FAQ: Where Can I Buy to Guarantee That I Have Equity in Five Years?
There are two types of real estate buyers in the world. Those that are looking for home and those that, while they may be looking for a primary residence, are really focused on the investment aspect of buying that home. The latter will often ask where they can buy that will guarantee them a good amount of equity in the next five years.
It sucks to burst that investment minded buyer's bubble, but that sure thing doesn't exist.
All properties are affected by the ups and down of the local market. There is no sure thing when buying real estate. In general, over the long term, properties do appreciate in value. However, the real estate market crash in the first decade of the 2000's taught us that our appreciating markets can turn on us in the blink of an eye.
If you are a buyer that is selling and moving from one home to another, don't focus on the appreciation. Here's why. Your existing home is being sold in the same market as your next home. If you waited to buy that next home until it was cheaper, your existing home would also garner you less equity. I know. My husband and I went round and round about this when we moved up from a townhouse to a single family home. My husband was so angry that we paid over $620K for our new home that was now worth only $500K. He never thought about what the current value of the townhouse we sold was. The one we sold for $410K was now only selling for $299K. Funny how that works. On paper, we lost equity. In reality, we didn't lose a cent. If we did that same transaction in the down market, our mortgage payment would have been the same.
First time buyers are the ones subject to the turbulence of real estate market ups and downs. Here's how they can avoid a downturn biting them in the rear end.
- Don't do 100% financing. The larger the down payment, the more room you have to maneuver if the market falls and you HAVE to sell.
- Don't ever do an interest only loan. If you never pay down principal, you won't ever buy your own equity.
- Don't buy a home whose mortgage payment is more than the property would get in market rent. In the event you end up upside down and need to move, you can always rent out the home and cover the mortgage.
- Don't buy more than you need. Just because you qualify for $400K, doesn't mean you need to max out your budget. Buy modest when you are buying your first house. Show boating will often land you in hot water if the market crashes on you.
There are no sure things when buying the property you will call home. It's best not to even consider it an investment, in my opinion. It's not easily liquidated, like stock. You can't sell it for money, it is your shelter! If you sell it, you still have to find a place to live.
The best way to look at home buying is this: You are going to pay to live somewhere, whether you rent or buy. You might as well have control over where you live, how long you live there, and get a tax break in the meantime.