As a renter, you may have thought about buying your own place. But does it make sense financially? Does it fit your lifestyle? Here are some things to consider.
Are you comfortable putting your money in an asset?
In many instances you may need to make a down payment on the property you purchase. It might not be twenty percent, but that still likely means taking a large sum of cash and converting it to an asset that isn’t liquid – in other words, if you needed that money for something else, you won’t be able to get it quickly or easily. If you don’t have emergency savings or another outlet to access cash, this is an issue that needs serious consideration.
How expensive is renting?
In a lot of cities, rents are rising. You may pay less per month if you own. That said, remember owning has more expenses: namely taxes and homeowners insurance. Be sure to factor those in when calculating the total monthly bill. And, don’t forget to include Homeowner Association Dues (HOAs) if you’re looking at buying a condo.
Did you know that building equity is a great way to build wealth?
When you pay your mortgage, part of the payment goes toward the interest you owe the bank, and part of it goes toward your principal, or your original loan amount. The portion of the payment that goes towards your principal is the equity you’re building. In other words, each month you own a little bit more of your home, meaning each month you’re essentially putting away money that, if you were paying the equivalent amount in rent, would just go straight to a landlord.
Are you comfortable fixing things yourself?
Not having a landlord sounds great, until your dishwasher breaks, or until your carpeting needs to be replaced … and you realize you need to take care of it and pay for it yourself. Having the freedom to decorate how you like also comes with responsibility. You’ll also need to have the savings to pay for it. That means putting away an extra amount every month above and beyond your regular payments, so you can keep your home well-maintained.
Are you ready to stay in one place?
Because of non-refundable upfront closing costs , the typical rule of thumb is that you need to own a place at least five years before you start to recoup those costs through the equity you build in your home. Staying in one home for five years can be a big ask – how important is the flexibility of renting to you? How ready are you to settle down?
How comfortable are you with risk?
As we’ve learned from that past decade, the value of a home can fluctuate. When you buy a place, you’ll also be subject to the changes in home valuations that affect all owners. That could be a good or bad thing, depending on which direction the valuation goes. Are you comfortable with this?
If you buy, will you still be able to save money?
Perhaps you’ve heard the term “house poor.” That refers to people who have stretched themselves to buy a home, only to realize that they can barely afford it – and now weekends out on the town and nice vacations are luxuries, rather than the norm. Be sure that the monthly costs you take on are something you’re able to cover without breaking the bank.
Going from renter to owner is a big step. Hopefully these questions help you think through what owning looks like and whether you’re ready to do it. If you feel you are ready, the next step is touring a few properties, seeing what’s out there and what the market is like in your area. Find a good real estate agent who can help you do this. After dipping your toe in the market, if it still feels right, you’re likely ready to get started in earnest!