You might have heard this before, but I will tell you again. The purchase of your home, in most cases, will be the biggest financial investment you will ever make. So before you decide to purchase a house, you should ask yourself how long do you intend on living in that house?
Even though in most cases buying a home is better than renting one, only after 5 to 10 years does a homeowner really get to see a return on their investment. It isn’t difficult for someone to lose money in the real estate market (remember what happened to investors and homeowners during the real estate crisis in 2008?).
Which may sound counterproductive coming from someone that makes money when you buy, but the facts are facts.
It’s important to be able to calculate what your mortgage payments will be. You can use this mortgage calculator by Bankrate to do so.
Let’s get some practice and take a 30 year fixed rate loan, at a loan amount of $240,000 with a 4% interest rate (view today’s mortgage rates here) which would make your annual payments total up to $13,750 or 1145.83 monthly.
The first year’s principal vs. interest split has you paying $4,226 principal payments (the original sum of money borrowed) and $9,523 interest payments (the charge for the privilege of borrowing money). So basically. the first few years of paying your mortgage you take home very little equity.
Only until year 14 of that mortgage do you the payments start to favor principal over interest, hence the very important question “How long do I plan on staying in this house?”
But don’t get discouraged, I have good news too, home buying isn’t just for the people looking to stay in a house for the rest of their lives. What if I told you there are ways of buying real estate without living on the property longer than 5 years and still make a profit? Sounds too good to be true but it’s not, it just takes more work than finding the perfect kitchen and a closet that will fit all your clothes.
It takes some serious research on the total costs it takes to maintain that property and the time to pay off that mortgage. This will make or break whether or not a buyer qualifies for the mortgage they are looking for, Zillow has a debt to income calculator you can use to see more or less how much of a mortgage payment you can afford.
The trick is to sum up your monthly costs and then compare them with the average rent price for a house similar to yours. This is important for those who don’t know where they will end up in 5 years. With rents that will cover your monthly costs and then some, you can always rent the sucker out and make some passive income. It is an investment, right?
Now for some more good news, you don’t even have to do any of the research! Giving you know a qualified real estate professional, and when I say “real estate professional”; I don’t mean your cousin Tommy the real estate agent that won’t stop calling you since he found out you were in the market to buy. I am talking about someone in the business of saving/making you some money!
Remember, real estate is an investment, there is no room for being nice and working with someone who is a good friend or family member. I will even go a step further and say you can save thousands of dollars per purchase working with someone that you are 100 percent sure knows what they’re doing. You might say “but Nick, how do I know I am working with someone that knows what they’re doing!?”
You didn’t have to yell, but I was hoping you would ask me that. That’s why I created a list of 7 questions to ask your realtor as well as 4 tips to help you save some money and find you the best deal. Remember you are investing.
1. What areas have the least amount of vacant homes?
Regardless of it being mostly renters or owners, you want an area in high demand or has the potential to be in high demand. Realtor.com came up with a great list of the top 10 housing markets constrained by tight inventory.
It is not a guarantee that pre-foreclosed or bank-owned properties are good deals but this will provide you some options as well as some extra information about the area.
3. Have you looked into any for sale by owner properties in this area?
Again, no guarantees but it is always wise to view all your options. You can use this website to search for properties sold by owners in your area.
4. Can you please provide me with a spreadsheet of the total costs to maintain the properties?
Once you have a list of homes you are interested in then ask the question.
Important: Here is where you know who you’re working with, if your agent doesn’t have a total cost spreadsheet on hand you are working with the wrong agent. Additionally, if they do not give you worst case scenario numbers as well as updated annual property taxes… Find you a new agent.
5. Which property offers the best deal?
If you’re looking at buying a home as an investment, the numbers are everything.
6. Which offer price do you think will be accepted and will save me the most money?
Ask this question once you have found 2 or 3 good options and you are ready to put in your offer. If you know your agent is top notch and looking out for your best interest, I would adhere his or her advice if they have proven themselves to be professionals.
7. Is there anything from the inspection that we could use to bargain the price down?
Ask this question after your offer has been accepted and you have completed the appraisal and inspection.
Important: Typically, with properties that are good deals you will find that the appliances might be outdated or even non-functional. This is a great opportunity to ask for a $1,000 to $5,000 credit at closing (depending on the price of the property). Sellers are typically willing to play ball to avoid putting the property back on the market.
Tips to Save:
- Don’t fall in love and don’t be afraid to walk away. (From both a property and a realtor)
- Don’t rush to put in offers but on the same token, remember, good deals don’t last. So if you find one be ready to move! (Don’t let your agent’s work go in vain.)
- Do your research before having your realtor look up houses.
- You can use Zillow and Trulia to get the ball rolling and speed up the search process (your agent will love you for this).
This will help avoid the wild goose hunt so many buyers find themselves in because they’re unaware of what they want. I suggest you find 1 or 2 cities near you worth investing in as well as the size and the more or less amount you will be qualified to purchase.
- Know where to compromise. If the size of the kitchen is the only thing stopping you from making 10’s of thousands of dollars… Well, you probably already know my opinion on the matter.
If you read the 7 questions and 4 tips I gave you, congratulations! You are now ready to begin investing in real estate and purchase a property! I hope I didn’t piss off too many of the unprepared real estate agents, but I know the great agents out there will appreciate this. There are a lot of investors out there making significant profits every day in every market, and I think with a little education and the right guidance, you can get off the sidelines and join in the celebrations.
Author: Nicholas Lara | Mortgage Expert and Real Estate Agent in Miami, Florida