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Born in the 80s – Part 2 (Cribs Edition)

April 6, 2011

As in MTV cribs, not baby cribs.  That’s another post for another day…

The biggest purchase you will make in your lifetime will be a house.  (Notice I said “purchase” and not “investment”, more to come on that later.)   There are a number of misconceptions and myths floating around about home ownership, and if you’re not careful, you’ll fall victim.  You’re especially vulnerable in your 20s, when it seems like the logical next step in your financial conquests.  So, before you take the plunge, here are two important facts to remember:

1.  Count the costs

When you go from rent living to mortgage living, not all things are equal.  If you pay $1000/month rent, and determine you can afford $1000 mortgage…not so fast.  Home ownership blesses you with a number of additional expenses, so make sure you count the costs, such as:

* Insurance ($50 – $100+/month)
* Property Taxes ($150 – $400/month)
* Utilities (you might pay these as a renter, but it will be higher with more sq ft. – $50 – $150/month)
* Maintenance (no more calling the maintenance guy or gal, you’re it! – $50 – $100/month)
* Lawn care ($100/month or a lot of sweat equity)

Uh oh, you’re $1000 mortgage just turned into $1,500.  Count those costs!

2.  Don’t view your house as an investment

It might turn out to be, but don’t assume it will be.  Ask anyone in Florida who purchased a home in the last 5 years if it was a good investment.  Long term, real estate is typically a good investment, but the chances of you still being in your first house 5 years later are slim.  Especially in your 20s, things can change quickly. Here are my suggestions:

  • Save a substantial down payment – I would recommend at least 10%, and would strongly encourage 20%.  This will provide adequate protection against any downturn in the market.  20% is better for a few reasons: (1) You don’t have to pay mortgage insurance premium (which averages $30/month).  (2) 10% would have offered you little protection in the recent downturn we experienced in Florida.
  • Renting is not evil – I’ve heard people say “You’re throwing your money away when you rent.”  Not true.  You’re paying for a service.  I know a lot of people that wish they had rented over the last 5 years.  Take your time when looking for a house, don’t feel the pressure.  Yes, there are advantages to home ownership, but make sure those advantages are worth the price you’re paying.

You’re life will not be defined by whether you own or rent.  Remember, we’re all about creating margin so you have room for your dreams.  You can do that as a renter or as an owner.  Count the costs, understand what you’re paying for, then make your decision.

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