Real Estate Is Not a Magical Investment
Residential real estate is like many kinds of investments in that market prices swing. Sometimes, it seems like everyone wants to rent, while other times you would almost swear that everyone wants to buy. The market value of real estate is just how much people are willing to pay for homes, and it changes dramatically. Due to the slow nature of real estate sales, the fickle nature of all markets and the fact that the word “investment” means different things to different people, real estate has the potential to shoot up in value and then come crashing downward.
Unfortunately, many people believe the old myth that buying and owning real estate is ALWAYS preferable to renting. There are also many people who do not understand all the costs of ownership and think that once they pay for the house they will never have to spend another dime.
This is also wrong and dangerous. While there are occasions when there is a benefit to owning the place where you live, in a lot of cases it is actually more financially viable to rent rather than to own. Instead of trusting in a myth, you should turn to calculations to see how the cost of homeownership and renting compare.
Instead of relying on the emotional real estate market to tell you how much a home is worth, it is better to compare the cost of owning a home to the cost of renting one. Sometimes, owning a house or apartment is more affordable than renting. Sometimes, renting is more affordable.
We will work through examples of how to estimate homeownership costs. For now, you should understand that this decision requires research and calculation, and should not be made based on what others believe about investments.
You Can Pay Too Much
Owning real estate comes with its own set of expenses, and sometimes those expenses are very high. They can even be higher than rent prices in the area.
For example, you may need a mortgage to help pay for your home. This will lock you into a term that will be far longer than most leases. If you do not shop around and negotiate well, you may be stuck with making a high monthly payment that could be difficult to get out of for a long time. Even if you do lock yourself into a reasonable long-term payment, rent and home prices can dramatically decrease under some circumstances. This will force you to make the decision to either abandon your home or continue living with an unnecessarily high cost of living.
Another expense that home ownership tends to entail that renting almost never does is closing costs and commissions. Chief among the incidentals that drive up your expenses as a homeowner are the costs you have to pay simply to start a mortgage. The banks that originate mortgages require upfront payment before they sell the loans to ensure their overhead expenses and profit margins. Beyond the early mortgage costs, there are incidentals that you need to consider before you make the leap into owning a home. When you sell a home, you will typically use a REALTOR® and will pay a hefty 5% commission on the price of the home.
Keep in mind that there are other costs that can appear right from the outset. These costs include liens against the property that are not caught during the title search, issues such as termite and water damage that are not found during the inspection and the remediation of such issues.
Attempting to ignore such an issue will only amplify both it and the costs to repair it down the road. Continuing to ignore a problem when you are a homeowner is a recipe for having your home literally fall apart at an unknown time in the future.
Before buying a house or apartment, you should use two or more online cost calculators to compare the cost of renting and the cost of buying. If the cost of buying is higher, you are not making this decision for financial reasons. You would be paying the difference to be an owner, and it would actually cost you more than renting. If the cost of homeownership is much higher than rent, then you should wait to buy at a lower price.
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Do You Want This Responsibility?
When you own an apartment or house, sometimes it feels like the home owns you. There are many responsibilities of homeownership, and there are many details you will have to manage. If you don't like the light fixtures, you can change them. But it is either you or the contractor that you select and pay who will actually perform the tasks involved in changing out those light fixtures. If you do this job poorly, it reflects entirely on you, and you have no one else to blame.
Your responsibility extends from the simplest tasks all the way to the major decisions. If you want another room, you can make this happen. And, in addition to making the decision to do something of this nature, you are the person who is ultimately going to be responsible for either physically doing the work or for hiring and overseeing the contractor who is going to do the work.
If something goes wrong, you are the person who is ultimately going to have to endure all of the fallout, including either living with a poorly done job, being taunted by a half-finished job or never even having the job get started because you accidentally hired a scam artist.
Fortunately, not everything about owning your home is about performing major tasks. In some cases, even a small leak in your faucet or the drain can be a source of pride because you can fix it yourself. Being a homeowner introduces you to and encourages you to develop a host of skills that a lot of renters never even think about. You can use these skills down the line to save yourself a lot of money and to make your home better, and you can experiment with improving your home. Of course, experiments can go wrong.
Beyond experimenting on creating the perfect home environment for yourself, being a homeowner also introduces you to chores. While a renter's life essentially consists of going to work and doing fun things, a homeowner's life also carries with it certain chores. No one else is going to clean the windows, and by the same token no one else is going to mow the lawn, trim any trees on the property, shovel snow and melt ice, or clean out the gutters. While some people are fine with these chores, keep in mind that signing up to own real estate is signing up for all of these things.
Where Will You Be in Five Years?
At the time of purchase, many new homebuyers think they will live in the home for the rest of their lives. This is usually not accurate: the average house gets bought and sold about once a decade. When you are considering owning a house or apartment, thinking beyond a few weeks down the line is essential to avoiding the loss of a lot of money to realtor commissions and mortgage closing costs you pay when you buy and sell a home.
When you buy a home, you should have a plan that would make you an occupant of that home for at least five years. If you do not want to live in the area and in the home itself for at least five years, don't buy it. While the dream of homeownership is romantic and feels great sometimes, it is a lot like marriage: most people don't just buy and sell a home in a fit of whimsy. It is a long-term decision. Homeownership makes more sense if you have a tenured government job instead of job in an industry where layoffs are common.
Homeownership makes more sense if you live in an area where you can commute to many different employers in your industry, and it makes less sense to buy a home that ties you to just one employer. If you and your spouse have careers that may cause you to move soon, don't buy a property until you both have jobs near the same location. Unless you are sure of where you are going to be five years down the road, don't buy.
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Investment Tip:
Educating yourself in the financial world will give you the know-how and basics that you will need in order to take control of your personal and business finances.
For those of you who are looking to move up the financial ladder and improve their career status and even your personal knowledge, education is the only way to do so, that being said it does not mean that you need to find yourself sitting in a classroom listening to long lectures because all this information is accessible to you online.
The right knowledge in the financial world will also undoubtedly improve your income but if you are looking to educate yourself in order to make money online than there are many ways that you can make an extra monthly income.
If you are interested in making your own investments and not relying on someone else's know-how than you need to know the basics of where and how to build a profitable long-term portfolio.
We strongly advise you to learn the basics before investing on your own, you can get the basics by starting with these very informative blog posts and get a clearer view of how to do it right.
