Setting your investment criteria is one of the most important things you will do when preparing to purchase a home. However, it’s vital that you understand that your criteria is only good if you stick to it. You must throw emotion out the door if you are going pay significantly less than your neighbors.
Sometimes there will be multiple offers on properties which can create a bidding war. When you’ve reached your mark, STOP. Do not “fall in love” with a home based on a feature it has; you can always add it to the house you ultimately buy. Never be afraid to walk away. Not walking away can be a costly mistake. As Kenny Rogers said, “You got to know when to hold ’em, know when to fold ’em, know when to walk away and know when to run.”
What can you afford?
If you are getting a loan, your lender has already determined how much you can afford. Your Pre-Approval letter will state that they say they will loan you a percentage of the purchase price (Loan to Value or LTV) up to a certain price. Let’s say for example your lender approved you for an 80% loan to value loan on a $100,000 purchase price. This means the most they are willing to give you is $80,000, up to 80% of the purchase price of the home. Does this mean $100,000 is the max you can pay? No. It does mean that if you go over that price, the % of loan (or leverage) will go down. If you pay $110,000, the lender will not give you $88,000 (leaving the remaining $22,000 for your cash). They will instead give you only the $80,000 (leaving the remaining $30,000 for your cash).
Choosing the Area
Choosing the area is very important. Real Estate values vary from location to location. You cannot expect to get a house in Santa Monica for the same price as you would in Lancaster. They are different markets, so knowing your price range can guide you to the areas that fit your criteria. In determining an area, factor in how far away it is from your work or if its an investment how far away your primary residence is. Make sure you are prepared for the commute or the ability to check on or service the property if you rent it.
Then narrow down your geographic criteria. Consider several key factors in determining your area:
- Proximity to schools
- Proximity to hospitals
- Freeway access
- Proximity to dining and retail
- Pride of ownership in the neighborhood
- Crime Rates in the Area
- Proximity to Parks and Recreation
- Proximity to Business Centers
Do you want a house or a condo/townhome?
Determining whether you should get a condo can depend on many things. Ultimately, there are benefits to both, so you need to make sure you make the right choice for you. In most markets, more homes sell each month than condos. This is because there are flat out more homes than condos for sale in any given area. Also, in most markets, this is a function of there being more demand for homes than condos.
Some things to factor into your decision here are:
- Do you want a yard? You can get a yard with a home, but then you also have to maintain a yard. They are fun to play and entertain in, but some condo communities also offer green space, bbq’s, playgrounds, basketball or tennis courts, pools, and more.
- Costs – Most of the time, a similar quality condo will be cheaper than a home in the same area. This is for a lot of reasons; size, multi-family living vs more privacy, building vertical, etc. So you can typically expect to save on the price with a condo. However, condos have HOA fees to pay for common area expenses. In some HOA’s this can be several hundred or even thousand per month. Make sure you check HOA fees before buying a condo
- Pets – Some condos do not allow pets, or restrict breeds. If you have a pet, make sure yours can live in the condo you may be considering
How many bedrooms and bathrooms?
This might seem obvious but in actuality, multiple setups could work for you. For example, do you need two full bathrooms or are you willing to settle for one full bath and one half bath if you find the right home at the right price? Is the extra bedroom for your home office crucial, or would a dedicated work space in a den, loft, basement, or garage also work for you? Although you should try and define your investment criteria as best as possible, consider a flexible living setup.
What amenities can you not live without?
Decide what are your wants, needs, and must-have’s before you’re in a position where you want to make an offer. If you wait too long to figure this out, you might be too late to make an offer, depending on the competitiveness of your market.
What Returns are you Seeking?
If you are buying a home to live in this section should be based on your enjoyment of the home. If this is your dream home, that should be factored into your buying decision. Most people are willing to splurge if it’s their own home. There is value in your happiness. Follow the tips in this book and make sure you get a good deal.
If you are buying an investment home you need to consider the returns you seek. How much are you looking to make? Are you trying to merely break even every month and look for your returns when you sell the home? Or are you hoping to rent it each month and cash flow? Do a rent study before purchasing. Survey several similar properties in the area. Try to stay in a 1-2 mile radius of the property, survey properties of similar age and condition, and properties with similar amenities (pools, green space, fitness, etc). Determine what these comparables are renting for per sq ft by dividing the rent by the size of the property. Then apply that rent per sq ft to the size of the property you are looking at.
You can calculate your monthly payment based on a certain price, interest rate and loan term. Then use the rent study to determine the monthly rent you can hope to bring in. Do not forget to factor in other monthly expenses like HOA Fees, Real Estate Taxes, Repairs/Maintenance (leaky faucets, light bulbs, filters, etc), Long Term Capital Improvements (Major components – New Roof, AC, Flooring, etc).
Make sure your rent can cover all expenses and the monthly loan payments. The money left over there is your cash flow or return. Determine how much money you need to make to offset anything you could be doing to invest; such as buying stocks or bonds.
Stick to the plan
Always remember, once you determine your investment criteria, stick to it! A plan only works if you follow it.
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