budgetfinds buying a home

To Buy or Not to Buy? 6 Key Points to Consider.

Monday, September 09, 2013 Sophie Magdalena

Home ownership; it's the American Dream, right?  This idea defined "The Greatest Generation" as they returned home from World War II and created the strong, upwardly mobile middle class of the 50's and 60's.  And it's an idea that they beat into the brains of their Baby Boomer children:  You'll be fine if you just grow up, get a job, and buy a home.  There was no decision to be made; you were going to buy a home, and the conventional wisdom said homes always went up in value.


Unfortunately, the so called safe haven of home ownership has shown its darker side in the last 20+ years.  As our economy shifts from industrial to technological, the need for centralized manpower has diminished, causing some areas to flourish as other areas fail—Silicon Valley was born as Detroit died. 

The old adage that houses always go up in value has certainly been proven to be untrue, especially recently (ask anyone who bought in 2007 and tried to sell in the past 6 years!).  Is buying a home a sure way to make money?  No.  Is buying a home a sure way to lose money?  No.  So how do we decide?  Take a look at the following 6 points to help guide your way. 

1.  Personal Financial Standing:  

When stuff hits the fan, and it someday will, you’re still on the hook for paying your bills.  Everyone, renters and owners alike, should have an Emergency Fund: cold, hard cash sitting in a savings account, equal to 3-12 months worth of your fixed and variable expenses.  But this account is even more important for the homeowner.  Bailing on your home is infinitely harder than backing out on your lease, so you need a backup plan.  If your Fund is less than 3 months strong, you should consider renting a while longer.  Without this safety net, you may find yourself moving back to your parent’s house, putting your name on the orange juice, and reminding your Mom she needs to knock…

2.  Cash Flow is King:  

Surely you’ve heard that Cash is King.  Well, it’s not.  Cash Flow is King.  Don’t let yourself be fooled that by owning a home, you can spend more each month and it’s okay because you’re “building equity.”  If you are living paycheck to paycheck on $1200 rent, then it’s going to get real ugly real fast if your mortgage+taxes+HOA’s+insurance+PMI+maintenance+utilities payment is $1500.  Can’t you just tap your savings?  No, that’s for real emergencies, not monthly bills.  Can you stop putting money into your retirement accounts?  Sure, but it’s not the best idea (more on this later).  What the heck are HOA’s and PMI?  See #3.

3.  Extra Expenses:  

When figuring your total monthly outlay, don’t forget about the additional (and rising) costs of real estate taxes, Home Owner’s Association (HOA) dues, utilities, maintenance, and insurance.  I’ve owned my house since late 2003, and the taxes have gone up every single year.  So have the HOA dues.  Insurance varies.  We’ve replaced almost every major and minor appliance, put on a new roof, remodeled a bathroom… the list goes on and on.  Oh yeah, and don’t forget Special Assessments.  While these can occur in any home, they are much more common in multi-unit dwellings.  These are fees for special projects: new storm doors, a new roof, sewer repairs, etc.  They aren’t covered under the Association Reserves, and the can be costly.  A storm door is about $250 per unit; a sewer rebuild can run about $25,000!

4.  Real Estate as an Investment:  

The old line of thinking went something like this, “buy a small home, let it double in value, sell it, buy a bigger home, let its value double or triple a few times as you age, sell it, downsize, and retire with all those profits.”  This is why “building your own equity” was thought to be such a great idea.  Don’t get seduced by the mythical compounding value of your home.  Feel free to ask anyone who owns a home in Detroit!  (Even Silicon Valley which has seen a few peaks and deep valleys in home values.)  In other words, don’t expect your first $100,000 micro-studio to parlay itself into a $3,000,000 dollar retirement fund.  Gains are not guaranteed, and over the long-run, home prices have done little better than inflation.  Your qualified retirement plans, on the other hand, while still prone to ups and downs, have fared far better in the long-run.

5.  With Ownership comes Responsibility:  

Another joy of home ownership is that when the stove breaks or the toilet leaks, it’s on you to fix it.  Plumbers ain’t cheap.  This can be a huge expense for a homeowner, but also a place to save considerable amounts of money and even make valuable improvements for someone who is handy.  Now, I’m not talking about I-watch-Holmes-on-Homes-every-night handy; I’m talking truly qualified to fix things with your own “ultimate set of tools.”  (And if you don’t get that reference, you need to get Fast Times at Ridgemont High and watch it right now.)  Are you buying a unit in a three flat?  Better check the reserves for when that place needs a new roof, because no matter how handy you are, they won’t let just anyone up there.

6.  The Intangibles:  

Are you a job hopper?  Does your company have the ability to transfer you to a new location?  In the past decade have you lived in 8 different cities over 5 states, 3 countries and 2 continents?  Perhaps you don’t need to be tied down by owning your own home.  How do you feel about holding debt?  Have you always dreamed of your own home?  There is something nice about being able to call a place your own.  Pride of ownership does exist.  And coming out of such a sharp drop in home prices, perhaps now is as good a time to buy as any…  But again, don’t fool yourself.  The money has to be there first.

Bottom line is this: You need to have the money to pay your bills, you need to do your homework so none of those bills are a surprise, and you need to have a safety net (other than your old room at Mom & Dad’s) to fall back on.  Once the math is done, the rest of the decision is your personal preference.  Just be careful not to rely on conventional wisdom, because it’s rarely very wise.

- Drew Powers
(847) 457-3155

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