Are You Ready to Buy a Home?

Reviewed Sep 21, 2016

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Summary

  • Your time-frame is crucial: The longer you plan to live in an area, the stronger the case for buying.
  • Add up all expenses when comparing the cost of renting and buying.

“Is this really for me?” Millions of would-be buyers have probably asked that question as they’ve watched the wild roller-coaster ride of the real estate market. They grew up hearing that home ownership is a reliable way to build wealth and get a firm foothold in the middle class. Now it seems anything but safe and sure.

But owning a home still can make sense for those who have adequate income and savings, job stability, and a long-range focus. For those potential buyers, the housing bust of recent years could turn out to be just the opportunity they have been waiting for.

First, though, they need to crunch some numbers and take a realistic look at their plans for the next few years. They may find they are not quite ready. Home ownership isn’t for everyone.
 
Are you ready to put down roots?

Buying a home is a little like marriage: You’re not ready for it unless you’re ready for commitment. In this case, the commitment is to stay in one place for at least as long as it takes to recoup the costs of buying and selling a home.

The days of “flipping” homes for profit after a year or two of ownership are long gone. Now you need to assume that the value of your home will rise, if at all, only at the historic long-term rate. You can get some idea of what to expect by looking at the widely followed S&P/Case-Shiller indices of home prices, which go back to 1987. In the 24 years of booms and busts leading up to 2010, the nationwide index grew at an average annual rate of 3.2 percent.

Here’s some math to put that figure in context: When you buy a home, you can expect to pay significant closing costs. These vary greatly from market to market, but they can total three percent or more of your loan. When you sell, expect to pay five percent to six percent in commissions, plus incidental fees on top of that. As a short-term play, a home is likely to be a losing proposition.

Still a good way to save

The longer you hold on to a home, the more its rising value is likely to absorb the costs of buying and selling. That’s true even with the ongoing costs of ownership such as taxes, insurance, maintenance, and (when rates are low enough) mortgage interest. “Over time, home ownership has been an excellent asset builder for Americans,” says Bob Fay, a certified public accountant in Canton, OH.

With little effort or attention, other than making the mortgage payments, homeowners can amass significant wealth without relying on pay raises. “People think they would be better off if they just earned 50 cents or a dollar an hour more,” Fay says. But those hikes tend to get absorbed in new spending. Not so with home appreciation.

Make sure the location is a fit

But there are some important “ifs” here. If you aren’t sure about the future of your job, buying gets much more risky. If you are not sold on the local schools, the neighborhood, and the general quality of life you will have (you might get very tired of a long commute very fast), then you also may want to stick with renting.

The decision to put down roots is both financial and emotional. It depends on your job security, income expectations, and how much you’ve saved. It also hinges on the question of whether you like the place and people where you will be for at least the next several years.

Ratios you should know

The most reliable way to weigh the financial side of the buy-or-rent decision is to add up all the costs of homeownership, minus the benefits such as the tax breaks on interest and property taxes, and the rent that you don’t have to pay. Then compare this to the cost of rent plus any utility bills or other fees that may be added to it.

A short-cut is to treat your prospective purchase as if you are an investor buying it to rent out. Look at the local going rates for rentals and compare them to the purchase prices of comparable homes. You might find, for instance, that a four-bedroom, three-bath home is renting for $2,000 a month down the street where a home of the same size is on sale for $400,000. The ratio of monthly rent to purchase price is called the gross rent multiplier. At 200 (in this example), investors looking mainly for rental income would consider it too high, but it would be more reasonable for a long-term buyer.

Lawrence Roberts, an Irving, CA, land development expert and author, says buyers should be conservative in calculating the gross multiplier. “After a while you realize that people don’t rent for the advertised prices,” he says. “It is probably a good idea to take five percent to 10 percent off comparable rental rates on properties offered on the market.”

Another ratio you need to know (your lender certainly will) is the one between your income and basic ownership costs. Specifically, if monthly payments for principal, interest, property taxes, and homeowner insurance (PITI) total more than a quarter of your gross monthly income, you may not qualify for a loan. Banks are much stricter in this area than they were during the boom years, and for good reason. A stable job may enable you to pay a higher ratio of PITI to income.

A nice cushion of savings can help, too, and it is always a good idea to have enough of an emergency fund to cover three to six months of expenses. These include housing costs, of course.

Are you a saver?

Fay suggests another financial test to see if you’re ready to buy a home:

  1. Write down the expected costs of ownership, including not just PITI but also all utilities and ongoing maintenance, which Fay estimates at $500 to $700 a year for a “basic house.”
  2. Write down how much you save each month and add your rent and any other housing costs (such as utility bills you might be paying) to it.
  3. Do you see a figure (from #2) that is higher than your projected ownership costs (from #1)?

If so, you are good homeowner material. You’re a saver. You have learned to live below your means, perhaps because you have successfully saved for the down payment. Congratulations. If you and your family like the new digs, if the neighborhood and the schools are a fit, if the price is right, if your job outlook is bright, and if you are ready to stop roaming and to settle down, then it’s time to buy.

Resource

Bankrate.com
www.bankrate.com/finance/mortgages/should-you-buy-or-rent.aspx

By Tom Gray
Source: Bob Fay, CPA; Nicholas Yrizarry, CEO, Nicholas Yrizarry & Associates Wealth Management; Lawrence Roberts; Standard & Poors

Summary

  • Your time-frame is crucial: The longer you plan to live in an area, the stronger the case for buying.
  • Add up all expenses when comparing the cost of renting and buying.

“Is this really for me?” Millions of would-be buyers have probably asked that question as they’ve watched the wild roller-coaster ride of the real estate market. They grew up hearing that home ownership is a reliable way to build wealth and get a firm foothold in the middle class. Now it seems anything but safe and sure.

But owning a home still can make sense for those who have adequate income and savings, job stability, and a long-range focus. For those potential buyers, the housing bust of recent years could turn out to be just the opportunity they have been waiting for.

First, though, they need to crunch some numbers and take a realistic look at their plans for the next few years. They may find they are not quite ready. Home ownership isn’t for everyone.
 
Are you ready to put down roots?

Buying a home is a little like marriage: You’re not ready for it unless you’re ready for commitment. In this case, the commitment is to stay in one place for at least as long as it takes to recoup the costs of buying and selling a home.

The days of “flipping” homes for profit after a year or two of ownership are long gone. Now you need to assume that the value of your home will rise, if at all, only at the historic long-term rate. You can get some idea of what to expect by looking at the widely followed S&P/Case-Shiller indices of home prices, which go back to 1987. In the 24 years of booms and busts leading up to 2010, the nationwide index grew at an average annual rate of 3.2 percent.

Here’s some math to put that figure in context: When you buy a home, you can expect to pay significant closing costs. These vary greatly from market to market, but they can total three percent or more of your loan. When you sell, expect to pay five percent to six percent in commissions, plus incidental fees on top of that. As a short-term play, a home is likely to be a losing proposition.

Still a good way to save

The longer you hold on to a home, the more its rising value is likely to absorb the costs of buying and selling. That’s true even with the ongoing costs of ownership such as taxes, insurance, maintenance, and (when rates are low enough) mortgage interest. “Over time, home ownership has been an excellent asset builder for Americans,” says Bob Fay, a certified public accountant in Canton, OH.

With little effort or attention, other than making the mortgage payments, homeowners can amass significant wealth without relying on pay raises. “People think they would be better off if they just earned 50 cents or a dollar an hour more,” Fay says. But those hikes tend to get absorbed in new spending. Not so with home appreciation.

Make sure the location is a fit

But there are some important “ifs” here. If you aren’t sure about the future of your job, buying gets much more risky. If you are not sold on the local schools, the neighborhood, and the general quality of life you will have (you might get very tired of a long commute very fast), then you also may want to stick with renting.

The decision to put down roots is both financial and emotional. It depends on your job security, income expectations, and how much you’ve saved. It also hinges on the question of whether you like the place and people where you will be for at least the next several years.

Ratios you should know

The most reliable way to weigh the financial side of the buy-or-rent decision is to add up all the costs of homeownership, minus the benefits such as the tax breaks on interest and property taxes, and the rent that you don’t have to pay. Then compare this to the cost of rent plus any utility bills or other fees that may be added to it.

A short-cut is to treat your prospective purchase as if you are an investor buying it to rent out. Look at the local going rates for rentals and compare them to the purchase prices of comparable homes. You might find, for instance, that a four-bedroom, three-bath home is renting for $2,000 a month down the street where a home of the same size is on sale for $400,000. The ratio of monthly rent to purchase price is called the gross rent multiplier. At 200 (in this example), investors looking mainly for rental income would consider it too high, but it would be more reasonable for a long-term buyer.

Lawrence Roberts, an Irving, CA, land development expert and author, says buyers should be conservative in calculating the gross multiplier. “After a while you realize that people don’t rent for the advertised prices,” he says. “It is probably a good idea to take five percent to 10 percent off comparable rental rates on properties offered on the market.”

Another ratio you need to know (your lender certainly will) is the one between your income and basic ownership costs. Specifically, if monthly payments for principal, interest, property taxes, and homeowner insurance (PITI) total more than a quarter of your gross monthly income, you may not qualify for a loan. Banks are much stricter in this area than they were during the boom years, and for good reason. A stable job may enable you to pay a higher ratio of PITI to income.

A nice cushion of savings can help, too, and it is always a good idea to have enough of an emergency fund to cover three to six months of expenses. These include housing costs, of course.

Are you a saver?

Fay suggests another financial test to see if you’re ready to buy a home:

  1. Write down the expected costs of ownership, including not just PITI but also all utilities and ongoing maintenance, which Fay estimates at $500 to $700 a year for a “basic house.”
  2. Write down how much you save each month and add your rent and any other housing costs (such as utility bills you might be paying) to it.
  3. Do you see a figure (from #2) that is higher than your projected ownership costs (from #1)?

If so, you are good homeowner material. You’re a saver. You have learned to live below your means, perhaps because you have successfully saved for the down payment. Congratulations. If you and your family like the new digs, if the neighborhood and the schools are a fit, if the price is right, if your job outlook is bright, and if you are ready to stop roaming and to settle down, then it’s time to buy.

Resource

Bankrate.com
www.bankrate.com/finance/mortgages/should-you-buy-or-rent.aspx

By Tom Gray
Source: Bob Fay, CPA; Nicholas Yrizarry, CEO, Nicholas Yrizarry & Associates Wealth Management; Lawrence Roberts; Standard & Poors

Summary

  • Your time-frame is crucial: The longer you plan to live in an area, the stronger the case for buying.
  • Add up all expenses when comparing the cost of renting and buying.

“Is this really for me?” Millions of would-be buyers have probably asked that question as they’ve watched the wild roller-coaster ride of the real estate market. They grew up hearing that home ownership is a reliable way to build wealth and get a firm foothold in the middle class. Now it seems anything but safe and sure.

But owning a home still can make sense for those who have adequate income and savings, job stability, and a long-range focus. For those potential buyers, the housing bust of recent years could turn out to be just the opportunity they have been waiting for.

First, though, they need to crunch some numbers and take a realistic look at their plans for the next few years. They may find they are not quite ready. Home ownership isn’t for everyone.
 
Are you ready to put down roots?

Buying a home is a little like marriage: You’re not ready for it unless you’re ready for commitment. In this case, the commitment is to stay in one place for at least as long as it takes to recoup the costs of buying and selling a home.

The days of “flipping” homes for profit after a year or two of ownership are long gone. Now you need to assume that the value of your home will rise, if at all, only at the historic long-term rate. You can get some idea of what to expect by looking at the widely followed S&P/Case-Shiller indices of home prices, which go back to 1987. In the 24 years of booms and busts leading up to 2010, the nationwide index grew at an average annual rate of 3.2 percent.

Here’s some math to put that figure in context: When you buy a home, you can expect to pay significant closing costs. These vary greatly from market to market, but they can total three percent or more of your loan. When you sell, expect to pay five percent to six percent in commissions, plus incidental fees on top of that. As a short-term play, a home is likely to be a losing proposition.

Still a good way to save

The longer you hold on to a home, the more its rising value is likely to absorb the costs of buying and selling. That’s true even with the ongoing costs of ownership such as taxes, insurance, maintenance, and (when rates are low enough) mortgage interest. “Over time, home ownership has been an excellent asset builder for Americans,” says Bob Fay, a certified public accountant in Canton, OH.

With little effort or attention, other than making the mortgage payments, homeowners can amass significant wealth without relying on pay raises. “People think they would be better off if they just earned 50 cents or a dollar an hour more,” Fay says. But those hikes tend to get absorbed in new spending. Not so with home appreciation.

Make sure the location is a fit

But there are some important “ifs” here. If you aren’t sure about the future of your job, buying gets much more risky. If you are not sold on the local schools, the neighborhood, and the general quality of life you will have (you might get very tired of a long commute very fast), then you also may want to stick with renting.

The decision to put down roots is both financial and emotional. It depends on your job security, income expectations, and how much you’ve saved. It also hinges on the question of whether you like the place and people where you will be for at least the next several years.

Ratios you should know

The most reliable way to weigh the financial side of the buy-or-rent decision is to add up all the costs of homeownership, minus the benefits such as the tax breaks on interest and property taxes, and the rent that you don’t have to pay. Then compare this to the cost of rent plus any utility bills or other fees that may be added to it.

A short-cut is to treat your prospective purchase as if you are an investor buying it to rent out. Look at the local going rates for rentals and compare them to the purchase prices of comparable homes. You might find, for instance, that a four-bedroom, three-bath home is renting for $2,000 a month down the street where a home of the same size is on sale for $400,000. The ratio of monthly rent to purchase price is called the gross rent multiplier. At 200 (in this example), investors looking mainly for rental income would consider it too high, but it would be more reasonable for a long-term buyer.

Lawrence Roberts, an Irving, CA, land development expert and author, says buyers should be conservative in calculating the gross multiplier. “After a while you realize that people don’t rent for the advertised prices,” he says. “It is probably a good idea to take five percent to 10 percent off comparable rental rates on properties offered on the market.”

Another ratio you need to know (your lender certainly will) is the one between your income and basic ownership costs. Specifically, if monthly payments for principal, interest, property taxes, and homeowner insurance (PITI) total more than a quarter of your gross monthly income, you may not qualify for a loan. Banks are much stricter in this area than they were during the boom years, and for good reason. A stable job may enable you to pay a higher ratio of PITI to income.

A nice cushion of savings can help, too, and it is always a good idea to have enough of an emergency fund to cover three to six months of expenses. These include housing costs, of course.

Are you a saver?

Fay suggests another financial test to see if you’re ready to buy a home:

  1. Write down the expected costs of ownership, including not just PITI but also all utilities and ongoing maintenance, which Fay estimates at $500 to $700 a year for a “basic house.”
  2. Write down how much you save each month and add your rent and any other housing costs (such as utility bills you might be paying) to it.
  3. Do you see a figure (from #2) that is higher than your projected ownership costs (from #1)?

If so, you are good homeowner material. You’re a saver. You have learned to live below your means, perhaps because you have successfully saved for the down payment. Congratulations. If you and your family like the new digs, if the neighborhood and the schools are a fit, if the price is right, if your job outlook is bright, and if you are ready to stop roaming and to settle down, then it’s time to buy.

Resource

Bankrate.com
www.bankrate.com/finance/mortgages/should-you-buy-or-rent.aspx

By Tom Gray
Source: Bob Fay, CPA; Nicholas Yrizarry, CEO, Nicholas Yrizarry & Associates Wealth Management; Lawrence Roberts; Standard & Poors

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