Read This Before Getting in the Rental Business

Repairs to HouseYears ago I had a conversation with a friend about some repairs on one of his rentals.  It went something like this:

Me: “Brett, I have some bad news today.  The garage door on one of your rental units warped and fell off its hinges.  I had a professional check it out, and they said it was beyond saving.  It will cost about $700 to replace.”

Brett: “That is too bad.  You know how to stop that from happening, right?”

Me: “How is that?”

Brett: “Get out of the rental business.”

The phrase, “get out of the rental business,” is a common joke amongst many of us who have been in the business long enough.  We know that there is only one way to stop many of the expenditures of owning rental property: never own it in the first place.  Otherwise, we take expenditures as a fact of life (as in any business).  Once you learn to handle them, this can become a very rewarding investment.

But here is the problem that I see too often: not enough people are told about the realistic expectations of owning rental property.  There is a myth going around that once you have the money to buy real estate, you can just sit back and watch the money come in.  It isn’t as easy as that.

Let’s face it; there are a lot of things that can go wrong with a rental unit:

–       Obsolescence (problems arising from a house getting older):

  • Roof starts leaking
  • Water Heater stops working
  • Toilet, Window, Faucet, HVAC problems, and more

–       Vacancy and Collection Loss

–       Tenant can mistreat the property

  • Stains in carpet
  • Uncleanliness
  • Unkept Yards
  • And more

–       Non-Payment of Rent and Eviction Lawsuits

You get the idea.  No matter how hard we try to prevent these things from happening, there is no way to stop all of them.  A good application process can weed out the really bad tenants, and a good insurance policy can stop a lot of major bills, but there are still expenditures that come about through owning a rental unit.

As a property manager, I feel like it is my duty to let owners know of these problems.  If you are thinking about getting in the rental business, but haven’t heard about the risks of this business, contact me and I can help explain it to you.  If you are in the rental business, but were never told of the risks beforehand, we can help you out as well.

I love the rental business; it is where I put the majority of my money.  If I didn’t think that it could work, I would have gotten out a long time ago.  In writing this post, I am in no way demeaning the thought of owning rental units; I just want every owner to be prepared for the business.

So here is the bottom line… owning rental properties can be a great investment, but it also carries much risk.  We, as a property management company, will do all we can to lower the cost of a rental unit while increasing the revenue.  Our presence can reduce much of the risk, but we cannot stop bad things from happening.  It is up to the owners to know how much they can risk.

Therefore, if you contact Loewen Clovis Realty to learn about our property management services, or to learn how to invest in rentals, we will not steer clear of the fact that the rental business is tough.  We will give you the full impression of the pros and the cons of the business.  By doing so, we hope that you get a realistic view of the business so that you can properly prepare.  With enough foresight and preparation, rentals can be a great addition to your portfolio.

Step 4 of Home-Buying Process: All the Tasks to Complete Closing

4.1  Escrow and Title Company
This is Step 4 of the Home-Buying Process.

This is Step 4 of the Home-Buying Process.

Once an offer is agreed upon and signed by both parties, an escrow account will need to be started.  You, the buyer, will need to give the earnest deposit to your broker, who will take it to the title company (or seller’s Qualifying Broker) that is designated in the purchase agreement.  The title company will start an escrow account by depositing your earnest money and issuing a receipt for it.

A title company will obtain the payoff amounts for existing loans and calculate prorated taxes, liens, rents, insurance policies, and utilities.  They will arrange for title insurance policies, pay off the costs and liens as agreed in the purchase contract, and close the transaction.  The will also arrange to record the transfer of title at the courthouse.

Your escrow will close when the county recorder notifies the title company that the deed has been changed from the seller’s name to the buyer’s name.

4.2  Inspections

A professional inspector is recommended to inspect the house you are buying.  Even if the house looks OK, it is highly recommended to have an inspector go through to do a more detailed inspection.  You will want to know as much as you can about the house you are buying.  Depending on how your contract is set up, you may be negotiating with the seller to pay for any major repairs that are required.

4.3  Appraisal and Survey

Your mortgage lender will designate an appraiser to determine the value of the home.  Since they have a large stake in the property you are buying, they will want to make sure it is worth the value that is being paid.

A survey is also usually ordered to determine the boundaries of the property.  This is to make sure that there are no encroachments on the property that were not disclosed.

4.4 Final Processes

Depending on the contract, lender, and house, there may be other things done before closing.  A lender can request final paperwork to make sure everything on the application is still current, insurance can be ordered, other inspections such as pest inspections, and more.

4.5 Walkthrough Before Closing

You should visit the home 1 to 2 days before closing to make sure that the repairs were done and the house is in the same condition as when you put the offer in.

4.6   Attend Closing

This is the final step to buying a house.  You will want to bring your purchase agreement, your settlement statement, a calculator, a pad of paper, mortgage commitment (if any), and any other paperwork that pertains to the house.

Congratulations, you now own a home!

*Just remember, this list is a rudimentary list of the steps to buying a house.  It is meant to familiarize you with the process of buying a home so you are not left in the dark.  There are several more details and processes that happen in the actual purchase of a house that a Realtor can help you with.  If you have any questions, contact a Realtor who you trust to get you started in the right direction.  We would be happy to assist you if you are looking for a good real estate professional.

Photo Credit: “Red Death” by Tiberiu Ana on Flickr. CC Licensed.

Step 3 of the Home-Buying Process: Make an Offer and Negotiate

3.1 Determine what you are willing to pay for a property

The buyer should determine the price they are willing to pay, not the broker.  However, a broker can do a market analysis of the area to make sure that the price is reasonable.  We will check recently sold houses to see what they sold for, how long they were on the market, and any other indicators of value.

Many buyers feel like they ought to go in with a really low offer and let the seller give a counter-offer.  This is usually not the best strategy, as many sellers will not see this as an opportunity to sell their house, but rather as an insult.  Although a buyer views each house as an investment, the seller may not see it the same way anymore.  They have made memories in that house and established emotional ties.  Make sure to take that into account with your offer.  If you insult the seller, they may decide to not work with you anymore.

The offer is more than just the price you are willing to pay though.  There are things to consider such as the amount of earnest deposit, down payment, inspection period, contingencies, and more.  The purchase agreement is an agreement that can be adjusted for many different factors.  Don’t worry though, that is why you have a broker.  We will help make sense of it all.

 3.2 Submit your offer

Once we have hashed out the details of your offer, we will submit it to the sellers.  There is usually an expiration period on the offer, so we will need to wait until the either the seller responds or the offer expires.

3.3 Negotiation

If the seller accepts your offer, then congratulations, you have just made a very important step to owning a house.  However, if the seller objects to your offer, they usually do one of two things… 1) submit a counteroffer, or 2) reject your offer completely.  If they have submitted a counteroffer, we determine whether it is acceptable or keep going back and forth.  Remember, negotiation is business, so don’t take anything personal.  We may just have to change enough features on the offer until both sides like it, or walk away if it is not reasonable.

If a seller rejects your offer outright with no counteroffer, there could be a number of different reasons.  The offer may have been too low, they could have changed their plans, or timing was just not right.  It is frustrating, but don’t let it get you down.  There are plenty of homes on the market to continue trying until one works.

Photo Credit: “Number Three on Train” by indi.ca on Flickr. CC Licensed.

Step 2 of Home-Buying Process: Find Broker and View Houses

Now that you are pre-approved, you can start looking for houses in your price range.  This is the exciting part!

 2.1 Figure out what kind of house you want

Before you start hitting the streets looking at houses, you must know what you want.  How many bedrooms?  How many bathrooms?  What location do you want?  Knowing what to look for really helps narrow down the search.  If you look at too many houses, they all start blending together, so make sure you have an idea of what you are looking for.

 2.2 Find a Real Estate Broker

Not all brokers are the same; we all have different areas of expertise and experience.  Just because your neighbor or friend acquired their real estate license doesn’t mean they are always the right match for you.  Buying a house is a big commitment.  Make sure your broker knows what they are doing.

Also, we see a lot of buyers view homes using several different real estate brokers.  This can create problems down the road.  For starters, you want a broker who is working for you… if you use several brokers, many will realize that you are not committed to them, and therefore they won’t commit to you.  Secondly, if you view a home with a broker, you are technically committed to them on the house that they showed you.  This can be frustrating if you find the house you love, but you cannot trust that broker.  Therefore, it is always best to view homes with the broker that you trust.

*I am sure that you were expecting us to tell you that we are the best company for your needs.  We will let you decide that.

 2.3 Identify the house you want

Finally, you can start looking at houses.  Before you start driving around though, you should get online and look at the houses available in your price range (our website is great for this, just click the search for homes link).  You can quickly narrow down properties by choosing the location, price, features, and more.  Our search pulls data from the MLS, which is the same service where real estate brokers get their information.  After you have an idea of what houses you like, contact your real estate broker to continue defining your search.

You will want to narrow your search down to about 5 houses before your first appointment.  This will help give you an idea of the market, and you can continue tweaking your searches if none of the first 5 works for you.  Some people find the house of their dreams the first time around, while others search a lot of houses before they find one that suits them.

Also, many real estate brokers have schedules; make sure to give them enough notice to see houses so they can set it up.  If not, you may be disappointed to find out that a broker cannot drop everything to show you a house with no notice.  Sometimes houses are not readily accessible without a prior notice from us as well.

Photo Credit: “Giant number two” by Ruth and Dave on Flickr. CC Licensed.

Step 1 of Home-Buying Process: Prepare, Budget, and Get Pre-approved by a Lender

1.1 Make sure buying a house is the right strategy

The first step to buying the home of your dreams is to first ask the right questions about why you are buying a house.  Do you plan on sticking around for several years?  Are you just buying a house because you think that is what you are supposed to do when you can afford one?  I have some great articles on buying vs renting that you can scroll through.

1.2 Find out what you can afford

Once you are sure that buying a house is the right strategy, you must look for a house that you can afford.  We don’t want you to stretch the wallet in order to make your payments.  You must look for an amount that you can maintain every month, while still being able to pay for unexpected maintenance and life fluctuations that come up.  Just google “afford monthly mortgage” and all sorts of sites with mortgage affordability calculators come up.

Just remember, it is your responsibility to budget correctly, not your bank’s.  Sometimes your bank will tell you how much you can “afford,” but only you can be sure about that.

1.3 Find out your credit score

Everyone is entitled to a free credit report at least once per year.  Just google “free credit report” and find a reputable company to get yours.  Mortgages usually require a good credit score nowadays.  A score of 720+ is deemed excellent, while a score of 620- is deemed as subprime by many lenders.  If you need to bump up your score before getting a loan, it could help you secure a better rate.

1.4 Get Pre-approved

This is one of the most important steps in the home buying process.  We almost made it a full step of its own.  Check out our article, why getting pre-approved is important to starting a house search.

In order to start this process, you must find a lender.  There are usually two types of lenders: local banks and mortgage brokers.  Our recommended first step is to try the bank that you deal with.  If you have established a good reputation with them, they will probably be more willing to work with you on getting a good pre-approved rate.  The advantage of a local bank is that they usually know the local market and can process everything in-house, which makes it a smooth process.

If you feel like your local bank is not a good choice for you, there are plenty of mortgage brokers out there who can help you out.  Basically, they assess your finances and then shop around financial institutions in order to find a loan that fits your needs.  The disadvantage to them is that they get a commission off of your mortgage, so they will sometimes shop around the institutions that give them a better commission to begin with.  If you are worried about this, just ask the broker about the various commission structures.

Also, make sure you are getting pre-approved, and not just pre-qualified.  The difference is that pre-qualification is just an estimate of what you can afford, but a pre-approval is a statement of fact.  Usually a bank puts a time period on their pre-approval, so make sure you are aware of when the pre-approval expires.

Photo Credit: “Number One” by John Ayo on Flickr.  CC Licensed.

Are Foreclosures a Great Investment?

House in ForeclosureThere has been a lot of talk about investing in foreclosures over the last several years.  A lot of this talk is because foreclosed homes have increased dramatically around the country and many people think that there is easy profit in them.  The truth is that while a good deal may come available, there is a lot of risk in foreclosures, and only experienced investors should be purchasing them from the courthouse steps.

Before we begin, I want to clarify that this post only deals with foreclosures being bought AT AUCTION.  This does not deal with pre-foreclosures or OREO’s (foreclosed homes now owned by the lending institution).

Here are the 5 things that most consumers need to know about buying a foreclosure at auction (typically the courthouse steps)…

1. Buying foreclosed homes at auction requires all cash.

This rule alone will make foreclosure investing nearly impossible for most people.  In order to buy a foreclosed home at auction, you will need to pay the full amount of money (most likely a cashier’s check) on the spot, or within hours of the auction.  There is no mortgage process.  You either have the money or you don’t.

2. The previous owners have 30-days to redeem the house.

In New Mexico, there is a 30-day redemption period on foreclosed homes after auction.  This means that if the previous owner is able to come up with the money to buy the house back, they have the right to do it within 30 days after the auction.  The investor who bought the home would get all of their purchase money back, but they would not be reimbursed for any work done on the property.  Therefore, the general rule of thumb is to not do any work on the house within 30 days of buying it at auction, or you risk losing anything you changed.

3. There is no guarantee on a clear title to the property.

When an investor buys a house on the courthouse steps, they are issued a “Special Master’s Deed”.  This is a very basic deed which doesn’t guarantee clear title to the property.  So while many liens are usually wiped out in a foreclosure sale, some liens could still exist and remain attached to the property.  If the buyers aren’t aware of these liens, they could be in for an expensive surprise.  Therefore, foreclosures can be very risky if the proper title research is not done.

Also, since many foreclosed homes are pulled off the auction track at the last minute, it can be costly to pay for title work on every house.  For this reason, many investors often do their own title work.  Yet another reason why foreclosures are usually bought by experienced investors and not the general public.

4. Foreclosed homes are often bought without a proper inspection

Rarely does a buyer of a foreclosed home get the chance to do a proper inspection of the property.  In fact, most of them are not even able to see the inside of the house until after they have bought it.  The reason is because few default owners allow prospective buyers to snoop around their house while they are in the process of foreclosure.  And by the way, don’t expect someone who is being foreclosed on to leave the place in good condition.

5. Foreclosures can often require eviction lawsuits

Many foreclosed homes are still occupied by the default home owners after the auction.  Often the new buyers of the house must evict the previous homeowners.  This requires more money, time, and knowledge of the law.  Let’s not forget the amount of damage that the previous homeowners may do on their way out.

Conclusion

I want to make it quite clear that foreclosed homes are usually only bought by experienced investors due to the riskiness of their nature… all cash purchase, little to no inspections, and possible title conflicts.  Regular home owners should tread very lightly in this area.  If not, they can stand to lose a lot of money from not being prepared.  This is contrary to what many “get-rich-quick-books” will tell you, but it is something that you need to know.

Photo Credit: “Sign of the Times – Foreclosure” by JefferyTurner on Flickr.  CC Licensed.

The 4 Resources Needed to Invest in Real Estate

Over the last decade or more, it seems like there have been a lot of real estate investment books, TV shows, infomercials, and seminars talking about how much money can be made in real estate.  While there is money to be made in real estate, it may not be as easy as you think.  Many of these shows and books usually have a creative way to make money, but most of those creative strategies are very risky, take advantage of others, or are too time-intensive to be worthwhile.

If you want to make money investing in real estate, your strategy is heavily dependent upon these four resources:

1. Cash & Credit
2. Knowledge
3. Time
4. Expertise

Cash & Credit

If you do not have a lot of cash, your investment opportunities will be limited.  Most financial institutions will not lend money for investment property without at least 20% down payment.  Majority of auction strategies, such as buying foreclosures, require all cash. And while many real estate “gurus’ say that you can invest in real estate with no cash or credit, they are often wrong.

If you are really serious about investing in real estate, start saving up your money.  Real estate can cost quite a bit compared to alternative investments such as stocks & bonds.  At the time of this writing, average home prices in Clovis, NM are $139,000.  A 20% down payment is $27,800.

As my professor used to say, “Cash is King.”

Knowledge

If you want to invest in real estate, there are a lot of things to be knowledgeable about.  For starters, you will need to know the law.  Owning property brings with it a lot of legal responsibility.  If you own rental units, you will need to know what the law says about landlord-tenant relations.  There are a lot of myths about what you can get away with as a property owner… just because you think that you can lock out a tenant who owes you money doesn’t mean that you have legal permission to do it.

Other areas where you may need to be knowledgeable are finance, property maintenance, property management, and taxes.  Real estate can often be complicated, so you will need to have the right connections and knowledge to be able to handle the situations thrown at you.

Time

Time can often be an area that beginning investors don’t think about.  You will want to make sure that you have enough time to handle the tasks that are involved in investing.  If your strategy is to rehab houses, this is a very time intensive strategy.  If you invest in rental houses, they still require time to manage, maintain, collect rent, and more.  If your schedule makes it hard to do some of these tasks, it may be worth looking into a more passive investment.

Even if you have the time to be a good investor, it doesn’t always mean that it is worth your time.  For instance, if you can make $20 an hour on a side job, and the profit you make investing only brings in $10 an hour, your time is still better off working the $20 an hour job.  Few investors actually pay attention to the amount of time involved; all the time it takes to search, buy, market, manage, and maintain an investment property may be more than it is worth per hour.

Many big investors do well because they take advantage of economies of scale.  It often takes the same amount of effort to manage 10 houses as it does 3, so it works for them. It may be hard to make it worth it if you only have a couple of investment properties.  So, make sure to analyze the time it takes and whether it is economical.

 Expertise

Another resource to take into consideration is your expertise.  Many investors started making good money in real estate because they have a skill that they could do themselves.  For instance, someone in construction could rehab a house a lot cheaper than someone who isn’t.  Someone who is good at managing rental units can avoid the cost of hiring a property manager.  You get the idea.  The more hands-on you can get with your investment property, the less money you will spend to hire others.

You won’t make much money if you get a large loan, pay contractors to fix everything, and hire a property manager to oversee your investments, as there is not much left over for yourself.  Make sure to take into account the expertise required to invest, and exploit the areas that you can do yourself.

Photo Credit: Money” by PT Money on Flickr.

Why Getting Pre-Approved is Important to Starting a House Search

Many buyers get frustrated when their Realtor asks if they have been pre-approved.  They think, “all I want to do is look at houses, we can worry about the pre-approval later.”  We understand your frustration, but let me help explain why the pre-approval process is so important….

1. A Pre-approval Letter shows that you can buy a house

Unless you plan on buying a house for cash, you will need some sort of financing.  If you cannot obtain the financing, say hasta luego to the idea of buying a home, for now.  There is not much more that is frustrating (to buyers and Realtors alike) than to look at houses for several days only to find out that you cannot obtain financing to buy one.  Therefore, we usually ask for a pre-approval so we can both have reassurance that you can buy a house.

2. A Pre-approval Letter helps define your search

It lets you know what you can spend, so it saves time and energy from searching for houses that you cannot afford.

Think of the emotional drain of finding the house of your dreams and then the bank says that you cannot afford it.  We would rather you not look at those houses that you cannot afford.  If you can only afford a $100,000 house, we need to make sure you are only looking in that price range.  If you look at too many houses outside of your price range, you will not enjoy the houses in your price range as much.  A Ford Focus never looks as good after you drive a Lamborghini.

3. You’ll have more leverage in negotiations with the seller

Having a pre-approval letter really makes your offer look good to the seller of the house.  They are more willing to negotiate with someone who is pre-approved than someone who isn’t.  Plus, if there are multiple offers on a house, yours will be ranked higher due to the fact that you are already pre-approved.  It is less risky for the seller than looking at an offer from someone who isn’t.

4. A Pre-approval letter is better than being pre-qualified

Many banks will give you an informal estimate of what you can afford, and this is known as pre-qualification.  It is not a statement of fact, but rather an opinion.  Make sure you get an official Pre-Approval letter.  This is a statement of fact, and will hold a lot more weight than a pre-qualification letter.  It takes more work to get pre-approved, but it will save you a lot of time in the long run.

We hope this gives you a few reasons why it is so important to get pre-approved.  If you have a hard time starting the pre-approval process, give us a call and we can help lead you in the right direction.

Photo Credit: Tax Return and Calculator” by TaxBrackets.org.  CC Licensed.

Rent vs. Own: 6 Reasons Why Renting is Better than Homeownership

Recently I wrote a post about why owning is better than renting.  Now I would like to look at the flip-side to that argument…. why renting is better than owning.  In my industry, it is taboo to talk someone out of owning a house.  It would be comparable to a car salesman convincing you to stick with your current vehicle rather than buying a new one.  But, the truth is, there are a lot of advantages to renting, and I would not be a good real estate professional if I didn’t talk about all facets of real estate.  So, here we go…

1. More flexibility

If you are new to your career, just arrived to town, still going or just finished college, or if you have a complicated financial circumstance (in the process of divorce for instance), renting may be the better solution for you.  The reason is because your future may change in an instant, and it is a lot harder to move from an owned home than it is from a rental.  I wrote an article about why it  wouldn’t be cost effective to own unless you planned on staying for at least 2-5 years.  If you are in a situation where your living arrangements could change quickly, renting definitely offers more flexibility than owning.  Some people just love to move often, and renting just works better for them.

Renting also offers more flexibility with your neighborhood preference.  For instance, say you moved into a neighborhood because you liked the shops nearby, or liked the neighbors, or whatever, and those factors changed…  The stores nearby closed down, a bad factory moved into the area, or your friends moved.  If you are renting, you can choose to relocate to another neighborhood pretty quickly.  A homeowner may have to wait for a while to sell their house (especially if the neighborhood is no longer as desirable).  Overall, renters usually have more flexibility with their living arrangements.

2. Fewer carrying costs (maintenance, insurance, property taxes, etc.)

While it is true that most homeowners pay less for their mortgage than a comparable rental, they also have to worry about maintenance issues.  Some of these maintenance costs can be quite expensive; roof repairs, plumbing problems, painting, electrical issues, and more.  When you are renting a house, these costs are usually covered by the landlord.  This is definitely one of the perks to renting instead of owning.  Your rent payments are predictable payments, no worrying about unpredictable maintenance expenses that come up.

3. Sometimes it is cheaper than owning

If a person does not have a large down payment (at least 20%), they will probably have to pay Private Mortgage Insurance, which can make owning nearly as costly as renting.  Or, if your credit score is not good enough to secure a lower interest rate, that could make a mortgage more costly as well.  Remember, just having a lower mortgage payment is not all that matters, it is the unexpected costs like maintenance that can actually make rent cheaper than owning.  If an owner is hit with a $10,000 roof replacement bill, it could take several years to even break-even with a comparable rental.  Therefore, if a rent rate is similar to a mortgage rate, renting may be cheaper in the long run due to the predictability of maintenance costs (or lack thereof).

Let’s not forget that some tenants have a really good rent rate because their landlord never raises the rent.  In these cases, their rent may be cheaper than owning.  No use spoiling a good living arrangement.

4. No risk in economic recession or depression

If our economy goes into a recession, homeowners initially suffer more than renters.  During a recession the market slows down, house prices fall, and many homeowners are stuck paying for mortgages on homes that no longer have any equity.  Just look at what happened to house prices in bigger cities over the last several years (Phoenix and Las Vegas ring a bell?).  Foreclosures have sky-rocketed around the country, and more people are looking to rent to avoid that mess from happening to them.

Let’s face it, the United States is in a lot of debt.  There are two ways that a government can pay off debt: inflation of the currency, or stopping the spending and letting the country go into a recession/depression.  Usually it is a combination of both.

Renters are not affected nearly as much as homeowners in times of deflation.

6. No Debt

Many financial advisors don’t see a mortgage as bad debt, but it is debt nonetheless.  If you really wanted to stay out of debt and avoid the mortgage altogether, renting is your alternative.  There are many advantages to being debt-free.

Photo Credit: “Unfurnished Apt for Rent” by turkeychik on Flickr.  CC Licensed.

Rent vs. Own: 7 Reasons Why Homeownership is Better Than Renting

Homeownership is usually considered a better alternative to renting, thus the reasoning why many people call it the “American Dream.”  I think that both have their advantages and disadvantages,  but in this post I will cover 7 reasons why homeownership is better than renting…

1. Homeowners can customize their property

As a homeowner, you can customize your property any way that you like.  You can paint, add a patio, remodel the bathrooms, put in new flooring, and more.  Most landlords would not allow you to do this, but being a homeowner gives you the right to do it.

2. Homeowners get tax benefits

Mortgage interest and property taxes are tax deductible.  You can also qualify for energy efficient deductions, home office deductions, and more.  Plus, if you own your home for 5 years, you can pretty much avoid federal taxes on the sale of your house.

3. You don’t have to deal with a landlord anymore

This can be a good advantage if you have dealt with bad landlords in the past.  You now have control over the privacy of your home and can maintain it the way you see fit.  If something goes wrong, you can control who to call and how fast you want them out (of course, you now have to pay the bills for that service).

Also, a landlord cannot ask/force you to move from the property.  When you own your own home, you have certainty about your living arrangements.

4. Owning a home forces you to save

There is an argument out there that owning a home is like forcing yourself to save.  A portion of your mortgage payment every month goes towards the principal of your house.  Whenever you sell the house, you can access all that equity that you have built up over the years.

5. A fixed mortgage won’t raise in times of inflation

If you have kept up with the economy, you may realize that inflation is the norm nowadays… and it looks to get worse before it gets better.  For the most part, inflation raises the cost of living, but not with your mortgage.  If you have a fixed mortgage, your payment will stay the same, regardless of inflation.  Renters cannot have the same guarantee with their payment.

6. House values usually increase

There is a good chance that your house value will increase over time.  If anything, it should increase to keep up with inflation.  If this is your only reason to buy a house though, beware.  House values also have the possibility of decreasing, as many have seen in other areas of the country.

7. Limited Payments

If you live in your house long enough, you can eventually pay off your mortgage and not have to worry about house payments anymore.  It could take 30 years (with a 30-year mortgage), but it is better than paying for the rest of your life in a rental.

Photo Credit: “Housing” by james.thompson on Flickr.  CC Licensed.

Rent vs. Own: How Long You Plan on Owning Can Make a Difference

How Renters and Owners View Homeownership as being Positive

One question that is asked a lot is whether it is better to rent or buy a house?  Whether buying is better than renting depends on several different factors.  For me, the starting factor is how long do you plan to stay in your house?

The general consensus is that if you do not plan on owning a home for more than 2-5 years, it is probably not cost effective to buy as opposed to renting.  Buying a house is a big commitment that requires some foresight.  There are extra costs involved.  There is more responsibility for maintenance, insurance, and taxes.  Although a mortgage payment is cheaper than rent, a lot of the initial costs aren’t recouped until 2-5 years of ownership.

NY Times has a great calculator to show this:  Check it out here.

Reasons as to why it takes 2-5 years for ownership to become cost-effective:

– Mortgages are structured so that there is more interest paid in the initial years of the loan.  This means that for the first several years of owning a home, not very much of your payments will be allocated to the principal of your loan, but rather to interest.  Therefore, you won’t be building much equity in the initial years.

– There are closing costs to purchasing a home.  They differ depending on the house and how your loan is structured, but there is still an initial expenditure other than just your down payment.  Even if a VA or FHA loan was used to reduce the amount needed at closing, those costs were lumped into the loan amount, and will still be paid off over the life of the loan or when the house is sold.  Remember, there are also closing costs to selling a house as well.

– Houses are not liquid assets.  This means that whenever you want to sell your property to get your money back, it may not happen as fast as you would like.  Unlike pulling your money out of a bank, getting your money (equity) out of a house takes time.  This is why you need to think of the exit strategy for your home.  Are you OK with waiting for it to sell?  Or, do you have another plan like keeping your house as a rental?

As you can see, there are several things to consider if you are on the fringe of buying a home, but don’t know whether you will be around for 2-5 years to make it cost-effective.

How to beat the 2-5 year rule

There is a way to lower the timeframe of cost-effectiveness though….

Since most people purchase the biggest house that they can afford (or the bank will let them), a way to lower your payments is to buy a home that is more modest.  It will lower your monthly mortgage payments and free you up to put the extra amount against the principal of your loan.  Depending on the situation, this could make owning more cost-effective than renting in a shorter timeframe than 2-5 years.

Another option would be to purchase a “fixer-upper” and do the work that is necessary.  Whenever you go to sell, even if it is before the 2-5 year mark, you might have created enough equity to have beat the initial cost of owning a home.

 Owning is still considered better than renting in the long-run

As you read through this post, it may be a little discouraging to hopeful homeowners, but it is only meant to reveal the inital cost of owning a home.  If you plan on staying around the area for longer than 2-5 years, you should really look at your options of homeownership.  In the long run, it is often more cost-effective to own a home as opposed to renting.  Plus, having your own place allows you freedom to customize and live in your home the way you see fit.

When it comes to home ownership, there is no black or white answer as to whether one should own or rent.  It all depends on the circumstances of each individual.

Photo Credit: “Trulia American Dream Infographic – Q1 2011” by truliavisuals on Flickr.  CC Licensed.