Friday, December 25, 2015

Top Ten Tips for Buying a House

In my previous post, Top Ten Tips to Building Wealth, I wrote that one should buy a house, preferably paying cash, i.e. without incurring debt. This suggestion generated much discussion.

Yesterday I was having dinner with a friend and we had a brief discussion about purchasing cash vs. taking out a low-interest 30-year mortgage, and briefly the merits (or otherwise) of doing so.

As a follow-up, I thought to post my Top Ten Tips for Buying a House:
  1. DO NOT buy a residential home in the absence of Triple D. If you are patient AND plan to purchase a home based on needs rather than wants, you may be able to scoop a cash bargain!
  2. If you do your homework, you might even be able to purchase a home for an amount equal to what you have already saved and/or have available as a down payment on a residential property. Meaning, you may be able to buy it outright in a cash deal.
  3. Looking to purchase a rental property for investment? You can still buy a house today using a credit card, because there are still thousands of ‘underwater’ properties available after the financial meltdown that was caused by the housing bubble of 2008/9.
  4. Accountants will tell you that your home is a (fixed) asset. Albeit correct in accounting terms, it is however, incorrect in investment terms:
    • Assets generate active or passive income. If you earn money on a regular basis from residential property (e.g. by renting out a home that you own), that property is an asset.
    • Liabilities cost money on a regular basis. If you own a home (whether paid for entirely or not) and you live in it, that home is likely to be a recurring liability, i.e. costing you money e.g. every month.
  5. A realtor’s Competitive Market Analysis (CMA) might be interesting, but it has little value beyond “being interesting.” Any house is worth only what a willing buyer is prepared to pay a willing seller... nothing more, nothing less.
  6. A realtor is not a financial advisor. In fact, most realtors care very little about your financial health. Realtors are salespeople who care mostly about sales commission (often their only source of income), earned by representing you in a realty deal that closes at the highest price they are able to achieve, period.
  7. Any amount of cash required as a down payment represents consideration of ‘opportunity cost’ in relation to other investment/uses that you may have been able to consider for that same amount of cash (awaiting investment)... often better invested elsewhere for a higher return.
  8. According to CBS News, for the period 1890-2005, inflation-adjusted home prices rose just 103 percent, or less than 1 percent a year. Comparatively, the historical average performance of the Dow for the period 1899-2012 (a similar period) was approximately 9.4% per year (including reinvested dividends).
  9. Many people will disregard costs when discussing their return on investment realized when selling a house. If you purchased a home e.g. 30 years ago for $10,000 and sold it today for e.g. $200,000 your profit does not equal $190,000.
    • On the positive side, you can factor tax savings (e.g. mortgage interest deductions), and the fact that you sold the house for more than what you may have paid for it.
    • On the negative side, you have to factor in 30 years of costs; like property tax; ongoing repairs and maintenance; realtor’s commission at the time of a sale, opportunity cost of not investing the down payment in 'the market;' adjusting the sales price for inflation over the period of ownership; money spent on unique and/or custom fittings like window coverings; etc.
  10. You have to live somewhere, so the cost of a home will always be a liability. This is true in terms of property tax, utilities, maintenance, etc. If unexpected costs (repairs, tax increases, etc.) cause discomfort, then you should rather rent for an amount similar to what it may cost you to make regular payments, for a residential home.

One of the most significant drawbacks to home ownership - especially with debt - is a potential loss of personal mobility. As an entrepreneur, I want to be able to ‘lock up and go’ to wherever business opportunities and/or adventure may present, without worrying too much about the ongoing running costs of owning a residential home.

The suggestions above may help readers to think a little beyond the propaganda that politicians, educators and your parents may have shared in the past: work hard at school, borrow to go to college, get a job, borrow to buy a car, borrow to buy a house… and live happily ever after with a lifetime of debt. This is also affectionately referred to as "The American Dream."

Or... you could simply decide to build personal wealth instead.