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Saturday, January 7, 2017

5 Reasons Why Buying A Home Is Still A Good Investment for Most People

Are you considering buying a home, but have been discouraged to do so by numerous financial gurus?  You currently rent, but despite being told by your money savvy and perhaps better off friends that what you're doing is right, there is still doubt in your mind that gets harder to shake as the first of each month comes around.  You're not alone.  There are thousands of people like you who have the means to buy their first home yet are uncertain of whether or not to commit to making this incredibly important life decision.

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The case against homeownership has gotten more attention the past decade for obvious reason ( The Great Recession).  Robert Kiyosaki became an overnight sensation when he explained why personal residences are not assets.  He wasn't discouraging homeownership, however.  He was simply making sure people understood why their homes weren't assets.  In fact, Kiyosaki has several luxurious residences that he's kept for many years.

When my friends or co-workers ask me for my opinion on whether or not they should get a starter home, I put it back on them:

1) Do you have more than 20% of your projected starter home's cost available to put down as a down payment?

If it will completely deplete your savings, the answer is, No.

2) Are you willing to live in this home anywhere from 7-10 years?

It makes no sense to buy a ball and chain if you plan on making career moves that will require you to leave the area.

3) Does investing your money in the stock market petrify you?  On a scale of 1-10 with 1 being "never," and 10 being, "I'm gonna do it tomorrow," when do you see yourself investing money in stocks or bonds?

If the money renters save by not paying a mortgage and housing expenses is simply going to be deposited in a money market account (within an IRA or otherwise) or CD, then what's the financial point of renting?

4) Would you be willing to rent a room or convert a space into a rental unit at some point in time?

This isn't a non-negotiable condition of purchasing a home, but it sure helps my blessing the decision.
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This checklist of questions gets the would-be homebuyer specifically thinking about who they are as people.  You see, a home purchase does make sense for a lot of people.  Let me give you five reasons, in fact, why buying a home is still a good investment for most people:

1.  You don't trust the stock market (or you don't know how to invest).  It will be hard to diversify your investments if you only believe in holding tangible assets.  It will also be difficult for you to earn a rate of return on your money that beats inflation handedly without investing in paper assets (house price growth may not beat inflation every time).  Well, for you, buying a home makes sense.  But don't buy one expecting it to appreciate in value.  Your biggest concern should be whether or not you are buying in a historically price (and job) stable area.  Appreciation is a plus.

2.  You have a family and believe in setting roots.  Some people love how owning a home makes them feel, especially come the holidays.  You get to make memories with your children in a place with walls you painted, floors you installed, gardens you tended to, and so on.  Not to mention, you get to leave this world knowing you instilled in your children the value of personal property.  It's just not the same in the landlord's house.

3.  You need to force yourself to save money.  Let's say that you somehow managed to save for a down payment and then some, but that overall, you're a lousy money saver.  Well, you won't need any behavioral finance tactics to trick yourself to "save" when you own a home.  The bank statement and threat of eviction is plenty of pressure on you to save.  A mortgage in essence is a savings account that you build by paying down a debt over time.  Provided the home value doesn't depreciate, you should get back some of what you paid (not including interest payments, property taxes, and maintenance expenses) into when you sell after fully paying it off.  You may be thinking, "I could've saved all that money while renting!"  Ah...but would you have?  Also remember that you get to live in your savings, rather than simply watch it accumulate in the bank.

*Note: Remember that all interest payments and property taxes are tax deductible!

4.  You are in the low- and moderate income bracket.  A report in 2013, Homeownership and Wealth among low-and moderate-income households, showed that low and moderate income homeowners generated a higher net worth than their renting counterparts.  In this report, it was concluded that people with "responsible" mortgages increased their net worth on average by $20K over three years compared to only $15K for those who rented.  So maybe owning a home makes you more responsible with your money?  After all, if you're not, you risk not being able to pay the mortgage note.

5.  You can have a financial resource for later.  A home can make for a bank approved form of collateral.  You can also apply for a HELOC, home equity line of credit, and make purchases or consolidate credit cards at lower rates.  You have to do the math as banks will charge fees for setting you up with a HELOC.  If in the long run you stand to save money by using a HELOC to consolidate higher interest bearing credit cards, then it makes sense to go this route.  Most HELOCs offer variable interest rates however, so be very careful.  Don't put your home on the line unless you have to. 

Buying a home is not always the best financial decision.  It may not be the best "investment" for some people.  But for people who have historically been under-represented in the homeownership equation, it may be the best decision.  It may also make perfect sense for impulsive types who can't save to save their life but would benefit from a routine budget that includes a mortgage payment.  If you don't trust the stock market or love being part of the homeowner camp, then by all means, buy that house but be smart about it.

Do you homework.  Study the area before you buy.  See if you're getting an undervalued property in a traditionally price stable area that has great job prospects.  It goes without saying that you should also make sure the mortgage you're getting is responsible for your financial situation.

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