Millennials are swarmed with investing advice – start saving early, take advantage of your employer’s 401(k) match and for heaven’s sake, dump those high-interest credit cards! But for many who are looking to build a retirement nest egg, financial advisors say purchasing a home is one of the best investments millennials can make.
“Buying a home is one of the smartest financial decisions you can make as early as your 20s,” says Riccardo Ravasini, managing director of Rava Realty, who handles properties in New York and Florida, “because it is inflation-protected and a physical asset that doesn’t disappear like stocks can do.”
Nationwide, millennials have been reluctant to buy homes for various reasons, including a volatile job market, high student debt and the delaying of life events, such as marriage. The rate of homeownership for millennials dipped to a low of 36.2 percent in 2014, according to U.S. Census data, although it’s also worth noting that the millennial generation represents the largest percentage of first-time homebuyers.
Financial and real estate professionals say the numbers are now slowly improving, and they are hopeful that more millennials will soon recognize the benefits to homeownership. Here are some reasons why financial experts say young adults should be investing in the housing market:
You’ll spend smarter. Rent payments go straight into the pocket of the landlord – and at the beginning of the next month, you’ve got nothing to show for it.
But mortgage payments are an investment in the future, says Tony Via, an assistant finance professor at Kent State University in Ohio. As the remaining balance on a mortgage is reduced, home equity increases, padding your own retirement account – and not your landlord’s. Better to spend your money on your own home than on unnecessary, short-term expenses that won’t provide value later, he says.
Consider the resale value. Property in solid markets such as New York, Miami or San Francisco is a good investment because those areas attract professionals who want to be there for a long time. Buying in areas where the market is trending up can increase net worth, Ravasini says.
Home prices in the Big Apple doubled between 1990 and 2000 and again between 2000 and 2012. The Standard & Poor’s 500 index saw a huge 315 percent increase from 1990 to 2000, but only a 14 percent rise from 2010 to 2012.
Enjoy the tax breaks. Mortgage interest is deductible from your income tax, lowering your tax burden to Uncle Sam. And homeowners usually don’t have to pay a capital gains tax when they sell if the property value increases by less than $250,000 and if the home has been occupied as a primary residence for more than two years. That’s a benefit that trumps even a very good IRA or other tax-deferred retirement plan, Via says.
Homeownership has emotional benefits. Homeowners are more likely to be invested in the local community and develop interpersonal relationships that create a reliable support system than those who rent.
“Although it is not a primary benefit for millennial homebuyers, there is also a sense of pride that homeownership invokes,” says Mike Hardwick, president of Tennessee-based Churchill Mortgage. “Through the investment of a home purchase, millennials can play a key role in restoring faith in the American dream and preserving it for decades to come.”
Low interest rates. Borrowing to buy a place to live is seen by banks as a much safer investment than credit cards, and interest rates are still at rock bottom. “It is hard to qualify mortgage debt as a bad financial decision these days,” Via says.
Supplement your retirement income. As millennials contemplate buying homes, Via says they should think about the future. They’ll benefit from having a home as a storehouse for retirement funds, and their homes will likely be paid off by retirement, allowing them to tap into home equity to fund retirement benefits.
This will help millennials supplement their 401(k) and IRA accounts, which will become increasingly more important as the U.S. struggles to fund Social Security, Via says.
There are plenty of benefits to owning a home, but Chris Copley, a regional sales manager for TD Bank in Pennsylvania and New Jersey, urges caution. Buying a home is for millennials who can afford it and who plan to stay in one location for a while, he says.
For prospective, young homeowners, Copley’s best advice is to do research. Talk to loan officers, ask questions and walk through the home-buying process from a financial perspective, he says. “Sit down and do the math. My advice always comes back to doing the homework.”
Crunching numbers is exactly what David Rader, 30, and his wife did before they purchased their first home on Cape Cod in Massachusetts in August. In an effort to make a smart decision, the couple weighed how long they expected to stay in the home, rent potential and their finances.
“We absolutely had reservations,” he says. “We really wanted to be sure we would be here long enough that it made financial sense.”