A home is a place to create priceless memories. It can foster a life-long sense of community and belonging. And more importantly, it offers key financial benefits like building generational wealth that make it a big part of the American Dream.
Generational wealth traditionally consists of assets passed onto future generations, like cash, stocks, or other securities. But did you also realize that along with a stock portfolio or 401(k) plan, a home is also an asset? When deciding whether to invest in the capital markets or in a home, it pays to weigh the benefits of homeownership.
Homeownership offers diversification away from stocks and bonds and can be a hedge against inflation. And, as your home property value increases over time, it can become the most valuable asset you pass on to your children. Future generations can use the property as their home or sell it to fund other assets or investments.
Why rent when you can own?
Why the big emphasis on home ownership over renting? Yes, as a renter, you are freed from the responsibilities of home maintenance. However, when you own your home, any effort and money you put into maintaining and improving it add to your home’s value. What’s more, as the owner, you have the freedom to make the changes you want rather than having them dictated by your landlord.
Not only do you have more control over maintenance and improvement decisions, but as a homeowner, you also have notable advantages with your biggest expense: your mortgage vs. paying rent. As a renter, you make payments that can increase every year, generating long-term wealth for your landlord, not you. In fact, rent prices skyrocketed by 12.8% in 2022, caused by a spike in demand and a lack of supply. Plus, there’s no return on your monthly rent. In contrast, through your monthly mortgage payments, you earn equity in your home (the difference between your home’s market value and your owed mortgage payments), which is the cornerstone of personal wealth. In addition, you also gain equity another way: as your home appreciates, that increased value goes directly to you.
Homeownership also provides long-term financial security during unpredictable economic conditions or rising inflation. And, once you no longer need a home, you can sell it. Equity and appreciation can enable homeowners to make a profit once their mortgage is fully or even partially paid off.
You also have the option to pass your home on to your children directly or sell it to them without commission. If you rent, your apartment doesn’t belong to you, so after years or decades of paying rent, there’s nothing to pass on to your children.
When looking at all the options, the equity and appreciation that you accumulate by being an owner lays the foundation for more freedom and financial opportunities for future generations.
A powerful source of passive income
Some homeowners may opt to purchase and rent out their property, whether a relaxing seaside getaway or a multi-family home. It’s a very attractive way to generate passive income—money earned simply by owning an asset; in this case, the asset is property. A real estate expert revealed on Forbes that multi-family homes generated an annual return of over 9% over the last decade and are expected to continue yielding favorable results in 2023.
Many homeowners decide to rent their property if they want to downsize and purchase a smaller second home or if work or personal events require moving to another city. You can receive consistent payments in exchange for allowing others to reside in your property, whether that’s for long-term living or vacation renting.
The money you receive can be used to help you pay off, or accelerate paying off, your mortgage or be set aside in an investment account for your children’s future.
Speak with a loan expert
Exploring the financial aspects of homeownership can be both exciting and challenging. Ultimately, being a homeowner provides you and your loved ones with a solid foundation for building generational wealth. First American Bank has experience crafting custom financial solutions for each homeowner’s unique needs. With our seasoned loan and investment advisors, you can consider all options and choose the best route for your financial goals.
Ready to get on the path to building generational wealth through homeownership? Contact our loan officers to learn about our mortgage offerings.
