One of the most important decisions a person will make is whether or not to buy real estate – perhaps a house, rental property, duplex or apartment building.
Making such a decision can be very emotional, even if it is very important. It can be both exciting and frustrating to bid on one property and be rejected, then bid on another property and get exactly what you want.
Home buyers have been on an emotional roller coaster since the start of 2021. The global pandemic has caused tremendous concern about the economy – so much so that many have taken a break before considering any type of property purchase. But when people started working remotely because of the COVID lockdowns, they wanted bigger houses or bigger apartments so they could have home offices. Additionally, low interest rates and tight inventories prompted multiple property offers that quickly drove up prices.
But home sales are slowing because the Federal Reserve is raising interest rates in an effort to stem rapidly rising inflation. As a result, properties no longer receive multiple offers and, in many cases, prices drop. Potential real estate investors may be starting to think this is the perfect opportunity to buy. It all depends on what you need and your financial situation. Here are some things to consider to help you determine if you’re ready to invest in real estate.
Is it time to make some long-term changes in your life?
Buying a property is a big deal. If you are planning to change jobs, get married or have children, you may want to put off buying real estate. In a few years, your requirements will probably change. When you buy a property, do you have to live in it long enough to allow the property to appreciate to the point of offsetting your purchase costs? Under normal circumstances, it will take about five years.
The last thing you want is to buy a property and have to move immediately because you’ve accepted a new job. The best time to make a major investment is when you have stability in your life and career and are ready to settle down.
Does your budget allow you to buy real estate?
Real estate – and everything that goes with it – is expensive. When determining your budget and the cost of a real estate investment, be sure to consider property taxes, insurance, dues and maintenance costs. And don’t forget the utilities.
Principal, mortgage interest, taxes and property insurance must be less than 28% of your gross income. Discussing your home purchase with a financial adviser is a good idea.
What about depositing money?
Most of the time, you need a down payment to borrow money from a bank or building society to buy real estate. The amount you invest depends on the type of property you buy. Lenders usually require at least 3% down payment, but sometimes buyers like to put down 6%.
By depositing 20% of the purchase price, you can avoid paying mortgage insurance, which covers the bank or mortgage company if you fall behind on your payments. The larger your down payment, the lower your loan will be and your monthly payments will also be lower.
What is your credit rating?
A good credit rating will help you get a mortgage. A credit score above 670 is what most lenders expect from borrowers. Credit scores between 740 and 799 are considered very good. A score above 800 is excellent.
You want to have an appropriate credit score before applying for a loan. If your score isn’t high enough, the best way to improve it is to pay all your credit card bills on time and reduce balances. Remember that your credit usage affects your score. You shouldn’t close credit cards you’ve had for a long time – just be sure to pay off their balances.
In the final analysis, only you really know when it’s the right time to buy real estate.