Home Buying Kit For Dummies - Eric Tyson

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alt="Tip"/> One way to avoid being jilted by a wayward landlord is to request that the lease contract guarantee you the right to renew your annual lease for a certain number of years, even with a change in building ownership. Unless landlords are planning on selling, and perhaps want to be able to boot you out, they should be delighted with a request that shows you’re interested in staying a while. Also, by knowing if and when a landlord desires to sell, you may be able to be the buyer!

      Renting advantages

      Buying and owning a home throughout most of your adult life makes good financial and personal sense for most people — but not all people and not at all times. Renting works better for some people. The benefits of renting are many:

       Simplicity: Yes, searching for a rental unit that meets your needs can take more than a few days (especially if you’re in a tight rental market), but it should be a heck of a lot easier than finding a place to buy. When you buy, you must line up financing, conduct inspections, and deal with myriad other issues that renters never have to face. When you do it right, finding and buying a good home can be a time-consuming pain in the posterior.

       Convenience: After you find and move into your rental, your landlord is responsible for the never-ending task of property maintenance and upkeep. Buildings and appliances age, and bad stuff happens: Fuses blow, plumbing backs up, heaters break in the middle of winter, roofs spring leaks during record-breaking rainfalls, trees come crashing down during windstorms. The list goes on and on and on. As a renter, you can kick back in the old recliner with your feet up, a glass of wine in one hand and the remote control in the other, and say, “Ahhhhh, the joys of not being part of the landed gentry!”

       Flexibility: If you’re the footloose and fancy-free type, you dislike feeling tied down. With a rental, as long as your lease allows (and most leases don’t run longer than a year), you can move on. As a homeowner, if you want to move, you must deal with the significant chores of selling your home or finding a tenant to rent it.

       Increased liquidity: Unless you’re the beneficiary of a large inheritance or work at a high-paying job, you’ll probably be financially stretched when you buy your first home. Coming up with the down payment and closing costs usually cleans out most people’s financial reserves. In addition, when you buy a home, you must meet your monthly mortgage payments, property taxes, insurance, and maintenance and repair expenses. As a renter, you can keep your extra cash to yourself, and budgeting is also easier without the upkeep-expense surprises that homeowners enjoy, such as the sudden urge to replace a leaking roof or old furnace. You don’t need to buy a home to cut your taxes. Should you have access to a retirement account such as a 401(k), 403(b), or SEP-IRA plan (see Chapter 2), you can slash your taxes while you save and invest your extra cash as a renter. So saving on taxes shouldn’t be the sole motivation for you to buy a home.

       Better diversification: Many homeowners who are financially stretched have the bulk of their wealth tied up in their homes. As a renter, you can invest your money in a variety of sound investments, such as stocks, bonds, and perhaps your own small business. You can even invest a small amount of money in real estate through stocks or mutual funds if you want (see Chapter 16). Over the long term, the stock market has produced comparable rates of return to investing in the real estate market.

       Maybe lower cost: If you live in an area where home prices have rocketed ahead much faster than rental rates, real estate may be overpriced and not a good buy. In Chapter 4, we explain how to compare the cost of owning to the cost of renting in your area and how to spot a potentially overpriced real estate market. Renting should also be cheaper than buying if you expect to move soon. Buying and selling property costs big bucks. With real estate agent commissions, loan fees, title insurance, inspections, and all sorts of other costs, your property must appreciate approximately 15 percent just for you to break even and recoup these costs. Therefore, buying property that you don’t expect to hold onto for at least three (and preferably five or more) years doesn’t make much economic sense. Although you may sometimes experience appreciation in excess of 15 percent over a year or two, most of the time, you won’t. If you’re counting on such high appreciation, you’re setting yourself up for disappointment.

      When you’re considering purchasing a home, you can do lots of reflecting, crunch plenty of numbers, and conduct copious research to help you with your decision. We encourage these activities and show you how to do them in later chapters.

      In reality, we know that many people are tempted to jump into making a decision about buying or continuing to rent without setting all their ducks in a row. At a minimum, we want to keep you from making common costly mistakes, so in the following sections, we go over the biggies to avoid.

      Renting because it seems cheaper

      When you go out to look at homes on the market today, the sticker prices are typically in the hundreds of thousands of dollars. Your monthly rent seems dirt-cheap by comparison.

      

You must compare the monthly cost of homeownership with the monthly cost of renting. And you must factor in the tax savings you’ll realize from homeownership tax deductions. (We show you how to make these calculations in Chapter 3.) But you must also think about the future. Just as your educational training affects your career prospects and income-earning ability for years to come, your rent-versus-buy decision affects your housing costs — not just this year, but also for years and decades to come.

      Fretting too much over job security

      Being insecure about your job is natural. Most people are — even corporate executives, superstar athletes, and movie stars. And buying a home seems like such a permanent thing to do. Job-loss fears can easily make you feel a financial noose tightening around your neck when you sit down to sign a contract to purchase a home.

      Although a few people have real reasons to worry about losing their jobs, the reality is that the vast majority of people shouldn’t worry about job loss. We don’t mean to say that you can’t lose your job — almost anyone can, in reality. Just remember that within a reasonable time, your skills and abilities will allow you to land back on your feet in a new, comparable position. We’re not career experts, but we’ve witnessed many folks bounce back in just this way.

When losing your job is a high likelihood, and especially if you’d have to relocate for a new job, consider postponing the purchase of a home until your employment situation stabilizes. (If you haven’t demonstrated a recent history of stable employment, most mortgage lenders won’t want to lend you money anyway — see Chapters 6 and 7.) When you must move to find an acceptable or desirable job, selling your home and then buying another one can cost you thousands, if not tens of thousands, of dollars in transaction fees.

      Buying when you expect to move soon

      People move for many reasons other than job loss. You may want to move soon to advance your career, to be nearer to (or farther from!) relatives, to try living somewhere new, or just to get away from someplace old.

      Unless you’re planning to hold onto your home and convert it to a rental when you move, buying a home rarely makes sound financial sense when you expect to move within

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