Sellers should keep an eye on these four building blocks for a better return
Homebuying is often a very emotional decision. It’s easy to see why, as your clients’ homes are their sanctuaries that provide stability and fulfill dreams. But there’s no reason your clients can’t also get a sizable return on their investment.
The problem is that often homebuyers don’t know how to think about their homes to get a good return. But real estate investors do. And it boils down to four basic building blocks that any of your clients can employ.
I call these four building blocks FACE, which stands for financing, appreciation, costs and equity. Here’s how your clients can use them to think like a real estate investor and get great returns.
Financing: Choose it based on the expected duration in the home
Naturally, financing is the costliest component of homeownership. If your client knows for a fact that she won’t stay in her home a long time, a lower interest rate loan, such as a 7/1 ARM, makes sense as she won’t be there anymore when it adjusts! Her costs will be lower.
If she does plan to live in her home for the foreseeable future, she should be aware that refinancing sets her back at the beginning of her amortization, as it is a new mortgage, where she will build equity more slowly.
In summary, your client would be wise to choose the least expensive mortgage for the duration that she intends to stay, and one where she won’t need to refinance, if possible.
Appreciation: Be familiar with hyperlocal trends
Appreciation is your client’s best friend for sizable returns. But not all areas increase in value at the same rate. Some areas haven’t recovered from 2006 levels, while others have skyrocketed in value by well over 100 percent.
Even one part of a neighborhood will appreciate at a different rate than another.
Luckily, there is a lot of data available, from Redfin, and others that you can use to see what the trends are for block or street level homes. Clients should search historical data on a hyperlocal level to get a read on appreciation trajectories.
Costs: Keep them in check from the start
Costs are often the leaky sieve that can determine whether a home is a good investment or not. It’s imperative that your client enlist a highly competent home inspector and do his or her best to detect any major issues ahead of a purchase.
Buying a quality home is one of the best ways to ensure a good investment.
Homes that are not attractive to others but can be fixed up to exceed the cost of improvements are excellent bets. Your client would be wise to remember to include the cost of financing improvements in his calculations, such as home equity loans.
Equity: Pay attention to it, always
Your client’s home equity is ultimately where his return or profit comes from.
According to a 2016 report by the Urban Institute, the average American has about $150,506 tied up in their homes. That’s what’s left after subtracting the debt on the mortgage from the home’s value. Of course, those numbers vary based on a variety of factors including location, age, etc.
Circumstances that can erode home equity are refinancing (if a decrease in interest rate isn’t enough to offset the losses from starting over with amortization), home equity loans and property depreciation.
Things that build equity are paying off a mortgage, paying off home equity loans and property appreciation. Clients should always keep track of their home equity, at any stage, by figuring out their current home value and then subtracting what they owe on it.
Keeping an eye on these four building blocks can mean the difference between your clients getting a nice return on their investment or not.
Nicole Hamilton is the author of The Game Plan for Homeowners: Control your Destiny and Win Big while Avoiding Common Traps, and the founder and CEO of Homeownering in Brooklyn, New York.