One of the biggest decisions a person will make is whether or not they will buy real estate — maybe a house, rental property, duplex or apartment building.
Making such a decision can be very emotional, although it’s very important. It can be both exciting and frustrating to make an offer on a property and be rejected and then to bid on another property and gain exactly what you want.
Real estate buyers have been on an emotional roller coaster since early 2021. The global pandemic caused a tremendous amount of concern about the economy — so much so that many took a break from considering any sort of real estate purchase. But when people started working remotely because of the COVID lockdowns, they wanted larger houses or bigger apartments so they could have home offices. In addition, low-interest rates and tight inventories sparked multiple offers on properties that rapidly increased prices.
But property sales are slowing because the Federal Reserve increasing interest rates with the goal of stemming the rapid rise of inflation. As a result, properties are no longer receiving multiple offers, and in many instances prices are declining. Potential real estate investors may be starting to think this is the perfect opportunity to buy. It all depends on what you require and where you stand financially. The following are some things to consider to help you determine whether you’re ready to invest in real property.
Is it time to make some long-term changes in your life?
Purchasing property is a big deal. If you plan on switching jobs, getting married or having children, you may want to delay buying real estate. In just a few years your requirements will probably change. When you do buy property, should you live there long enough to allow the property to appreciate to the point that you make up your purchasing costs? Under normal circumstances, that will take about five years.
The last thing you want is to purchase property and have to move immediately because you accepted a new job. The most opportune 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 property — and everything that goes along with it — is expensive. As you determine your budget and the cost to invest in real estate, be sure to take into account property taxes, insurance, dues and maintenance costs. And don’t forget about utilities.
The principal, mortgage interest, taxes and property insurance should be less than 28% of your gross income. Discussing your real estate purchase with a financial adviser is a good idea.
What about putting money down?
Most of the time, you need a down payment to borrow money from a bank or mortgage company to purchase real estate. How much money you put down depends on the kind of real estate you’re purchasing. Lenders usually require at least 3% down, but buyers sometimes like to make a 6% down payment.
By putting down 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 is, the less your loan will be — and your monthly payments will be lower, too.
What’s your credit score like?
A good credit score will help you obtain a mortgage loan. A credit score greater than 670 is what most lenders want from borrowers. Credit scores between 740 and 799 are considered very good. A score greater than 800 is excellent.
You want to have an appropriate credit score before you apply 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 get the balances down. Don’t forget that your credit use affects your score. You shouldn’t close credit cards that you’ve had for a long time — just be sure to pay down their balances.
In the final analysis, only you really know when it’s the right time to purchase real estate.