When, And When Not, To Invest In Real Estate

A guide to help you decide when it makes sense to invest in real estate and when it does not.

Real estate can be a great investment or a very poor one. More than two thirds of Americans are home owners, so the majority of people will chose to invest in some form of property. By carefully avoiding a few pitfalls it should be very easy to make sure your real estate investment pays off nicely.

Investing in your own home is a complex decision that you should investigate thoroughly before setting out to purchase a home. By far the most important factor when choosing buying a home is your time frame. Unless you plan to be in an area for at least three years you should probably rent rather than buy.

There are several reasons most people should not house hunt if they don't they don't plan to stay in one area very long. In the first place, home ownership usually has more upfront costs than renting. Most renters are asked in advance for a month's rent and a deposit fee. In contrast buying a home involves closing costs and often a significant down payment. Closing costs include everything from an attorney's fee to title insurance to fees banks charge to create the mortgage. A down payment is usually at least five percent of the purchase price.

In the short term home ownership poses some very real financial risks. The biggest risk is that real estate prices may drop. This can cause the home owner to face a situation where the mortgage and closing costs exceed the current value of the house. If you have to sell the house at this time you may not get your money back. On the other hand renters face no such risks. If real estate prices fall he may even benefit because rents may actually go down as landlords compete for tenants.

You should also avoid buying a house if you have just changed jobs or have a lot of other debt. A job change can make lenders reluctant to approve a mortgage because newly hired employees face greater economic instability. If you have lots of other debt this can also be a red flag for a loan officer. Lots of debt may indicate an individual has problems managing money. It's much better to wait a while and pay down as much of the debt as you can before rushing to invest in real estate.

If you are planning to live in one place for at least three years buying a home can be a terrific financial decision with a nice payoff. First of all, most people who purchase their homes do not buy them outright. They put down a small down payment and then seek a home loan or mortgage from the bank for the balance of the house and closing costs. At first this decision may seem contrary to popular wisdom, which asserts that debt should be avoided whenever possible. As a general rule that's true. This rule does not apply to home mortgages because of one crucial difference: home mortgage interest and property taxes are tax deductible. This means that whatever you spend on a mortgage will not count as part of your income. It also means most homeowners will be able to afford more in monthly mortgage payments then they would in rent. For example, if you were able to get a nice two bedroom apartment for $800 a month, you might be able to afford a $1000 a month mortgage.

Another reason why long term home ownership can be a good financial boon is appreciation. As home prices go up your house is valued more. You can sell your house for a higher price than you paid for it. The profit you earn from selling a primary residence has traditionally been tax free and is likely to remain so in the future.

Equity is the amount of money in your house once you've subtracted the mortgage. Investing in a house long term will build up your equity. If you don't want to sell your house and move you can tap into the money in your house with a second home loan. Like the first mortgage the second home loan is still tax deductible. You can use that money for anything from medical expenses to college tuition. If you study your finances carefully you should have no problem deciding exactly when to invest in real estate.

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