We're talking about everything real estate. We get lots of questions on this topic, so we're going to try to tackle as much as we can. But at the end, if there's anything we haven't addressed, please shoot us a message at support@afirefi.com.
Purchasing real estate can be a very, very emotional decision - much more so than any other investment you may make, especially if you're thinking about investing in your own home. But for today, we'll focus on the practicalities of buying a home.
I'm thinking about buying real estate. What's the first step? How do I start?
The first step is deciding how much you can afford before you go out. Otherwise, we fall in love with amazing places that possibly we can't afford. And the first thing we think about is to go to the beginning, where we talk about budgets and the time tested theory of Elizabeth Warren's 50-30-20 rule (she calls it a "rule," I always call it a "guideline"). It tells us that we should never be spending more than 50% of our total income on our essentials. Those essentials includes all of your expenses for your home, including:
the interest you pay to your mortgage
utilities, the electric and water
property taxes
general maintenance
depreciation, allow for 1% to 2% of a purchase price
all additional expenses, anything else other than your necessary expenses
50% of your income has to pay for everything for that house and the rest of your living expenses, including your car. You start to narrow down on how much you can afford. So if you were making $1,000 a month, you only have $500 to spend per month on your mortgage and everything else, if you're making $100,000 a month, then you only have $50,000, and so on. So that gives you the place to start to narrow down how much you can afford.
Ask the owner for bill history. How much does it cost to pay the electric on this house? If you want to run an AC and a pool? How many times a week or a month does the gardener have to come? Prompt those questions so that you can fill in the blanks. The last thing you want to do is buy a house that you love, and then find that it makes you "house poor," meaning you're spending so much money on the house that you can't get out with your friends, you can't go on that vacation, you can't get the puppy. The very first thing to do is get an idea of what price bracket you're in.
Is there a right time, or best time, to invest in a piece of real estate?
Some of the influence is going to come from your community, your society and the habits: when I lived in the UK, everyone owned their own property, even the 18 year old was paying a mortgage rather than paying rent. When I grew up in New York, everyone rented. I would say buying real estate as young as you can afford, it is a great idea. As long as you are not planning on travelling, or if so, and want to rent it out, you know you can rent it out. Owning real estate is a fantastic investment. And it always gives you a place to come home to.
How much is a property really worth?
You can you can approach your price point from a few different ways. Here are four important aspects to consider:
One, if it's a house, how much would it cost to rebuild that house? If you want to theoretically build it from scratch, instead of buying it from someone else, how much would that cost? A lot of times there's a per square foot average for a neighbourhood.
Another thing you can do is look at comparable sales, especially if you're looking at apartments. What is an apartment going for in another building or another floor? If you're looking at homes, it's very easy in certain places to just go online and find out what comparable sales are like. Do you have Zillow? That is available in a lot of countries but if you're in a place that doesn't have Zillow you just have to go and speak to people, speak to agents, look in the newspapers and do your own research.
Finally, are you planning on repurposing the house? Are you flipping it, are you planning on renting it out? Are you going to make income from this property that would all play into how much you would be willing to pay for said property?
Other thing to think about when you are trying to figure out what a property is worth, is the area. What is the average salary for the residents? Can they afford the prices that are coming in? Will they have to move out? Is the neighbourhood changing? What is the crime in the area, what's the education in the area? Again, you can a lot of times find these price these statistics on Zillow. Sometimes you also have to hunt around for this information. If people can't afford to stay there anymore, prices are likely going to come down. And if prices are going up, who would have to move into that neighbourhood? I owned a place in Florida in about 2004. At that time, the price points were not affordable to the people who lived in neighbourhood. I put my property up for sale and I got out in 2006, before the crash in 2007. Those are the things that start to show up when people can't afford the properties in the area. Either new people have to move in, or the property prices could crack.
When you're looking at buying real estate, who are some of the key people you need to take with you on that journey?
When you're going to see property, less is more. Work with an agent. They have a lot of knowledge about the area. You may feel like, well, they want me to buy the property because they want to make a commission. That is true- you have to keep that in the back of your mind. But they potentially know a lot of things about the taxes, the buildings, the community, construction contacts and policies in case you need work done, a lot of times they can even give you estimates as to what it costs to get work done. They'll know the neighbourhoods and they can give you the practical things to think about like, okay, that place doesn't have enough bathrooms, you're gonna have to add a bathroom. So, I would say a good qualified agent. Again, if you're in a place that that has a lot like multi listing agents, they rate the agents, and the ratings tell what the agent is good for. This way, it's usually possible to reliably pick out a good agent. If not, go by word of mouth, and you try to find someone that matches up with what you need.
And then bring someone that knows you well so that you can have fun with it. As much as it's an investment, it's also a fun investment. Bring someone that can enjoy the journey. That will help you sort out which properties are good for you.
Should I be saving towards as big a down payment as possible?
The down payments will be somewhat dictated by the banks, or by the lender with whom you may be working. They will have a minimum, and that fluctuates with the economy. Sometimes they'll let you have as low as a 2% or 5% down payment; at the other extreme it could be a 30% down payment. 30% down is ideal, but not always possible. You can put down 10% and establish your mortgage. Then, while you're making up your expenses, put in extra money to pay down your mortgage each month. This gives you flexibility to have the bigger mortgage if you need it. Make sure you're staying within your 50% expenses with everything including that house, your car, and all other monthly expenses. Then you can take any surplus and pay down the mortgage. Perhaps you can reduce a 30 year or 20 year mortgage, and pay it off in 15 years instead.
The Real Estate Ladder
A lot of times you want to get in on the "real estate ladder" as young as you can. The theory is that like investments in the stock market, real estate, over time, goes up in value. I always say "investments track humanity," and we're always moving forward. And real estate by nature, if you're in a good neighbourhood, if you've bought a good property, even if prices come down, eventually they start to move up again. It's just like investing in the stock market, there's no one specific day that you can invest. If you pick a good price point and you make intelligent decisions, your real estate should increase in value. Getting in sooner rather than later means that if you're buying a property now, it should be at 100, it should be worth 120 in the future. Instead of waiting, then and paying a higher price, it's better to start now so that you are in that real estate ladder. If you want to move to a bigger property, you can sell the original property and buy a bigger property. This way, your property is going to be tracking other property prices. Once you enter into a real estate investment, whether it tracks up or down, you are in the investment market, and then you have a marker in that market.
This is the first part in our series on everything to do with REAL ESTATE purchasing and investing. Read Part II here.
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