Why the wrong decision can ruin you financially.
Photo by Negocios on wirestockAlthough real estate is a popular investment class, and even on a small scale, it remains one of the most trusted ways for people to increase their personal wealth; it’s one of the most difficult investment categories to analyze since there has never been a standard source of pricing data.
However, many people think that buying a home should be one of their first investments. Some of them even feel that renting a house is wasting their money.
The reality is that buying the wrong house can cause you to lose even more money than renting if you don’t know what you are doing.
Even big investors have lost money in real estate because it doesn't just depend on buying a nice house and waiting for its price to rise. There are certain factors that you must take into account when buying.
“The problem with real estate is that it’s local. You have to understand the local market.”–Robert Kiyosaki
Most times, renting first is one of the smartest decisions you can make. It gives you the opportunity to know what you really need, you can search for the house you want calmly, and you can even save money.
Here are 4 reasons you don’t need to buy a house now and why the wrong decision can ruin you financially.
Renting gives you the possibility to earn more money.
Depending on where you buy the home, the prices can be so high that there is no way to recover that home's cost.
For example, Rocco Pendola, in his article “stop telling me to buy a house,” explained that he lives in Los Angeles, where he pays $1343 a month in rent. In this same place, the houses are $1,000,000.
A ten percent down payment equals $100,000. A $900,000 mortgage at 3.2 percent over 30 years produces a $3,892 monthly payment. That’s $2,549 more than his rent payment.
If he continued living rented and invested those $2,500 monthly with an interest rate of 9% compounded, in 30 years, he would have $6,084,242.
The factors that a house increases the price depend on the economy, location, and time. Assuming that the house appreciates 7% every year, you could buy that same house for $3 million after 30 years.
Before buying a house, I recommend you analyze the following factors: If the rent will be lower than buying the house in that neighborhood, the possibility of pay the loan before the scheduled time, what is the estimated appreciation of that place, and how easy it would be you to sell it later.
You probably will never get the investment back.
Two years ago, I bought a house in construction because it gave me better payment facilities and was cheaper than a house already built.
The problem with buying a blueprint house is that you do not know how it will really be until they finish it, even if you see pictures and blueprints. When they started building it, I realized the materials were cheaper, and the spaces were not what I saw in the photos.
Also, when they finished it, the final product was without doors in the closet and bathrooms. Also, there were some issues that I needed to fix. So I had to do some renovations to make it look better.
Renovation costs are expensive. I had an idea of how much it would cost, but I didn’t know just how much stuff would actually need fixing and how much those things were going to cost.
I had to repaint the interior, put gates on the windows and the balcony (required in the country where I live) and add the doors in the closets and bathrooms.
I had not contemplated that I would spend more on a new house than just the price of this one, but there is always something to fix, even if it is minimal.
Just because a house is new doesn’t mean it doesn’t need renovations.
Before buying a house, you should know that you will also have to add additional expenses to the final price.
Depending on what change you make to a house, these expenses are not added to the final payment. For example, I can’t tell a buyer I have to raise a house price because I added bathroom doors.
Usually, the renovations that add value to a house are new designs or additional spaces like pools in the backyard, not basic necessities like doors or gates.
If you will buy a house, add at least $ 10,000 for repairs and remodeling to the house price. If you can still sell it and earn more money from it after everything you do to the house, then it is worth buying.
Your debt capacity could be limited to make other investments.
When buying a house, many people pool their partner’s salary to have greater debt capacity. Normally the debt capacity is 30% each, and having the possibility of buying an apartment more expensive can be a temptation.
But this is a mistake because if one of the two loses a job, the other will only be able to count on 40% of the salary remaining after paying the loan.
Also, having a high loan will not allow you to use your credit in other things, for example, a car or starting a business.
According to El Confidential Newspaper, the number of house debts in the United States in 2020 is 15.000 million dollars. If half of that money were used to start businesses instead of buying houses, there would be more job opportunities and a better country economy.
Banks want you to get into debt, because if nobody wants a loan, they would be out of business.
Remember that “what you can afford” is not always what you really need. Sometimes it is better not to buy something so big to use your money more wisely.
Banks and real estate agents will always want to win. Knowing what the best options are for you does not depend on them but on what you want for the future.
If you are going to buy a house with your partner, use only 25% of one of the two's debt capacity. That will give you a better chance to invest the remainder of their salary and have financial peace in case of an emergency.
You will not have the freedom to move out whenever you want.
Buying a house means that it is the place where you want to live for at least 5 years to be worth the investment.
In my 20s, staying in one place for a long time is quite an important decision. This can impact my personal and professional growth.
For example, being in one job for a long time can be bad for your professional growth if you are not in the right company. But if you have a loan, it is difficult to change an established job for a new one.
We can be slave to jobs that we cannot escape because we have to pay for a house.
For example, 4 years ago, I worked in a bank for a little more than the minimum wage in my country. I decided to move to a company that would allow me to grow and learn more about programming, and today I have the same salary as people who had 9 years working in that bank.
If I had stayed there, I would probably be making $100 more by now. But moving allowed me to earn four times more, study, and have a side hustle.
If I had had a home loan at the time, I probably wouldn’t have wanted to move from the stability of my current job to venture into an unknown company.
The advantage of being in your 20s is that all the decisions you make will greatly impact your future almost immediately. You’re young enough to make mistakes and success.
Being tied to a bank loan is a decision that you must make carefully because it will not only impact you financially but also your personal goals.
You could tell me that buying does not necessarily have to be living there forever; there are options like selling or renting it to someone else.
The problem with this is that you will always have to depend on someone else to do anything, and you must have an emergency fund in case something happens, like don’t have people living there for a whole month.
Even if you don’t live in it, having an apartment will mean that you have to prioritize it over all your decisions.
Before buying a house in your 20s, visualize where you want to see yourself in 5 years. If you want to change jobs, start a new business, move to another state, travel, or buy something much more expensive.
All those decisions will impact the investment you are making now, and if it is not possible to make them together with the purchase of the apartment, it is better not to invest.
Final thoughts
Renting a house is not wasting your money. On the contrary, it gives you the possibility of investing much better than buying a house.
There will always be good opportunities to invest in real estate, don’t think that because a person tells you that it is the opportunity of your life, you should buy a place.
Remember that real estate agents want to sell you, and banks want you to get into debt; that’s why they will always tell you that buying is a good option. However, that is not always the best decision.
Before making such an important step, analyze what the advantages and disadvantages of that investment are. If this will cost you your career, savings, and dreams, it will not be worth it.
Don’t take all the credit that a bank gives you; take the credit you can pay. Buying a home just because you can afford it doesn’t mean you’re making a good investment.
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