The first step in this process is to determine if there is any reason to avoid buying a home. Several factors may point towards NOT buying a home and there may not be an option to buy for some consumers. For example, if you cannot afford to pay a monthly house payment (which will include principal, interest, taxes and insurance) should consume no more than 33% of your monthly gross income. Your total debt payments, including your credit cards and student loans, should remain below 38% of your total household pay.
After determining that you can change from a renter to a home owner, several benefits become evident. Instead of paying someone else’s mortgage, you will begin to pay down the equity on the home with every dollar paid over interest payment on your mortgage. Of course, property values fluctuate and the value of the asset could go down- there are no guarantees that properties will hold their value.
Investment properties are a vehicle for investing in real estate in order to increase income by renting out properties. The rules of supply and demand will eventually eliminate any arbitrage on buying property in that if you are making more on rentals in an area than you are paying on the debt to purchase that property, others will use that same equation and that opportunity will go away. This speculation should only be undertaken if there are expendable reserves as renting property is a speculation in real estate, which is one of the most risky uses of money.
Usually, throughout history, rents and home prices move in tandem. But with historically low interest rates and several accommodating mortgage options (No documentation, No money downpayment loans, interest only loans, etc.) most renters want to become home owners. Of course the renter has to be able to afford to become a buyer and then has to be able to commit to the change of lifestyle that often accompanies a large financial change.
In fact, the national gap between the costs of renting and buying is the widest it's been in more than a decade. This means you may save money by renting, at least in the short-term. Rather than overextend your budget to buy in a heated market, you could rent within your means while saving your money while waiting for a better buying opportunity when buying becomes a better alternative. For example if the monthly cost of renting is nearly half the cost of buying, you would be better served waiting to buy a home. These figures do not include property taxes, homeowner's insurance and other costs that come with a house, so renting may be an even bigger bargain.
You then have to investigate local housing prices and neighborhood specification to make sure that this is where you want to live. Two important factors in the equation are: How long would you plan to stay in that housing situation and how much you expect your home to appreciate. You will typically need to stay in a home at least three years to recoup your costs. Although, because you never know how the real estate market will fare you may have to protect yourself with a five year time horizon.
It is imperative to remember that even if you plan to stick around long enough for the purchase to recoup costs, the problem is moot if you cannot afford to pay the bills.
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