Over the last several years (ever since the recovery started to happen) we have heard lots of doomsday reports of another recession or economic crisis being right around the corner. Bad news sells of course, but we also know that (at least in real estate) the market is cyclical and it will go up and down. Panic typically comes from being unprepared for unexpected events and so we thought it would be a great idea to discuss some of the financial lessons we learned from several financial cycles that we have experienced. We hope you find this information helpful and would love to have a conversation with you about any of these points should you desire.
First point: Your home isn’t always an investment. I think it is important to understand that when you buy a primary residence, you may buy it with the thought that one day this will be a great investment property and chances are that if you hold onto it long enough, it absolutely will be. HOWEVER, when you are buying a primary residence, you are buying a place for you to occupy, a place for your bed and your dishes and your tv. You’re paying yourself your own rent rather than paying it to someone else. The benefit to that is over time, you actually OWN that thing. The equity you build in your own home can be used in the future for other things, but in the beginning, it is all about just not paying your rent to someone else. During times of economic crisis, you may find that your home isn’t that “nest egg” that you thought it was always going to be. When that happens it is important to go back to that original understanding of what your house IS and that it is better to pay rent to yourself than to someone else. Historically, values have always come back and a home has always been (in the long game) a good investment in yourself.
Point two: Every homeowner should have an emergency fund. I am a firm believer in this. Dave Ramsey in his Financial Peace University class teaches that everyone should have a baby emergency fund of at least $1000 and that should be built up over time to 3 to 6 months of expenses. Doing this provides you the ability to ride through any financial crisis that may come by helping you have the time to make good financial choices for yourself and may even help you to keep that house rather than walking away from something that could be a great asset in the long run. Even more than that, having an emergency fund provides a level of peace about your finances that you definitely won’t have if you don’t have any.
Point three: Beware of risky mortgages. If you will remember back, the first that fell in the last great recession were those that had adjustable rate mortgages or interest only payments that reset and they weren’t able to refinance. Some reverse mortgages can be dangerous territory as well. It is important to understand the risks associated with borrowing money in general and the additional risks associated with “creative” lending products. There may be a good reason to do a reverse mortgage, but think it through to the very end and does it really get you what you want? It is always my practice to think of the absolute worst case scenario and make sure I am willing to live with that if it actually were to happen. Before the last great recession, no one thought it would happen either, but it sure did.
Point four: Buy what feels comfortable – not what you qualify for. This is one of the most important conversations I have with each of my buyer clients. The undoubtedly will qualify for more than what they are comfortable with. Think of your budget. If you are qualified to buy a $500K house but your budget is used to paying $1200 a month for housing, the two monthly payments aren’t going to line up. Be sure you understand what the monthly output for a total purchase price looks like and set up your expectations and buying budget to match. Again, if you are only comfortable making that “interest only” payment with the promises that in 5 years you’ll be able to refinance and undoubtedly you’ll be making more money so you’ll be able to qualify and will be comfortable with a higher payment, you could be setting yourself up for a devastating financial situation.
Point five: Homeownership isn’t for everyone. WAIT, WHAT?!? Did a real estate agent just say that??? Yes, I did. Owning a home comes with additional responsibilities and financial commitments other than just making a monthly payment. Roofs and water heaters wear out, air conditioning units die, the HOA requires the exterior of the home to be repainted, etc. If you aren’t prepared to handle the extra commitment of owning a home and its upkeep and your desire is to just keep calling the landlord to come and take care of everything for you, then you may not be the right person to own a home. Consider what you are willing to budget and sacrifice for and if it doesn’t include maintenance on a house, don’t buy one.
Home ownership should be considered a long term investment. (Yes, there is a difference between investing in real estate and owning a home) The strategies and commitments to owning your own home should be well thought out and prepared for. It is our belief that a home should be a blessing to you and your family not a curse. We hope these five points have given you something to think about and maybe even something to correct in your current home ownership journey. As always, we are here to be a resource to you. We’d love to discuss any of the points in this blog topic and any other real estate/home related questions you may have. Please feel free to reach out to us at any time with your needs and questions. AND as always, we are never too busy for your referrals and they are the greatest compliment you can give us.
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