Chapter One
Deciding Whether to Buy
In This Chapter
* Considering the pros and cons of owning and renting
* Avoiding common mistakes when deciding to buy or rent
Every month, week, and day, we buy things large and small: lunch, a new pair of shoes, and every now and then, a car.
Most people buy things without doing much comparison shopping, but instead draw upon their past experiences. When the counter help at the nearby coffeehouse is friendly and you like the brew, you go back for more.
Sometimes purchases lead you by association to related purchases. You get a pet cat or dog, for instance, and buying a collar and pet toys may naturally follow. By the same token, you buy a home, and before long you have a new television and gardening gloves.
You end up being really happy with some items you purchase. Others fall short of your expectations ... or worse. When the items in question don''t cost you much, it''s no big deal. Perhaps you return them or simply don''t buy more in the future. But when it comes to buying a home, that kind of sloppy shopping can lead to financial and emotional disaster.
If you''re not willing to invest time, and if you don''t work with and heed the advice of the best people, you could end up overpaying for a home you hate. Our goals in this book are simple: to ensure that you''re happy with the home you buy, that you get the best deal you can, and that owning the home helps you accomplish your financial goals.
Weighing the Advantages of Owning versus Renting
Nearly everyone seems to have an opinion about buying a home. People in the real estate business - including agents, lenders, property inspectors, and other related people - endorse homeownership. Of course, why wouldn''t they? Their livelihoods depend upon it! Therein lies one fundamental problem of nearly all home-buying books written by people who have a vested interest in convincing their readers to buy a home.
REMEMBER
Homeownership isn''t for everyone. One of our objectives in this chapter is to help you determine whether home buying is right for you.
Consider the case of Peter, who thought that owning a home was the best financial move he could make. What with tax write-offs and living in a place while it made money for him, how could he lose? Peter envied his colleagues at work who''d seemingly made piles of money with property they bought years ago. Peter was a busy man and didn''t have time to research other ways to invest his money.
Unfortunately, Peter bought a place that stretched his budget and required lots of attention and maintenance. Adding insult to injury, Peter went to graduate school clear across the country (something he knew he was likely to do at the time he bought) three years after he purchased. During these three years of his ownership, home prices dropped 10 percent in Peter''s neighborhood. So after paying the expenses of sale and closing costs, Peter ended up losing his entire down payment when he sold.
Conversely, some people who continue to rent should buy. In her 20s, Melody didn''t want to buy a home, because she didn''t like the idea of settling down. Her monthly rent seemed so cheap compared with the sticker prices on homes for sale.
As it always does, time passed. Melody''s 20s turned into 30s, which melted into 40s and then 50s, and she was still renting. Her rent skyrocketed to eight times what it was when she first started renting - that insignificant $150 monthly rent was now over $1,200 per month. Even with the late 2000s real estate price declines, home prices really seemed out of sight compared with three decades earlier. She fearfully looked ahead to escalating rental rates in the decades when she hoped to be retired.
Ownership advantages
Most people should eventually buy homes, but not everyone and not at every point in their lives. To decide whether now''s the time for you to buy, consider the advantages of buying and whether they apply to you.
Owning should be less expensive than renting
You probably didn''t appreciate it growing up, but in addition to the diaper changes, patience during potty training, help with homework, bandaging bruised knees, and countless meals, your folks made sure that you had a roof over your head. Most of us take shelter for granted, unless we don''t have it or are confronted for the first time with paying for it ourselves.
Remember your first apartment when you graduated from college or when your folks finally booted you out? That place probably made you appreciate the good deal you had before - even those cramped college dormitories may have seemed more attractive!
But even if you pay several hundred to a thousand dollars or more per month in rent, that expense may not seem so steep if you happen to peek at a home for sale. In most parts of the U.S., we''re talking about a big number - $150,000, $225,000, $350,000, or more for the sticker price. (Of course, if you''re a medical doctor, lawyer, management consultant, or investment banker, you probably think that you can''t find a habitable place to live for less than a half-million dollars, especially if you live in costly places such as New York City, Boston, Los Angeles, or San Francisco.)
TIP
Here''s a guideline that may change the way you view your seemingly cheap monthly rent. To figure out the price of a home you could buy for approximately the same monthly cost as your current rent, simply do the following calculation:
Take your monthly rent and multiply by 200, and you come up with the purchase price of a home.
$ _________ per month ? 200 = $ ________________ Example: $ 1,000 ? 200 = $200,000
So in the preceding example, if you were paying rent of $1,000 per month, you would pay approximately the same amount per month to own a $200,000 home (factoring in tax savings). Now your monthly rent doesn''t sound quite so cheap compared with the cost of buying a home, does it? (Note that in Chapter 3 we show you how to accurately calculate the total costs of owning a home.)
WARNING!
Even more important than the cost today of buying versus renting is the cost in the future. As a renter, your rent is fully exposed to increases in the cost of living, also known as inflation. A reasonable expectation for annual increases in your rent is 4 percent per year. Figure 1-1 shows what happens to a $1,000 monthly rent at just 4 percent annual inflation.
When you''re in your 20s or 30s, you may not be thinking or caring about your golden years, but look what happens to your rent over the decades ahead with just modest inflation! Then remember that paying $1,000 rent per month now is the equivalent of buying a home for $200,000. Well, in 40 years, with 4 percent inflation per year, your $1,000-per-month rent will balloon to $4,800 per month. That''s like buying a house for $960,000!
In our example, we picked $1,000 for rent to show you what happens to that rent with a modest 4 percent annual rate of inflation. To see what may happen to your current rent at that rate of inflation (as well as at a slightly higher one), simply complete Table 1-1.
REMEMBER
If you''re middle-aged or retired, you may not plan on having 40 to 60 years ahead of you. On the other hand, don''t underestimate how many more years of housing you''ll need. U.S. health statistics indicate that at age 50, you have a life expectancy of nearly 30 more years, and at age 65, nearly 20 more years.
Although the cost of purchasing a home generally increases over the years, after you purchase a home, the bulk of your housing costs aren''t exposed to inflation if you use a fixed-rate mortgage to finance the purchase. As we explain in Chapter 6, a fixed-rate mortgage locks your mortgage payment in at a fixed amount (as opposed to an adjustable-rate mortgage payment that fluctuates in value with changes in interest rates). Therefore, only the comparatively smaller property taxes, insurance, and maintenance expenses will increase over time with inflation. (In Chapter 3, we cover in excruciating detail what buying and owning a home costs.)
REMEMBER
You''re always going to need a place to live. And over the long term, inflation has almost always been around. Even if you must stretch a little to buy a home today, in the decades ahead, you''ll be glad that you did. The financial danger with renting long term is that all your housing costs (rent) increase over time. We''re not saying that everyone should buy because of inflation, but we do think that if you''re not going to buy, you should be careful to plan your finances accordingly. We discuss the pros and cons of renting later in this chapter.
You can make your house your own
Think back to all the places you ever rented, including the rental in which you may currently be living. For each unit, make a list of the things you really didn''t like that you could have changed if the property were yours: ugly carpeting, yucky exterior paint job, outdated appliances that didn''t work well, and so on.
Although we know some tenants who actually do some work on their own apartments, we don''t generally endorse this approach, because it takes your money and time but financially benefits the building''s owner. If, through persistence and nagging, you can get your landlord to make the improvements and repairs at her expense, great! Otherwise, you''re out of luck or cash!
When you own your own place, however, you can do whatever you want to it. Want hardwood floors instead of ugly, green shag carpeting? Tear it out. Love neon-orange carpeting and pink exterior paint? You can add it!
WARNING!
In your zest and enthusiasm to buy a place and make it your own, be careful of two things:
Don''t make the place too weird. You probably want or need to sell your home someday, and the more outrageous you make it, the fewer buyers it will appeal to - and the lower the price it will likely fetch. If you don''t mind throwing money away or are convinced that you can find a buyer with similarly (ahem) sophisticated tastes, be as weird as you want. If you do make improvements, focus on those that add value: skylights, a deck addition for an outdoor living area, updated kitchens and bathrooms, and so on.
Beware of running yourself into financial ruin. Changing, improving, remodeling, or whatever you want to call it costs money. We know many home buyers who neglect other important financial goals (such as saving for retirement and their kids'' college costs) in order to endlessly renovate their homes. Others rack up significant debts that hang like financial weights over their heads. In the worst cases, homes become money pits that cause owners to build up high-interest consumer debt as a prelude to bankruptcy or foreclosure.
You avoid unpleasant landlords
A final (and not inconsequential) benefit of owning your own home is that you don''t have to subject yourself to the whims of an evil landlord. Much is made among real estate investors of the challenges of finding good tenants. As a tenant, perhaps you''ve already discovered that finding a good landlord isn''t easy, either.
REMEMBER
The fundamental problem with some landlords is that they''re slow to fix problems and make improvements. The best (and smartest) landlords realize that keeping the building shipshape helps attract and keep good tenants and maximizes rents and profits. But to some landlords, like Leona Helmsley, maximizing profits means being stingy with repairs and improvements (although some of Leona''s tenants took her to court for her "excessive thriftiness").
When you own your home, the good news is that you''re generally in control - you can get your stopped-up toilet fixed or your ugly walls painted whenever and however you like. No more hassling with unresponsive, obnoxious landlords. The bad news is that you''re responsible for paying for and ensuring completion of the work. Even if you hire someone else to do it, you still must find competent contractors and oversee their work, neither of which is an easy responsibility.
Another risk of renting is that landlords may decide to sell the building and put you out on the street. You should ask your prospective landlords whether they have plans to sell. Some landlords won''t give you a truthful answer, but the question is worth asking if this issue is a concern to you.
TIP
One way to avoid being jilted by a wayward landlord is to request that the lease contract guarantee you the right to renew your annual lease for a certain number of years, even with a change in building ownership. Unless landlords are planning on selling, and perhaps want to be able to boot you out, they should be delighted with a request that shows you''re interested in staying a while. Also, by knowing if and when a landlord desires to sell, you may be able to be the buyer!
Renting advantages
Buying and owning a home throughout most of your adult life makes good financial and personal sense for most people - but not all people and not at all times. Renting works better for some people. The benefits of renting are many:
Simplicity: Yes, searching for a rental unit that meets your needs can take more than a few days (especially if you''re in a tight rental market), but it should be a heck of a lot easier than finding a place to buy. When you buy, you must line up financing, conduct inspections, and deal with myriad other issues that renters never have to face. When you do it right, finding and buying a good home can be a time-consuming pain in the posterior.
Convenience: After you find and move into your rental, your landlord is responsible for the never-ending task of property maintenance and upkeep. Buildings and appliances age, and bad stuff happens: Fuses blow, plumbing backs up, heaters break in the middle of winter, roofs spring leaks during record-breaking rainfalls, trees come crashing down during windstorms. The list goes on and on and on. As a renter, you can kick back in the old recliner with your feet up, a glass of wine in one hand and the remote control in the other, and say, "Ahhhhh, the joys of not being part of the landed gentry!"
Flexibility: If you''re the footloose and fancy-free type, you dislike feeling tied down. With a rental, so long as your lease allows (and most leases don''t run longer than a year), you can move on. As a homeowner, if you want to move, you must deal with the significant chores of selling your home or finding a tenant to rent it.
Increased liquidity: Unless you''re the beneficiary of a large inheritance or work at a high-paying job, you''ll probably be financially stretched when you buy your first home. Coming up with the down payment and closing costs usually cleans out most people''s financial reserves. In addition, when you buy a home, you must meet your monthly mortgage payments, property taxes, insurance, and maintenance and repair expenses. As a renter, you can keep your extra cash to yourself, and budgeting is also easier without the upkeep-expense surprises that homeowners enjoy, such as the sudden urge to replace a leaking roof or old furnace.
TIP
You don''t need to buy a home to cut your taxes. Should you have access to a retirement account such as a 401(k), 403(b), SEP-IRA, or Keogh plan (see Chapter 2), you can slash your taxes while you save and invest your extra cash as a renter. So saving on taxes shouldn''t be the sole motivation for you to buy a home.
Better diversification: Many homeowners who are financially stretched have the bulk of their wealth tied up in their homes. As a renter, you can invest your money in a variety of sound investments, such as stocks, bonds, and perhaps your own small business. You can even invest a small amount of money in real estate through stocks or mutual funds if you want (see Chapter 16). Over the long term, the stock market has produced comparable rates of return to investing in the real estate market. (Continues...)
Excerpted from Home Buying For Dummiesby Eric Tyson Ray Brown Copyright © 2009 by John Wiley & Sons, Ltd. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
