The Rules of Real Estate have Changed!
Just a few years ago real estate experts were advising investors to
purchase as much real estate as possible by leveraging assets through
private financing. While that may have been a good strategy at the time,
since then the market has experienced a drastic decline and the rules
have since changed.
Many of the same people who followed that advice and relied on borrowing
money in order to build extensive real estate investments are now
suffering from the effects of over-extending their financial resources.
This problem is not only effecting investors but also homeowners who
relied on the same advice to purchase their primary residence and are
now facing potential financial disaster. One of the reasons for this is
that many people bought into the idea of the impenetrable real estate
market. They believed their home was a solid investment and did not
prepare themselves for the inevitable turn that the market was going to
take. If you are considering the purchase of a home in the future, it is
imperative to make sure that you do not buy for the wrong reasons.
One common myth that many people still believe is that their home is a
good investment. We now know that is not always the case. There is
always a good chance that your home will hold value over a long period
of time, but do not buy into the idea that it will appreciate in value
faster than the rate of inflation. Ultimately, there is not much chance
that you will become independently wealthy simply by owning a home.
In addition, if you decide to sell your home, steer away from the idea
that you can simply deduct the amount you paid for it from the sales
price to determine how much you will have earned on your home ownership.
The final cost basis will include any home improvements that have been
made as well as maintenance expenses and tax bills. All of this must be
subtracted from the sales price. When you take into the true cost of
owning a home, you will likely find that you will not have made as much
money on home ownership as you originally thought.
Another common myth that many people still buy into regarding home
ownership is that they will receive a tax deduction. It is true that a
tax deduction is offered by the government for mortgage interest as well
as other types of tax credits, such as green technology but in general,
these tax benefits will not outweigh the expenses of home ownership.
Most homeowners eventually find that their tax return is not affected
that much by the tax deductions related to their home.
Many people make the decision to purchase a home because they have heard
that renting is the equivalent of throwing away money. During the early
years of paying off a mortgage, there typically is not a substantial
financial advantage to owning a home over renting. Renting; however,
does offer the flexibility to being able to move if you need to do so
without worrying about the hassles related to selling a home. In
addition, with renting you also have fewer responsibilities and
expenses.
Homeowners and those considering the purchase of a home often believe
that home ownership forces you to save money. It is true that as you pay
off the principal portion of your mortgage loan, you will be setting
away money as part of your net worth. The problem; however, occurs when
you want to actually access that money. With a true savings account, you
earn interest on your savings and you can tap into at any time. That is
not the case with a home. You can only access the funds by selling the
home, refinancing it or taking out a line of credit or loan on the home.
If you choose to refinance, you will also likely end up paying even more
money in interest if you choose to extend the term of the mortgage loan.
Home ownership will probably always remain the true definition of having
achieved the American dream, but it is important to keep in mind that
due to shifts in the real estate market, the rules have changed.
Finances can play a critical role in determining whether renting or
buying a home at the current time is the best option, given the current
circumstances. The best option is to run the numbers and make a sound
and informed decision based on what is best at the time the decision
must be made.
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