For many, home ownership is the Holy Grail. It is regarded as the final stage that heralds your arrival to financial freedom. Is this the reality though? Home ownership comes with a myriad of benefits and advantages when carefully executed at every stage. Otherwise, it can lead you to financial ruins. Here is how.
Reduction in Flexibility
Getting a mortgage means you are ready for a financial commitment that you could remain tied to, for up to 25 years. When your personal situation changes in the early days of the commitment, the financial loss could be devastating. Think about needing to sell your property to move to a new job, getting a divorce or losing your job. You may have to sell your home at the risk of taking a significant hit to your personal finances.
Decline in Property Value
When many people purchase their home, they expect the value to increase over a period. There is a low possibility of national property market growth going into negative territory but the rise in value could be miniscule. First time buyers may not see up to a 4% increase in value on the value of their property. Yet there is the possibility of unusual price swings affected property prices in specific locations. Example, a home located in an area where there have been a lot of foreclosures over a short period can see a decline in value. Similarly, major employers moving to away from an area or government constructions in a specific area can reduce the overall appeal. In such situations, it could take years to get back to breakeven. You could be sitting on potential heavy losses if there is need to sell before the market has recovered.
Increase in Outgoings
The possible profit as a result of an increase in value for a property over the course of a year pales in comparison to the amount of outgoings required to maintain ownership of the property. The interest rate on mortgage will most likely guzzle up any gains in value as long as you keep fulfilling obligations. This is in addition to other expenses such as home repairs and maintenance, home insurance, utility bills, renovations costs, property taxes and more. New homeowners who are not fully prepared for the financial commitment may never fully recover and could still face foreclosure.
Loss of Investment Opportunities
There are many investment options that can yield far higher returns than a home. In fact, if your sole reason of buying a home is for investment purposes, you are going to get the short end of the stick. House prices in the US, for example, the real return on property over the last 125 years is around 69%. That means a $2 investment in 1890 would return $3.38 today. In contrast, investing in the stock market over that same period would have returned $3,106 adjusted for inflation!