buying a home
These days, when it’s tougher than ever to sell a house, homeowners are turning to renting as a way out.
Renting may be a good option when you can’t sell, but not everybody is cut out to be a landlord. And while renting may seem like an easy short-term fix, it may not be a long-term solution.
Make sure you consider all the factors before deciding whether renting will solve your problems…or create more.
Problems With Renting Your House
While you may have excellent reasons for renting your house, consider the following before giving up on selling your house.
Buying Another Home – Leaving equity behind in your house may prevent you from purchasing a new house.
Property Management – Managing receipts, maintenance, repairs, emergencies, and other requirements associated with renting requires time, money, and effort. You can choose to do it yourself or you can choose a property manager to do it for you.
Market Recovery or Market Bust – It may take longer than you think for real estate prices to recover. Right now, the economy remains weak. Downward pressure on home values will continue for the foreseeable future. Who can say how much longer or steeper prices will sink before an eventual upswing. Once the market is on an upward trajectory, it will take years for prices to return to previous highs.
Depreciation – While the IRS allows you to take deprecation as an expense against rental income, don’t think of ‘depreciation’ as only a tax deduction good for improving cash flow. Since tenants are unlikely to treat your home as well as you would, physical depreciation is a very real aspect of turning your home over to tenants.
Capital Gains Taxes – If you rent your house for only two years, you can still sell your house and be exempt from paying IRS taxes on up to $250,000 of capital gain (when single) or $500,000 (when married). However, the depreciation you took against rental income may have to be recaptured. Be sure to consult your tax accountant.
Re-lease or Try to Sell Again – In this climate, you’ll find tenants quickly. Once the first year’s lease is over, you’ll have to decide whether to continue renting your house or try selling. Either way, you’ll have to invest in cleaning, painting, landscaping, replacing carpet, upgrading appliances, and making repairs before the next tenants or buyers move in.
Damaged Goods – When you’re ready to sell, your house may be considered ‘damaged goods’. Homebuyers can immediately tell if a house has been lovingly cared for or simply lived in. And they will take this into consideration when making offers.
Selling With Tenants in Place – Let’s face it, tenants don’t care if you sell your house or not. They don’t have a stake in the outcome. They only know it disrupts their schedule. They won’t keep the house as neat and clean as you would. They won’t be as flexible to accommodate showing appointments as you would. And they may hang around the house during showings, making homebuyers uncomfortable and eager to leave. Once their lease is up, you’ll find yourself in a negative cash-flow position and may very well be forced to rent once more.
Rental Merry-Go-Round – After renting your house for what was supposed to be no more than a year or two … just until the market turned around … could turn into a long-term commitment. You may get stuck on the rental merry-go-round, unable to jump off. The window between leases will leave you with only a short time to list and sell your house. Before you know it, you’ll be back on the rental merry-go-round, still waiting for the opportunity to unload a monumental burden.
Rental Prices May Go Down – Right now rental prices are what they are, and they may be just fine for your needs. But renting your house as a short-term solution may not be a long-term solution. With so many homeowners turning to renting as an expedient to selling, tenants will have more homes to pick from. In time, instead of facing a ‘Buyer’s Market’ on the selling end, you may very well face a ‘Renter’s Market’ on the rental end. Such a circumstance would drive rents down year to year. After factoring in rising insurance rates and property taxes, you may eventually find yourself in a negative cash-flow position.
Mortgage Rates – Mortgage rates are the lowest they’ve been in recent history. But they can’t stay low forever. When the economy recovers, the Federal Reserve will start raising key interest rates. Mortgage rates will climb in lockstep, making homeownership more expensive. To make up for higher monthly costs, buyers will bargain that much harder, forcing prices down once again.
New home sales in June fell by 1.0% from May, to a rate of 312,000. Relative to a year ago, sales are up 1.6%. While the rebound is more than welcome, it is still a very dismal rate of new home sales. Also, there was a downward revision to the May numbers of 4,000 to 315,000. Thus, relative to where we thought we were, it could be seen as a 2.2% decrease.
The June level was worse than the expected rate of 320,000. The fourteen lowest months on record (back to 1963) for new home sales have all been in the last fourteen months. New home sales have only exceeded the 400,000 level three times since September of 2008, when the financial markets collapsed. The most recent time was in April 2010 as sales were inflated by the rush to get in under the wire and collect the homebuyer tax credit.
Unlike used home sales, each new home built creates a huge amount of economic activity. Not only are low new home sales bad for the big homebuilders, but also for all the companies that make the products and supplies that go into making a new house.
In terms of employment, it is not just all the roofers and framers that lose jobs due to weak new home sales, but employees at all the firms that make the stuff that goes into making a new home. Of course, if those employees are out of work, they are not spending on other goods and services dragging down a host of seemingly unrelated businesses.
With the prices of used houses weak, it makes selling a new home that much tougher. After all, a used home is a very good substitute for a new home.
Even extremely low mortgage rates have not been enough to get things going again. We still have extremely high vacancy rates — both of apartments and houses sitting empty — although lately we have seen some improvement in the rental market. Until that excess is absorbed, it is unlikely that we will get anything like a robust housing sector.
Even a tripling of the new home sales rate from current levels would bring us to what was considered a normal rate of sales back in the 1970’s and 1980’s. Back then we had far fewer people, and thus a lower need for places for people to live.
Tags: buying a home, home sales, new home sales
Buying a home is a major emotional and financial decision. Often times, people want to buy a home; however, emotionally cannot afford to commit to the home-buying process. They are, in fact, afraid.
“My payment will be too high” or “What if I lose my job,” are some of the “excuses” people often use.
Here are some of the major advantages of buying a home:
- Quality of Life. Home-buying and living in your home affects the quality of life. It adds to your confidence, giving you a sense of pride and satisfaction. You have a sense of emotional well-being as well as peace of mind.
- Tax Deductibility of Mortgage Interest. The entire mortgage interest payment is tax-deductible and the “net” cost of the mortgage payment actually puts money in your pocket.
- Tax Deductibility of Property Taxes. Similarly, property taxes are due and payable and may seem like a lot of money. Property taxes are also tax deductible and you get it back in the form of tax savings.
- Appreciation Potential. Typically and historically, nationwide property values have gone up in value at around 7% per year. In some areas properties have, in certain good economic times, appreciated at the rate of over 20% per year. At 7% conservative rate, the property doubles in value every 10 years. So, a property worth $500,000 will be worth $1,000,000, equaling a gain of $50,000 on a yearly basis. For an average person, it is difficult to save that kind of money.
- Deferred Capital Gains. Real estate investment capital gains can be deferred by exchanging the property for like-kind property. So, when the property appreciates and you decide to sell it and do no want to pay the capital gains tax, you can buy another property of like-kind and avoid capital gains tax. This allows you to switch properties when required.
- Once in a Lifetime Exclusion. Upon the sale of a personal residence, the IRS allows an exemption and one does not have to pay taxes on a gain of $250,000, if single and up to a gain of $500,000, if married. For example, if you’re single and buy a property and live there for five years and the property appreciates by $250,000, you can sell the property and not pay any taxes at all.
- Principal Accumulation. This is strongly tied to appreciation in the property value. Payments made toward the mortgage payment help you accumulate principal which essentially helps you establish a reserve savings account which you can later tap into by obtaining an equity line of credit or getting an equity loan, if needed.
- Pride of Ownership. It is fun to invite people to “your” home and feel good about it. It also instills confidence in your family, your children and makes them more confident individuals.
- No Landlord. You are in-charge and do not have to deal with a landlord who might not make repairs or maintain the property as you would like.
- Leverage. Where else can you buy this size of an investment with 0-5-10% down. You can buy a property for a personal residence for as low as zero down if your credit is good, and watch the investment grow. This, in turn, allows the net investment return to be much higher (than the actual appreciation rate on the value of the property). To follow up on the example earlier, if the property grows at 7% and doubles in value, since the amount invested in buying the property might be only $50,000 (at 10% down payment), the actual return is much higher on $50,000 investment.
- The Real Cost of Renting! At $700 per month, with a 6% rental increase per year, you will pay $110,719 over a 10 year period. If the rent is higher, you can count on paying much more and not getting any return or tax benefits at all.
Can you add more to this list of advantages to buying a home? We’d love to see what you could add to our list. Just use the comment link below.
While you’re trying to decide when the best time to buy real estate might be, line up a team who can help you accomplish your goal when you decide to move forward. You can do this by researching online, attending open houses in the area and asking a real estate agent to keep you on top of market fluctuations.
Your decision to buy should be based on your personal financial situation, not on the national or global economy.
If you’re a home buyer, make sure you have job security, a relatively healthy economy in your local area and a plan to stay put for at least 10 years.
Good economic news will help fence-sitters make the decision to get serious about moving. Bad news of any sort can cause the market to stall.
Find a good local real estate agent to work with who understands your needs, and wait to buy until the time is right for you. It could take you a year or so to make the final decision. Some agents don’t have the patience to stick it out.
One of the most difficult aspects of the current home buying process is financing the transaction. Find a mortgage broker who is a real professional, has been in the business for years and who understands what current underwriters will require from you to process your loan.
Assemble all the financial documents you’ll need for loan approval even before you start looking. Ask your real estate agent or broker to have your loan package previewed by an underwriter so you know beforehand if there are any problems.
Take care of any possible closing issues in advance so they don’t cause last-minute delays in closing. Your real estate agent can help you with this area.
Condominiums and townhouses are going up in higher numbers these days. Living in a condo or a townhouse is a great choice for people who are attracted to the idea of owning a property at a fairly inexpensive price and yet is well-situated in the city. Of course, one of the greatest things about condo living is maximizing its amenities. Another advantage is that owners only maintain their own units because the entrance and hallway maintenance is assigned to a housekeeping staff or maintenance crew.
Many units are furnished for hassle-free move-ins. Most city dwellers do not have the time to monitor construction and renovation of their units, that’s why condos and townhouses offer a great alternative to a single-family home. Condominiums and townhouses even allow owners the convenience of moving in to pre-finished units that suit their tastes and budget. In addition, in most cases, they are easier to clean and maintain.
A well-developed condominium and townhouse also means enjoying a long list of integrated services: higher level of security, incomparable facilities management, concierge or housekeeping services and sometimes faster turnover on sales or rentals. Indeed, condo or townhouse living is an amazing option for those who want to try a new and fresher perspective in modern lifestyle.
Though you don’t own the actual building, you are in full ownership of the living space, and you have the tax benefits and positive credit information regarding long term benefit of ownership. It’s also a good starter property for young working professionals and couples who need to build experience in owning and maintaining property.
Townhouses offer a little green space, generally in the form of a small backyard area and landscaped walkup drive that leads to the front door. Some townhomes are designed to include a backyard porch or a terrace upstairs to enhance the feeling of open space. Furthermore, because your townhome’s front and back yard are small, you won’t be having much yard work to do. When you’re planning to add a deck or a patio onto the back of your townhome, you’ll have even less yard to take care of.
Condos and townhomes may be good options when looking for a place to live these days. Talk to us about the options available in our market for condos and townhomes.
Tags: buying a home, condos, owning a home, townhomes, townhouses