How to buy your first property — part 1
Whether you are buying your first home or your first investment property, getting started can be difficult. I have been asked many times by newcomers to real estate how to buy as the hurdles seem insurmountable. Recently, I met with two friends, Adam, looking to purchase his first home, and Nathan, his first investment property.
Let’s start with Adam, who is buying his first home.
Finding a home
Adam is motivated and goal-oriented; he wants to stay in his hometown of Napa, California, and get married in a few years. Houses in Napa have a median price of $825,000, according to Realtor.com. Adam may be able to find a home in the $600,000 to $650,000 range, but those sell quickly.
Initially, Adam focused on purchasing a condominium as the starting price is much lower. I explained the differences between a condo and a single-family detached house and convinced him otherwise. Condo-living can be different when it comes to having a family and pets. There are a couple of other considerations.
First, in most cases, condo developments have a homeowners’ association that handles the exterior maintenance of the buildings and provides amenities of the development. This comes at a cost in monthly association dues, which could be in the $250 to $500 range. I explained that a lender considers association dues part of the monthly payment, just like property taxes and insurance. In our example, homeowners’ dues take away purchasing power when you initially qualify for a loan of as much as $100,000. Second, condos could be more challenging to sell as the pool of potential buyers are usually smaller than those looking for a house.
Making the purchase
Meeting with a real estate agent is an excellent first step to learn about the process, what to expect, how much of a down-payment is needed, and how to qualify for a loan. Meeting with Adam, I provided him with the ins and outs of searching for a house and making an offer. I also referred him to a loan agent to explain the loan process.
Ugliest House in the best neighborhood
My suggestion to Adam is to purchase a house in a desirable neighborhood. This can be subjective to the individual, but the point to look for is an uncared-for home among many cared-for homes. The key is livability, working electrical and plumbing, a roof that does not leak, and a solid foundation. After moving in, Adam will have many years to paint, install new flooring, update the kitchen and bathroom, update the landscaping, all while living in the home.
Two important caveats
Others in the real estate industry may not agree with my philosophy of owning a home; your home is not an investment. We all need a place to live, whether it is an condo, a mobile home, or an estate. A home is an expense that may appreciate in value over the years.
Additionally, having a loan is a ball and chain around your ankle. You are in partnership with the lender, and they are in the business of making money. There are tax advantages to financing a home. Still, comparing the cost of the interest you deduct from your income is far less than the interest you are paying each month. It is tough to purchase a home without securing financing, so my suggestions to Adam are to not over-extend himself even if he qualifies, secure a fixed-rate loan, and pay it off early.
In my next article, we will talk about Nathan’s desire to purchase an investment property.
Burt M. Polson is the CEO of ACRESinfo.com, a commercial real estate brokerage company, and CEO of StoneMarkerInvestments.com, a private equity real estate fund. Call him at (707) 254–8000 or email burt@acresinfo.com and burt@stonemarkerinvestments.com.
