Is Buying A Home A Great, Good, Or Risky Investment – Today?

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The answer to above question depends on a lot of factors, from your financial health/stability, the location you live in and the health of your local real estate market. 

I purchased my first home when I was 25, and admit I was  clueless on the process and cost associated with buying a home.  It turned out to be a good investment, I was LUCKY! Instead of relying on luck, lets look at buying versus renting logically! 

As usual I found another free calculator you can plug your variables and help  decide if you should buy, rent or continue living with your PARENTS.  

https://www.realtor.com/mortgage/tools/rent-or-buy-calculator/

The above calculator allows you to plug your down payment, interest rates, closing cost and other key factors {see example chart below} and will estimate how long you need to own the property to break even and make it a good, maybe a great investment.  I recall my brother purchased a home in NJ, for a relative short period and walked away with a six figure profit.  That was a great investment.  A few years later, I purchased a condo in NJ and loss tens of thousands when I sold.  A poor and painful investment.  Investing in real estate depends on lots of factors. 

I was not kidding when I mentioned the option of living with your family/parents.  That is a great way to save for your new home and/or investments.  What’s the rush to move out? Just make sure all parties benefit!  Help your parents with expenses- you are no longer a child. And for heavens sake, your Mom is NOT your maid. Based on a recent court case, I suggest you move out prior to your parents serving you an eviction notice! True Story!

BUY VS RENT EXAMPLE – RALEIGH NC

Lets look at a Raleigh NC example.  I went to college in Raleigh and purchased two properties prior to moving out of the state. Below example purchase,{Home Cost: $303,000 versus the option of  renting for ~$1400 per month} requires  you to own the home for SIX years before you break even, versus renting. 

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MORTGAGE RATES ARE AT 7 YEAR HIGH – STILL RELATIVELY LOW

Your loan amount and interest rates determine your monthly payment and therefore influence how much house you can afford, as higher interest rates increase your monthly payments. Mortgage rates today for a 30 year loan average about 5%, remaining historically low.  The Federal Reserve is slowly increasing federal rates and we have no way of knowing how high rates will go.  So now MAY be a good time, if your finances are in order and you have the down payment saved. 

Consider a 15 our 20 year mortgage if you can afford it.  Your payments will significantly increase, but you will pay significantly less interest over the life of the loan.  As your income increases, you may be able to refinance to a 15 or 20 year mortgage in the future.

BELOW EXAMPLE: UPFRONT COST TO PURCHASING RALEIGH HOME

DOWNPAYMENT:   The above example assumes you put a 20% or  $60,600 down payment.  The average downpayment in 2016 was 11%, so you can significantly reduce that downpayment.  You will however increase your monthly payment by requiring Private Mortgage Insurance (PMI), if you go less than 20% down.  Typically the premiums for private mortgage insurance can range from $30-70 per month for every $100,000 borrowed.

BUYERS CLOSING COST.  Typically, home buyers will pay between 2 to 5 percent of the purchase price of their home in closing fees (excludes down payment).  Assumed 4% in this example, or 4% of the $303,000 home price = $12,120

TOTAL BUYERS CLOSING COST: $60,600 + $12,120 = $72,720  {Cash you have to bring to the closing table.}
Having adequate savings for your closing cost is the number one obstacle that prevents Americans from buying a home.  Many future buyers will rent a smaller apartment or home {or make peace with Mom/Dad} and save up their closing cost.

ONGOING COST OF BUYING A HOME
There are other ongoing annual cost associated with buying versus renting:
* Property Taxes
* Homeowners Insurance
* Maintenance Cost (Exterior and Interior painting; Roof Repairs; HVAC
* Replacement/Repairs; New Appliances and this list GOES ON AND ON AND THESE COST NEVER EVER COME AT A GOOD TIME!} This week my neighbor had his roof redone $$$$$$.
* Average U.S. Homeowners Pay ~$9,000+ PER YEAR  Maintenance Cost

SOME OF MY LESSONS LEARNED FROM MY OWN PURCHASES

Never let a real estate agent talk you into more house than you can comfortably afford.  Many real estate agents are honest people.  But unfortunately, some agents put their own best interest ahead of their clients.  Remember, the higher priced house you buy, the bigger pay day for the AGENT!  Ten years ago millions of Americans lost their homes during the banking and real estate crisis.  The size of your purchase should be guided by two different figures: the amount you can qualify for and the amount you feel COMFORTABLE BORROWING.  Never exceed your comfort level.

ADJUSTABLE RATE MORTGAGES: Adjustable rates look desirable at the start of the loan, but can be adjusted down or up each year. While it is possible your rate can go down, in most instances my rates increased. These loans have a maximum rate they can be increased to. Ensure you can afford the loan if your rate increases to the maximum rate, which is typically six percentage points added to your original rate.

TWO INCOME COUPLES: If possible buy a house you can afford on one salary, so if your partner is laid off or stops working, you are NOT homeless. Banks typically will not lend if your total housing cost are above 28-30%.  Personally I prefer to keep that percentage much lower, in case you or your partner lose a job or have other emergencies. The size of your purchase should NOT be guided by the maximum loan you qualify for. 

“LOCATION, LOCATION, LOCATION”: Concentrate on the quality of the public schools and other location factors.  Majority of home buyers have kids. The most important factor about your location is the school ratings.  Draw a circle around the area within your maximum work commute and select the best school district. Fortunately all the major real estate apps and websites give you the school ratings.  Buy a home in the area with the best school scores, even if that is a smaller home.

HOMES TO RUN FROM- MAXIMUM SPEED: Regardless of the “great” deal the real estate agent tells you it is, avoid homes:
* Next to a major or busy road,
* Unusual (UGLY) designs,
* Smaller lawns than your neighbors (remember those kids),
* Most expensive home in the neighborhood
I have seen too many friends and neighbors struggle to sell their homes when it was a poor investment due to above and other factors.  

Be very careful buying houses with in-ground pools. There is significant annual cost (Thousands of $$) in upkeep.  Many buyers avoid buying a house with a pool. Again, a tougher resell when you are ready to move on. 

THE DECISION
First, can you afford the upfront cost and are you planing to stay in the home long enough to make it a financial wise investment?  In smaller less expensive towns you may breakeven in two+ years and in larger cities you may breakeven in 10+ years or never break even. 

If you decide to rent, the money you planned to use for a downpayment and closing cost, could be invested in the market, so there is an opportunity cost to consider also.  In above example, if you rented versus purchased this home you could invest the $72,720, in a savings account, S&P 500 ETF, or other investment tool. 

Buying a home should be an investment and can be a key component in building wealth. Every mortgage payment means you OWN (build up your equity in the home) more of your home, which you will get back when you sell it (hopefully at a higher price than you paid for it, but that’s not always the case).

Homeowners can also take advantage of tax deductions, which can lessen the cost of owning a home. But keep in mind, the 2019 tax changes reduced some of the deductions. Buyers are now only able to deduct interest on the first $750,000 (seems like plenty to me!) of mortgage debt on a home. And more importantly, homeowners can now only deduct up to $10,000 in state and local taxes, including property taxes — a deduction which used to be unlimited. While the changes mostly affect buyers in high-cost markets, the deductions have become less valuable because of the near doubling of the standard deduction, which means fewer homeowners will itemize and take advantage of them.

Becoming a homeowner means committing to fixing that leaky roof, backed up toilets or heat pump that stops working on the coldest blasted night of the year. Some people just don’t want the responsibility. Renters can pick up the phone and call the landlord. Some landlords also tend to pick up the tab for utilities, trash pick up and landscaping

Also, consider the source of your income. If your paychecks are not steady or your job security is uncertain, it might make sense to hold off on buying a home. Renters can always pick up and move to cut back or follow a new job.
With the exception of the very wealthy, buying a home is likely the most expensive purchase you will make. 

For many Americans a home is their best and largest asset. Consider the decision carefully and logically.  

GOOD HUNTING!

Powers Investments Management, LLC

This blog will provide, information and simple strategies, that will assist you to achieve YOUR financial objectives and long term targets. For over 30 years, I solved multi-million dollar problems, for Fortune 10-250, companies. My formal education includes: Business, Finance and Chemical Engineering {Problem Solving} at: Harvard, Rutgers and North Carolina State. And an additional 30+ years, managing my family’s investment decisions. I currently manage/advise people with net-worths ranging from the tens of thousands to several million dollars.

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