Fear of First-Time Homeownership
A: I have a client to thank for this post; you know who you are! Being a first time buyer could be a very scary thing. You start to think about housing bubbles, giving away tons of money in down payment and closing costs, feeling broke again, and getting involved in a huge investment without knowing everything you really need to know. Trust me I understand. Also trust me when I say that these feelings are normal. As long as you understand whether buying is the right decision for you, what you can really afford, and then focus on a best of breed housing product after seeing 10-15 property's, you'll do just fine!
It's all about building wealth! Owning your home for the most part will cost you more money than renting on a monthly basis, so you should understand WHY it is that buying makes more sense than renting! In short, you should seriously consider buying instead of renting if, and only if:
1. TIMELINE - Timeline to own is greater than 4 years OR Rental Investment Strategy
2. JOB / SALARY - Your job is secure and your salary affords a debt/income ratio under 30%
3. LISQUID ASSETS - You have enough liquid assets AFTER closing to cover at least 6 months MORTGAGE + MAINT + TAXES payments (family gifts are fine as long as they stay with you after closing and are truly a gift given to you to assist in buying your first home)
These 3 criteria are MUST's in one's decision to buy or rent in a particular marketplace. After that, it boils down to how happy you are in a particular neighborhood, planning ahead for lifestyle changes (such as a having a baby), and knowing how much you can afford!
You need a timeline to own over greater than 4 years to be able to ride out any short term bumps that the housing market may experience. Timing the market is very difficult and by having at least a 4-5 year timeline to owning, you would most likely be able to sell your home when you want to and NOT when you have to. Sellers who MUST sell within a certain timeframe rarely get top dollar at resale.
Quick Tip: If you have the 'live-in then rent-out' strategy in mind, try to live in the apartment as your primary residence for the first 2 years. That way, you can rent it out for another 2 years and if you decide to sell it after the 4th year, you will qualify for the primary residence tax benefit for any gains reported at resale on the transaction. You must live in the property for 2 out of the last 5 years as your primary residence to qualify for this tax break.
Your job MUST be secure! No rocket science here. As long as your job is stable and your income is growing, than putting your money into a home you own rather than a home you rent, is always a better long term play. Your monthly total living expenses + other debt expenses should not exceed 30% of your take home pre tax monthly income. Closer to 25% is more ideal. If you are buying a condo, there will be little review of your finances so its up to you to determine whether you are buying within your means.
Quick Tip: If you are self-employed, be sure you have twice as much liquid assets in reserves AFTER closing than normal just in case you have some temporary down time of income.
Finally, having enough liquid assets to be able to cover the down payment PLUS closing costs is a MUST. But having enough liquid assets AFTER these costs, is a bigger MUST! Be sure to have enough reserves in liquid assets to cover at least 6 months of living costs of the new home. If it cost you $3,000 a month to live in your new home, than you should have at the very minimum $18,000 in liquid assets after closing. You'll need more to pass a co-op board!
Here are some must-reads that I wrote in the past if you are considering buying vs. renting.
Are You Ready To Buy?
To Buy or Not To Buy: Here's What To Do
High Monthly's: Find The Discount
How To Retain The Most Resale Value
UrbanDigs Says: Your first year as a homeowner should be a rebuilding year. Sacrifice your vacations, night-outs, gifts to friends/family, and any unnecessary spending so that you can SAVE MORE MONEY to rebuild your liquid accounts a bit after plunking down most of your money into your new home. Buying a home is forced savings as you pay down a bit of principal each month in your mortgage payment; assuming you don't have a interest-only type of loan product. By building wealth little by little and getting tax benefits in your monthly payments and at resale on profits, owning your home proves time and again to be a savvy long term investment. Its those homeowners who buy for the wrong reasons and above their means that get into trouble!