Homeownership: Make the Most of Time and Don't Let It Get the Best of You

It may seem like your payments are all going to interest at first, but greater equity comes with time.

A recent post on The Atlantic proclaimed, "It Will Never Be a Good Time to Buy a House." And, while there are some hard truths outlined in the article (such as the lack of inventory and today’s higher interest rates), homeownership is about the long game and sitting on the sidelines doesn't equate to winning for most, especially if you haven't made your first investment. Renting is helping someone else gain equity or profit (if the home is owned outright), so investing in you as soon as possible is key. It can be a hard journey but we can do hard things, right?

Since numbers don't lie, let's look at an example of a first-time homebuyer who bought a two-bedroom condo in a on-the-rise neighborhood in DC ten years ago. Despite a good job, with the relatively high cost or real estate, he put down only 5% of the $429,000 sales price, understanding that this would mean an additional cost for private mortgage insurance (PMI) for a while. Closing costs, including the down payment, equated to just under $33,000 and the total monthly payment of PITI (principal, interest, taxes & insurance), PMI, and the condo fee equated to $2,750/month. At the time, the median rent for a similar unit was $2,200. Who would want to pay $550/month more? (Answer: Almost anyone planning to stay or hold onto the unit for five or more years)

After an early termination of his PMI due to him proactively requesting an appraisal due to rising property values in his neighborhood, let's fast forward to 2023. Today he is paying less than in 2013 ($2,550/month) without PMI and even with higher taxes, insurance and condo fees. That same unit would rent for $2,900/month on today's market (a 30+% increase, while he is paying 7% less than in 2013). As an owner-occupant, he'd be making out great. As an investor-landlord, he is clearly in the black -- now having someone else help him continue to gain equity and cover his mortgage (and then some). My how the tides have turned.

And this is just looking at his cost of living; however, here's the real magic: over those 10 years his property value appreciated more than 45% (or almost $200,000), while he also gained another $100,000 of equity by paying down his mortgage. During this time, he may have paid approximately $20,000 more in the early years to own vs. rent but, even with is $33,000 down payment, an investment of $53,000 that grows to $300,000 in 10 years isn't too shabby (that's just under a 19% annual return). Other benefits include stability, the peace of mind of being able to make his home own, the savings not having to move, etc. A home is one of the few investments you can enjoy while it appreciates. Even if he had sold five years in, the equity would have made a solid down payment on a new $1M+ home.

Yes, this is only one example. And, yes, interest rates back then were closer to 4% and the location of the home was on the rise...but the principals still apply. With a lack of housing supply, the S&P CoreLogic Case-Shiller Home Price Indices are near their highest inflation-adjusted levels. The price of entry may be higher but the trajectory in a vibrant market like the DC metro area is clear.

Even if your budget may be tighter due to higher interest rates and that first home may be a condo or townhouse instead of a detached home, time is your greatest asset in real estate. Whether you're in your 20s, 30s or beyond, you can crunch your numbers, make moves and invest in you. The average age of today's first-time homebuyer is at an all-time high, but that doesn't mean you can't beat the average (and I love helping first-time homebuyers make the leap with confidence). Curious in running your personal scenario? Reach out today and let's look at your financial situation, the variables you can change, and the market to see what your path may look like.

Amber Harris is the owner of At Home DC, an interior decorator and a licensed real estate agent with Keller Williams Capital Properties working with clients in DC, Maryland and Virginia.

From Homeowner to Real Estate Investor: What You Need to Know

A good financial planner will advise you that you want to have diversity in your investment portfolio, with the mix depending on your risk profile, stage of life and short- and long-term goals. Homeownership is a great way to build wealth, as your housing costs are helping you gain equity (instead of paying someone else’s mortgage and expenses) and realize other advantages (from tax savings to simply enjoying making a home your own).

Photo Credit: PT Money

Many individuals and families will own a primary or secondary residence, perhaps a vacation home, but others will jump back into the market with the goal of acquiring a property purely as an investment. Some will join a REIT (real estate investment trust), while others will buy and hold (waiting to sell when the time is right) or flip (making improvements and selling right after). However, many investors will buy and become landlords, having someone else pay most or all of their mortgage (and, ultimately, securing equity over time).

In the DC area, we have a very fluid population, with people constantly coming to and leaving the area for work and study — meaning there’s a strong demand for rentals. And, while DC’s rate of population growth rate has slowed down a bit, the region continues to be a draw for individuals and businesses. So, what should you ask yourself if you and your financial advisor agree a new real estate investment may be right for you?

• What’s my budget? Adding a property to your personal portfolio will require an initial investment and ongoing maintenance and carrying costs. You’ll want to consider the upper limit on your investment and then calculate the associated expenses — down payment (with higher requirements from lenders for investment properties), closing costs, professional fees (for the purchase, finding tenants and perhaps property management), maintenance reserves, etc.

• Where’s the “sweet spot” in the market? An investment property may or may not be a property you could see yourself in. As an agent, I advise my clients on the state of the rental market and what types of properties (size, location, price point, etc.) are the most likely to be consistently in demand and rented with limited gaps in tenancy. Just because it doesn’t meet your needs, tastes and location preferences doesn’t mean it isn’t a good investment.

• What’s my required capitalization rate and/or cash flow? Investors often evaluate potential properties by looking at their capitalization rate, or cap rate. Simply put, the cap rate is your annual return, calculated by dividing the net income by the market value of the property. In more competitive markets, like DC, lower rates might be expected. Another key consideration is your projected cash flow. Ideally, your rental income should cover the mortgage principal, interest, taxes and insurance on the property at minimum. If you are looking at investments that may have a slightly negative cash flow, take the time to even further evaluate if this is the best investment for you now. Perhaps you’d be better served by putting your funds into another short-term investment so you can increase your down payment and lower your PITI or by finding another property.

• What type of landlord will I be? If you are buying an investment property near your home (or where you have a network already established), you may be able to self-manage your property. While this will require you to invest time and be on call 24-7, you will be reducing your ongoing expenses. However, carefully consider the trade-offs in time and stress if your budget allows you to outsource the property management (with fees running up to 10% of the rental income). Either way, if you haven’t already, familiarize yourself with landlord-tenant laws in your area. You’ll want to ensure, whether you are hiring a property manager or self-managing, that you are a well-respected landlord , abiding by rules and regulations and understanding the processes for handling any potential issues.

If you’ve asked yourself these questions and think acquiring an investment property may be right for you, reach out to an experienced agent to dig in deeper and talk about next steps in evaluating your readiness!

Am I Ready to Be a Landlord?

After you transition from being a tenant to being a homeowner, many people come upon a new decision point: becoming a landlord or not. That juncture could come about for a few reasons, including:

1. You have to leave your beloved city/neighborhood for work, family or other pursuits.

2. You need to up or downsize in the same market.

3. You are contemplating investing in real estate and building a secondary (and maybe, eventually, primary) income source.

Whatever the reason, there are several important factors to consider before becoming Mr. (or Ms.) Roper (pretty sure at least 50% of my audience might need to Google this reference). In no particular order:

• What is your motivation? Perhaps the property holds sentimental value for you or you see an opportunity for even more equity by holding onto it. Either way, make sure you can articulate your motivation and use that to evaluate whether you become (and remain) and landlord.
  

• What is the rental market like currently? Do you live in a neighborhood near a hospital where you are likely to get residents or in a community that has a large expat population? And, just as when you are buying or selling, you must consider inventory levels - total volume but also the availability of and demand for homes like yours.
  

• Does it make financial sense? It is hard to perfectly predict what will happen to any given market or economy, but you should start by running the numbers. Look at what similar properties are renting for in your neighborhood, itemize other anticipated expenses such as maintenance and costs for acquiring tenants (whether or not using a real estate agent) and determine if you want to manage the property yourself (harder to do if you are moving out of town) or higher a professional company (and pay a percentage of each month's rent). This is where a spreadsheet with formulas will help you run various scenarios. And don't forget that you may not have a tenant 12 months of the year, so you have to be prepared to carry your mortgage (if you have one) during periods of vacancy.
  

• What are the business and legal implications? In order to be a landlord, you should make sure your property is legal and licensed (UrbanTurf has a great writeup). You also need to make sure you are in compliance with any condo/HOA bylaws (if applicable) and are insured appropriately. Every market is different but some (like Washington, DC) are more tenant friendly - meaning a problem tenant can be an even bigger problem. If you're in D.C., you likely have heard of (or are familiar with) the Tenant Opportunity to Purchase Act (TOPA). If not and you intend to rent a property in DC, familiarize yourself with it.
  

• Will this impact other real estate transactions? If you intend on buying a second (or third) home, keep in mind that your existing mortgage on a rental property still counts toward your debt-to-income ratio (most lenders don't want to see this higher than 36% of your monthly pre-tax income) and can affect being approved for (and your interest rates and down payment required for) any additional mortgages. Talk to your mortgage broker to understand your options.
  

• Do you want to be a landlord? Your time is money. Whether or not you higher a property management company, think about the demands (and potential stress) being a landlord places on you and proceed with what feels right!

Finally, remember that real estate is not an incredibly liquid asset, meaning that it cannot be quickly sold (in comparison to stocks, etc.). If you anticipate a scenario where you may need the capital invested more readily, you might want to consider investing your dollars in other ways.

I have several clients that are thinking through becoming a landlord or selling right now, and there isn't one right answer for everyone. Consult with your Realtor and financial advisor to land on what's best for you - personally and financially.

Amber Harris is the owner of At Home DC, an interior decorator and a licensed real estate agent with Keller Williams Capital Properties working with clients in DC, Maryland and Virginia.