In the real estate boom years, it did not take much to convince buyers to jump into the real estate market. Prices were increasing every month and they were afraid to be left behind. While double digit appreciation is no longer the norm, there are significant financial advantages to buying a home on the Outer Banks.
The advantages of home ownership accumulate over time. Selecting a primary home or vacation home you can afford is the critical first step. Home ownership should be part of your long term investment and retirement strategy. While money can be made buying, fixing up houses and flipping them; the risks increase and it becomes a whole other category of investment. You should plan to own a home for 5 or more years to fully realize the tax advantages and appreciation gains.
The Federal Housing and Finance Agency (FHFA) tracks the statistics for the housing market and reports timely information here. The monthly house price index for the US, shown in the graph below, shows the Jan 2015 home price index back to the peak reached in July 2006. It appears the market has reached bottom and the future trend is increasing. So now is the time to buy a home or investment property in OBX to reap the profits from future appreciation!
Build Equity Each Month
Rents can be lower than mortgage payments in some markets. However, over time rents increase as the general level of inflation increases. At the same time, a homeowner with a fixed rate mortgage will pay less interest monthly and more principal; increasing the equity one has in the home even with modest increases in the price of the home. After years of paying rent, one has nothing to show for it. After years of paying a mortgage, one will have equity, so a sale will net a tidy profit. Buying a home is like living in your bank (and making a deposit to savings every month)!
The IRS tax code allows interest paid on your mortgage to be deducted from your tax obligations. In the early years, this is a huge benefit as interest is the largest part of your payment and will significantly reduce what you owe to the IRS. Some closing costs (points and origination fees) incurred the first year you purchase the home are also deductible. Property taxes paid on your primary home and vacation home are also fully deductible. Many experts advise comparing renting versus buying a home on an after tax basis to illustrate the true cost of each.
Capital Gains Exclusion
Once you have lived in the home for 2 out of 5 years, you can sell it and keep up to $250,000 of the profits ($500,000 for married couples) without paying capital gains taxes. If you purchase a vacation rental property, you can use this to your advantage by renting the property for years and making it your primary residence for two years prior to selling. Profits over the above limits are taxed as a capital asset and taxed at a lower rate than normal income, further increasing the tax benefits of home ownership.
Home Equity Lines
Once you have equity in the home, this can be an inexpensive source of capital. Establishing a home equity line of credit will allow you to borrow against the equity, at a much lower interest rate, than credit cards or other vehicles. Interest paid on home equity lines is also tax deductible further reducing the cost. Home equity lines can provide funds for paying off high interest credit cards, funding home improvements, college, medical expenses or capital for a new business.
Strong Credit History
Making your monthly mortgage payments on time every month demonstrates character and a lower risk to lenders. This will provide you with better credit terms (interest rate and down payment amounts), for other credit you may need in the future. In addition, your credit rating is used to evaluate you in everything from obtaining insurance and the rate you will pay to obtaining a job.
Talk to the experts at Eillu to find the best location for you to make your Outer Banks property ownership dreams come true. Discover a sound financial strategy to turn your investment property into your retirement.