10 Rules to Know About Home Buying

Real Estate

This is more about basic homeowner and real estate rules than it is about the steps to the real estate process. From pre-approval to making an offer, negotiations, home inspection, and closing, the basic steps to a real estate process is not necessarily the rules to general real estate. Whether you're buying a home or just dipping your toe in the water of investments, it's important to understand some of the basic rules when it comes to the real estate industry.

#1. Home ownership is not the end-all American dream.

A large house leveraging all of your finances may be a bigger risk than you're ready for. Is buying a house really the best option for your needs and your finances now or would you be better suited to buying in the future? Does homeownership really offer the investment and rate of return that stock portfolios would? Yes, buying real estate is an investment but it's also a risky one. Depending on how long you are hanging onto the house, it could benefit you or sink you. It's important to understand the risks of buying and owning real estate before jumping in.

#2. Only by if you're hanging onto the house for several years.

If you're planning on selling the house in two years you may actually lose money. Even if the real estate industry grows, you have taxes, real estate commissions, and the cost of marketing to think about when turning around and selling a house. It's better to stay in the house at least five years or own the house for at least five years before selling.

#3. Land appreciates but dwellings depreciate.

Keeping up with the general increase of home prices can be tricky and even though the land increases in value, the house may not as much. Consider spending between 1% and 2% of the homes value on maintenance each year.

#4. Gain is good but it could be offset by maintenance and property taxes.

Homeowners insurance, property taxes, association fees, transaction costs, and maintenance all come into play when owning real estate and you really need to weigh the cost between the investment game and the money are putting into it.

#5. "The benefit of leverage is often offset by the cost of leverage"

Homeowners may put down 10% or 20% of the homes purchase price but they collect 100% of any price appreciation. The total interest paid could rival the increase in home equity. Again, it's a numbers game so it's important to understand all financial components. [Source]

#6. The mortgage interest tax deduction is overrated.

I don't know about you, but in the last few years, I've noticed that my mortgage interest makes no difference on my tax return. Our standard deductions are now over what most people would get back on their tax return. Don't consider this a big tax break when buying a property.

#7. Inflation is important to fixed rate mortgages.

Inflation will likely drive up your homes price as well as your wages but leave your mortgage payment unchanged. This means you could pay your mortgage with depreciated dollars having more income for everything else.

#8. A paid off home is really the key.

I know you seen a lot of articles that state it's okay not to pay off your mortgage, but there's nothing more comfortable than having a retirement without a mortgage payment.

#9. Remodeling may not be the best option.

I always tell people to remodel if they really want to. It might increase the value of a home but by less than the dollars you spend. Cost versus value is quite different so make sure your remodeling for the right reasons.

#10. Real estate agents want you to make a decision quicker rather than a higher price.

Think of it this way, the real estate agent's commission will be the same whether you buy now or three months from now, but the amount of time, effort, and money that the agent has put it has far exceeded what they could actually get. Would you want to work three months longer for the same commission?

That's not to say you should be rushed. For those that are selling, if you have your house on the market for an extra month but yet make more, it could be a huge win for both of you. But, if you buy a house that you're not happy with an end up moving sooner than expected, it could be a terrible mistake so don't let the agent rush you into any major decisions but it's important to understand the situation.

Read More: What makes a home appreciate?