Thursday, December 22, 2011
Things you Should Know About Buying a House part 2 of 3
Houses do evolve with time (and sometimes very quickly). So your stepbrother has visited the house and told you it was fine and that you should save a couple of hundred bucks and not get it inspected, especially since it's only 3 years old? WRONG!!! Professional house inspectors are trained to look for details usually overlooked by regular home buyers such as insulation, traces of moisture, suspicious cracks, electricity and plumbing. They can also usually give you an idea of how much it would cost to bring any of these up to code. Finally, a good inspection done by a professional can usually pay for itself by using it as a bargaining tool. Shrink your mortgage. How many payments are there in a year? The answer is it depends. If you pay monthly, there are 12, if you pay bi-weekly, there are 26 (or the equivalent on 1 extra payment / year) which goes a long way to reduce your capital, especially in the first years, when most of your payment goes on paying interest. Do you have a little extra cash in the end of the month? Even ridiculously small amounts, applied monthly on your capital will save you thousands of dollars when done over 10, 15 or 25 years. Make sure when you choose your mortgage plan that you won't get penalized for doing so and that you tell your lender to apply the money to your capital as using it as a little deposit towards your next payment often even get you any interest, let alone help in any way. Owning real estate does have it's advantages. Choices: as the owner, you can decide whether to select a building that matches your current needs, has enough room for future expansion or maybe is large enough for you to lease parts of it. Equity: every month, your payments are applied to paying down your mortgage and building some equity which could be useful eventually to secure a loan for new equipment, to finance an acquisition or simply as an asset. Appreciation: not withstanding any unforeseen occurrences, your building should appreciate with time. This appreciation could, just as the above mentioned equity, be used to get better financing conditions. Power: as the landlord, you are the person in charge of deciding how to finance the building, picking the tenants, choosing the decorations, selecting entrepreneurs for the work to be done, improving the building. You even have control over your rent's rate. You make your money when you buy, not when you sell. One extremely important factor to consider before making your decision is that you make your money when you buy but realize it when you sell. Paying more than the fair market value, not taking into consideration your cash flow factors (mortgage, interest rates, insurance, taxes and repairs VS incoming rent, other income possibilities such as parking for example) or letting your feelings dictate a purchasing decision may negatively affect your exit strategy for year if you are not careful. Though appreciation is quite probable, I suggest you don't factor it in when crunching your numbers: if the deal is still a good deal without factoring in appreciation, you are likely to make a favorable ROI (return on investment) when you decide it's time to go for your exit strategy. If you absolutely need appreciation to justify your purchase, be extremely careful as no one really knows what will happen in the future and, in the present, you may be paying too much. Discuss the situation with a real estate agent know for his or her integrity such as Anne-Marie Perno with whom I often do business ( I will include a link to her website in the resources box below). Pay off your house in 12 year: doing this you could actually get it for free. If you understand but most important if you use my preceding advice about crunching the numbers before you buy and only buying a house that makes sense financially, then sell the house after 1 year in Canada, 2 in the US and repeat the process 5 more times, you could very well end up with a paid for mortgage and your dream house. This is something worth looking into, especially with the: Tax advantages of flipping houses. Since I'm not a CPA and that all situations are unique, I strongly suggest you meet with a competent financial advisor who will help you evaluate your particular situation. For now, keep in mind that in most situations, you will be able to use some of your expenses as depreciations to reduce your taxes or some of the rent as a personal income. What I do know for a fact though is that in most places, you can keep 100% of the profit (the difference between purchasing cost including cost of renovations and selling price) if you obey to some guidelines such as not doing it more often than once every 1 or 2 years depending on where you live and, in some places, reinvest your profits in purchasing a more expensive property.