TED JENKIN: The American dream of homeownership has been indelibly etched in our minds and hearts for decades. While I do believe that homeownership is great for most families over the long run, a huge mistake professional 20-somethings make with their finances is purchasing a new home before they are truly ready to own a home.
Why is it so easy for professionals at this age to make this common mistake?
Cheap debt. Sometimes, we let the tax tail wag the dog. With all of the press on interest rates being historically low, the young professional is feeling pressure that it could be now or never when it comes to buying a home. Consequently, many are purchasing homes without considering both the short-term and long-term financial ramifications, including immediate home improvements, and maintenance and upkeep.
The total obligation ratio: Many individuals in their 20s aren’t considering the weight of the student debt and credit-card debt they carry when they buy a property. They underestimate the overall strain a mortgage (as well as home improvements) will put on their finances in addition to their other debt obligations.
Job moves: Many 20-somethings will make a job switch within five years of taking a first job—often to another city. They often don’t consider the repercussions of a home sale if they need to sell within a short period of time—such as paying capital-gains taxes if they haven’t lived in the property for at least two of the last five years and potential downside movements in the real-estate market.
The burden of a rental. Although the renter’s market is very hot right now, we know how this can go in cycles. Far too often, the 20s professional will assume that it is easy to rent out and maintain a rental property if he or she moves. Just wait until the pipes burst during a cold weather spell like we are having now, or you get a renter who damages your property. If it was easy, everyone would be doing it.
Homeownership can be great for most people throughout their lifetime, but for the young and ambitious professional, be very careful before you dip your toe into buying your first home.