If you are like most young professionals you may be wondering if you should buy a home or keep renting. Before you make a decision, you must first consider whether or not you can afford to purchase a home. As I mentioned in “Should you buy a home or keep renting? Part 1, you cannot simply compare the average mortgage price to the average rental price and make a decision.
There are many other expenses associated with becoming a homeowner that you must consider. However, if you do determine that buying a home is a financial possibility, your next task is to determine whether or not buying a home makes practical sense at this point in your life. Here are 4 additional questions you can ask yourself to help figure that out:
Are you going to stay in the same area for at least 5 years? As a general guideline, it takes about 5 years to break even on a home. If you live in a home for less than 5 years and decide to sell it afterwards, there is a good chance you will lose money overall, even if you sell the home for more than you purchased it. Why? Well, because the transaction fees you must pay to buy a home and the expenses associated with selling a home are really high.
By the time you pay your real estate agent 3% of the purchase price, pay the buyer’s real estate agent another 3% of the purchase price, AND consider all of the costs you had when you first bought the home, there is a good chance that your expenses will still outweigh your costs until the 5 year mark. If you know you are likely to move to another area in less than 5 years, it may be wise to wait to purchase a home.
Are you going to want to live in that same house (consider size and location) 5-7 years from now? The first home that many people purchase is usually a “starter” home. It typically has 3-4 bedrooms and is a decent sized space for 2-3 people. Although that type of home may be ideal for you now, you need to consider whether it will be ideal for you 5-7 years from now. You may get married, have a child or two, and even change jobs. Is the home you want to purchase now ideal for that kind of lifestyle as well?
For example, is it a place with good school districts for your [future] kids? Is it close to your job? Does it have enough space for you, your spouse, a kid or two and a pet? The answer most people come to is: no. As a result, they end up looking for a different home, or paying a large amount of money to upgrade their current home, a few years after they purchase the "starter" home. This process of buying one home, just to sell it a few years later, and purchase something bigger can be quite expensive.
I am not suggesting that you buy more house than you can afford to protect yourself against these life changes. However, I am stating that if there is a good chance you won’t want to stay in the home 5-7 years from now and it takes 5 years to break even on a home, it may not make practical sense to buy a house right now. Nevertheless, if you doubt you’ll experience drastic life changes in the next few years, or feel fairly confident that the type of home you want to purchase will still fit your lifestyle in a few years, then purchasing a home now might make sense.
Are homes affordable in your area? Let’s face it. Not all cities are created equal. Before you get set on the idea of buying a house, you must figure out if homes are actually affordable in your area. If you are not sure, go to a website like Zillow.com or Realtor.com, type in the size of your desired home in the the city of your choice, and check out the home prices. Once you see what homes are selling for, you can then go to your bank to see how much money they are willing to lend you.
For example, if you live in a low cost of living area like Orlando, FL the average house is probably around $240,000. Thus, there is a better chance a bank will loan you the money you need. However, if you live in a higher cost of living area like San Francisco, CA where the average house is $1.61 million then it may be difficult to find a bank willing to lend you that much money.
In addition to cost of living, you also have to look at the neighborhood in which you plan to live. Some of the nicer neighborhoods in better school districts often charge a “Homeowners Association (HoA) fee." This is a monthly expense you give to the neighborhood that covers the cost of private parks, neighborhood events, community pools, and general upkeep. Some areas don’t charge an HoA fee, other places may demand an extra $1200 a month in these fees. Before you decide to buy a home, examine the cost of living, average home prices, and HoA fees in your desired area to see if purchasing a home is feasible.
Is it a good time to buy houses in your area? Many people assume that houses appreciate in value from year to year. Unfortunately, this is not always the case. Sometimes houses go down in value. You need to examine the housing market in your area and see what the latest trends have been. Along with looking at appreciation trends, you also need to consider home pricing trends. In the real estate world we use the phrases “seller’s’ market” and “buyer’s market.” A seller’s market means that the demand for homes exceeds the number of homes available. This is bad for people looking to purchase a home because it means that houses might be selling for more than they are worth.
In contrast, a buyers’ market means that there are more houses available than people who are looking to purchase. This is a good for people looking to buy a home because it means that houses might be selling for less than they are worth (which increases the chance that you can find a good deal). Before you decide to purchase a home, take a look at the housing market in your area. If it is a seller’s market, you may want to wait to buy a home. If it is a buyer’s market, then you may be able to find a great deal and should consider purchasing a home sooner rather than later.
My point? Even if buying a home is a viable financial option, you still need to consider if it is practical to purchase a home at this time. For starters, it usually takes about 5 years to break even on a home, even if you purchase a home and end up selling it for more than you bought it. In order to avoid losing money, you need to make sure you plan to stay in the same area for a significant amount of time. You also need to make sure that you would still want to live in a home of that size and in that location 5 years from now.
Once you determine those two things, you need to look at different housing websites and determine the average home price in your area. Are homes affordable in your desired city? Have houses been appreciating at a decent rate where you plan to buy? Is it a buyers market in which home prices are lower than normal or is it a sellers market in which home prices are higher than normal? After answering these questions, in addition to the financial questions listed in the previous post, you should be better able to decide if it makes more sense to buy a home or keep renting.
Tell me, was this post helpful? If so, what additional topics would like me to address?