As you can imagine, the most important thing in real estate is that you want your wealth to improve as a result of taking on property ownership. And this is a high risk venture. To better your chances of having that venture pay off and improve your wealth, here are some things to keep in mind:

1. Only buy property if you are very sure that you will own it for at least five years. The longer you live in that property, the better.

2. Don’t buy more than you can afford.

3. Take the time to educate yourself on real estate risk issues and do the hard work to mitigate the known issues that cause risk.

Looking over the first point, you may wonder why you shouldn't buy property that you'll only own for a shorter period of time. The answer is relatively simple — when you buy property, you want the value of it to increase over time, and in a normal market, it will. But if you only own the property for a few years, that doesn’t give it much time for the value to increase. For example, let’s say it goes up in value $5,000 in two years. That may sound good, but the purchase and sale of real estate generally has significant transaction costs on each side. When you purchase, you pay closing costs, escrow costs, loan fees, transfer taxes, etc. that will add up to several thousand dollars. Then, when you sell, you pay sales commission, give repair credits, pay for title insurance, etc. which will probably be at least 7%-8% of your sales price, which typically comes out to around $7,500.

This means if the property price goes up $5,000, but you have to pay out $7,500 in fees on your purchase and sale, you are worse off financially by $2,500! The breakeven point is usually at least five years, so if you do not plan to own the property for at least that long, you probably will be better off staying as a renter of someone else’s property until you find a place you're ready to commit to for at least half a decade.

The second point, “don’t buy more than you can afford,” would seem to be common sense, but you can’t imagine the number of people who stretch every dollar to buy real estate, as detailed by Mark Fitzpatrick . A lender also may tell you that you are qualified to purchase a property up to a certain amount, but that doesn’t mean you have to spend that much. You want your home to be an asset, and if you can comfortably afford the monthly housing expense (mortgage payment, property taxes, insurance, HOA fees), it is an asset. On the other hand, if you buy too much and can’t afford your other bills or are stretched every month, it is a liability. Even someone who isn’t a Certified Public Accountant knows that assets are much better than liabilities, so don’t overspend!

Finally, real estate purchasing and ownership has significant other risk issues. Everything from buying a property in bad condition that takes all your money to fix to not properly reviewing your title insurance policy and having a significant title problem could pop up as huge obstacles. There are also issues with people in condominium communities being hit with special assessments from homeowners associations, individuals not having the proper dwelling insurance in place when there is a fire or burst pipe, and many other things that can go wrong.

The way to reduce these types of risks is to properly educate yourself on those risk issues before you purchase property. Here’s a Zillow article I wrote on this issue: Want to Make Smart Wealth Building Real Estate Decisions?

This year may be the year for you to stop paying rent to someone else and start earning some home equity, but it is important to realize that owning a home is not always a winning situation. It can also leave you in a much worse financial position than you believe. Your taking the time to learn and make smart purchases will hopefully help you earn that wealth for your future.

The last major plan, the Home Affordable Refinance Program, or HARP, let homeowners who were current on their mortgage, but with higher than market interest rates, and those who were underwater on their mortgage, refinance those loans to lower rates. This was supposed to help those who were not already able to refinance on their own, due to some issue with their credit, income, or the value of the property. That plan also was just for loans owned or backed by Freddie Mac or Fannie Mae, the government-sponsored mortgage agencies. Those two entities back approximately half of the $10+ trillion in mortgage loans in the U.S., though most of the loans they back are under $417,000, the conventional loan maximum amount.

HARP followed several other mortgage relief plans that have been attempted in the past few years, such as HAMP, another Hope for Homeowners, and Making Home Affordable. In addition, there have been many state and local plans to help people in financial trouble. But while those various plans may have helped some homeowners, they have not helped nearly as many people as they were originally projected to assist. Additionally, these plans have slowed the market-clearing mechanism of the housing market, which many economists say is needed to find the housing bottom. After all, once the bottom is hit, we can start heading upward again.

But what do the presidential candidates think of the current president's plan? According to The Wall Street Journal Mitt Romney has said that these mortgage programs prop up the housing market and that the government should “let the housing market hit the bottom.” John Boehner, the speaker of the house, said, “I don’t know why anyone would think this next idea is going to work” when all the others have not. But President Obama had a different opinion. “It is wrong for anybody to suggest that the only option for struggling, responsible homeowners is to sit and wait for the housing market to hit bottom,” he said. But who's strategy is right is up to each individuals interpretation of the facts and what happens in the years ahead.

The new plan —HARP 2.0 — differs from the original HARP because all mortgage loans would be eligible for refinancing to lower interest rates, rather than just Fannie and Freddie loans. But here’s the catch: any loans refinanced under this program would be funded by the Federal Housing Administration. And yes, “federal” means that they are essentially backed by you, the taxpayer. In essence, this new plan, if implemented, will have the U.S. government take on additional risky debt that could end up costing taxpayers tens or hundreds of billions of dollars. Some say this is a political ploy, but regardless of your political affiliation, we are all taxpayers first and need to reduce costs to the government, not increase them.

But fret not because this plan is most likely not going to be approved by the U.S. Congress, so it will probably never be implemented. It also would hurt private mortgage security bondholders who took the risk and lent money to these borrowers. While many might think those bondholders are rich Wall Streeters, in reality those bond holders include your grandparents, parents, and maybe even you via the mutual funds you hold in your 401(k) plan. The end result is that when the government subsidizes, one person wins/benefits, while another person loses/pays. This means that if you are not a beneficiary of the program, you're essentially chipping in to pay for your neighbor!

Either way, the government has tried numerous foreclosure prevention plans, but none have worked very well. It is horribly unfortunate that anyone would ever have to lose their home to financial reasons, but that's the cold reality of how our banking system works. And regardless of the recent economic pain, it works pretty well and provides the average American a relatively fair standard of living. Remember, these tough times will pass, and for all of our sakes, let’s hope the economy and housing market start to improve sooner rather than later.

We're already a week into 2012, but let's take a moment to reflect on 2011. There were lots of great article posts last year, and we wanted to recap a few of them to make sure you don't miss out on any important information.

Renting Now, Landlord of the Future? – Here, we discuss what you should consider if you are planning to be a landlord, how to educate yourself on property ownership, and the current state of the market for potential property moguls. Renting Now, Landlord of the Future?

Are Rents Heading North – This article focuses on the issues and financial items that will impact rental prices during 2012 and over the next few years. Are Rents Heading North

Selecting a Roommate – Interested in rooming with someone to split the bills or just to have the company? This article details how to evaluate your potential for harmony or issues when considering a co-tenant. Selecting a Roommate

Homeownership Is Not Always the Best Choice for Young People – In this blog, we discuss how you should not rush to buy real estate. Instead, you should educate yourself and wait until your time is right to be a long-term property owner. Read for more information on when to consider homeownership! Homeownership Is Not Always the Best Choice for Young People

Avoiding Rental Disasters – No one wants to deal with the hassle of a rental disaster, so in this article, we discuss potential disasters and what you can do to help minimize those disasters at your residence. Avoiding Rental Disasters

Overall, there is plenty of good, useful, and interesting information in all the past articles. So when you have time, peruse through the RentersInsurance.com blogs to find the article information that appeals to you and your situation. Enjoy!

As reported in the media in recent months, rents have started to rise and are projected to continue rising for the next several years. Some people may believe that means they should buy a home to “lock in” the long-term lower costs of homeownership and appreciation in value. This could be true, depending on your circumstances and if you are creditworthy and can finance the purchase of a home. However, keep in mind that in the early years of homeownership, it is generally much more expensive to own than it is to rent. There are many items and issues that an individual leasing an apartment may not consider or think about until they have moved into their new home and the bills start coming.

Here is a list of just some of the items you could end up paying for if you buy a home:

• Down payment. The first item you will need is a downpayment to make your purchase. It could be as little as 3.5% percent of the purchase price, or $3,500 on a $100,000 home. Many people, however, try to put down 20% when they buy to avoid a monthly expense called Private Mortgage Insurance, described below. If you do buy a property with a 20% downpayment, that could be as much as $40,000 on a $200,000 loan. As you can see, a downpayment is a big hurdle to buying property.
• Closing Costs to Purchase. There are also closing costs to be considered when you purchase. They run from $2,000 to $20,000, depending on the state you live in, the loan terms you are receiving, and the cost of the property. They cover title and escrow costs, prepaid taxes, loan origination fees, discount points, appraisal, HOA fees, etc. These can really add up.
• Renovation. You also will most likely be doing some renovation when you buy the property, even if it is in good shape when you move in. You may paint the interior, change out the carpeting, and buy a new refrigerator or dishwasher. There are many other small items you probably will buy too, such as drapes and window coverings, plants, decorative items, throw rugs, and many other items to make your house feel like a home. Put together your shopping list so you have an estimate of the costs.
• Mortgage Payment Above Prior Rental Payment. Once you move in, you will probably find that your mortgage payment is higher than your prior rental payment. You can have your real estate sales professional or mortgage lender calculate this amount early on in the process so that you are aware of the upcoming increase in monthly costs.
• Property Taxes. If your mortgage payment alone was not higher than your prior rent, when you add in the property taxes that you will now pay, they will most likely put it over the top. Property taxes vary by state and city and generally run about 1% to 3% per year of the purchase price of the real estate. Since they can vary so widely, make sure to confirm with the county or your real estate professional how much these taxes will be once you purchase the property. Remember that the amount can be very different from what the prior owner paid, depending on where you live.
• Property Insurance. Your property dwelling insurance will most likely be much higher than your prior renters insurance too. You can get an estimate of the amount from a licensed insurance agent in your area. Depending on the type and coverage, it can run from $150 to $850 per year.
• Private Mortgage Insurance. If your downpayment is less than 20%, you will have to pay PMI until you have at least 20% equity in the property. A rough estimate is that it will cost you an additional $60 or so per month per $100,000 of mortgage money that you borrowed. Here is some additional information on PMI too.
• Repairs and Maintenance. As an owner, you are also now responsible for your own repairs. The landlord probably paid for these before, but now these costs are paid by you. Depending on the condition of the property, a rule of thumb is 1% to 2% of the property value per year will be spent on maintenance and repairs. This could be from $75 per month to $250 per month as a rough gauge.

These are not the only costs of homeownership. In fact, depending on the property you buy, there could be many other expenses, like landscaping, fences, new heating systems, etc. The best course of action is to learn as much as possible before you buy and talk to property owners about the costs of homeownership. Over long periods, your costs should become less expensive than renting, on a relative basis, because your mortgage stays constant while people still renting are subject to rental increases. But overall, the better understanding you gain of the costs, the better off you will be to comfortably absorb those higher costs once you join the world of homeownership.

To increase the chances of your ability to purchase a home in a few years, you should learn the buying process and make yourself as creditworthy as possible well before you plan to start house shopping. It has been getting much harder for individuals to buy real estate due to tough new mortgage financing restrictions. And because of this tightening of credit, to increase your chances that you will be able to buy a home, you should take some steps to better prepare yourself. 

The first item you should do is find out what your current credit profile looks like. There are two ways to do this:

Get Qualified by a Lender - You will need to meet with a mortgage lender – a bank, independent mortgage broker, or mortgage lending company – so they can qualify you for a loan. They'll look at your credit score, your debt-to-income ratios, and your assets, like cash in the bank, stocks, or bonds. They'll put all your information into a computer program to determine the approximate amount you can borrow to buy a home, and hence the maximum value home you can purchase. 

It is a good idea to do this sooner rather than later. This way, they can advise you on how to get your finances in order so that you will be as creditworthy as possible when it gets closer to your time to buy. 

Get Your Own Credit Report – If you just want to know how your credit report looks, you can do that too. Your credit report is the accumulation of all your past payments and other history from your credit card use, car loans, and leases you’ve signed, as well as many other factors that are collected by the three national credit bureaus. You can get a free copy of your credit reports at AnnualCreditReport.com. You can also view the RentersInsurance.com blog article “Why One Should Consider Their Credit Report Their Most Valuable Asset” for more information on your credit report and how they work. 

Next, since you hopefully know what you can afford from the lender qualification, you should contact and interview a few local real estate sales professionals. They can help you compare the amount for a house you can afford to what neighborhoods or communities are realistically in your range. Then, you can occasionally drive and walk those neighborhoods, go to open houses, check out the school ratings, and determine the target area where you would like to live. If none of those affordable neighborhoods are places that you would like to own a home, you probably need to keep improving your credit, income, and assets for a few more years. Talk to the lender again on what you need to do to be able to afford a home in the neighborhood where you would like to live. This will let you know if you are even in the ballpark of reasonable purchase options. 

Also, start saving your downpayment. Set up an automatic investment plan with a bank or mutual fund so that some of your money goes straight to savings each month – this way, it's out of your hands to spend. Add more money to this balance each time you get paid. The more downpayment you have to buy a place, the better chances you will have of being able to purchase and the better terms you will get on your loan. Consider asking your parents to match – and maybe hold outside of your reach – the contributions you are putting away to save for a home. They might even throw in some extra downpayment money if they see you are being responsible about preparing to purchase a home. 

Terminate the unused gym memberships, pay off your car loans, and practice buying only what you need instead of what you want.  All this will help you to save. 

Finally, realize that property ownership is a long-term deal. You do not want to buy real estate if you are going to own it for less than five years. Therefore, while you should always be saving money to buy a home, it is better to hold off and keep renting until you are positive you can buy a home you will love for many, many years. 

Owning a home can be a great long-term wealth building opportunity. And there are additional benefits like stability in your life, ability to change the home to your liking, and earning equity. Start taking the right steps today so that you can purchase a great place just a few years down the road.

Article by RentersInsurance.com – Protecting the Renter