Are You Ready For A Home Of Your Own? (Part 1)
Spring has sprung and it’s the season for serious home buying.
I’ll never forget the moment we purchased our first house. We were both 28 years old and it felt like a giant step into true adulthood. I remember feeling a whirlwind of emotions all at once; excitement, happiness, fear and uncertainty. Do we really know what we’re doing? My husband and I spent a grand total of maybe 60 minutes inside the rather compact four walls before we signed the offer on the dotted line. We had to. “It’s a seller’s market”, our agent explained, and the property would most likely be gone by end of day. I’d spent more time contemplating the purchase of a new pair of jeans than I had this new, multi-year commitment.
We got lucky; our first home was a wonderful place to live, start our family and a great investment. Ok, maybe it wasn’t all luck. We did do some homework first ( as we analytical types tend to do). I would highly recommend you do the same- both soul-searching and number crunching. There are no guarantees what will happen with future home prices and mortgage rates. But, at the very least, you must be comfortable that you are making an informed decision for your financial and emotional health.
I don’t regret the sacrifices we made in other areas of our life to buy our first home. But, is home ownership the right decision for everyone? Not necessarily. Here’s some food for thought to help you decide what’s right for you.
1. Do you really WANT a home of your own? What’s driving your decision to buy? The REAL DESIRE to own your own home (I hope so!) or others telling you it’s the right thing to do? Are you ready now or should you wait and save a few more years? Think about your priorities for your life and your money.
In my own view, there’s nothing wrong with renting but many people will tell you otherwise. Renting provides flexibility to respond more quickly to life’s changes and challenges- a job loss, career change, return to school, a major relocation etc. Renting provides experience and helps you learn what you want and don’t want in a home of your own. When you are renting, a lot of chores and responsibilities get done for you. Running a home takes more of your free time and money. Remember the movie the Money Pit? An extreme example of the downside of home ownership but, no doubt, you will experience some bumps along this road. Things happen and it’s up to you to deal with them- leaky roofs, clogged toilets, flooded basements, weeds in the lawn/garden, snow covered driveways and more.
However, like most things in life, home ownership can be well worth the sacrifices. Home owners often experience tremendous pride of ownership, the feeling of belonging to a community and the joy of making improvements to a property they can call their own. You owe it to yourself to understand whether, why and when you want a home of your own.
2. A home is one of the biggest financial (and emotional) decisions of your life– It’s SO important to get your big ticket purchases right for peace of mind. Once you fall in love with a potential house, your rational, logical mind can disappear. You become willing to do almost anything to get the house of your dreams. Keep your emotions in check and use your head. You want your home to be a great place to live AND a great investment. A solid, well maintained home in a good neighbourhood should increase in value over time. However, a home with large drawbacks i.e. on a busy street, near a noisy airport or in a poor neighbourhood/school district could lose value or be tough to sell in a market downturn.
3. Buying a home is not the only way to build wealth. If it’s wealth that you’re looking for, there are easier ways to get there than buying a home. Some people will disagree. Each year, a McMaster professor assigns his finance students the following project; whether renting or buying a home makes you wealthier. What’s fascinating is that over the last six years, none of the students have been able to substantiate buying as creating more wealth over the long term (for details, please read the article here). This result goes against popular thinking. Other data reinforces the students’ conclusions; over a ten year period ending mid-2013, growth of the TSX composite index (Canadian stock market) was 141% vs. 85% for the national composite index of real estate prices in Canada. Clearly, home ownership is not the only ticket to wealth in the long run.
4. How secure is your career, skill set and health? It’s important to invest in yourself but especially so when you invest in a home. Your ability to earn income is critical for being a happy homeowner and eventually becoming debt free. How likely are raises or promotions in your future? If you lose your job, how likely or quickly can you become reemployed at a similar salary level? Do you have a second family income, emergency savings or a back up plan? Do you have health concerns that could reduce your earning power in the future? It’s wise to ask yourself these tough questions before (not after) you buy.
Next week, we’ll explore more questions, considerations and number crunching. Stay tuned.
Photo courtesy of echoice.com.au