Is Homeownership Still A Viable Path To Building Wealth?
Would you rather rent or buy? One of the biggest advantages of owning your property: your own home is still a good and secure building block for retirement planning. Because by buying a property instead of renting, the housing costs in old age can be drastically reduced.
It is therefore crucial that the house or apartment is as paid off as possible when you retire. A loan that is often necessary for building financing should be repaid by then. You can find out everything you need to know about “repaying your building loan” here.
However, if you want to buy a property for your use, you should have enough equity. It should be at least 20 percent of the purchase price to get the lowest possible interest rates from the bank. In principle, building financing without equity is also possible.
But the additional costs alone when buying a house or apartment can quickly add up to a five-figure sum, which then also has to be financed. Before you start looking for the right property, the financial framework should be clear.
The following five options are generally available for investing in one or more properties:
- Buying a property as your own home
- Buying a property as an investment
- Purchase of real estate funds and real estate stocks
- Invest digitally in real estate via crowd-investing
- Invest in real estate with real estate savings plans
How Does Homeownership Contribute To Building Wealth Over Time?
Anyone who invests in a property as their own home usually plans to live in it for several decades. This is why this form of real estate investment is a long-term investment. However, this also means that you are committed to the property for a long period. Selling a property that has not yet been paid off can be difficult and often involves financial losses.
In addition to the recommended equity share, a fixed income is a crucial prerequisite for a loan. The risk is quite low compared to other forms of investment, as real estate generally increases in value over the years.
What Are The Financial Benefits And Challenges Of Owning A Home?
If you don’t want to buy a house or condominium as your own home, but rather as a pure investment, you should consider other questions than when purchasing a property for your use. For the rental to work smoothly and for the property to generate as high a return as possible, the location and condition are crucial.
Well-maintained properties in sought-after locations attract more wealthy prospective buyers, generally bring in higher rents, and pose less risk of vacancies. In addition to the purchase price – just as with a home – the additional purchase costs and maintenance costs or maintenance reserves are also crucial.
A property always involves effort – for example, if there is a change of tenant, there are problems in the household or repairs need to be made. When buying a condominium, it is advisable to look at the minutes of the owners’ meeting before purchasing and to find out about the current tenants and other residents.
Is the project well planned and are the general conditions and conditions correct? Then a property that is to be rented out is a comparatively low-risk investment. To get a low-interest loan, you should bring at least 20 percent of the purchase price as equity.
Many private investors plan for a long-term investment period. However, this depends on the investment strategy, which we will discuss in more detail below.
How Can You Evaluate Whether Homeownership Fits Your Financial Goals?
There are some methods to evaluate whether home ownership is compatible with your financial goals as a beneficial investment model. Among these, the priorities are reviewing your budget and income situation and researching the costs of owning a home.
Although home ownership has numerous advantages as a long-term investment model, factors such as loan payments, taxes, insurance payments, and periodic maintenance costs can make compliance with financial goals difficult.
However, owning a home may not be suitable for every investor model. Therefore, your financial situation and financial health must be suitable. These costs and expenses that we mention should be taken into consideration by investors when evaluating whether homeownership fits investors’ financial goals.
What Are The Alternatives To Traditional Homeownership For Wealth Building?
To invest in real estate, you don’t necessarily have to buy a house or apartment. One way to invest in real estate, even with smaller amounts, is to purchase real estate funds and shares in real estate companies. In times of high real estate and construction prices, many investors rely on the opportunity to increase their money on the stock market.
The asset class is broad. You can choose from:
- Open real estate funds
- Closed real estate funds
- Real Estate Stocks
- Real estate ETFs (exchange-traded investment funds) or REITs (real estate investment trusts, i.e. listed stock corporations from the real estate industry)
The principle of real estate funds works as follows: several investors jointly finance real estate projects in the residential or commercial sector. The corresponding properties are rented out. The rental income and the increase in value upon sale create the return from which investors benefit.
There are differences between open and closed real estate funds. Open-ended investors usually invest in several properties, which spreads the risk of loss of rent. Closed funds, on the other hand, usually only invest in one project. As soon as enough financing capital has been raised, investors can no longer purchase shares.
What Role Does Real Estate Market Research Play In Property Investment?
If you can’t afford your property but want to invest smaller amounts in real estate, you should do your research beforehand. Stocks and funds are subject to significantly higher fluctuations than properties purchased directly. Closed funds in particular involve high risks, but can also provide high returns.
Whether it is a short-term, medium-term, or long-term investment depends on the type of investment in question. With open funds, you are only allowed to sell your shares after two years and must register the sale at least twelve months in advance.
In addition, closed funds in particular are usually associated with high fees. If you are not prepared to deal intensively with these forms of investment, you should think about other options.
See you in the next post,
Anil UZUN