3-Step Ladder To Home Ownership

A: Making the decision to buy now or wait for a serious downturn has proven time and again to be a virtually impossible feat. The problem is that you never know until well after the downturn has already reversed course where you should have bought in. Being that this realization is one of hindsight, timing the real estate market has always been a very difficult thing to do. Therefore, stick to a 3-step ladder approach in guiding your decision of whether to buy now or continue renting. Originally Published March 26, 2007

It all depends on your own unique situation.

By analyzing a couple of very important facts about your own current situation, you could be able to crunch the numbers and figure out how to make a buy versus rent decision. These include your financial situation, your planned time line to own, and your ability to find value (for resale) and happiness (for yourself).

Take it as a 3 step ladder up to the roof of home ownership. If you can make it up each step without falling, than you should probably consider buying over renting.

STEP 1: Your Financial Situation

Are you employed and can you comfortably afford to buy this home? One of the first things you should do is talk to your financial adviser or trusted real estate agent to discuss how much property you can actually afford. For the most part, what you will find is that you should put no more than 30% of your take home monthly income before taxes towards the total monthly costs of owning the property. To figure out your own situation, do it in reverse. Take the amount that you take home in salary every month, and simply multiply it by 0.30 on a calculator. If you earn $6,000 a month, than you should strive to keep your total monthly living expenses under $1,800/month (6000 x 0.3 = 1,800).

In addition, you should have saved up approximately 8-12 months of your total monthly living expenses in liquid assets AFTER you close on the property! To do this you must first tally up all your liquid (easily converted to cash) assets which include your checking/savings accounts, money market accounts, CD’s, etc.. Now that you know how much money you have, subtract the down payment that you will put towards the purchase and the closing costs estimate that your agent could provide for you. How much do you have left? How many months of living in this new home will you have leftover after you close? To do this, simply take your total liquid assets and divide by the total monthly living costs of the property. It should be between 8-12 months. For stricter co-ops and those who are self-employed, you should be closer to 12-18 months of liquid assets AFTER closing.

Finally, is your job secure? If there is a chance that you can lose this job or be transferred in the near future, than you just fell off the first step and can no longer proceed up the ladder to home ownership. Otherwise, step on.

STEP 2: Timeline To Own

This will be the easy step. Taking into account transaction costs to both buy and sell a piece of real estate, I like to advise my clients to take into consideration their minimum time line to own.

At the very minimum, you should plan to live in this home for 3 years. Ideally, I would like to see a buyer plan to own the home for a period of at least 4-5 years. That way, the home will have had time to appreciate and you will have taken good advantage of Uncle Sam’s tax benefits offered to homeowners.

Keep it simple, if you don’t see yourself owning the property in 2 years than you just fell off the second step. Lucky for you it’s just a step stool!

STEP 3: Find Value & Happiness

Your almost there. At this point you have pretty much figured out that you should be buying a home being that you are financially capable and not pressured to sell in the short term. The only thing left to do is to find a home that is a ‘best of group’ product and meets all your housing needs.

To find a best of group product you must gain knowledge of the properties in your target price group. Even if the apartment has a deal breaking flaw and you know its not the one, you should still go to see it to gain product knowledge. If anything, it will confirm a best of group product when you find it! You’ll know within the first 30 seconds of walking into a property if that is the right one for you. Keep your focus on putting your hard earned dollars towards the permanent features of the property such as location, views, sunlight, and raw space!

And finally, does the apartment have a good feel to it? You’ll know it when it happens. If it makes you happy because you know you are looking at your new home, than you just made it to the roof of home ownership!

Use this as a guide! If you meet all the criteria mentioned above with the exception that you only have 6 months of liquid assets instead of 8, than go for it as long as the building board will accept your application to purchase; especially if your time line to own is 5+ years.

SIDEBAR

While I just discussed the 3 most important factors towards making the buy versus rent decision, there are also variable factors that could come into play as well. These include factors that change with time such as interest rates, rental vacancy rates, and whether it’s a buyers’ or sellers’ market.

The very idea that these factors change with time makes it very hard to time perfectly. So, consider these only as extras in your decision.

Right now interest rates are still historically low, yet significantly higher than they were only a few years ago. Try not to let it affect you. Since interest rates are constantly moving and no one really knows where they might be heading in the future, it will only cloud your decision-making. If anything, you should research where rates are right now so that you have an accurate idea of what your monthly payments will be for the buy versus rent decisions you must make.

Rental vacancy in Manhattan has been below 1% for some time now. One of the main reasons for this is that potential buyers got priced out of the market and were forced to rent. In addition, many prospective buyers chose not to buy in the hopes that the market would retreat significantly. It didn’t. All it did is result in a very tight rental market with little to choose from and rental prices at 5-year highs. As rental prices rise, buying becomes a more viable decision.

Add it all together and you get a very healthy Manhattan real estate market, especially during the most active months of the year. I would describe the current market as a sellers market but before you go into frenzy about what I just said you must understand what a sellers market is. A sellers market is one of tight inventory and strong demand putting the control in the hands of the seller. In these types of markets bidding wars (even below ask) are very common and good deals are hard to find and don't last long. This is what is happening right now in Manhattan since early January.

UrbanDigs Says: If you climbed to the roof of home ownership and you found a great apartment that is priced right, go for it! If you made it to the top but only found a property you liked but didn’t love, than wait! When the frenzy dies down you might have more bargaining power but less options to choose from in the generally slower summer months.

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