I have had numerous discussions with potential home buyers with regard to the pros and cons of owning a home. There are many substantial benefits but the foreclosure crisis in recent years is illustrative of some of the major drawbacks in owning a home.
- Renting. If you rent you have flexibility. Most leases are for a year or two. When the lease is over you can move. If your company relocates to a different part of the country, or out of the country, you are not stuck with a significant piece of real estate. In some situations you can simply notify the landlord you are moving and give the landlord the ability to rent your house even before your lease is up and avoid financial liability to the landlord.
- It should also be noted that when you buy a house, there are many up front costs related to the acquisition of the house. These are often referred to as “closing costs”.
- Is owning a home a good investment? It generally costs much more to pay the expenses concerning owning a home than to pay rent. However, most homes over time will appreciate in value. If you have a conventional mortgage for either 15 or 30 years, your mortgage payments will be the same each and every month. However, the taxes on your house will usually go up. Since taxes are usually incorporated into the mortgage payments that you send to your bank, it is most likely that even though the actual mortgage payments will stay flat, the amount of your expenses will go up from year to year.
According to Richard Green, a professor at the University of Southern California the following is a rule of thumb as to how much appreciation you will need to make the home a worthwhile investment vis a vis staying in an apartment and paying rent. Professor Green states that house values should not “have to go up more than 3% a year for you to break even.” Professor Green suggests that your home should not be your sole investment. He states “the idea that home ownership doesn’t carry a lot of risk with it is wrong.” “If you are in a mutual fund, with a long term prospective, it is probably going to grow faster than real estate values. Housing can be more volatile than you think (depending on location).”
- What is equity in a home? To start with, you only build equity if the value of your home is increasing. If your home is appreciating while you are paying off the mortgage, you are developing equity in your home. To determine the equity in your home you subtract from the appraised value of your home the amount of your mortgage debt. What remains, if anything, is your equity in the home.
- Home ownership is a long term investment. It is generally suggested that if you purchase a home you stay in it for a minimum of 5 years. This will give your home a reasonable period of time to appreciate. You also need to consider the closing costs involved in purchasing a home and the expenses involved in selling a home when you determine the actual equity in your home.
Buy a Home and You are the Landlord
When you rent, if something breaks you can contact the landlord and/or his representative and request they make the repairs that are necessary. When you own a home, if something breaks, doesn’t function properly, or goes wrong, you are responsible. If you can’t fix it, you have to hire someone at your own expense to fix it. Maintenance costs in a home, generally, are more than most people anticipate. Before you buy a home you should have an engineer inspect the home and advise you whether the boiler, electrical system, roof, foundation or other aspects of the home are in good condition. You don’t want to buy a home and have it fall down shortly after you purchase it.
Elliot S. Schlissel is a foreclosure defense attorney. He helps homeowners in the Metropolitan New York area fight foreclosure lawsuits and obtain mortgage modifications.
