehicle could match? Such an investment exists, and it's almost too good to believe. Consider:
- It's extremely low-risk. While investors do occasionally lose money on this opportunity, it's almost impossible to lose your entire investment.
- Despite the low risk, returns can be strong -- more than 10% during some years. And even when returns are low, they almost always keep pace with inflation.
- It's extremely tax-advantaged. Your gains when you sell could be all (or mostly) tax-free, regardless of your age or earned income status, with a minimum holding period of only two years.
- If you don't have the cash available to make this investment, there are businesses that will rush to lend you what you need -- and the interest on those loans is tax-deductible.
And the biggest advantage of all? One that no stock or mutual fund can match?
- You get to live in it!
I'm talking about a home, of course. While investing in homebuilders like Toll Brothers (NYSE: TOL ) and D.R. Horton (NYSE: DHI ) can be a hit-or-miss proposition over time, owning your own home is pretty close to a can't-miss investment, especially if you buy carefully and hold for at least a few years.
Many of us aren't used to thinking of our homes as part of our overall investment portfolio, but they are -- and thinking about them in that light can help us make better decisions when we buy, fix up, or sell our homes.
Thanks, Mr. Tax Man!
While homeownership would obviously be worthwhile even without the tax advantages, the special tax breaks given to homeowners are a big part of what makes a home such a strong investment. Most Fools know that interest on a home mortgage is tax-deductible (as are points and loan origination fees), but some are surprised to learn about the huge tax exemption you get when you sell. The first $250,000 of profit on the sale of your home is tax-free. If you're married and file jointly, that number swells to $500,000. Tax-free. Period. No fine print about having to have earned income or be age 59 1/2 or any of that. It's just yours. The only condition is that the home has to have been your primary residence for at least two of the last five years before you sell.
In fact, quite a few couples have used that exemption on gains to build significant wealth over time by moving into fixer-uppers, spending their nights and weekends doing the fixing, and selling them at a significant (tax-free!) profit a couple of years later. The success of stores like Home Depot (NYSE: HD ) and Lowe's (NYSE: LOW ) , which make contractor-grade materials and tools easily available to ordinary folks, make do-it-yourself efforts easier than ever -- but it's still hard work, of course, and not for everyone.
Still, if you enjoy swinging a hammer or have a knack for hanging wallpaper, this can be an enjoyable and satisfying way to significantly increase your wealth. And even if the house you buy is in good condition, doing your own remodeling -- provided you know how, are confident you can do a good job, and don't do anything too wacky -- can add considerable value to your investment, as well as make your home a nicer place to live.
We all know that real estate has historically appreciated over time, but by how much? Truth is, the average rate is a hard thing to nail down -- the rates of appreciation vary wildly from year to year, and from place to place. The U.S. Department of Housing and Urban Development tracks these changes and variations via the House Price Index, and if you follow that link and spend a few minutes exploring, you'll start to get a sense of the regional variations over time. For instance, in 2006, house prices in the Fool's home state of Virginia were up 7.46%, versus 4.6% for California and a mere 0.45% for Massachusetts, two states that are often thought of as having "hot" real estate markets. But go back five years, and you'll see a completely different picture, with prices in Massachusetts increasing by more than 12%, well ahead of both California and Virginia.
Just to be clear, not everyone is going to see high returns every year. The housing market has bullish periods and bearish periods and bubbles, just like any other market. In fact, your return in your area over any given span of time might be quite low after adjusting for inflation. Subtract interest and property taxes and maintenance expenses, and your house might not seem to compare well with the S&P 500, even with all the tax advantages. But I still say it's a great investment, one that everyone should consider making if they can. (Check out fellow Fool Mary Dalrymple's thoughts on renting vs. buying for an idea of the considerations that should drive your decision.) A home provides a stable reservoir of value that is likely to at least keep up with inflation over time, a solid foundation for your overall wealth-building plan, and an opportunity to build sweat equity. And of course, you can't live in an index!
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