NEW YORK (MainStreet) — People in their 20s or 30s simply aren't buying first homes as eagerly as they did before the Great Recession. But if you're in this group, which ranges from the gun-shy to the sensible, could you buy and minimize the risks that scare so many off?
Yes, though renting is still the best option for many.
The tilt toward renting is a reaction — in many cases an overreaction — to the housing collapse, which left millions owing more than their homes were worth. Also, developers are putting up rental complexes that offer a kind of extended college experience, with loads of activities and services that make the living easy, though expensive.
Because today's 20- and 30-somethings are likely to change jobs more often than their parents or grandparents, renting often makes sense. It's hard to break even on a home until you've owned it for four or five years, long enough for appreciation to offset expenses involved in buying and selling.
But some young renters can afford to gamble a bit, figuring that even if they change jobs they may not have to move. For them, buying offers a chance to build equity and to do as they like with the home — if only they can minimize the risk of losing money if they have to move sooner than expected. There are a number of ways to do that:
Buy in a stable location. Gentrifying neighborhoods can be very appealing, often offering bargains and an abundance of other young people. But gentrification is a halting process that often suffers reversals. Minimize the risk of falling or flat home values by buying in an established, stable neighborhood.
Haggle hard. Realtors rationalizing prices often focus on the affordability of monthly payments. But the buyer should remember that every extra $1,000 paid on purchase means $1,000 less in your pocket after a sale.
Avoid white elephants. A "unique" home may be charming to you but a turn-off to prospective buyers in the future. A home with wide appeal will also be easier to rent out if you have to move before you find a buyer.
Don't overspend. The more you spend, the greater the damage if worse comes to worst and prices do fall.
Consider roommates. Income from renting out an extra bedroom or two can be substantial in today's tight rental market, and could go a long way toward making a short-term ownership profitable.
Add sweat equity. If you're handy, do-it-yourself improvements can add more value than they cost. Even low-skill jobs such as painting and landscaping that might not raise the home's value dramatically can shorten significantly the time it takes to sell, reducing the danger of having to support two homes at once.
Plan on a FSBO. With a for-sale-by-owner you can save thousands on a realtor's commission. A standard 6% commission equals two years of appreciation at the average annual rate of 3%. In other words, by selling on your own, you could shorten your break-even period by two years.
Owning a home is not a guaranteed moneymaker, but over the long run it's cheaper than renting. Though it may not make sense to leap into homeownership at 20 or 22, it's probably best not to wait until you're 40, either.
— By Jeff Brown for MainStreet