Everyone needs a place to live. We have to pay rent to use real estate. As renters we pay rent to the landlord. When we purchase a home we pay rent to ourselves. We can subtract the cost of renting from our mortgage payment since we are paying that cost
There is an additional advantage to owning a home. Most people borrow most of the money for the purchase of their home,
which increases the return on the appreciation you do get. This is called “leverage”. If you were to pay cash for a home for say $200,000 and it appreciates 3% over time your return on your investment would be $6,000, which is a 3% return on your $200,000
investment. If you were to make a 20% down payment on the the same property and finance the rest, your return on your cash Investment would be a 15% return on your $40,000 investment. That’s great.
What about the interest you have to pay? 5% interest on your home would be around $8,000 for the year. Odds are you would pay at least that to rent the same house. Uncle Sam wants to help with that and will allow you to deduct your interest and taxes on your tax return with the mortgage interest deduction.
Finally, you’re slowly but surely paying down your mortgage, which is like putting money in a savings account every month. This is why real estate is such a great way to build wealth over time. In fact, the Federal Reserve reports that the median homeowner has a net worth of $184,400, while the average renter’s net worth is $4,000
(Federal Reserve Board Survey of Consumer Finances,