In this day and age you may well be asking yourself “What are the advantages of Buying a House, Condo or Property?” There are certainly many advantages of buying a home – both financial, tax wise and most importantly to provide a home and not a temporary dwelling for your family. To a great degree you are in essence “Where you live”.
It is true that you may read in the popular media that a major devaluation in the house market in underway. Look to the long term. Things may go up and down. There may be corrections. However in the long term “They are only making so much land” and “Everyone has to live somewhere”. Consequently over the long term real estate and property prices have always been increasing and have always been a good investment.
If you will notice – rich people seldom are renters. It may be argued that in a rental property the owner takes the hit on repairs and taxes.
It can always be debated as to whether that the mortgage payment s that you make to the bank or finance company are “forced savings” and that you are really not ahead in a financial sense. Whether this is true or not at the end of the day, if you own the property, you will have a substantial asset of worth, whereas if you are a renter, when you close the door, or they carry you out, you will leave with and have accumulated nothing in a financial or financial asset sense.
In addition to the accumulation of financial assets over time when owning property there are additional financial tax advantages to owning property rather than renting. First mortgage interest and real estate property taxes are tax deductible. A penny saved is always a penny earned. Anyone who is paying a mortgage can enjoy these tax benefits for the interest paid on their mortgage as well as property taxes paid. What is important to understand is that in the first few years of your mortgage, most of the money you pay to the bank, credit union or S & L goes towards payment of interest. Not the amount that you owe on the loan (the principal). The financial institution that gave you the mortgage wants to get their piece first. This is not a bad thing for you. Indeed it is in your favor. Your biggest interest charges and hence biggest tax deductions will be in those early years of your mortgage payments. If you understand the rules, as well as follow these rules to the letter – then the mortgage and mortgage tax deduction rules are your favor. You cannot stop the sea and you cannot stop the process of the power of compound interest. In essence someone else will be helping you along the property asset accumulation road as you buy your first home – whether it is starter home, country property or condo and move along the road of home ownership. As you continue to upgrade your home and properties over the years you can be reassured that as long as present rules stay in force – these tax deductions will act greatly in your favor towards your real estate assets and personal worth.
Why your Credit Rate is Important When Youâre Buying a House
Going into the real estate market takes more work than what meets the eye. The whole buying process undergo a lot of phases, wherein each phase can determine the success of the entire house-buying process, as well as its failure. One of the things that can stop this process from happening is if a buyerâs credit rate is not good.
People who are looking to buy a house sometimes do not have the exact amount in their possession when they decide to purchase a house, which is why these people may need to take loans or mortgages just so they can pay the necessary amount needed in order for them to get the house that they want. One of the things that these lenders will take a close look at before they will lend you the money that you need in order to purchase the house that you want is your personal credit report, or your credit rate.
These lenders will make sure that you are a good credit risk before they would even think about lending you the money that you need. To help them assess your credit rate, they will consider a few factors to help them decide if you are indeed credit worthy. They will take into account your payment patters, wherein they will check how often you pay your debts on time or how late. They will also look at how often you apply for credit, as well as your debt ratio, which helps them gauge your ability to pay. They do not want to lend people who cannot keep up with their payments money.
One way of being able to make sure that you will maintain a good credit rate is to make sure that you limit the amount of credit that you may attempt to handle, which should be based on your income. If you are only earning a certain amount of money per month, make sure that you do not exceed that amount in the amount of credit that you attempt to borrow or use.
If you do not pay back the amount of credit that you have been using or borrowing, then you will have a bad credit rate, making it more difficult for you to be able to get credit later on in the future. If this happens, then you will not be able to get loans, or secure larger interests rates in securing larger loans, to pay off the price of the house that you want to buy. This can greatly affect the entire house-buying process.
In order to maintain a good credit rating, a person must appear to be a good credit risk for the lenders, which will help him or her get the loan that he or she may need to purchase the house that he or she wants. One way of doing this is by making sure that you make the required payments in a timely manner. Make sure that you pay your bills on time, pay off your bills in the time required without overextending your debt. The fewer debts you will have in your credit history, the better your chances will be of getting the loan that you need for buying the house.
Vanessa Arellano Doctorhttp://miamirealestateinc.com
What Documents are Involved When you Buy a House?
Buying a house is not as simple as just giving another person the money for the house, and then the house is instantly yours. There are a lot of other things to consider before the whole process of purchasing any house can go underway. Once all of these elements are taken into account, the whole purchasing process can go very smoothly and expediently, but if things are not in order, then the process may take a longer time to complete.
Before you should try to buy any house, there are a few things that you need to make sure first so that you will encounter less problems along the way. You must first make sure that you have enough money to allow you to invest on a house.
The amount of credit that you have to your name does not necessarily need to be the exact amount of what you need for the house that you intend to purchase, just as long as your credit allows you to pay whatever mortgage plans or whatever payment schemes you have entered into. If you are earning, make sure that you are brining in more money than what you need to spend. This will help ensure that you have enough money in your credit to be able to pay for whatever purchases you make.
Also make sure that you have enough money to use as down payment for the house, which ranges from 10-20 percent of the purchase price of the house.
It is also a good idea to look at other houses that are available in the vicinity, and see if there are other options for you. This will help you gauge what you really want in a house, and if the house that you intend on buying is what you really want.
Try looking at the overall layout of the other houses, the number of rooms in the house, the bedrooms, kitchen, garage, and anything else that you may think as important to help you decide. Try to find other choices just in case the house that you are currently looking at is not feasible later on. Also, try to look at the neighborhood as well. This can also be a factor in how you are going to go about making your decision.
You should also have a decent real estate agent that will help represent you in the entire process of searching and negotiation of the house. Once you have already found the house that you want, allow your real estate agent to negotiate with the seller in order to get you the best deal possible. Once this has been consummated, the process of turning over the house to you now begins.
Before the house can be legally given to you, there are a few things that is necessary in order for the contract between you and the seller of the house to be consummated. The final step in the process of buying a home is usually conducted in a title office. This is where the parties involved will have to sign the necessary documents and mortgage arrangements. One of the important documents that is needed when there is a purchasing of a house is the deed of the house. This will help prove that once the whole sale has been consummated, that you are now the legal owner of the property that you are purchasing.
Another document that is needed in this type of sale is the title of the house, which helps show people that you are the person who has any legal claim to the property, or that you are the person who has any lien against it.
Once these two documents are already with you, then the house that you have purchased can already be transferred to your name, and you now legally can do whatever you wish with it, just as long as your mortgage arrangements do not encounter any problems.
Vanessa Arellano Doctorhttp://realestatepress.org
Is Buying a House a Good Investment?
Intended Audience
Individuals looking to purchase a home for personal use or as an investment. As well, looking into conventional wisdom’s statement that buying a house is one of the best investments someone can make.
Summary Points to Take Away
Analysis
Conventional wisdom states that buying a house is one of the smartest and best investments an individual can make. This article is geared towards challenging this conclusion to see whether this statement rears any truth to it.
Why a House is a Good Investment?
Forced Savings Plan
Most individuals claim that the purchase of their personal home was the best investment they’ve ever made, which is true in most cases because it is the only investment they’ve ever made. The general public struggles with saving for retirement; thus, purchasing a house assists in that problem as it forces individuals to continuously pay down the mortgage (or lose the house in a foreclosure to the bank); therefore, allows the storing of equity for the owners. This built up equity (i.e. market value of home minus remaining mortgage) can be borrowed against during their retirement years or they can downgrad into a less expensive house in order to provide some retirement funds to the owner. If individuals take a disciplined approach to saving, then the benefit of being forced to save in order to pay for a house diminishes
Leverage
Typical real estate purchase require only a 5% deposit, while the remaining amount can be borrowed through bank debt. Few alternative investments outside of real estate can the acquirer obtain such significant leverage, which can enhance investment returns.
Example, suppose that you purchased a home for $200k, for which you made a 5% deposit down ($10k). During the next few years the house appreciates in value and you sell it for $220k (10% higher than the level you purchased it). Though the return on the house is only 10%, the return to the investor based on invested funds sunk into the home ($10k) is 200% ($20k earned over $10k investment) – that is the power of leverage. On the negative side, more debt means higher fixed monthly mortgage payments; thus, higher risk of being able to make the monthly mortgage payments. As long as cash flow is not a concern and the mortgage payments can be met – investments should be leveraged to maximize returns to the investor. Could you imagine walking into a bank and asking for $100k to invest in equities while only putting 5% down – likely to never happen, this is a major benefit of real estate ownership.
Inflation Resistant
Real estate holds its value during inflationary periods; thus, acts as a hedge against the investors other assets that aren’t protective against inflation (ex. Currency). The asset will continue to hold its buying power (store of value), which is difficult to get outside of investing in precious metals. The reason real estate holds its value is there is the same number of houses that the increased monetary supply of dollars are chasing; thus, it’ll take more dollars to purchase the houses as the supply of houses stays stagnate while the demand rises (due to the increase in the number of dollars in everyone’s hands). This can become critical given the current economic times and numerous expansions of monetary supply across many nations, which will have the aftermath affect of higher inflation.
Capital Gain is Tax FreeIn Canada, every home owner is provided with a capital gain exemption on amounts earned in excess of cost for their principal residence. Only one piece of real estate can be claimed as the principal residence per individual. For example, if you owned a home and a cottage, only one of those houses upon selling could take advantage of the principal residence exemption. No other asset class has such advantageous tax reduction characteristics. Unfortunately this is a onetime event; thus, those holding numerous pieces of real estate can only apply it to one property.
Allows for Control over the Asset
Real estate is typically an investment an individual has control over (assuming you’re the majority owner – which is typically the case) by the means of the owner has the ability to increase the value of the asset, which may not be the case in most other investment opportunities. When purchasing real estate, owners can make capital improvements to the home (ex. Finished basement, new porch, etc.), which will increase the value of the property (capital appreciation) as compared to purchasing stocks or mutual funds as assets where the owner can’t take action to increase the value of those assets (unless they’re a significant owner, greater than 20% – which is typically unlikely). The ability to control an asset adds value to the owner through what is known as a control premium, as a real estate asset may be more valuable in the hands of some individuals over others.
Why a House is a Bad Investment
Lack of Diversification
Average individual thinks the stock market is very risky while investing in real estate is more of a certainty. Purchasing equities allows the owner to conveniently hedge their risk amongst various companies in numerous industries, countries, etc. The purchase of real estate doesn’t provide the ability to diversify risk away as easily unless an investor plans on owning numerous pieces of different types of properties (ex. residential, commercial, resorts, etc) across various markets (North America, Europe, etc) – which is probably very unlikely for the average investor. Purchasing real estate prevents the diversification of risk because it’s dependent on the economic, migration, and regulation trends of the local area.
For example, assume you purchased a home in Oshawa, Ontario – which is a town extremely reliant on the large manufacturing facility of General Motors (GM). Should GM cut back on production or move their facility housing prices would fall sharply as it is the biggest employer in the area; thus, demand from individuals will decline as unemployment rises and real incomes fall. With a decline in demand and supply staying stagnate (as you typically can’t “un-build” a house once it’s constructed) the price will have to shift towards in order to align demand with supply.
Real estate doesn’t allow the investor to diversify away the specific risks in the local area as compared to purchasing equities, which allows the investor to spread risk amongst investments that perform differently during different points along the business cycle. Most individuals when purchasing real estate have all their eggs in one basket.
Maintenance Costs
Transaction and maintenance costs are significantly higher for real estate investments than stocks, mutual funds, etc. When purchasing stocks costs are typically broker commissions ($20 per transaction if using an online discount broker), while when purchasing a home it is typically 2% commission on the transaction value, significantly higher than purchasing equities.
Once you purchase shares, no further cash is required from the investor unlike real estate, which requires constant annual expenditures that continue to increase the investors cash committed towards the property, such as property taxes, insurance, utilities, maintenance and repairs of the asset, etc. These are costs that real estate investors or home purchasers don’t factor into their expected return, but play a significant role as the payment of property taxes (etc.) doesn’t contribute to the value of the property for eventual sale in the hopes of capital appreciation.
Historical Lower Returns Compared to Equities
During any 20 year period throughout history, no other asset class has outperformed equities, which includes real estate. This is from the perspective of asset vs. asset without consideration of leverage and how that may enhance returns (as discussed earlier). While it is true that over the long run real estate prices go up in value, this is typically due to inflation incurred. Recent spikes in housing prices seen in the past 10 to 15 years has been due to changing demographics, specifically the baby boomer generation (who makes up largest segment of the population in North America) go through life stages at the same time (same goes for starting a family and purchasing a home and real estate investment property). The result was a large influx in demand without a corresponding increase in supply as construction requires lead time; thus, leading to rising real estate prices.
Will this high demand continue? That’s where the argument lies. Likely there will be softness felt in overall real estate demand as baby boomers already have their homes and they’re likely to either stay put, move to retirement homes or downgrade into a smaller place in order to obtain some retirement income. Immigration will continue into North America that will prop up demand, but likely not the extent to fulfill the whole in demand left by the baby boomer generation; therefore, the future appreciation in real estate properties is likely to flatten out.
Can’t Take Advantage of Available Opportunities
The purchase of a home or real estate property requires the individual to tie up a significant portion of their net worth into the property (in a lot of cases, all of it). Having all your net worth in real estate is a risky strategy as you’ll be severely impacted by movements in real estate prices as compared to having your cash tied up into several asset classes; thus, less vulnerable to swings in any one asset class. Similar to the discussion had under the “diversification” section of this article.
With the majority of an investors net worth tied up in a real estate property, there isn’t available cash to take advantage of other opportunities that come along; thus, significant opportunity costs are involved in venturing into real estate. This should be considered before purchasing an expensive personal home or making a real estate investment.
Limited Scope
Real estate is a local good, unlike gold for example – which can be bought and sold throughout the year for the same market price. An individual looking to buy a personal home or make a real estate investment doesn’t have access to all available properties as there are physical limitations to contend with. It comes down to wanting to live where you grew up or currently work or not wanting to buy a rental property far from your home in order to reduce logistical issues. For example, if you live in Toronto, Ontario and are looking to make an investment in a rental property, you’re unlikely to consider properties in Paris, France though the opportunities may be better than those surrounding Toronto due to language and logistic issues. Equities (and etc.) are globally traded and available; thus, users can take advantage of opportunities around the world; thus, their scope is not limited to the local area of their current surroundings like real estate is.
Additional Points to consider if you’re purchasing a Home for Personal Use.
Doesn’t Provide Any Cash Flow
An asset typically provides you with cash flow, i.e. puts cash in your pocket. When purchasing a home, cash only flows out (property taxes, repairs, etc.); some would argue that if it appreciates in value then it is an asset. In this instance it is only an asset when converted into cash and if that is the case, where will you live? Likely end up buying a new house, which has also gone up in value similar to your house. This makes it difficult to realize the value of your personal home appreciation, which acts more like a liability than an asset since it takes cash out of your pocket instead of putting some in there.
Tax Deductibility of Interest
Interest expense paid due to bank loans taken to finance investment properties is deductable against income because the investor is pursuing income and tax legislation allows deduction of any expenses incurred in the pursuit of income. This is not the case for a mortgage taken out to purchase a house for personal use as the individual is not in the pursuit of income; thus, interest expense is paid with after tax dollars, with no tax shelter provided. If those funds had been borrowed to invest in equities or mutual funds, the interest would be deductable because again that would count towards the theme of pursuing income.
Can Get Personal Joy Out of It
Unlike equities and other alternative investments, the investor can’t personally use or get joy out of it as compared to purchasing a home, which the individual can live in and enjoy during the investment process. An investor who purchases shares in General Motors (GM) can’t exactly borrow and test drive cars whenever they please simply because they’re a part owner. This is a qualitative benefit that is difficult to quantify, but should be considered.
Where to go from here?
The main reason to purchase a house is to have somewhere to live and enjoy their life, don’t think of it as an investment. Buying a home isn’t a bad decision; it is the investor’s perception that may be tainted because it is important to realize that there are many arguments against a home as an investment to be considered. Don’t buy real estate property with the mindset that an individual can’t lose and that there is no better investment opportunity than to purchase a home, etc. Beware of conventional wisdom that states there is no better investment than purchasing a house.
THANKS,
SIMON GIANNAKIS