Saturday, August 28, 2010

Seven Reasons Why You Shouldn't Buy a Home - DailyFinance

A friend recently sent this article to me to see my opinion about it. Upon reading it, I realized that it must have been written by an investor who owns rental property. That could be the only explanation of the absurd arguments in the article.

First of all, in reference to the "American Dream" mentioned in #6: I always thought the “American Dream” was that you have the opportunity to do anything you want in pursuit of happiness. You can be dirt poor and turn yourself into a self-made millionaire, for example. But I believe the American Dream varies from person to person. I guess for some, homeownership is a part of that. What am I saying…I KNOW it’s a part of it. I experience people crying in closings because their dream has come true.

Here’s my take on the article:

1) No diversification. Most people put the bulk of their net worth in their house and then they borrow money to pay for the rest of it.<--fact of the matter is that if people don’t put their $$ somewhere, it’ll be spent, not invested. So if people’s only investment is in real estate, I think that’s good because it’s a solid investment that has use.

2) It's illiquid. When times are tough and you need cash, you can't sell it.<--sure you can. Not only that, you can take out a home equity loan for hard times which is much cheaper (on interest rate) than a credit card or personal loan, plus it’s tax deductible.

3) It costs a lot more than renting. Most people think you are "throwing money away" when renting. Quite the reverse. There are many hidden costs when buying a house: Transaction costs (legal, real estate agent, title check, inspections, etc.) often come to 7% to 10% of the cost of a house. So you are 7% to 10% down immediately.Home improvement (adding a bathroom, upgrading the kitchen, installing double-pane windows, landscaping, etc.)Ongoing maintenance and repairs (periodic roofing, plumbing repairs, yard upkeep, fixing things, etc.)Your real estate taxes (which will ultimately be more than the tax savings you get on your mortgage interest) First of all, buyers don’t pay the realtors..sellers do. Second, you’re not “throwing $$ away” when renting…you’re helping the homeowner pay his mortgage while he builds equity in the home over time not to mention the rental amount includes his property taxes, insurance plus an income on top. So if you’re renting a home for let’s say $1200/month, you can BUY the same home for like $900/month. Closing costs can run up to 6% of the mortgage but you can also ask the sellers to pay for it. Plus it’s tax deductible. And the argument that your property taxes cancels out your income tax savings generated by homeownership can be true but also laughable. When renting, you ARE paying the property taxes and have no tax breaks on your income tax. The costs of upkeep on a home doesn’t costs less than renting. Like I mentioned before, all of that is figured into your rental note per month. If rental property owners were losing out, we wouldn’t have investors…no one would mess with it..what would be the point? Also, there are home warranties you can purchase for unexpected break downs. And generally speaking people will care for their own property better than they do a rental property so problems don’t arise as often. If you need a lot of work done to the home when you buy it, most likely you bought a distressed property in need of repairs that had a sales price to reflect that. So you are still coming out ahead. You chose work over payment. If you don’t want to do repairs, choose a home that doesn’t require it and pay top dollar for it. It’s that simple.

4) It's not fun. I'd much rather have my landlord shovel the snow than me shovel the snow. And, by the way, heart failure goes way up during a snow storm. A sedentary lifestyle doesn't lend itself to the arduous task of shoveling our driveways. Well we don’t deal with snow down here in Louisiana but we do deal with rapid growing grass. Most renters are responsible for their own grass cutting, which can be up to twice per week. The ones that aren’t responsible for it, a lawn company is usually hired by the landlord and that expense is rolled into your monthly rental payment. If you’re a homeowner that doesn’t want to do yard upkeep, hire a professional just like you did when you were a renter.

5) Your down payment is not a down payment. It's the sound of a flushing toilet. Think about it: You never get that money back. Even when you sell the house, you just put it into the next down payment for tax reasons. You can say goodbye to that money once you put it into a house. This is a flat out lie. As stated, you get your down payment back when you sell. If you choose to reinvest in another home, that's a choice. It's still not wasted, it enabled you to have a down payment for another home. Bringing back home equity loans, you can always do that to utilize your funds if needed. If you've lived in your home for at least two years, there is no need to reinvest to avoid taxes on the sale because you won't owe any.

6) No job flexibility. Why did owning a house become "the American dream"? Not to sound socialist (since I'm the opposite), but Corporate America was happy to propagate that myth so it would be harder for you, the homeowner, to leave your job if there were few jobs in your area. You'd have to both move and quit your job if you wanted to leave your job. Moving is harder when you own. Really? Moving is hard, period. Whether you are buying or renting. If you’re renting and you’re stuck in a lease, you have to pay to be released from it. When you have to sell your home, you actually come out with profit to start in your new location.

7) I think in the long run, housing prices go up. But if you really believe in housing as an investment, then own a good REIT or two and diversify by buying REITS that own residential homes throughout the country so you aren't tied to any one area. If you really want to borrow 300% and put 50% of your net worth plus debt into one investment, then that's what you should do. But I wouldn't really recommend that either. I really don’t have a comment on this because I have no experience with REIT but plan to research it.

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