Investing in real estate is a phrase that is commonly thrown around, and it can often feel confusing. What real estate should I invest in? Is buying real estate actually a good idea? Why should I invest in real estate, and if I want to, where would I even begin? We are here to help you get some answers to common questions surrounding investing in real estate, so let’s dive in.

### Is buying a house a good investment?

In many scenarios buying a home is a great investment. You could be buying a home for your primary residence, and that is a good investment because you are building equity (wealth) through your home purchase as you pay down your mortgage. Real estate usually increases in value over time—just look at how much home prices have increased in the last decade!

In many cities, home prices have increased by over 50%! If you bought a home for $500,000, and it increased in value by 50% you would see the home’s value now being $750,000, meaning you made $250,000 off of that investment and the number will likely continue to grow. While there is always some anxiety about a crash from time to time, in the long run homes tend to grow in value at a high rate and this is largely due to the lack of available inventory in the U.S. (as the population grows, especially in some cities, we’re not building enough new homes to cover the gap).

And, because of the value of the mortgage itself, you’re building wealth on an asset that is much, much larger than what most people could ever save on their own or put into the stock market.

To over-simplify an example, say you’re trying to decide whether to buy a $500,000 home with 5% down, or continue renting for another 3 years and put your savings in the stock market?

If you buy a $500,000 home, it’s reasonable that the home will increase in value by about 5% in the first year (a pretty conservative growth rate). So, that means the home you bought (and could then sell) is worth $25,000 more one year later, but through compounding earnings, is worth $48,812 more after three years. Even if you subtract the cost of closing (3%, or $15,000) and the higher cost to maintain a home (about 1% per year), you’re still up by $18,812.

If you continued renting for another three years and used the same money from your down payment (e.g., 5%) and closing costs (e.g., 3%) and put it into the stock market (much more risky, but let’s assume the same 5% per year in gains), your $40,000 investment will have only gained about $6,305 in value.

In other words, with the same money, buying a home generates significantly more value even in a short time period. And this says nothing about the significant tax breaks that come with owning a home.

### How much money can you make by owning a home instead of renting?

If you buy a $450,000 home with 5% down and a 7% interest rate, your monthly mortgage payment would be about $2,846. After 10 years, if home prices go up by 50%, your place could be worth $675,000. By then, you’d have paid down your loan to around $377,500, giving you nearly $300k in equity.

Now, if you’re renting a similar spot for $2,846 a month, you’d shell out around $341,520 over those 10 years with nothing to show for it—no equity, no ownership, just rent receipts. Meanwhile, the homeowner’s sitting on almost $300k in equity.

### What does Return on Investment (ROI) mean in real estate?

In real estate, **Return on Investment (ROI)** measures how much profit you make compared to how much you’ve invested in a property. It’s a way to gauge the financial success of your real estate investment.

**Location**: Is the neighborhood nice and growing? Are there good schools, parks, or shopping nearby? Have new businesses opened in the market lately? Homes in popular areas tend to increase in value more steadily.**Market Trends**: Check if home values are going up or down in the area. Look at recent sales of similar homes to see if the property you’re interested in is priced fairly.**Property Condition**: Make sure the home is in good shape. If it needs a lot of repairs, those costs could eat into your potential profits.**Rental Income**: If you plan to rent out the property, find out how much rent you could charge compared to similar rentals in the area.**Comparable Sales**: See what other similar homes in the area have sold for recently. This will help you understand if the home is priced right.

To understand if your property investment is paying off, you can calculate the Return on Investment (ROI). Here’s two ways to look at ROI.

**Cost Method**: This is about how much money you make compared to what you spent. For example, if you bought a house for $150,000 and sold it for $200,000, you made $50,000. To find the ROI, divide your gain ($50,000) by the initial cost ($150,000). So, $50,000 divided by $150,000 equals 0.33, or 33%. That means you earned 33% more than what you invested.

**Out-of-Pocket Method**: This focuses on what you actually spent out of your own pocket. If you bought a property and your initial out-of-pocket cost was $70,000 (maybe because you financed part of it), and the property is now worth $200,000, you would calculate ROI based on this. If you gained $130,000 (the increase in property value), your ROI would be $130,000 divided by $200,000, which equals 0.65 or 65%. This shows a 65% return based on what you actually spent upfront.

If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.