For the past 40 years and longer, California homes have increased in value by 8.9% every year on average. When you consider that a home buyer commonly pays only one-fifth of a home's price in cash, leverage works to magnify the investment return on the buyer's cash down payment by 5 times. As a result, the typical home buyer in California can look forward to an average yearly return on their cash investment of 44.5%. Not too bad, considering the stock market returns only 8% to 12% on average.

You might say “okay, but what about property taxes and interest on the money you borrowed to finance the home?” Those expenses are real, but real estate is the only investment choice that you can live in. Accountants have a fancy term for this called “imputed rental value.” What they mean is that whether or not you own your home, you have to pay for housing. If you don't own an investment (home) to live in, you'll have to pay rent.

In addition, the government wants you to own your home. The IRS provides a huge incentive by giving you income tax deductions on the money you pay for both interest on your mortgage and property taxes. For many California home buyers, the after-tax expense of mortgage interest and property taxes is comparable to the amount they would have to pay for rent.

What's the bottom line? Owning real estate as a vehicle to increase your wealth is doubly smart because the expenses of mortgage interest and property taxes are largely paid for with the money you would have used to pay rent. The investment return on your down payment is like a 44.5% annual bonus. Over time, the effect of compounding returns on your original down payment builds wealth.