At LexION Capital, I advise my clients on how to handle life transitions, including how to adjust their financial plan to accommodate their important financial milestones and unique goals.
For many people, one of the most significant financial decisions they make revolves around buying a home. Many Americans today decide that owning a home would actually be a significant liability. The mortgage crisis changed the American Dream. We have shifted from the idea that home ownership is a universal goal and benchmark of success.
If you plan to stay in an area for at least five years, buying a home might make sense, but it’s not an automatic yes. This is a huge decision that will impact every aspect of your financial life, and it must make sense for you. Here are three questions to keep in mind as you consider the financial impact of deciding whether to buy a home.
- Am I prepared to give up some financial and lifestyle flexibility?
Renting provides flexibility, which can be especially impactful in an economic climate when relocating for a job may be helpful or necessary. And financially, a home is an illiquid investment–once you buy, your assets are tied up. If you do decide to sell, you still have a number of costs to consider in terms of both money and time: a house must go on the market, you must finalize and close a deal, pay the real estate agent, and from there you will still need to buy a new home. Be sure that being tied to your potential home will not hinder your current financial needs and future goals.
- Am I prepared to take on the ongoing costs?
There are costs associated with home ownership, from upkeep to renovation to property taxes, that you don’t deal with as a renter. When you do choose to buy a home, you must consider whether this particular property is truly a smart financial move for you. For example, a historic home may provide beloved vintage charm, but steep renovation and repair costs can add hugely to the bottom line.
You must always build extra room for unexpected expenses into your financial plan. Be sure to consider extra wiggle room for upkeep and renovations, but also plan to add to your emergency fund. If your boiler breaks in below-freezing weather, you never want the emergency repair to eat into your ability to pay your regular bills.
- Is this how my money can best serve my and my family’s financial future?
Remember, a home is an illiquid asset, so it can’t be considered in the same light as your investment portfolio. A home is a single, concentrated investment. On the other hand, the capital that you would use to purchase a home could be invested in a diversified global portfolio to grow for years to come.
There are many things to consider in deciding whether and when to buy a home. Like any financial decision, it must make sense given your long-term goals, and it must be a good fit for you.