Home ownership has long been associated with individual wealth. In fact, there are few endeavors an individual can undertake that have as drastic an impact on your net worth as owning real estate. In this blog post, Brandon Turner of BiggerPockets.com lists four ways real estate can help you create some serious net worth.
For most people, changes in the tens and hundreds of thousands of dollars – or even millions – in the asset column of your balance sheet can be hard to come by without some real estate ownership. Therefore, it goes without saying that market changes that impact the price of your property can have a tremendous impact on those numbers.
Over the next five years, home prices are expected to appreciate 3.22% per year on average and to grow by 17.3% cumulatively, according to Pulsenomics’ most recent Home Price Expectation Survey. Read more…
Those numbers are projections – they’re expectations or estimates. They haven’t happened yet, and they’re not intended to spur anyone into a purchase of or investment in a house or otherwise. Rather, they illustrate how real estate as a whole can tip the scales when we’re talking about wealth and net worth for a family.
In fact, this Economist article outlines the work of Thomas Piketty’s book, “Capital in the Twenty First Century,” where he discusses inequality and the role investments have in creating it. His argument is basically that the return on investments are focused more in the capital gains, as opposed to gains in labor, earning investors more money. Investors in turn reinvest for more wealth. Granted, that’s overly simplistic, but it’s enough to serve the purpose of this post.
The book received some major criticism in the form of a blog post by a 26-year-old MIT graduate student named Matthew Rognlie. In summary, Rognlie argues that while most investment gains are relatively stable, real estate outpaces the market, disproportionately creating wealth for owners:
“The return on non-housing wealth, in fact, has been remarkably stable since 1970 (see chart). Instead, surging house prices are almost entirely responsible for growing returns on capital.”
The implications for such an argument are far-reaching indeed, and though the blog post has its critics, it seems that both Piketty and Rognlie agree that real estate plays a part in the creation of said wealth. Perhaps they just aren’t in agreement on the extent of that role and other factors.
Regardless, it is clear that real estate significantly impacts the bottom line of families and individuals … but how?
In the previously mentioned article on Entrepreneur.com, Mr. Turner lists four ways real estate can make you a millionaire:
1. Cash flow 2. Appreciation 3. The loan pay-down 4. Tax benefits
The details of each item on that list are beyond the scope of this particular article, but you’re encouraged to read the entire article if you’re interested in how real estate can contribute to family wealth.
“Not only is homeownership something to be proud of, but it also offers you and your family the ability to build equity you can borrow against in the future. If you are ready and willing to buy, find out if you are able to today!” Read more…