One of the interesting things I see in our current market is the young millennial generation still seems all to prone to renting rather than purchasing. With rents heading sky-high, they are literally throwing money out the window waiting for the day when they can afford their dream home. They don't seem to this day may never come unless they build some equity. The best way to build equity is with a small starter home.
In the New York area, that often means a small cooperative or condo. In many cases, they can save hundreds in rent a month since maintenance costs and taxes on such purchases are far less than monthly rent. In other places, it could mean a small house of around 1000 sf.
In recent years, the "tiny house" movement has captured the imagination of many Americans. Now, I'm not suggesting that a family of five should live in a postage-stamp home of 400 sf., but by scaling back on their dream house and purchasing what they can afford right now, many younger people would be positioning themselves to own their dream home a lot sooner than if they continue to wait.
Without getting too much into the weeds, a small purchase will accomplish several things:
It will reduce monthly outlay...
Most rents in the southern end of Westchester (and other high-rent areas) have extremely high rents driven by high demand and a lack of supply. the monthly outlay on something like a small cooperative with an 80% loan is going to offer immediate financial relife.
It will stabilize outlay and remove uncertainty...
Rents are rising and this is causing great disruption. Renters have to face the decision each year of whether to pay more or move. The rental market is very volatile. Many people who longed to live in New York City rushed in when the market went way down during the great recession. Their new lifestyle was short-lived. Within just a couple of years, a series of rental hikes pushed many of them right back out.
Equity is built by paying down the loan...
When the mortgage is paid, a portion of it goes to amortization. As the loan gets paid down, equity builds and that money comes back to the owner when they sell the home.
Appreciation also builds equity...
Even without appreciation, the above benefits far outweigh the financial benefits of renting. But homes tend to apprciate around 4-5% a year. This added value, if present, will add to the nest-egg being built by all of the other factors.
Further Reading:
Entry-Level Homebuyers - It pays to own
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