Is Buying a House an Investment?
Is Buying a House an Investment and other common housing questions we receive at Rate Marketplace. If you’re thinking of buying a home, the financial side of the equation is probably foremost in your mind. After all, buying a house is likely the largest single financial transaction you’ll make in your lifetime. However, there’s another important consideration, too, and that’s the time commitment you’ll need to make in order to keep your finances healthy over the long-term.
How to Buy and Flip Houses
A majority of homeowners, and especially first-time buyers, will likely have plans to upgrade or move in the future, typically for more space or better work and personal opportunities. However, if you move too soon, you risk losing money on the transaction– possibly a lot of money. Avoid these common mistakes if you’re thinking of flipping a home:
Not Enough Money
Real estate investing is costly. The first cost is the property purchase. While low/no money down financing claims abound, locating a legitimate vendor is difficult. You also pay interest if you finance the purchase.
Even after the Tax Cuts and Jobs Act, interest on borrowed money is still deductible, although not fully.
Every dollar you pay in interest increases the amount you need to sell to break even.
And only the interest on a mortgage or HELOC used to buy a flip house is deductible. Your principal, taxes, and insurance payments are not.
Research your mortgage alternatives thoroughly to select a lender that offers affordable interest rates. A mortgage calculator allows you to compare the interest rates offered by various lenders. Of course, paying cash avoids interest, but there are also property holding fees and lost opportunity costs.
Making a profit is more difficult now. According to ATTOM Data, profit margins fell to their lowest level since 2011. That doesn’t imply there isn’t money to be made (ROI was 40.6%), but caution is essential. In 2019, the average gross profit on a flip was $62,900, but that’s gross.
Not Enough Time
Renovating and flipping houses takes time. Buying the ideal property might take months. After you buy the house, you’ll need to fix it up. If you work during the day, demolition and construction can take up your nights and weekends. The costs of compensating others will diminish your earnings.
After the work is completed, you’ll need to schedule inspections to ensure the property meets local building requirements. If not, you’ll have to invest more time and money to do it right.
Not Enough Skills
Builders and skilled professions like carpenters and plumbers often flip properties as a side hustle. They know how to find and fix a house. Some of them have union jobs that pay them during the winter while they work on side ventures.
Sweat equity is the true money in house flipping. You can flip a house if you can hang drywall, roof a house, and install a kitchen sink.
Not Enough Knowledge
To succeed, you know how to pick the appropriate property, at the right price. Buying at $60,000 and selling at $200,000 in a community of $100,000 homes? Not often enough in today’s market.
Even if you score a fantastic deal on a foreclosed home, knowing which upgrades to perform and which to forego is critical. To avoid a money hole, you must also comprehend the applicable tax and zoning legislation.
Not Enough Patience
Professionals wait for the ideal property. They buy the first house they see. Their next step is to hire the first contractor who submits a quote. Alternatively, they use a network of pre-approved contractors.
Inexperienced sellers hire a realtor. Professionals use “for sale by owner” to cut costs and increase earnings. Inexperienced painters plan to slam on a coat of paint and make a fortune. Professionals know purchasing and selling residences requires time and money.
How Do Mortgages Work?
Is Buying a House an Investment? The mortgage industry structures loans in such a way that, in the early years, your monthly mortgage payments are largely going toward paying interest only, leaving the principal balance on your home untouched. After the five-year mark, however, you’ll see more of each monthly payment applied to the principal you owe on the home. At this point, it generally becomes safe to assume you have enough equity in the home to ensure you won’t lose money by selling the property.
Finding a Great Lender
Is Buying a House an Investment? Every buyer’s situation is unique, of course, and consulting with your mortgage lender or other financial professional can be beneficial if you find yourself needing to sell sooner than anticipated. Although the so-called “Five Year Rule” is a good benchmark for making sound real estate decisions, there may be options on the table that suit your particular situation.
Image via Flickr/americanadvisorsgroup