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When Buying Your Own Home To Save On Rental Is Not Smart
Unless you have been living under a rock, you would have probably heard about the wisdom of buying your own house. Instead of spending a monthly chunk of cash on rentals you will be paying off your mortgage instead. The best part is that you own the house and build a “nest egg” you can tap into in future via home equity.
Even though the most aggressive preachers of this philosophy are probably stakeholders for a performing real estate market, you would probably agree at some level that they are right. But that is not exactly so. Things are never as simple as they seem when it comes to hyped investments that costs hundreds of thousands of dollars.
The only way that buying a home is part of financial planning is when you view your house as something more than just a roof over your head. Only when you classify your house as an asset will it make sense to buy for a “nest egg”.
Perception is everything. Buying a car can be an investment instead of a liability if you run a car rental business. See how the spin doctor works?
Investment is about returns and cash flow. And there is no guarantee that owning your own home will get you both. The only people who are guaranteed a return are the agents pocketing a commission from buyers and sellers. Nice. You sign off on a lifetime of debt and someone profits from it immediately. And that person is not always you.
Why buying is not as smart as the alecs make it seem
It is amazing that many financial and property gurus advocate buying your own home for investment when you are actually getting into the biggest debt trap in your life. How is that a good first step to financial independence. It could very well be the first step towards foreclosure.
So instead of having to annoy yourself about the rental next month, you will now have to worry about the house you can only afford by taking into account your income for the next 30 years? Does that really make sense?
Enough about buying a big house so that you can invite your friends over for parties. They are not coming as often as you imagine. Forget about being an adult and owning your own home. That is insulting the millions of adults living the high life and renting their homes. Ignore the notion that buying your own home is taking responsibility for your family. You can’t call getting into a lifetime of debt responsible, can you?
Sure, you will only have to fork out 10% to 20% of the price as down payment. The rest is easily affordable when your monthly household income is taken into consideration. But how is that different from rolling over your credit card bills month after month. You see the paradox here?
The point I’m making is that you should not let the “own my own home” wave make you dizzy. The advantages and benefits can seem great. But no one can guarantee that your investment will bear fruit in the long term. For all you know, your property can depreciate, and you get a call from the bank requesting that you top up your home equity one day. If you haven’t noticed, the real estate market has not been the same since 2008.
From history, what we have learned for certain is that the market don’t learn from it.
If you are currently seriously considering leaving the rental life and purchase your own home, just do yourself a favor and make some simple calculations. It will give you a better perspective of what you are getting into.
First work out your average monthly costs of having your own home. Include the mortgage, taxes, maintenance, etc. Now compare that with the projected rental you will have to pay if you continue renting. Take into account that rentals are more open for negotiation than the expenses you have to spend upkeeping your property. Plumbers, roofers, electricians, etc. These are the contractors you have to hire no matter what the price to fix problems in the hosue.
If a 20% down payment does not faze your bank account and the monthly mortgage repayment is less than 30% of your household income. Money don’t have to be a factor anymore. Your decision will now be based on non-financial matters. Yes, these things actually exist. It’s not all about dollars and cents.
Will relocating affect the life of your kids? Will moving to a new place actually make it less convenient to commute? Is the new neighborhood as safe as where you live now? Does the amenities in the area compare with what you currently enjoy at a rented home? There are so many factors to think over.
However, if you are already short on the down payment and the mortgage instalments can put a strain on your lifestyle, you could be biting more than you could chew. Yes a lender might approve that million-dollar loan… but can you swallow it?
If given a choice, everyone would want to own their own house. The recurring problem these days is that many are trying to achieve that unrealistic dream motivated by an “idea”. If you don’t think that you can afford it, the prudent thing to do is to let it slide.
Good things can come for those who wait. Real estate prices can fall in future. Or if your personal income suddenly suffers a hit, you can just move to a smaller rental apartment. There is no long term financial commitment. You wouldn’t be able to get a discount on your mortgage payments if you went ahead and buy a house.
If investment is the underlying reason why you are seriously entertaining the thought of buying real estate, maybe you have been brainwashed. Real estate is not the only form of investment available to the regular guy. There are many alternative forms of investment that perform just as well, if not better, than real estate. And many of them require lesser effort and money too.
Property ownership is just another road to financial security. Don’t make the mistake of thinking it is the only way.