Owning real estate means committing to the property and everything that comes with it over the long term. Properties come in all shapes, sizes and price ranges. There is much to consider and a lot on the line, so getting it right from the start is essential.
If this is your first time venturing into buying or investing in a house, it’s normal to feel overwhelmed by the process. Here’s what you should know.
Determining Which Property to Buy or Invest In
Once you’ve decided to own real estate, the first step is determining what property is best for you. This involves doing some research to understand what drives the housing market relative to the current state of the economy. For example, supply and demand dynamics determine what properties are available and how much you’ll likely pay.
Having established availability, you must evaluate other critical considerations.
Location
Check out the area where the house is located. What’s the neighborhood like? What is the condition of the other properties on the street? Are there public amenities like schools and hospitals nearby? Researching the location gives you a good idea of the type of area you’re buying into, as well as an indication of the house’s potential.
If you’re investing, consider the property in context. A spectacular vacation home in an area people hardly visit will not have good returns. Remember, there’s a lot you can do to improve the property itself, but you can’t improve the location.
Pros and Cons of Different Home Types
Different types of properties suit buyers with various lifestyles. Picking the right house can be as important as choosing the best location. You’ll need to weigh the advantages and drawbacks unique to each property type. For example, a condo might have pet restrictions or limited parking compared to a townhouse.
Some properties are more expensive than others, so it also depends on your financial capacity. Consider these questions to help you make an informed decision:
How much space do I need? Single and multifamily homes are your best bets if you need a property with lots of room to accommodate a growing family.
Do I want the freedom to renovate? Generally, you have much more flexibility to spruce up a single-family house than other residential properties. Apartments and condos might be the most difficult to personalize as the rules tend to be stricter.
Am I willing to pay additional fees? Depending on the HOA regulations in co-ops, condos and townhouses, you might have to pay a monthly fee to cover services like landscaping, garbage disposal, playground maintenance and other amenities.
Will I want to refinance in the future? Refinancing lets you take advantage of lower interest rates, which translates into lower mortgage payments. Co-op properties are typically more challenging to refinance as they require additional steps, such as obtaining approval from the board and finding a lender that offers co-op refinance loans.
Property Valuation
Before purchasing a house, you must ascertain its actual market value. This ensures you’re paying a fair price for the property. Different valuation methods are available, but the most common revolves around comparing the sales of properties with similar characteristics in the area. This provides a suitable benchmark for assessing how much homes go for in that location.
Current Condition
Evaluate the condition of the property you want to purchase. Search for homes that look like they’ve been well-maintained over the years so you can save on maintenance and repair costs down the road. You’re more likely to get tenants if you plan on renting out the property, as most people don’t want a run-down house.
However, if you’re looking to buy a property to flip, a home in poor condition makes more sense. Similarly, you might be in the market for a fixer-upper. In these instances, assessing how much work is required to restore the house to a livable condition is important.
The 1% Rule
This rule only applies to properties that you buy for the sole purpose of making rental income. It considers the upfront purchase cost, including repair or renovation expenses, and calculates 1% of the figure to determine the estimated rent. Can you charge renters that amount in that area? If yes, then the property will likely be a good investment. If not, there’s no reason to dig any deeper.
Decide on Property Ownership
The next step is to decide on the proprietorship details. This is an important consideration because it determines who takes over the property if the owner passes away or cannot handle the responsibilities.
There are different types of real estate ownership, each with unique characteristics. For example, tenancy by entireties is only available to married couples, whereas joint tenancy allows two or more individuals to share a unified interest in the property. Take the time to understand the available options and select the one best suited for your situation.
Financing Your Real Estate Purchase
Buying a property is a significant investment and vital to determine how much house you can afford before diving into the real estate market.
Your credit score, debt-to-income ratio and how much down payment you can put up will determine your financial readiness. For instance, taking out a conventional mortgage requires at least a 3% down payment and a minimum 620 credit score. However, anything less than 20% will incur private mortgage insurance.
The type of property can also determine what kind of financing to choose. For example, you can only use an FHA loan for primary residence purchases. If you want to buy an investment property or vacation home, you’re better off obtaining a jumbo loan.
Of course, you can always pay in cash if you have the liquidity. Mortgage debt in the U.S. reached over $11 trillion as of 2022. Cash is the way to go if you don’t want to worry about making loan repayments or monitoring interest rates.
Lastly, consider the ongoing costs of owning real estate. These include property taxes, maintenance expenses, utilities, HOA dues and more. Include these in your budget and ensure your finances are healthy enough to carry them.
Choose the Right Property for You
It takes a lot of research to select the ideal real estate to buy or invest in. You can find a house that meets your expectations and preferences by considering factors like location, property valuation and financial readiness.