Understanding the risks and benefits of home ownership

. It seems that a lot of folks think that if you rent you are doing something wrong...that you are throwing away money. There are many reasons to rent instead of buy that can make it the smartest answer for you and your family. But that doesn’t mean there’s anything wrong with buying.

Owning your own home is a goal for many people. Many are drawn to the idea that the house is actually yours. And while a lot of that is emotional, there are some practical aspects as well. Assuming you make your mortgage payments (or if it’s paid off, your tax payments) then no one can make you leave.

Want to paint the inside or outside a funky color? Go ahead. Want to remodel things your way? Get your hammer. Want a pet? No problem. It’s your home, do what you want (well, within the bounds of governmental codes and restrictions).

A house is also an investment. This can be good and bad. Just as stocks on the whole go up across time, so does the value of the average house. But as stock investors know (and house owners recently found out) the price does not always go up. If you’re not planning on selling the investment it’s not that big of a deal. But if you need to move, then hope it’s not a year like 2008.

What can make this worse is that houses typically are a leverage investment. What’s that mean? Consider someone who buys a $100,000 home, putting 20% down and financing the rest. At that point they have only invested $20,000 but have control of a $100,000 investment. This is very powerful if the value of the house rises. Let’s say that by the end of the year the house is now worth 5% more. That’s 5% of the $100,000 value. But it is 25% of the $20,000 invested—a rather substantial gain.

Of course what is powerful can also be terrifying. If the house loses 5% of its value, your loss is 25% of what you invested.

Given time though, just like in most investing, the down markets get cancelled out by the up markets. The key is to make sure you have enough time for these to even themselves out.

The other thing to remember is that you need to plan for both contingencies and the inevitable. As pointed out last week, rent can often be higher in cost than a mortgage payment because the landlord has to prepare for maintenance and repairs that the house will need. You should do the same. In essence you are your own landlord. And while you don’t need to make a profit from the renter, you do have to make sure you don’t lose money either.

So as you look at houses to buy, don’t just consider the mortgage for your budget. Factor in the times carpets need to be changed, plumbing needs to be fixed, counters need refinishing, roof needs replacing, and your A/C requires work. Have an account that you save into just as a landlord does, after all, you are the manager of this investment.

This article was published in the Wichita Falls Times Record News on November 17, 2013.