How To Make Sure That Your Next Home Purchase IS A Smart Investment



With the housing crisis dragging on, we’re seeing a lot of recent media attention on renting as the new “normal”. There have been quite a few articles out there about why buying a home is not a good investment, and renting is better. It may well be better for some people to rent, and some folks will probably never be able to handle the responsibility of owning a home. But speaking from the point of view of a “middle aged geezer”, who spent many of my young adult years as a tenant, I’m also aware that sooner or later most tenants grow tired of renting for a variety of reasons.

Smart investing

Make sure your next home is a smart investment © Minerva Studio - Fotolia.com

Tenants tire of restrictions like not being able to paint their own rooms, work in their own yard or plant their own garden. And not being allowed to have pets can be a big drawback for many tenants. Then there is the issue of having children and needing more space for a growing family.

And as you get a little older, you start to realize that having a home that is paid for could be pretty important in later years. There are many solid reasons why owning a home has always been “the American dream”. All in all, owning a home is pretty important to most folks at some point in their life, whether it’s a “good investment” or not. But that being said, there is absolutely no reason why buying a home should not be a smart investment.

Real estate investors have clubs all over the nation that offer education on how to invest in residential real estate, (some of it good, and some bad).  But investors make up only about 30% of all home buyers. That leaves roughly 70% of the entire market, with little access to unbiased information about what investing in a home of your own really means, and how to insure that your home purchase is a sensible one that will not leave you “underwater” and struggling to make ends meet.

The bottom line is this: All home buyers ARE real estate investors, simply because no one ever buys a home with the intention of losing money.  

There is no need to fear buying a home in any market, under any circumstances, if you utilize some simple to understand principles.

1. Pay attention to the TOTAL COST of your mortgage, not just the monthly payment.

Home loans are amortized. That means you have a monthly payment that is the same each month, but during the early years of a 30 year mortgage, most of your payment is interest, not principal. People are “underwater” because they are not paying down their principal fast enough. You can deal with this by making an additional, separate principal payment each month from the outset.

If you plan to pay an additional $50 each month, with a separate check designating “principal payment”, you’ll save thousands of dollars in interest, and cut years off of your mortgage. It’s one of the best ways to take advantage of those expensive, low or no down payment government insured loans, and still save money. Start pre-paying additional principal with your very first mortgage payment. If you’ve already got a mortgage, start with your next payment. It’s possible to pay off a 30 year mortgage in just a few years by throwing as much extra money as possible towards the principal.

2. When buying, use “average dollars per square foot” to help determine your offer price.

Buyers who are not knowledgable about this process, don’t worry, your agent probably won’t be either. 😉  This is a method I developed while investing in neighborhoods where the properties were built over a 100 year period, with lots of different types of houses. I’ve found that it works very well. I also teach this approach to real estate investors, some of whom happen to be real estate appraisers.

First, Have your agent pull sales comps for the neighborhood where you want to buy a home.

Using the absolute latest comparable sales available in that neighborhood, divide the sold price of each home by it’s square footage. For example: $100,000 / 1000 sq ft = $100 per sq ft. Try to do this with 3 or 4 recent sales. Then average all three of these together. Let’s say your average is $125 per square foot. Then multiply this average by the square footage of the home you are going to make an offer on:

For example: $125 sq ft X 1347 sq ft. = $168,375

Assuming the comparable sales are very recent, this is an excellent way for an investor to determine what I call the “real time market value” of the home. If the home is already priced below this figure, you’re in pretty good shape. If it’s priced higher, the asking price is too high from an investment perspective.

If you want to think even more in terms of a good investment, take the “real time market value” that you came up with, and shave another 20% or more off of that, and make that your opening offer. Yes it may get rejected, but the object of the game is to never pay more than you have to, instead of just assuming you have to pay the asking price. If the property you want to buy is a bank owned REO, I’d probably take 30% or more off the top, and subtract repair costs as well. (Hey, you want to think like an investor. You can always go up, but it’s pretty hard to go down on your offer price.)

3. For existing homeowners, appeal your property taxes if you have not already done so.

Or plan to appeal the year after you purchase your home. I’ve helped homeowners who are “underwater” shave significant amounts off of their mortgage payment by getting the property tax assessment reduced by as much as 50%. Neighborhoods hard hit by foreclosure are prime targets for this strategy.

Check with your local county tax assessor to find out when your property tax appeal can be submitted and to get the forms. If you need help, pay an agent to pull the comps for you. There are also companies out there who offer tax appeal services.

There are lots of ways to make sure that buying a home is a good investment. And this market is an excellent buyers market in most areas. It’s one of the best times to buy a home in the past 20 years.  Don’t let the general media fool you into thinking otherwise. After all, aren’t those the same folks who were telling everyone  how “hot” the market was back in 2008?
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Donna Robinson is a 16 year veteran of the real estate industry and a staff writer for RealtyBizNews.com. She is an active real estate investor who also provides coaching and consulting services. Contact her at donnaconsults@reihelp.com or call her office at 888-915-9968 to inquire about coaching or consulting.

Comments

  1. meg mahon says:

    Hi Donna, I have a question about property taxes.
    Do property taxes ever travel with you from the home you sold and apply to a new home that you want to buy? I have a good rate under prop 13 and would like to keep this savings if possible. Thank you Meg

    • Hi Meg, property tax exemptions or rates apply to each specific property, based on several factors, including the local tax breaks that are available, but generally do not follow the buyer, and are property specific. If you want to keep a rate you presently have, your next property will probably need to be in the same area where your current tax rates are. If you are benefiting from Prop 13, you will want to stay in the area that is subject to the prop 13 tax rules. I’m assuming that is California. If you move to another state those Prop 13 rules will not apply.

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