Buying Pros and Cons
Although buying can offer many benefits, it is important to understand both the pros and cons of buying a home, which are listed below:
Buying Advantages- Tax Benefits - Significant tax benefits by deducting mortgage interest and property taxes paid from total earned income
- Huge Profit Potential - If home is purchased significantly below market rate, there is a great opportunity to sell in a short term period and profit (i.e. purchase home that is worth $250,000 for $200,000 with $20,000 down payment (10%). Home is sold for $220,000 2 years later profiting $20,000, a 100% return on the $20,000 down payment investment tax free (actually more than 100% if princpal paydown is factored in). It is a good idea to check what rents go for in case market declines dramatically so at least homeowner can rent out the home to cover mortgage payments
- Huge Profits Tax Free - If home has been occupied 2 out of the previous 5 years before selling, there is no tax on profits up to $250,000 for an individual and up to $500,000 for married couples filing jointly (i.e. occupied home 2004-2006 and sold in 2008)
- Fixed Costs - Mortgage payments are at a fixed cost for a period of time (15 yrs, 30 yrs, etc), which minimizes personal budgets from changing (i.e. landlord increasing rent, moving to another apartment or house that may cost even more than current rent)
- No More Moving - Homeowner does not have to worry about landlord raising rents or not allowing the lease to be renewed forcing renter to move
- Design and Decorate - Homeowner has ability to design, remodel or decorate home however homeowner pleases whereas in a rental home, landlord may restrict even small things such as no permission to nail holes in the wall to frame pictures
- Passive Income - If homeowner decides to move out and make the home into a rental property where monthly rental income is greater than total monthly costs (i.e. mortgage, interest, taxes, insurance, etc), the home can be great source of passive income and build wealth for the owner (easily accomplished often with multi-unit homes)
- Less Flexibility - Moving process is not as easy as ending a lease. Homeowner will need to decide whether to sell or rent out the home. Having the home unoccupied for months while still paying mortgage, taxes and insurance can be a huge financial burden
- Accountable for Home Issues - Cost of maintenance issues will need to be resolved by homeowner. Having friends and family refer plumbers, electricians and contractors would be a good idea, which can actually be even better than calling a landlord who may delay getting things fixed in a timely manner
- Financial Risk - If home is purchased at or above market value and the value of the home declines, the equity, particularly the down payment is at risk of being completely wiped out, putting the homeowner in a lot of trouble especially if the home has to be sold due to financial circumstances
- Less Cash on Hand - Buying a home decreases a buyer's cash on hand and lowers emergency fund (cash saved away in case of emergencies such as becoming unemployed or unexpected health problems)
