As a young professional establishing your career, you may start to consider buying a house. Before you make a decision on whether to buy a home or keep renting, weigh the pros and cons listed below:
Pros: Buying a home can help you….
Purchase an asset that can increase your net worth. One of the perks of buying a home is that it is usually considered an “asset.” Unlike cars which depreciate or go down in value each year, homes tend to appreciate or go up in value. Clearly, things can change, as many people painfully saw during the housing market crash in 2008, but that is not the norm. Plus, even when there are rare “down years” the housing market usually recovers shortly afterwards. If you buy a home there is a fairly high chance that in a few years, that house will be worth more than you originally paid for it. As the home appreciates in value, your net worth increases.
Build equity (or value) in your own investment. Many people like the idea of owning a home. They would rather send in a monthly check towards something that is “theirs” and feel like renting is “throwing money away.” Although I disagree with this statement, I understand where they are coming from. When you rent, your money goes to the landlord and someone else uses that money to build his or her net worth. In contrast, when you buy a home, the money you pay the bank each month is used to pay off your mortgage. As you pay off your mortgage, you decrease your debt. Each payment you make to decrease your debt, decreases the percentage of the home the bank owns and increases the percentage of the home you own. Thus, you are able to increase the equity (or value) you have in the home, which again increases your net worth.
Potentially save money in taxes. When you buy a home you usually take out a mortgage (aka a home loan) from the bank. As you pay off this mortgage each month, you are paying back a portion of the amount you borrowed (the principal) and the fee the bank charged you when they gave you the loan (the interest). The first few years you pay a mortgage the majority of your payment is interest. According to the tax law, you can actually deduct the part that is interest from your taxes each year which can save you money.
Keep in mind, you can only use this tax deduction if you “itemize your taxes.” Many young professionals don’t itemize their taxes because they opt for the standard deduction which saves them even more money. My point is that buying a home has the potential to save you money on taxes if you happen to have a very high income, are already planning to purchase an expensive home, or have to itemize your taxes for some other reason.
Achieve that feeling of accomplishment. Let’s face it. Many people like the idea of owning their own home. It’s a major part of the American Dream many of us want to achieve. Plus, it makes us feel like we’re finally maturing and have reached true “young professional status.” While I may not be able to quantify the “feeling of accomplishment” that comes with homeownership, its value is definitely there. If you are established in your career and plan to stay in same area for at least 5 years, homeownership is viewed as the next step and often provides internal and external validation of our life choices.
Cons: Unfortunately, if you buy a home you will have….
Less mobility. Unlike signing a one year lease to rent a house or an apartment, purchasing a home is more binding. When you take out a bank loan to purchase a home, you sign an agreement to pay back that loan (aka the mortgage) over 15-30 years. Although you can sell the home if you decide to leave the area, it is not as easy as you may think. In fact, most people who buy a home plan to stay in that home for at least 5 years (I talk about why that’s the case in a previous post). If you are going to stay in a home for at least 5 years you have less mobility than if you would have simply rented an apartment or a home using a one-year lease. If you change jobs or have to move to a different state, it is much easier to break a rental lease than it is to put your home back on the market and sell it in a reasonable amount of time.
More debt. Perhaps the biggest disadvantage to purchasing a home is that you have to take a large loan in order to do so. The vast majority of people don’t have $300,000 lying around to spend on a home so they put down a small percentage of the purchase price (usually 3-20%) and get the rest of the money from a bank in the form of a mortgage. While there is nothing inherently wrong about getting a mortgage and making a payment each month towards it, you cannot ignore the fact that doing so puts you in a large amount of debt.
Although a mortgage is considered “good debt” since you are purchasing an asset that can go up in value over time, you may not be in a position to do so right now. Many young professionals already have credit card debt, car payments, and a large amount of student loans they already have to pay back. Taking on another $200,000 in debt may not be ideal. Plus, the more debt you take on, the longer it will take you to pay it all back. The longer you take to pay back your debt, the more money you waste in interest payments and the harder it becomes to dig yourself out from under this pile of debt to actually build your net worth.
High upfront costs- I talked about the added costs associated with buying a home in a previous post, but in case you missed it let me state it again. Buying a home is expensive. The transaction costs (or closing costs) associated with buying a home are an estimated 3% of the entire purchase price. So, if you buy a home for $250,000 expect to spend another $7,500 in transaction costs. Along with this expense, you also have to purchase furniture and appliances. Lastly, you have to factor in decor items and moving expenses. Those who rent don’t usually have to worry about the majority of these high upfront costs.
Additional monthly/annual expenses. Along with high upfront costs, there are recurring expenses you must add to your monthly budget if you buy a house. Every homeowner must factor in the cost of property taxes and homeowners insurance. Some people even have homeowners association (HoA) fees they must consider as well. Plus, when you own a home you are responsible for any repairs. This means you have to put aside additional money each month to cover these inevitable costs. Altogether, the cost of property taxes, homeowners insurance, and repairs typically add another 40% to your monthly costs. For example, if your mortgage is $800 a month then you can estimate spending an additional $320 a month ($800x40%) on top of that $800, in added homeownership fees.
To summarize, before you buy a home as a young professional, there are several things you must consider. By purchasing a home, you are able to buy an asset that increases in value and build equity in an investment that can increase your net worth. You also have the potential to save money on your tax bill while experiencing that feeling of accomplishment knowing you are making boss moves in your life. On the other hand, purchasing a home gives you less mobility in the event that you need to relocate. It also causes you to take on a large amount of debt (in the form of a mortgage), has high upfront costs, and adds additional expenses like property taxes, homeowners insurance, and repair costs to your monthly budget. Before you purchase a home it is important to consider these pros and cons to ensure you are making a sound decision.
If you are unsure whether to buy a home or keep renting you can refer to my post “Should you buy a home or keep renting part 1 (and part 2) and use to the New York Times’ rent vs buy calculator as a guide.