In down economies and real estate markets it is possible for people to lose all of their equity in a home and more. Some homeowners can find themselves owing much more on their homes than the current market values indicate they are worth. If the homeowner has already made a few thousand dollars in payments on the mortgage, then this situation can be very disastrous for the homeowner. They may find themselves facing imminent foreclosure or short sales on their homes, devastating their credit ratings for years to come.
While conventional wisdom suggests that it is always better to own a home than it is to rent for your long-term financial outlook, many homeowners are learning painful lessons that this is not always true.
When home values are dropping rapidly, and there are no sure signs of stabilization in the home market, or in the economy as a whole, it might be better to seek a rental property instead of home ownership. Your landlord tenant forms may actually save you from thousands of dollars in lost equity, and ultimately from a painful bankruptcy proceeding.
It is true that while you are renting your money is not going toward building equity in your own property, but in tough economic times, your landlord may be taking tax write offs and not building their equity either. In this case, you can sell your home and take the equity you have in it before it is lost. This turns renting an apartment or house, especially if you can rent at a lower monthly lease than your previous mortgage, a hedge position. You will not be building equity, but you also will not be risking equity and loss either.
A hedge position is a financial term for taking a position that reduces or offsets risk and loss. Many people are familiar with the idea of buying gold to hedge their investments against inflation. Renting a home in a down housing market and economy is the same thing. It is a hedge against falling home prices and unemployment rates.
If you think the market will be down for a number of years, try to lock your rental in with a lease agreement for a specific period, a year or two at the same lease price. This way the property owner cannot easily remove you from the property and you do not have to worry about rent going up or having to find a new rental later on. On the other hand, when you think the market is going to turn soon, you will want to have a periodic rental with a month-to-month agreement. This way you can give thirty to sixty days notice when you are ready to re-enter the market and buy a new home.
