Ah, homeownership. There’s so much to think about. First, a few things to keep in mind:
- This isn’t an anti-homeownership post. In fact, buying a house can be an excellent financial goal to accomplish.
- It can also be one of the biggest financial mistakes out there.
- Knowing what you’re really getting into is the best way to avoid the potential pitfalls down the road. Knowledge is power people!
Ok, let’s dive right in. Many folks still have the mindset that owning a home means you’ve really made it in life. While the “American Dream” has changed quite a bit over the past few decades, people still think that young Americans should…get married…buy a house…and have a couple kids. Sounds familiar, huh? That social pressure is tough to deal with, and can cause millennials to take the plunge into buying a house before they’re financially ready. Homeownership is an investment, there’s no doubt about it. But the real question is this: Is it really the right investment for you?
Presenting the financial realities of homeownership:
If you own your home, it’s a liability.
Technically, when you’re talking about assets vs. liabilities, real estate is in the asset category. But people are often misguided by the notion that if you own the home you live in, rather than renting it, you suddenly have this great asset at your fingertips. We don’t want to be the bearers of bad news, but it’s just not that simple. Why, you ask? In our opinion, an asset is something that puts money in your pocket. In the world of real estate, an example is a rental property you own that generates positive cash flow (meaning you make more money each month from rent than you spend paying for maintenance, management, mortgage, taxes, etc.). A liability is something that costs you money, and that’s exactly what owning the home you live in does. You pay the mortgage, taxes, insurance, maintenance costs, and the like, and your home doesn’t generally provide you with any positive cashflow.
Now, sure, there’s the possibility that you make money on the sale of your house, when that time comes. Maybe your neighborhood becomes the next up and coming area in town, and houses sell for above the asking price as soon as they’re put on the market. That would be great, but it’s not something you should count on. There’s no way for you to know when you purchase a property if you’ll be in that situation at selling time.
Buying a house is a loooong term investment.
It generally takes a really long time to gain equity through paying your mortgage. Assuming you take out a 30 year mortgage, which most people do, your monthly payments go mostly to paying interest on the loan before you start putting a significant dent in the principal value. Because of this, it takes significant time to build meaningful equity from your mortgage payments alone. The problem here? Most Americans don’t live in the same house for 30 years. In fact, according to recent data, Americans move an average of 11 times in their lifetime. That’s a lot of packing up and shipping out, which means folks often sell their houses before their loan is fully paid off. Every time you sell a house, there are additional expenses involved – spending money getting your house ready to put on the market, closing costs, and realtor fees – which can eat away at any equity you may have.
High costs of home repairs and upgrades.
Everyone wants to make changes to their house to really make it their own. These home repairs and renovation costs are expensive, especially if you don’t have the time or knowledge to be a do-it-yourselfer. YouTube is a great resource for odds and ends home fixes, but lots of things can go wrong in your house that require a professional. These unplanned expenses can quickly become a problem if you’re living at your monthly income limit between your mortgage and other monthly bills. With renting, you phone the landlord and the repair gets taken care of. With homeownership, it’s on you to pay to fix that leaky hot water heater, broken pipe, or worn out heat pump. You may increase the value of your property by making upgrades, but you’re also paying for those renovations out of your own pocket, which can hold you back from putting money away for retirement or other important financial goals.
Houses are illiquid investments.
An illiquid investment means it’s hard to get at the equity you’ve put into it. You can’t just pull money out of your home whenever you want like a savings account. You could refinance if you have equity, and get to the funds that way, but that still takes time and money. You could sell to get at your equity, but that takes time too and we already discussed the additional costs involved there. So if you need to have quick cash on hand for something that’s happening in your life, better look to your savings, because you’re not going to be able to pull it quickly from your home equity. Is that a bad thing? Not necessarily, so long as you also have liquid investments to offset the fact that your money is tied up in your home. It’s a good idea to diversify your investments and maintain an emergency savings fund for this very reason.
What does all of this mean for you as the potential homebuyer? Should you or should you not look to purchase a house in the near future, or even make it a long-term goal? Owning a house may be a great thing for you to take on, but it all depends on your personal financial situation. We are certainly not anti-homeownership, but you should know that it’s not always rainbows and sunshine with owning a home. We want all of your surprises to be good ones. Having a financial plan can answer a lot of questions about whether homebuying is a good option for you. With a plan in place, you can see what purchasing a house can do to your financial situation as a whole. Still have questions about the prospects of investing in a home, or interested in our financial planning services? Don’t hesitate to reach out.