Typically, the purchase of a new home is one of the largest financial transactions and investments of one’s life. Whatever home you purchase should work for you now—fulfilling your basic housing requirements at an affordable monthly cost.
Ideally, it goes beyond the basics and even beyond being an investment: it is a home you love.
Historically, though it is very difficult to predict cycles, San Francisco real estate has proven to be an excellent investment over the longer term. This is due to the advantages of leverage (the ability to finance much of the purchase); the significant tax benefits of home ownership; economic, demographic and geographic conditions in the city (growing economy and population while the city’s size stays the same); and long-term appreciation trends. Real estate is usually considered one of the best hedges against inflation.
And if one doesn’t “refinance out” increasing home equity (over-encumbering the property with debt), home ownership – as you pay down the principal balance on your mortgage month by month – typically acts as a “forced” savings account that can help build very significant household wealth. In addition, the $250,000/$500,000 tax exemption on home appreciation capital gains can supercharge the financial return when you do sell.
Here are some questions to consider:
- How long do you plan to own the home you wish to purchase? Buying and selling in the short term always entails more risk, while longer-term ownership (5+ years) typically allows one to ride out a downturn, if one occurs. Looking at any 10 year period over the past 40+ years, it is hard to find one in which substantial appreciation did not occur in San Francisco. However, if one has to sell during a downturn, the result can be painful.
- Are current interest rates advantageous for buyers? Low interest rates on a long-term fixed-rate loan make an enormous difference in the ongoing costs of housing (and your ultimate return on investment).
It’s worth noting that with a fixed rate mortgage, one’s housing costs stay relatively stable for the entire period of the loan, while rents typically increase, sometimes very significantly, over time. As the years pass, this can add substantially to the benefit of buying.
- How does the cost of home ownership, with existing tax benefits, compare to renting? NYT Rent vs. Buy calculator: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0
- How does owning compare in the calculation of building your financial assets over time? From a NYT article, Homeownership & Wealth Creation: “Renting can make sense as a lifestyle choice or because of income constraints. As a means to building wealth, however, there is no practical substitute for homeownership.” Article link: https://www.nytimes.com/2014/11/30/opinion/sunday/homeownership-and-wealth-creation.html
- How important is it to you to own the home you live in, with all that implies—security, control, pride of ownership, the ability to make changes and improvements according to your own tastes and needs?
Any investment has both potential risks and rewards—which only you can weigh according to your financial circumstances and plans, your timeline, and your projection of future economic trends. It is also recommended that you consult with your own financial adviser or CPA. Tax law is subject to change.