Eric Tyson - Home Buying Kit For Dummies

You’re always going to need a place to live. And over the long term, inflation has almost always been around. Even if you must stretch a little to buy a home today, in the decades ahead, you’ll be glad you did. The financial danger with renting long term is that all your housing costs (rent) increase over time. We’re not saying that everyone should buy because of inflation, but we do think that if you’re not going to buy, you should be careful to plan your finances accordingly. We discuss the pros and cons of renting later in this chapter.

Over the many years that you’re likely to own it, your home should become an important part of your financial net worth — that is, the difference between your assets (financial things of value that you own, such as bank accounts, retirement accounts, stocks, bonds, mutual funds, and so on) and your liabilities (debts). Why? Because homes generally increase in value over the decades while you’re paying down the loan used to buy the home. Remember, we’re talking about the long term here — decades, not just a few years. The housing market goes through downturns — the late 2000s being the most recent down period — but the long-term trend has always been higher.

Even if you’re one of those rare people who own a home but don’t see much appreciation (increase in the home’s value) over the decades of your adult ownership, you still benefit from the monthly forced savings that result from paying down the remaining balance due on your mortgage. Older folks can tell you that owning a home free and clear of a mortgage is a joy.

All that home equity (the difference between the market value of a home and the outstanding loan on the home) can help your personal and financial situation in a number of ways. If, like most people, you hope to someday retire but (also like most people) saving doesn’t come easily, your home’s equity can help supplement your other sources of retirement income.

How can you tap into your home’s equity? Here are three main ways:

Some people choose to trade down — that is, to move to a less costly home in retirement. Sell your home for $500,000, replace it with one that costs $300,000, and you’ve freed up $200,000. Subject to certain requirements, you can sell your home and realize up to $250,000 in tax-free profits if you’re single, or $500,000 if married. (See Chapter 17to find out more about this homeownership tax break.)

Another way to tap your home’s equity is through borrowing. Your home’s equity may be an easily tapped and low-cost source of cash (the interest you pay is generally tax-deductible — see Chapter 3).

Some retirees also consider what’s called a reverse mortgage. Under this arrangement, the lender sends you a monthly check that you can spend however you want. Meanwhile, a debt balance (that will be paid off when the property is finally sold) is built up against the property.

What can you do with all this home equity? Help pay for your children’s college education, start your own business, remodel your home, use it toward your retirement, or whatever!

Think back to all the places you ever rented, including the rental in which you may currently be living. For each unit, make a list of the things you really didn’t like that you would have changed if the property were yours: ugly carpeting, yucky exterior paint job, outdated appliances that didn’t work well, and so on.

Although we know some tenants who actually do some work on their own apartments, we don’t generally endorse this approach because it takes your money and time but financially benefits the building’s owner. If, through persistence and nagging, you can get your landlord to make the improvements and repairs at her expense, great! Otherwise, you’re out of luck or cash!

When you own your own place, however, you can do whatever you want to it. Want hardwood floors instead of ugly, green shag carpeting? Tear it out. Love neon-orange carpeting and pink exterior paint? You can add it!

In your zest and enthusiasm to buy a place and make it your own, be careful of two things:

Don’t make the place too weird. You’ll probably want or need to sell your home someday, and the more outrageous you make it, the fewer buyers it will appeal to — and the lower the price it will likely fetch. If you don’t mind throwing money away or are convinced that you can find a buyer with similarly (ahem) sophisticated tastes, be as unusual as you want. If you do make improvements, focus on those that add value: a deck addition for an outdoor living area, updated kitchens and bathrooms, and so on.

Beware of running yourself into financial ruin. Changing, improving, remodeling, or whatever you want to call it costs money. We know many home buyers who neglect other important financial goals (such as saving for retirement and their kids’ college costs) in order to endlessly renovate their homes. Others rack up significant debts that hang like financial weights over their heads. In the worst cases, homes become money pits that cause owners to build up high-interest consumer debt as a prelude to bankruptcy or foreclosure.

A final (and not inconsequential) benefit of owning your own home is that you don’t have to subject yourself to the whims of an evil landlord. Much is made among real estate investors of the challenges of finding good tenants. As a tenant, perhaps you’ve already discovered that finding a good landlord isn’t easy, either.

The fundamental problem with some landlords is that they’re slow to fix problems and make improvements. The best (and smartest) landlords realize that keeping the building shipshape helps attract and keep good tenants and maximizes rents and profits. But to some landlords, maximizing profits means being stingy with repairs and improvements.

When you own your home, the good news is that you’re generally in control — you can get your stopped-up toilet fixed or your ugly walls painted whenever and however you like. No more hassling with unresponsive, obnoxious landlords. The bad news is that you’re responsible for paying for and ensuring completion of the work. Even if you hire someone else to do it, you still must find competent contractors and oversee their work, neither of which is an easy responsibility.

Another risk of renting is that landlords may decide to sell the building and put you out on the street. You should ask your prospective landlords whether they have plans to sell. Some landlords won’t give you a truthful answer, but the question is worth asking if this issue is a concern to you.

One way to avoid being jilted by a wayward landlord is to request that the lease contract guarantee you the right to renew your annual lease for a certain number of years, even with a change in building ownership. Unless landlords are planning on selling, and perhaps want to be able to boot you out, they should be delighted with a request that shows you’re interested in staying a while. Also, by knowing if and when a landlord desires to sell, you may be able to be the buyer!