It was an interesting question from a client: would you buy the home you live in right now? And could you? Many people cannot afford today to buy the home they currently live in. That’s true mainly for older people who bought their homes 10, 20, 30 years ago, but it’s also true for younger owners in some areas. Prices are way up in many markets and even those whose incomes have risen a lot might not want to buy that $2m home they paid $400k for back in the day. Is your house a good deal?
Real estate! Can’t live with it, can’t live without it
You may have heard this story before: “That property is so overpriced, who would ever be stupid enough to pay that!?”…referring to the $5m apartment in Manhattan in 2011 that is now $15m. Or the other version: “that property is a great value at that price” …and has been now for ten years in Rockport, price unchanged for a decade.
The cost of living in your own home – owning, renting, selling, appreciating or depreciating (that happens, too) can and should be a calculated process unique to you. And it is unique. Summing up national prices of real estate in 2006 former Fed chief Alan Greenspan said, “all real estate is local”. I think he is right, and that is the dilemma. It could be worth looking at.
3 helpful questions for you
What now!? For self-guidance, try these three simple mind steps, Dr. Seuss style.
- Could I buy my home at today’s price?
Sample answer: yes of course, I am spending less than I am making and saving/investing the difference, I am fine.
- Should I buy my home at today’s price?
Sample answer: hmmm…..where would I live if I sold it? I hear Canada is nice. Fortunately, I don’t have to make that decision right now.
- Would I buy my home at today’s price?
Sample answer: I better check the facts. Owning/not selling right now implies some very specific future prices that can work for me or against me. Best to know ahead of time what can happen.
Have the conversation
For many people a home purchase is their first big financial event. Later on, with the passage of time and perhaps multiple properties your personal real estate can take on a life of its own. It can change, too. Downsizing later on is very real for couples whose kids have left the nest. With yourself, or with your advisor it’s a good idea to have the ‘personal real estate conversation’ now. Ask all the questions and expect detailed answers.
What is the proper leverage for me?
Our ancestors said you have made it in life when you have paid off your mortgage and have no debt. But none of them are alive today to experience the truly unusual zero interest rate world we have lived in for seven plus years. They may not give the same advice now. Believe it or not, there is a good financial case to leverage your home(s) up to $1.1m with an interest only mortgage, and never pay off the debt. The current rate on that is 3.6% pre-tax, 2% after tax. Isn’t that $1.1m better off invested in a diversified portfolio? Cash flow alone on that portfolio can cover the debt service. Check your income statement before you answer the question fully.
Show me the rent-or-own calculation in my area
This one is more complicated than it looks. Renters don’t pay property taxes, maintenance, or home insurance. Owners pay for everything. There’s more here than meets the eye here. Call or email us for the 17-factor checklist that sorts it all out.
John Osbon – firstname.lastname@example.org
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