Homes occupy a soft and tender place in most of us. We may remember our idyllic childhood. Perhaps, happy times at huge family gatherings. Maybe your house is your shelter (both literally and figuratively) from the stresses of a crazy world. That quiet little cabin by the lake, oozing serenity and calm. The midtown brownstone, offering anonymity in a busy and congested city. The purchase of a house is an emotional decision. A decision that can reduce otherwise logical and intelligent people to impulsive children.
First off, I would like to separate the idea of a house and a home. In my way of thinking, a house is just a house. It provides a basic utility, shelter. While most real estate, including residential, appreciates over time, increases in value are not guaranteed. My idea of a home, is anywhere my family and I are living. It can be a house, an apartment, an RV, even a boat……you get the idea. It is a place where our needs are met and we come together as a family. My family makes my home, not my shelter.
Much has been said about a house not being an asset. I guess that all depends on your definition of an asset. I am in the camp that believes assets provide their owner with cash flow and, as such, I do not consider our house an asset. I can also understand the views of the other camp…..whose members tout housing as an asset because it usually holds it’s value over time. Historically this has been true, and I have no information to suggest that the future will turn out any differently.
You may be wondering why we bought our house, if I’m so opposed to housing. I need to be clear, I am not opposed to buying houses. In our case, I purchased this house to take care of my dying mother. Buying this house was a mistake, but I was young and it was right down the street from her house. I will always cherish those last couple years with her. A couple years later she died, the housing bubble burst, and nine years on our house is still worth dramatically less than I paid. I list some suggestions below if you’re currently shopping for a home. There are reasons it makes sense to buy a house. Some of those reasons include:
- You intend to live in the house for a long time (10 years minimum).
- Owning is cheaper than renting, in your area. This is the case in our part of Florida. Houses like ours currently sell for ~$125,000, but rent for ~$1,100/month. (This will change in the near term as institutional owners are buying up all the supply). For a more extreme example, look to the midwest. Where my family lives in Kansas, you can buy a particular house for ~$65K…..while that same house rents for ~$850/month. This is why savvy real estate investors (like FI Fighter) often buy homes in the midwest…..where they get far more cash flow for their money.
If you decide to buy a house, recognize that there is a trade off. Don’t just buy one because it’s what you think you’re supposed to do. In general its not a good idea to ever doing something merely because it is expected. Think for yourself…..each person’s situation is different.
Benefits to buying a house include:
- More control over future costs such as monthly payments. While the cost of rent tends to go up every year or two…..your monthly mortgage payment should stay pretty stable provided you have a fixed rate mortgage. Please note that your insurance and taxes may still go up annually.
- The ability to modify the house to better meet your needs. Remodeling a house can be fun and exciting, but it’s very rare that the value of the house appreciates as much as your remodeling costs. Only remodel when necessary.
- A boost to your ego. I felt this one too. It felt good to “own” something….even though I had a reasonable mortgage on the house.…..and therefore didn’t really OWN it.
- Stability. Let’s face it, it is stressful to move apartments every year or two. Add children to the mix and it’s really stressful.
- Slowly building equity. Banks tend to “front load” the interest you pay on a mortgage. This means that the vast majority of your PI (principle and interest) payment is interest, which doesn’t pay down your loan balance, for the first few years you pay the mortgage. Check out an amortization schedule to be sure you understand where your payments are going.
You make sacrifices when buying a house too. Some of the most common ones include:
- Less flexibility to move or relocate. This is the annoying flip-side to the stability mentioned above. Transaction costs are expensive. I know, I am in the real estate industry.
- Unexpected costs and repairs. The fact of the matter is that eventually plumbing breaks, roofs leak, and air conditioners (or furnaces) die. This hasn’t been much a problem for us, because I’m fairly handy, but when you are renting…..you just call the landlord.
- Stuck in a deteriorating neighborhood. While neighborhoods can improve, they can also deteriorate. There are many factors that may cause your house to decline in value, but one of the biggest is a deteriorating neighborhood. Be conscience of these trends before you buy.
- It is much more difficult to cut costs or downsize. This again goes back to number one, listed above. If you lose your job or can’t work because of a medical problem, owning your house can become a real problem. While I wouldn’t avoid home ownership on the basis of fear, it is something to keep in mind.
My thoughts and suggestions for first time home buyers include:
- Seek professional advice. Money spent on a real estate professional, especially a skilled broker and attorney, is usually well spent. Also, don’t go cheap and skimp on the home inspection. Unless you’re a professional contractor you NEED a professional’s advice.
- It has been said real estate is all about “location, location, location”. Nothing could be more true. Select a stable or rising neighborhood.
- Don’t be the most expensive house in your area. It will limit the number of potential buyers interested in purchasing your home when it comes time to sell.
- Buy a house that doesn’t need to be remodeled. As I mentioned above, you rarely receive a good financial return on the money you spend on remodeling.
- Buy as much house as you’ll need, but not more than you foresee needing. As mentioned above, the transaction costs associated with buying or selling a house can be steep. It is best to minimize your transactions.
- Buy a house you can afford without being financially stretched. We know first hand the benefits of buying less house than you can afford. We were never financially stretched in our current house, even when one of us was out of a job. We had flexibility because we bought less house than we could afford. While past generations considered a house their “greatest investment”, I believe there are better places to invest your money.
This article was originally published on www.incomesurfer.com
What are your thoughts on home ownership? What advice would you give someone looking to buy their first house?