Evaluate Other Living Options Before Purchasing A Home

As a professional athlete you will be confronted by numerous financial decisions.

One of the most important decisions will include your housing arrangements both during your sport’s season and in your off-season.

The very first question that you should ask is: “Should I buy or rent?”

Your first thought should be about simple economics. If I can buy someone else a house — the rent payment literally pays for their mortgage — then I can buy one for myself. Why should I pay for someone else’s mortgage payments and in the end be left with nothing, or a very small net worth?

The decision should also be based on your contract.

It is imperative you have a conversation with your agent. You must have an understanding as to the guaranteed money you will receive from your contract. As we know, in pro sports that is the only amount of money you can definitely count on. For example, the base salary amounts (called Paragraph 5) in an NFL Player Contract are not guaranteed. If you are injured or released during the term of an NFL contract there would be a substantial loss of income which could affect your ability to pay for a large financial obligation such as a house.

Before making a final decision, look at both sides of the coin. After all, there are a lot of people who choose to rent rather than purchase a home. So be sure to look at the pros and cons of both options.

Here are some of the main factors a professional athlete should consider before deciding whether to buy or rent:

Location

You really want to think about where you plan on living over the next three, five, ten or even thirty years. If you plan on doing a lot of relocating over the next couple of years, then buying may not be your best option.

Employment

Your employment definitely plays a big role in your final decision. As a professional athlete you can be traded or released instantly. If you were to relocate within a year or two and sell your house it may be difficult to break even after paying your realtor their commission. With three years or more in a house the property value should almost always increase so the chance of your financial loss decreases.

Finances

Your financial situation is a major factor in buying a home. Can you afford the extra monthly payments that a mortgage and property taxes usually require? Do you have the available cash necessary to make the down payment?

Depending on your lifestyle, your cash flow situation at the end of the month plays a major role in your decision.

It’s one thing to want something, but at some point, you have to weigh your options to see whether or not you can actually afford such a commitment like a mortgage.

Every person’s situation is different, so people should take the time to look at their own situation and consider each factor separately. Other important issues include: which option offers more value (expense vs. investment)? Which option offers more stability? Which one allows tax deductions (with home ownership, you can deduct mortgage interest and real estate taxes from your income tax)?

WHY BUY?

Sense of pride

This is a “feel good” reason — but it’s true, at least for most people. You’ll have a greater sense of accomplishment when you own a home.

Steady payments

As a renter, you run the risk of your lease cost going up. With a fixed rate loan, you can set your payment and keep it there for the duration of the term. An increase in real estate taxes, which typically happens after the first year of ownership along with higher homeowners insurance premiums may increase your monthly payment.

Rate of return

Real estate has historically been a solid investment. Real estate values over extended periods of time have increased at a steady rate and can be viewed as a conservative alternative to the volatility of the stock market. The recent problems in real estate, including foreclosures, under the right circumstances could turn out to be a major buying opportunity in this down market.

Forced savings

When purchasing a home, a large down payment can be a forced savings program. Combined with a 15 year mortgage your outstanding principal will be reduced quickly.

Better credit opportunity

It will be a lot easier to apply for other loans if you already own a home. You can build equity over time and borrow against that equity if you choose to. Credit card companies typically favor homeowners, which is why you’ve probably noticed that one of the early questions in credit card applications is, “Do you rent or own a home?”

Freedom

You can do whatever you want to your home. You don’t need the landlord’s approval every time you want to paint or redecorate.

Some other advantages of home ownership include:

*Real estate taxes are also tax deductible.
*Homeowners can benefit from tax-free profits on the sale of their home (primary residence), up to $500,000 (If you are married and filing jointly and have occupied your home for any two of the last five years). If you are single or married and filing separately, you can enjoy tax-free profits up to $250,000.
*Interest on home equity loans for up to $100,000 can also be deducted from your income taxes.
*Buying a home can be a way of saving for retirement by building equity.
*Buying a home now is a rather secure investment. Because of the recent drop in home prices across the country, you can expect prices to go up over the long run — unless you bought in an extremely hot market, a place next to a junkyard, railroad or the local nuclear power plant.
*You don’t have to worry about following the landlord’s “special” rules, or being kicked out for breaking them. Note, however, that some places (condos and homes) do have rules established by the association.

WHY RENT?

Small initial payment

At maximum, you make a security deposit in addition to the first and last months’ rent. If you buy a home, you may need to put a 10-20% down payment, which is equal to several years’ rent. You can also use the down payment to invest in other projects.

Liquid cash

There are other ways to earn interest. With real estate, sometimes you can make more money, and other times you’ll make less. Imagine if you had taken the down payment back in 1990 and invested in the DJIA [Dow Jones Industrial Average]? You would have had a return of over 300%. The NASDAQ would have given you a return of over 900%.

Higher flexibility

This is a great benefit if you’re young or you simply don’t like your neighborhood any more. When you rent, since most leases are for a year or less you can move when your lease expires. You don’t have to wait for your house to sell. If you’re relocating, at worst you’ll lose your security deposit. That’s nothing compared to the possible losses incurred if you have to sell your house quickly.

Less risk

You don’t have to worry about natural disasters (earthquakes, floods, storms, and so on) that might inflict serious damage to your home. As a renter, you simply receive insurance for your personal property while the landlord repairs whatever needs fixing, or cut the rent and fix it yourself.

Less responsibility

You don’t have to worry about painting the walls, keeping up with the standards of city codes, or being disturbed at three in the morning to fix a broken water pipe.

Fixed costs

You pay your rent (which may go up 3% a year), while some utilities such as water may even be included at a flat rate. You don’t have to worry about unexpected maintenance costs or property taxes going up.

Financial insecurity

Are you in danger of being released? If you are, how long will it take for you to land with another team? Do you have the cash reserve to continue to pay your mortgage, homeowners association and other expenses of ownership? If you have any important doubts, then I would strongly recommend that you lean towards renting. Losing your job is bad enough; you don’t want to lose your home in the process.

DECISION TIME

Economics 101

Anyone who is merely looking at the bottom line should run the numbers. Houses are expensive. Yes, they may appreciate. And yes, they provide significant tax advantages. But houses have an unfortunate tendency to leak, peel and blow their furnaces at inconvenient times.

The Importance of a Real Estate Attorney

Consult with a real estate attorney before signing a purchase contract or a lease. Your attorney may be able to negotiate important lease terms. These include your ability to break the lease for a fixed sum in the event of a trade and your responsibilities for maintenance of the house and who pays for utilities. With a purchase, there are many parties involved who each are looking out for their own financial interests and you need someone who knows the intricacies of the process of buying a house and obtaining a mortgage.

Conclusion

Consult with your financial advisor and discuss which scenario is best for you. Everyone has different contract terms and housing needs so make sure you fully evaluate your situation before you make this important decision.