I think the answer is simpler than it appears. If you are renting, then your landlord is keeping everything that you are giving him. In the example where your mortgage payment is $1,100 per month, approximately $800 goes towards interest, and the other $300 is the principal that goes towards your equity.
As I was saying before, when you are paying your own mortgage, $300/mo. is actually going towards your own principal, and in 25-30 years you will more likely own the property outright.
Of course there are some risks involved with owning real estate: maintenance, and possible depreciation. But if you look at real estate values over the last 20 years, I think that on average it has increased in value by about 6% per year.
Now here is the hidden secret of real estate that most successful people have figured out. If you were to put down 5% as a down payment then the bank finances the rest of 95%.
Let’s say that you buy a property that costs $400,000 and it appreciates a modest 6% per year.
What it really means is that your return on investment will be based on “your investment” --- the 5% down payment or $20,000. However your net equity appreciation is based on the total value of the home. So it looks like $400,000 x 6% = $24,000 per year.
So you just made $24,000 in one year with a $20,000 investment. That is the real leverage that speeds up your long term financial wealth!
In essence you got paid for money that you never had, because it was the bank’s money to begin with. Therefore your actual return on investment happens to be 120% that year. Not bad, ehhh?
Of course there are some risks involved when owning real estate. Perhaps the market might go down like it has in the last couple of years. However I think that real estate should be a long term investment vehicle, and I am very optimistic that if you purchase with a 5 or 10 year plan in mind, you should end up doing really well financially.
Just ask yourself the question: what’s the worst thing that could happen to you when owning real estate?
Probably you will end up paying for it over the long run and it will be free and clear in 25-30 years. Now that’s not a bad deal is it?
Just picture yourself retiring and not having to pay to a mortgage. Wouldn’t that give you a great deal of peace of mind instead of renting at age 50?
I am a licensed member of the Real Estate Council of Alberta since 2005 - proudly representing CIR REALTY, Calgary’s largest real estate brokerage. I enjoy keeping my readers up to date with real estate related information that they can easily understand and use for their own benefit. I welcome feedbacks and comments equally from first-time visitors to my blog, past clients and also from my fellow REALTOR® colleagues. Thanks for stopping by!