This article is part of our 52 week journey through Bill’s latest book, The Graduate’s Guide to Life and Money. Each week, a full excerpt from his book will be presented from beginning to end. To get your copy of his book, visit www.TheGraduatesGuide.com.
So you really think you are ready to buy a home. What’s that you say? You are not quite sure. Should you rent longer? Well, you have come to the right place. First we’ll help you decide if you are ready to buy a home, then we’ll decide if it makes sense financially. Finally, assuming it is your time to buy, we’ll show you all you need to know about the home buying process from beginning to end.
One of the most common questions people ask is. “Should I rent or buy?” Purchasing a home is a huge commitment and is really a personal decision. If you are single and you really enjoy all of your free time, you are really busy taking graduate courses, or you are a young couple that really enjoys being on the go, home ownership may not be for you just yet.
Unlike taking care of a 600 square foot apartment, owning a home takes a lot of time and energy. Usually it takes longer to clean (since it is bigger than your apartment). Plus, you are also responsible for the outside (unless it is a condominium). I’ve heard more than one homeowner complain that their home owns them, instead of the other way around. Between the lawn care and the shrubs and the carpet, you will spend a few more hours cleaning. On top of that, you are also in charge of any repairs. If your roof gets a leak or your furnace quits working, there is no more calling the landlord. Now everything is your responsibility.
If that didn’t scare you away, you have to ask yourself a few questions before you put in your first bid. How long are you going to stay in town? Are you going to be looking for a new job in the next six months? Will you want to move closer to work once you get your next raise? Will your financial situation change soon? What about marriage? If you are going to be getting married in the next couple of years, you may want to make sure your partner also wants a home right away. As a rule, if you are going to be moving in the next three years, you should not buy a home. If you will be staying there for more than three years, homeownership may be a good idea, depending on the cost.
There are several exceptions to the rule. If you are relatively risky and you think the housing market is or will be tight and the prices will increase a lot, you may still want to buy a home and plan to profit from the resale. It is possible to do this, but highly unlikely in less than three years. Remember, sales commissions from real estate agents usually run about 8%. That means if you buy a home for $100,000, you have to resell it for just under $109,000 just to break even. There are other factors to consider also, such as how much money did you put into the house while you were there, were the payments more or less than what your rent would have been, how much did you save in taxes, etc. The key is that you would need a large jump in price in a short period of time to profit.
Another exception, and this too is for risky investors, is if you will buy the house, live in it for a while, then move out and rent it to others. I will talk about real estate a little bit in the investing chapter, but suffice it to say rental property can be profitable, but it takes a lot of hard work. Much harder than investing in the stock market.
Other factors to consider with owning a home include pride of ownership, the feeling of belonging to a community or owning a piece of the earth, or any other personal feelings that come into play. As mentioned earlier, buying a home is a very big commitment, but it is also a very personal one. Not every decision has to be based strictly on numbers.
With that said, if you have determined you are ready to buy a home, you should look to see if it makes financial sense. You can check your numbers on any one of several online calculators to see if it is cheaper or more expensive to own instead of rent.
Bill Pratt is a former credit card executive turned student-advocate. He is the author of Extra Credit: The 7 Things Every College Student Needs to Know About Credit Debt & Ca$h and The Graduate’s Guide to Life and Money. Bill speaks at colleges to educate and entertain students about real-life issues in money, leadership, and success. His goal is to help students succeed personally and financially so they can improve the lives of those around them. You can learn more at www.ExtraCreditBook.com or www.TheGraduatesGuide.com.