To Buy or Not to Buy

Purchasing a home is a major emotional and financial decision. Often times, people want to buy a home; however, emotionally cannot afford to commit to the home-buying process. They are, in fact, afraid. "My payment will be too high" or "What if I lose my job," are some of the "excuses" which I often hear. People do not realize that they are able to meet all the commitments over their life span.

In any event, when everything is said and done, here are some of the major advantages of buying a home:

1. Quality of Life. Home-buying and living in your home affects the quality of life. It adds to your confidence, giving you a sense of pride and satisfaction. You have a sense of emotional well-being as well as peace of mind.

2. Tax Deductibility of Mortgage Interest. The entire mortgage interest payment is tax-deductible and the "net" cost of the mortgage payment actually puts money in your pocket.

3. Tax Deductibility of Property Taxes. Similarly, the property taxes are due and payable twice a year and may seem like a lot of waste of money. Typically, property taxes are $1.10/$1,000 of your purchase price. However, the property taxes are also tax deductible and you get it back in the form of tax savings.

4. Appreciation Potential. Typically and historically, nationwide property values have gone up in value at 7% per year. In California and some other states, properties have, in certain good economic times, appreciated at the rate of over 20% per year. At 7% conservative rate, the property doubles up in value in 10 years. So, a property worth $500,000 will be worth $1,000,000, equaling a gain of $50,000 on a yearly basis. For an average person, it is difficult to save that kind of money.

5. Deferred Capital Gain Treatment. Real estate investment capital gains can be deferred by exchanging the property for like-kind property. So, when the property appreciates and you decide to sell it and do no want to pay the capital gains tax, you can buy another property of like-kind and avoid capital gains tax. This allows you to switch properties when required, for example, an area might be facing downturn or you might be moving, etc.

6. Once in a Lifetime Exclusion. Upon the sale of a personal residence, the IRS allows an exemption and one does not have to pay taxes on a gain of $250,000, if single and up to a gain of $500,000, if married. For example, if you're single and buy a property and live there for five years and the property appreciates by $250,000, you can sell the property and not pay any taxes at all.

7. Principal Accumulation. This is strongly tied to appreciation in the property value. Payments made toward the mortgage payment help you accumulate principal which essentially helps you establish a reserve savings account which you can later tap into by obtaining an equity line of credit or getting an equity loan, if needed.

8. Pride in Your Home. It is fun to invite people to "your" home and feel good about it. It also instills confidence in your family, your children and makes them more confident individuals.

9. No Landlord. You are in-charge and do not have to deal with a landlord who might not make repairs or maintain the property as you would like.

10. Leverage. Where else can you buy this size of an investment with 0-5-10% down. You can buy a property for a personal residence for as low as zero down or an investment property with 5-10% down, if your credit is good, and watch the investment grow. This, in turn, allows the net investment return to be much higher (than the actual appreciation rate on the value of the property). To follow up on the example earlier, if the property grows at 7% and doubles in value, since the amount invested in buying the property might be only $50,000 (at 10% down payment), the actual return is much higher on $50,000 investment.

11. The Real Cost of Renting! At $700 per month, with a 6% rental increase per year, you will pay $110,719 over a 10 year period. If the rent is higher, you can count on paying much more and not getting any return or tax benefits at all.

Madan "Raja" Ahluwalia is an Attorney at Law and Realtor. Raja possesses a thorough understanding of the real estate market and trends, based on years of involvement in real estate, both for his clients and for his own investment purposes. Contact Raja via e-mail at raja@kw.com and at 650.430.4023.