Real estate markets carry the same traits as other markets. There are buyers and sellers coming together at a price point where both are willing to trade.
Like any other commitment, there are questions to ask and practicalities to consider. Seek to understand rather than shun ownership.
Here is a short list of questions to answer to get you started:
What is the property worth? Emotions will play a larger part in pricing real estate than stocks. A home is someone's space in the world. Holding memories and secrets, a hug when arriving back from a trip, a gathering spot. People's feelings towards a potential home is powerful. You would have been lucky to own a flat in Notting Hill before the movie with the same name came out.
How much “home” can you afford?
General rule of thumb is to spend no more than 30%-40% of gross income on all housing related costs. This feeds back into the 50/30/20 rule.
How do rental prices stack up against purchase prices?
What would the cost of a monthly mortgage be versus the monthly cost of rent for a comparable property? Sometimes market forces make renting more expensive than owning.
Can the property help pay for itself?
What is the rental market for the full home or a single room? Can you use it as a home office or grow plants or trees for re-sale?
Do the prices in the area make sense to you?
Does the average salary of residents versus the average cost of housing make sense to you?
Will the existing community be able to afford to stay?
What do you think is feeding interest in the area?
What are the property taxes and how do you feel about the local government, their history and the outlook?
Can you afford the maintenance?
All the things we care about need maintenance... Friendships, pets, children, cars, homes.
One rule of thumb is to ensure you can afford 1% of the purchase price of a home to conduct maintenance each year. I double that to 2% to allow for design, technology and purpose to keep up with my homes changing life cycles. Often it isn't the initial costs which cause stress but the unanticipated maintenance.
The Future: Exit Strategies
Markets are collections of thoughts, outlooks, opinions and cash flow of countless people. Investments need to consider the question: If you wanted or needed to sell, could you? Real Estate could take two weeks or two years to sell. If you were not able to sell, is there a selection of reputable management to handle renters and repairs for you? Who would be your renters?
What stage of life are you in?
A well lived life is going to involve some risk taking but consider the stage of life you are staring down. Hint: its not an age thing. When my mother became ill, I liquidated all my investments so I didn't have to manage them - And so I had cash on hand if needed.
Pssst, Renting is not without Risk. If you are a renter, you are at risk of rental prices increasing and pricing you out of the area. If you love an area consider committing to it.
Like all investments, invest only in what you understand and enjoy.