If we could design the perfect investment, what financial and tax attributes would we look for? For the financial attributes, we probably want:

• Uncommonly high rates of financial return
• An investment that doesn't get crushed by inflation
• The ability to leverage our money
• Easy entry into the investment
• Relative safety

We have to give Congress a perfect 10 for its home ownership tax subsides that include:

• An up-front tax subsidy for points paid on a mortgage taken to buy or improve the home
• Tax subsides for mortgage interest paid
• Tax subsides for property taxes paid
• Tax-free profits of up to $250,000 for singles and $500,000 for married couples on home sales

What makes the home produce more than 30% in annual compounded returns? Answer: Leveraged appreciation!

When we leverage our money, we gain (or lose) substantially as the investment rises and falls in value. Say we can buy a $200,000 home for $20,000 down. Ignoring for the moment the costs of financing, let's look at what happens should this home appreciate at 4% a year for 7 years to $263,186 in value and compare that to what the $20,000 invested at 10% would return. With the home, we realize:

• An increase in capital from our $20,000 down payment to an accumulation of $83,186
• A rate of return equal to 23% annually

• An increase in capital from the $20,000 invested to an accumulation of $38,974
• A rate of return equal to 10% annually

Of course, we did not put all the numbers into the above computations. We did not consider the cost of interest on the home. Further, we did not consider the tax on the cash out of the investment. We did that on purpose. We developed the big picture here so you can see the impact of the "leverage" component on the value of your investment in a home.

For the past 30 years, home values have exceeded the cost of inflation. When inflation went crazy in the 1970s, average home values outpaced inflation with a 11.17% compound rate of growth. What happened for the past 30 years may not happen for the next 30 years, but we expect little change in the fact that homes will track inflation, and that generally means increases in home values.

Compared with other investments that use leverage to produce outstanding returns, entry into the home market is easy. Often all you need is good credit and a down payment. When you compare that to the "net worth" requirements for some leveraged investments, that's nothing.

However, it takes time to accumulate a down payment and build a worthy credit history. First time home-buyers might seek help in this regard from parents or other relatives. Such help might come in the form of a loan.

Planning tip: Don't be sloppy with your family loan. Ensure your tax subsidy for the mortgage interest tax deduction by making sure that your relatives have a mortgage backed by a security interest in your home. In this case, you probably want to engage the services of a title company or real estate closing attorney to make certain the home legally secures the mortgage.

The first-time home-buyer might use a business approach to obtaining the home. Tax law supports "equity-sharing" whereby the home-buyer can enter into an arrangement with an investor who we'll call "deep pockets." Deep pockets makes the downpayment on the home in return for an equity interest in the property. The home owner makes the monthly payments in return for his ownership interest. In addition, the home owner pays a fair rent to deep pockets for the part of the home owned by deep pockets. Technically, this underutilized arranged in known the tax law as a "shared equity financing arrangements." The benefits to deep pockets from this rental arrangement include:

• Leveraged investment returns
• No tenant problems as the tenant is the working co-owner on the property
• Tax benefits -- just like a regular rental property

Lawmakers want Americans to own homes. That's why we get the four tax breaks mentioned at the beginning of this article. First, if we have to pay points to secure financing on our mortgage, lawmakers subsidize us with a points deduction in the year we buy the home.

Tax law next alows deductions for mortgage interest on the acquisition of a home. However, if the mortgage exceeds $1 million, only $1 million qualifies as acquisition dept for purposes of the interest deduction. ACtually, you deduct mortgage interest on up to $1.1 million in mortgage debt on your home when you count both the $1 million and the $100,000 home-equity debt limits.

The interest deductions means that our true cost of financing a home is not the true interest rate, but the after-tax cost. Thus, if we can save 40% in taxes when we deduct mortgage interest, we pay only 4.2% after-tax interest on a 7% mortgage.

Tax law also authorizes tax deductions for property taxes on our homes making that cost less than it appears on our property tax bills.

But tax law reserves its biggest and newest subsidy for the time we sell. When we sell our home, we can avoid taxes on profits of up to $250,000 if single and $500,000 if married. This is big! To get this break, we must:

• Live in the home as our principal home for 2 of the 5 years before sale
• Own the home for 2 of the 5 years before sale

Compare the benefits of owning the home with the cost of renting a home. Federal tax law does not give renters any benefits. Renters must use "after-tax" dollars to pay rent. If the renter is in the 40% tax bracket, that means the renter has to earn $2,000 to pay $1,200 rent. Further, what does the renter have after paying the rent? Nothing!

When we consider the rent or buy decision, we have 3 distinct parts to think about:

• Tax benefits
• Cash flow
• Net worth

We are going to use Bill and Sara as our example. They both work and if they buy a home, they will realize 40% savings on their new tax deductions. They invest $25,000 of their $40,000 of savings in their new home. Their tax deductions for mortgage interest, points, and property taxes produce $8,000 in tax savings.

The purchase of the home impacted Bill and Sara's cash flow as follows:

New tax savings	$	8,000
Lost investment income		-2,500
New costs for home		-20,000
Less rent no longer paid		+14,400
Decrease in spendable cash	$	-100

In Bill and Sara's case, they have to cut their standard of living by $100 a year to own their home. That's a minuscule price to pay for an asset that is going to multiply their net worth. In fact, look at what happens to Bill and Sara's net worth in their very first year:

	Rent	Buy
Savings account	$44,000	$16,500
Cash out for home		-100
Home		208,000
Mortgage		-178,000
Jewelry, furn., etc.	30,000	30,000
Net worth	74,000	76,400

In the first year, Bill and Sara increased their net worth by $2,400 and that's only the beginning. Each year after this first year, Bill and Sara will experience a greater increase in net worth and cash flow. The home continues to grow in value each year. The mortgage continues at the same rate but in terms of real dollars, it takes less effort by Bill and Sara to pay the mortgage. Think of this in terms of "after-inflation" dollars that make the mortgage cost less as time goes by.

With a 5% increase in home values rather than the 4% we used above, Bill and Sara come out far better. In fact, if Bill and Sara can make better than average decisions, they might realize 6 or 7% or more in appreciation on their home. It doesn't take much appreciation for the home to produce more than 30% in after-tax compounded returns.

Even if the home never increases in value, Bill and Sara come out ahead by buying rather than renting. Payments on the mortgage do not increase like rents. Further, Bill and Sara will eventually pay off the mortgage whereas the rent never stops. The net effect: Bill and Sara increase their net worth with the home, even that home does not increase in value because it eliminates rent.

In summary, your first investment move should include the purchase of a home so that you can quit paying rent. If you already own your home, congratulations on your wise decision. But now as homeowner, you might have to empower another family member, perhaps with a loan or a shared-equity financing agreement. Remember, home ownership in the United States in uniquely advantaged by the tax laws. Thus, buy a home and take advantage of leverage, inflation, and tax-free sales to build net worth.