The Risks and Rewards of Homeownership
The Risks and Rewards of Homeownership.
Homeownership is a big decision - one that comes with both risks and rewards. Risks include the possibility of your home depreciating in value, having difficulty selling it when you need or want to, or being forced to move if you can't afford the mortgage payments or property taxes. Rewards can include building equity, getting tax breaks, and having a place to call your own.
The bottom line is that you need to carefully consider both the risks and rewards of homeownership before making the decision to buy a home. Weighing your options and understanding all of the potential outcomes is the best way to ensure that you make the right choice for yourself and your family.
The financial commitment.
One of the potential risks of buying a house is the strain it can put on your finances. Putting together a down payment for a home is no small task. Buying a house also usually means borrowing money in the form of a mortgage. Between the high upfront costs and the monthly mortgage payments, owning a home takes a significant amount of money.
The purchase price is not the only thing to factor in when it comes to figuring out if you should buy a house. There are monthly payments, in addition to your usual mortgage payment, such as maintenance costs, homeowners insurance, title insurance, and property taxes. And don't forget one-time costs like closing costs once you secure a home.
Whether you're dealing with an expensive house or not, the money you have tied up in your home is money that you cannot use for other investments. While other investment opportunities are not as safe in the long term, it will take years to be able to take out a good amount of money from a home equity loan, for example.
Using your house's equity.
After taking a property off the housing market, your home's equity can be used to spend more money than you would have on hand through home equity loans and home equity lines of credit.
While you want to be careful about how much you house your home equity line of credit, since it uses your house to secure the loan, you can use the credit to make updates to the home or finance other projects. Home prices being what they are lately, it makes financial sense to use property values to your advantage.
Once you build equity in your home by paying your mortgage regularly, you have more financial flexibility and can leverage the home purchase you made years prior to deal with things like renovations.
Buying a money pit.
Buying a home without a home inspection can be a massive mistake. Because of the recent housing crisis, some buyers have had to compromise a lot on their home buying journey. It got to the point where having a good investment in that market could have been something that makes little sense otherwise.
Foregoing a home inspection means you're buying the property "as is." You're not getting a warranty for anything that might be wrong with the home - and there could be plenty of things wrong with it.
If you find out after closing that the home has serious structural damage, you will have to spend even more money to repair it. This is just one example of the many ways in which buying a home without a home inspection can come back to bite you.
These hidden costs of home-ownership can put a big damper on your enjoyment of the home if it's your primary residence or your ability to generate cash flow by renting the place out. If you intended to get some passive income to help pay off the mortgage interest then it could be an uphill battle before it all pays off.
Passive income.
If you buy a home, it might make more sense to turn it into a rental so that you can benefit from the rental income while paying off your monthly payments and building equity in the property. After taking care of mortgage basics, factoring in the interest rates, tax benefits and capital gains taxes, you may find that in the buying versus renting debate, you find yourself in a special position.
Though difficult to pull off, you could buy a home and split it off into separate rental properties to establish a cash flow that fast tracks you toward your next house.
If your mortgage terms allow it, you can also pay your mortgage faster, gaining more equity in the home faster than if you were living in it.
There are low upfront costs when it comes to turning the investment property you bought into an Airbnb relative to the profit but these can easily be recouped if your home sits in a desirable area for tourists or young professionals. You might have to take out the trash on your way back home or hire someone to take care of that though.
Being tied to one location.
If your home is in an area that declines over time - increasing crime rates, neighbours that bring down home values through strange renovations, the construction of a factory upwind from your home, etc - or find that the housing market itself is starting to collapse, then you might be in a disadvantageous position.
The issue with buying a house is that you're going to be stuck to that location for a while. Between the money invested and the cost of moving somewhere new, your budget is going to find itself squeezed like an orange on a Saturday morning - if you can still afford fresh orange juice.
There's a reason why many investors buy up homes when the stock market takes a downturn since a house's value is something that is generally safe and less 'liquid', meaning it can't be turned into free-flowing cash easily. Still, if you were planning on selling or moving into a better neighbourhood, selling might mean taking on a loss instead of a profit. This is why it's a good idea to research the neighbourhood and its future before buying a home.
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