Right now, many people wonder if now is the right time to buy a house. In the United States, where I live, there is interest in buying now, before prices completely recover and while interest rates are near record lows. In Canada, there is a little more caution with regard to buying a home, since there are fears — especially in certain markets — that a bubble is involved.
No matter where you live, buying a home is a big commitment, so you shouldn’t enter into the transaction lightly. Additionally, it’s also a very personal decision, so what’s right for you now might not be right for someone else. Here are two things to consider before you buy a home:
Why are You Buying the House?
First, ask yourself why you are buying the house. The decision to buy a home is often rooted in a combination of personal and financial factors. Take a look at your situation and figure out the why behind your decision to buy a home.
Some think that a home makes a good investment. Over time, it’s possible for the home to appreciate in value, and provide a reasonable return. In some cases, it’s not so much the appreciation as it is the tangible nature of the home. It’s much easier for some to repose their faith in a piece of property they can touch.
Others want to buy a house as an income property. If you have the temperament to become a landlord, you can purchase the home and then rent it out, earning money each month. This can be a way to cultivate income now, while waiting for the home to appreciate in the future.
There are those who believe that a home doesn’t make a particularly good financial investment, but that it can be a great emotional/personal investment. Homeownership might have cachet attached to it, or perhaps you just want a place you feel like is truly yours. Buying a home can provide a safe, stable, and personal space that your family can use as a haven.
Perhaps you want to buy a home for a little of all those reasons. Before you buy, though, examine the real reasons that you want to buy. Just buying because everyone else around you thinks you “should” have a home is rarely a good reasons to make such a big financial commitment.
Can You Afford to Buy?
Once you determine why you want to buy a home, it’s time to decide whether or not you can afford to buy the home you plan to purchase. Whether or not you can afford to buy depends, in part, on the reasons behind buying the house. If you are buying a home to serve as an income property, you might be able to afford to spend a little more (assuming you can find a tenant to pay rent regularly) than if you simply plan to move in and raise a family.
When deciding on whether or not you can afford to buy, ask the following questions:
- How much of my income can I part with each month? Remember that a home is a commitment. A portion of your income will go to the home each month. How big do you want that portion? Will it take away from other things you want to spend your money on? You don’t want to end up “house poor.”
- Is most of my consumer credit dealt with? It makes sense to wait to buy until your consumer debt is mostly handled. Adding another debt obligation while you are already struggling with high-interest consumer debt, can burden your finances.
- What happens if I lose some of my income? If losing some of your income would lead to losing the house, you might reconsider its affordability. Do you have other sources of income? An emergency fund? Our home payment is less than 1/5 of our monthly income. This means that losing some of our income wouldn’t devastate our ability to make payments.
- What happens if I have to sell at a loss? Could you absorb a loss if you had to sell an underwater home? Or if market conditions or the need for a fast sale forced you to sell for less than you owe on your mortgage? Earlier this year, we thought we might have to try to sell to move for a job. We realized it would cost us about $10,000 out of pocket to make it happen. Is that something you’re prepared for?
Think about the consequences of buying a home before you take the plunge. W
What other ways can you determine if you are ready to buy a home now?
We don’t have to buy a house and honestly I don’t think we’d be ready anyway. If we had the chance to move into another country (which we hope to be able to in few years), we’d rent until we have the money to buy a house.
Your lifestyle really does matter in these calculations. If you think that you will be headed someplace else, it makes sense to rent instead.
I bought my first home when interest rates were 11%. Just buy what you can afford and plan what you can spend so you are never house poor.
Great point! If you plan your life around interest rates, or what you THINK the markets will do, you’ll never reach your goals.
@Jane, great advice to make sure you’re never house poor. I used to work with someone who spent every single cent of take home pay on their mortgage payment. Although their home was very nice, they were very tired of never being able to do anything. A little less house would have given them the freedom enjoy more things as a family rather then be confined to their home.
As for buying an investment property, I would highly recommend that all of your readers run the numbers including the cost of professional property management which is typically between 5%-10% of gross rent plus a leasing and renewal fee (all of these fees are negotiable by the way). That way, if they decide at a later date they don’t like being a landlord, don’t have the time or are completely burnt out dealing with toilets, fridges and collecting rent they know their investment will still meet their goals.
Having a professional property manager managing your rental property also usually results in cheaper (and faster) maintence as they have relationships with contractors. It can also results in happier tenants who rent for longer because they have a professional on the other end of the line 24/7. With rental turn over being the single highest cost for me with my rental properties (averaging about $1,200 per unit per turnover) having a tenant renew for a second, third, fourth, etc. year can save a lot of money!
Plus, if someone else is dealing with the day-to-day management, you’re freed up to look for more real estate deals!
Great insight on buying as a rental property! I don’t think I could do landlord things, so I would definitely hire a management company to oversee any property I had. I think your observation on turnover also makes a lot of sense. Thanks for the food for thought!
I want to have my own house but financially I’m not yet ready. I’m still living with my parents now. Hopefully in the near future I will have a so called own house.
Very timely post. My wife and I are looking into buying a place…well a co-op in NYC. We’ve been renting for awhile and everyone tells us we’re wasting money. I don’t agree. But now that we have a baby, we’re sure of the neighborhood where we want to stay, and my jobs are more or less stable, I think the time for us to buy is now.
It really is all about your individual situation. I like how you’re thinking it through. I don’t think you’re wasting money if you are thinking things through and preparing yourself for the right situation.
The time to buy is when you’ve spent time thinking about and planning your home purchase. Jane is right. Don’t make a decision because you are worried that rates will go up, home prices will go up or any other factor that might make you rush into a decision/move you weren’t quite ready for.
Because you brighten my day I have nominated you for the Sunshine Award.
Thanks for making the world a brighter place!
I’m a huge proponent of buying a home. When we purchased our house the deal was we needed a side rental just in case one of use loses our job. If I didn’t have that I wouldn’t have bought it.