Myths About Purchasing
Conventional wisdom can be passed on for decades, just like conventional loans. Because these wisdom nuggets have been repeated so many times, everyone assumes they are true.
Myth: You Can Buy The Worst House In A Great Neighborhood
Because it makes sense, this idea is a common one. Everyone knows that location is key to making a smart investment. The worst house in the most desirable neighborhood should be great. It doesn't matter if the house you buy is not in your price range. It turns out that this is not a great idea. The bottom 10% of homes in a ZIP code will appreciate at the same rate as the rest of the houses, so you won't be any better or worse off than your neighbors. It turns out, in the most wealthy neighborhoods, the house with the lowest value is more likely to appreciate slowly than those around it. It's not just a myth, but it is also false when it comes down to the most desirable neighborhoods. The worst house is in the worst neighborhood.
Why is that? Likely, the demand for affordable homes isn't as strong in wealthy neighborhoods. People who desire to live in luxurious ZIP codes also want fancy homes. A significantly cheaper house than the ones around it is less likely than a house with problems to attract bargain hunters.
What about the most dangerous house in the hottest area? You can buy a low-end house in a neighborhood with five years of high-than-average home values and make a tidy profit. Timing is everything. You'll end up with a house that isn't performing well if you miss the spike. You will see a lower appreciation if you purchase a low-tier home in a hot neighborhood.
The data shows that to get the best return on your investment, you need to purchase in the most expensive area that you can afford. You don't need to buy the most expensive house or one that is right in the middle. The worst house is the worst.
Myth: A Foreclosure Is The Best Way To Get A Great Deal
There were many stories about huge discounts on foreclosed homes during the height of the housing bubble. You could get foreclosures for half the price of comparable homes. So it was foolish to buy anything else. Although the talk is quietening, some people still believe that foreclosures are always a bargain. But, unfortunately, it's not always true.
Foreclosures are often sold for less than other properties. They are not like other homes. People in financial distress, who are unable to pay their mortgage payments, are more likely to neglect basic maintenance. If you are going to lose your house, why fix the roof? Some homeowners who are facing foreclosure vandalize their homes and remove copper piping and appliances. Banks don't have to disclose as homeowners do.
The impact of foreclosures on prices varies from one market to the next. Some regions still offer steep discounts for purchasing a foreclosure. It has almost disappeared in some areas. You shouldn't assume you will get a better deal if you buy a foreclosed house. Compare prices of homes in similar sizes and conditions.
Myth: Real Estate Is A Bad Investment
Stocks perform almost twice as well as residential real estate when you compare their annual returns over long periods. You can't live off your stock portfolio. It's not worth anything every month. A mortgage is also an option when you buy a house. This gives you tax benefits and allows you to leverage your down payment to make larger investments. You can purchase $100,000 worth of stock with $100,000 you have to invest in stocks. If you have the same $100,000 to invest in stocks, you can purchase $500,000 worth of real estate if you put 20% down on it.
Myth: Home Buying Is Risk-Free
Although real estate has been less volatile than stocks, it is still an investment that can be risky. But, although it's a risky gamble, it can pay off in some cases. We're not talking about the horror stories that you see on the news about a couple purchasing a home high above a huge snake den or finding giant holes in their floor from carpeting.
Low-income families are more likely to make a risky purchase than those who have a mortgage. If you have to make a large financial sacrifice to purchase a home in a poor neighborhood, you could be in serious trouble if your job is lost. It's less likely that you have a financial cushion. If you lose your job in a downturn region, you won't be able to sell your house as your potential buyers may also be out of work. This means that you cannot move to another job.
Low-income homeowners will not be able to take advantage of the mortgage-interest deduction due to their less likelihood of filing itemized tax returns than those with more financial means.
Do you need to be wealthy to own your home? No. It doesn't mean you should go into homeownership expecting to get a financial boost immediately. However, if you have the finances to do so, real estate can be a great investment.
