Why Should I But My Home Now?

This is the biggest question most young couples have (may be, with Bittubhaiya and/or Sonudidi)  - if they are renting an apartment or even a house. I have done rent vs. buy analysis myself when I was ready to buy my first home and always have found that buying a home makes sense in a long run. But there are other advantages of buying a home.

As a general rule of thumb, most homes appreciate about four to five percent a year (yes, forget double digit appreciations in your calculation – for now, at least.) One thing you must remember that this number varies from town to town or within the same town, it varies from one neighborhood to another. And comparing this appreciation with stocks, very likely, it is less lucrative to buy a home than to put your money in stocks or treasury bonds. But is it the only reason you’d like to buy a home? Think again.

Say, you saved $50,000 over last few years and debating on what to do with this money.

Let’s presume, it’s sitting in your money market account, earning about 2% interest(!). The simple calculations say that you will make about $5,204 in interest over a period of five years – roughly 10.4% return on investment. Good enough? Not exactly. Uncle Sam will take away some portion of it – depending upon your tax bracket.

Now let’s take a look at investing money in stocks. I have never been expert at this and was always afraid to invest money in stocks and bonds. I have heard stories about someone doubling and tripling their investments in just five short years. But I am sure everyone is not so lucky. I may be wrong, but for calculation purpose, let’s assume, average, over last five years, the appreciation is about 10%. Some of the safer returns can be considered at about 5 to 8%, I guess. Your overall return could be as high as 40% - or may be more. Though is that what you have earned? Do not forget Uncle Sam is waiting for His share from this income.

In the third scenario, let’s presume, you did decide to buy a home – in my opinion, you did THE RIGHT thing. Let’s see what happens to your $50,000 over a period of next 5 years. With $50,000 as a down payment, you can buy a home worth $250,000. You can borrow almost five to 9 times of your savings, and I am a bit conservative here. (I know, I know, there are closing costs and home inspections and attorney fees etc. etc. as one time expenses – but I’d like to KISS – Keep it Simple, Sir.) You have to borrow about $200,000 from the lender. At current rates or in worst case, you borrowed this money at 7%. Your monthly payment will be about $1,330. At the end of five years, you have paid whopping $68,000 in interest only and about $11,000 towards principal. The interest you paid was tax deductible, so you saved between $10,000 - $20,000 in tax and $11,000 in forced savings account. (What is that forced savings account? We’ll see that in a while.)

What happens to your home value? My best guess based on historical data is, it is about $320,000. (I always quote here – I wish, I had a crystal ball to see what would happen in future…). That is $70,000 more than what you started with. Should I be conservative? Let’s say, your home’s value is $300,000 - it’s up by only $50,000! Now let’s do checks and balances. Your savings in tax: $15,000. Your forced savings account: $11,000. Your home value appreciation: $50,000. Total return on investment of original $50,000 is sum of all these numbers – $76,000!!! Is there a catch somewhere? Yes, apart from $1,330 of mortgage, you pay town taxes; you pay for minor repairs of your home – or little more for upgrade of your home. But overall, you tend to gain. Actually, you should be ready to buy your next home with the equity built on this home – and use this equity as a down payment.

I consider a home as an FSA - a forced savings account. You may or may not put money aside in your savings account but no matter what you will make a mortgage payment on your home and part of this payment is going towards the principal. I know, most of the early years of mortgage payment is mainly interest only, but it does help you save your income tax. If you are not aware of the fact – here it is: Your town taxes and mortgage interest payments are federal tax deductible. Whatever mortgage interest and property taxes you pay in a given year, it brings down your gross income by that amount – for federal tax return, bring down your tax obligation.

I met this gentleman – no, not Mr. Babu - the other day. What he does for his living? Buys a fixer-upper, fixes it and sells it in two to four months. If he can find a tenant who would pay him reasonably good rent to cover the mortgage, he would rent it. Finito. And he makes living out of this. At present, he has few properties – some of them already rented, some of them ready to put on market for sale and some of them are being renovated.

Though, the main idea of this article is not to look at your home as an investment, it surely is an investment with perhaps, maximum ROI. ROI? Yes, return on investment.

The biggest myth I have heard of, from someone who wants to buy a home is – I need 20% down payment so I can’t afford to buy a home! Yes, a MYTH! And what is the fact? Well, email me or call me to find out how simple it is to own your home. Because, I’d always say – as far as buying a real estate is concerned – ‘Kal Kare so Aaj Kar, Aaj Kare so Abhi!’

This is just one of the reasons to buy a home. There are more reasons why you should buy a home – now. Some of you may have read what procrastination would cost them in my previous articles.

If you want to know all the reasons why you should buy a home – now, send me an email at Lokvani@iPraful.com or visit my website at http://www.iPraful.com.

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