The Monetary Benefit of Homeownership

[Dax Nollenberger]

Searching the internet for whether homeownership is actually valuable will leave your head in a daze. Major players in the real estate investing space will argue that you shouldn’t own a primary home, others will argue that you shouldn’t take on any debt, and many more will encourage you to accumulate as much real estate as possible. So many varied opinions pulling in every conceivable direction only adds to an already overwhelming decision and leads to the inevitable buyer thinking “am I making the right decision?

To understand why you should be a homeowner, we need to identify the many benefits of homeownership. Pride of ownership and the ability to make a house a home are obvious benefits but I want to focus on the financial benefits of homeownership: debt paydown, appreciation, and tax benefits. If it were an investment property, there would be even more: rental income and rental property depreciation.

I know, I know, there is great value in using the money to leverage investment properties. In California, appreciation is king. 

The numbers will certainly look different wherever you are but the premise is the same, there are great monetary benefits to homeownership. 

To best understand the financial benefit of homeownership, we need to walk through a scenario:

Hypothetical Homeowner’s

• Buying in Santa Cruz, CA
• Using a 30-year fixed mortgage at 5% interest rate
• Married- Filed Jointly
• Cumulative Income: $350,000
• Purchase Price: $1.5M
• Down Payment: $300k
• Mortgage Amount: $1.2M
• Monthly Payment: $6,441.86

If they Rent: 

The math is pretty straightforward here. If they rent for 5 years at $5,000 per month, they will have paid $300,000 to someone else.

NOTE: This doesn’t even account for the potential of continually rising rents.

If they Buy:

One of the benefits of owning is that instead of paying off someone else’s mortgage, you are paying off your own. The Principle Paydown is the portion of the payments that go toward actually paying off the house. With an amortization schedule, the majority of the early payments are going toward interest on the loan but as you pay it off over the years, more goes toward the principle. This allows you to build equity in your home. After five years, the equity built from debt paydown is $98,055.21.

Another huge benefit for homeowners is the tax benefits. The interest that you pay on your mortgage is tax-deductible as is the property tax (although the property tax deduction is capped at $10,000 per year in CA). After five years, the cumulative tax benefit is $142,667.04.

Historically, Real Estate prices go up over time so it’s safe to predict the value of your home will continue to rise after purchasing. We assumed a highly conservative 3% annual growth rate. For reference, the Cumulative Annual Growth Rate (CAGR) in Santa Cruz County since 2010 is 7.6%. After five years, the value added from appreciation is $238,911.11.

After 5 years, the cumulative homeowner benefit is $479,633.36.

After 5 years, the cumulative benefit of not paying rent is $300,000.

After 5 years, the cumulative expenses (interest and property taxes) are $-380,706.35.

After 5 years, the NET benefit of homeownership vs renting is $398,927.01.

In the example above, homeownership would pay these potential homeowners about $80,000 a year!

Homeownership > Renting

So, buyers, if you are asking yourself “am I making the right decision?” the answer is a resounding YES!

If you'd like to plug in your own numbers, reach out for free access to my homeownership benefit calculator. 

- Dax Nollenberger

Realtor, Santa Cruz County 

[Dax Nollenberger]

Quote from @Tony Kim:

Quote from @Dax Nollenberger:

Searching the internet for whether homeownership is actually valuable will leave your head in a daze. Major players in the real estate investing space will argue that you shouldn’t own a primary home, others will argue that you shouldn’t take on any debt, and many more will encourage you to accumulate as much real estate as possible. So many varied opinions pulling in every conceivable direction only adds to an already overwhelming decision and leads to the inevitable buyer thinking “am I making the right decision?

To understand why you should be a homeowner, we need to identify the many benefits of homeownership. Pride of ownership and the ability to make a house a home are obvious benefits but I want to focus on the financial benefits of homeownership: debt paydown, appreciation, and tax benefits. If it were an investment property, there would be even more: rental income and rental property depreciation.

I know, I know, there is great value in using the money to leverage investment properties. In California, appreciation is king. 

The numbers will certainly look different wherever you are but the premise is the same, there are great monetary benefits to homeownership. 

To best understand the financial benefit of homeownership, we need to walk through a scenario:

Hypothetical Homeowner’s

• Buying in Santa Cruz, CA
• Using a 30-year fixed mortgage at 5% interest rate
• Married- Filed Jointly
• Cumulative Income: $350,000
• Purchase Price: $1.5M
• Down Payment: $300k
• Mortgage Amount: $1.2M
• Monthly Payment: $6,441.86

If they Rent: 

The math is pretty straightforward here. If they rent for 5 years at $5,000 per month, they will have paid $300,000 to someone else.

NOTE: This doesn’t even account for the potential of continually rising rents.

If they Buy:

One of the benefits of owning is that instead of paying off someone else’s mortgage, you are paying off your own. The Principle Paydown is the portion of the payments that go toward actually paying off the house. With an amortization schedule, the majority of the early payments are going toward interest on the loan but as you pay it off over the years, more goes toward the principle. This allows you to build equity in your home. After five years, the equity built from debt paydown is $98,055.21.

Another huge benefit for homeowners is the tax benefits. The interest that you pay on your mortgage is tax-deductible as is the property tax (although the property tax deduction is capped at $10,000 per year in CA). After five years, the cumulative tax benefit is $142,667.04.

Historically, Real Estate prices go up over time so it’s safe to predict the value of your home will continue to rise after purchasing. We assumed a highly conservative 3% annual growth rate. For reference, the Cumulative Annual Growth Rate (CAGR) in Santa Cruz County since 2010 is 7.6%. After five years, the value added from appreciation is $238,911.11.

After 5 years, the cumulative homeowner benefit is $479,633.36.

After 5 years, the cumulative benefit of not paying rent is $300,000.

After 5 years, the cumulative expenses (interest and property taxes) are $-380,706.35.

After 5 years, the NET benefit of homeownership vs renting is $398,927.01.

In the example above, homeownership would pay these potential homeowners about $80,000 a year!

Homeownership > Renting

So, buyers, if you are asking yourself “am I making the right decision?” the answer is a resounding YES!

If you'd like to plug in your own numbers, reach out for free access to my homeownership benefit calculator. 

- Dax Nollenberger

Realtor, Santa Cruz County 

Are you taking into account what the renter would do with the extra $300,000 he can keep as downpayment? What if that money was invested in the stock market that returned 8%? Or what if that money was used to buy a rental property? 

With that said, I'm obviously a homo and also rent out a portfolio of homes so I believe in homo-ship. But I honestly believe that there are multiple ways to achieve financial prosperity. I don't think there is anything wrong with renting your primary and putting all your assets to work outside of your primary.

 Hi Tony, 

In the scenario you presented, with $300,000 compounding annually at 8% for 5 years, you'd have $440,798. A gain of $140,798. That is certainly a strong alternative. If I had assumed a 5% yearly appreciation rate instead of 3%, the net value of homeownership would have increased by $175,511. Like my scenario, it makes some assumptions (about the stock market return in your case) that may not be true (especially if we head into a recession). Obviously, there are many different strategies for wealth building and each person's situation warrants a different strategy. My goal for this post was to identify the value of homeownership, especially in CA where appreciation is king. Thank you for your response.