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Home buying: Back to the future

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POSTED March 12, 2010 2:13 a.m.
Twenty-one years ago they bought a house in the custom East Manteca neighborhood of Spring Meadows for $210,000.

The home – in today’s all-over-the-board market- is probably worth at least $280,000.

A knee jerk response would be to go, “ah, ha! It doesn’t really pay to buy a home in the long run.”

Looking only at market value is more than a tad myopic. It doesn’t tell you the entire story of the positive impact that owning a home can have on your financial situation let alone your approach to life.

The couple – who asked that their name not be used – has every intention of retiring in the home and having a mortgage burning party. They are in the process of putting on a 45-year roof so, in the words of the husband, “I don’t have to worry about putting on a new roof until I’m 100 years old.”

The plan, of course, is not to have a housing payment or a major roofing expenditure when they are retired and are living on more or less a fixed income. But the home has allowed them to do more than that. It also has allowed them to invest wisely – in income producing property.

Financial planners almost universally believe the smartest thing that anyone can do who is in a position to do so is buy a house. That doesn’t mean shoot for the moon or to use your primary residence as an ATM. It means something that fits your lifestyle but is also affordable. Going whole hog on a house can be an expensive proposition.

Why is buying a house the foundation to long-range personal financial planning?

For the vast majority of people the biggest monthly expense they have is housing costs. Buying a home with a fixed rate mortgage flat lines or stabilizes your biggest monthly expense.

Take the couple as an example. When they bought the home, their monthly payment including taxes and insurance was $1,100. At the time rents for an average home in Manteca hovered around $800. Since there’s a custom home and a bit larger than average at the time the rent would have been higher. Today’s typical rent is right around $1,200 for an average home.

Again, it looks like an argument against homeownership since a $100 difference after 21 years doesn’t seem that much.

But here’s the rub. Typical Manteca rents surpassed $1,800 a month earlier this decade. Someone who bought their home 21 years ago was protected from being hit with rents that were more than 120 percent higher than in 1989. Ten years from now the couple will have no monthly housing expense except for property taxes and insurance. If they were renting they’d be paying at least $1,200 a month if not more unless they wanted to downsize into an apartment. Rents in 15 years went up 120 percent in Manteca. It is doubtful they could rent an apartment for that amount they could a home 25 years from now.

For the sake of an example, though, let’s assume the couple lives for 25 years after the house is paid off and that instead of owning a home they were renting for $1,000 a month. In a 25-year time period they’d avoid paying $300,000 to someone else by buying their own home

Of course, homes do appreciate over the long haul. But even if they didn’t owning a home with the intention of having a mortgage burning party produces financial advantages that have nothing to do with appreciation.

Then there is the issue of tax advantages. Buying a home – unlike some other tax deductions - actually will eventually pencil out because you will hold an asset. It’s not the case of spending $1 to save 25 cents in the long haul. Ultimately it will reduce the cost out-of-pocket of the interest. And there will be a point at some place earlier than simply rent reaching the same amount as the mortgage payment that you will reach a break even point of buying versus renting and then be on the positive savings side from there on out.

What the couple did when they had adequate equity and loan rates had dropped was to use their home to secure the purchase of income producing property.

It got them started in rental homes. By doing most of the work that needed done themsleves, they were able to get to a point where rent receipts went from simply covering their mortgage payment to a positive cash flow. Again, there will be a point when they will own those rentals free and clear. That would make rent – after any costs related to property upkeep are taken into account – a major source of monthly income.

In essence whoever is paying the rent is helping the couple buy their financial stability for the future.

Then there are the non-financial considerations – emotional and more – that comes from owning your own home. Whatever you put into improving it is yours and not enhancing someone else’s nest egg.

No matter how you dice it, buying a home 21 years ago was a wise move.

And for the same reasons that is why buying a home will look brilliant 21 years from now.
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