When investing in my first mutual fund years ago, I was given the following advice: If you plan on needing this money within five years, you’d be better off putting it in a low risk investment such as a CD or, perhaps, a money market account. With the stock market going up and down constantly, that made good sense to me.
The same can be said for investing in real estate. When deciding to buy a home, if you don’t plan on staying there for at least five years, you may be better off renting. In spite of the recent market swings, real estate can still be a sound investment. All you really need is a bit of common sense:
This advice is nothing new. It’s the same in any market. Once you begin to speculate and/or overextend yourself, you become vulnerable to conditions you have no control over.
The past few years have been like another gold rush. People were speculating that property values would increase so quickly that it made sense to borrow 100% or even 103% of a property’s value. These folks were sure they would build equity quickly. The lenders, too, were sure that this would happen, and felt comfortable lending money to high risk borrowers. In reality, no one had a crystal ball.
Yes, hindsight is 20-20. Remember when a 20% down payment was required to buy a home? Lenders had good collateral, and borrowers were less likely to take risky chances with their own hard earned savings. People would save for several years in order to make a good down payment on their home. And over the years, as they upgraded, their down payment was increasingly more substantial, as they hadn’t used up their equity, paying off other debts.
Sometimes it really pays to look back in history and see what works and what doesn’t.