I get this question from new clients who are about to buy their first home and clients who have owned their home for a while, “How long should I plan to hold on to my home before I sell?”
Whether you want to make a quick profit from the rising real estate prices in Northern Colorado or face an impending move out of state, knowing how long you’ll need to commit to owning your home for all sorts of reasons is essential.
According to Bankrate.com, buying instead of renting is a better financial decision if you plan to own your home for five years or more in Colorado.
But, the real estate market is very neighborhood specific, so how long do you need to own your specific home before it makes financial sense to sell? We break it all down for you right here!
Break-Even Basics
Everyone would like to make a profit or at least not lose money — break even — on their home when it comes time to sell it.
A valid “break-even point” is not simply what you originally paid for a home. It’s more complicated than that. This figure also includes the costs associated with buying and owning, the tax benefits you’ve taken advantage of during your ownership, and the cost of selling your home.
You must also factor in the equity you’ve gained in your home and any appreciation in its value since your purchase date.
Let’s Break It Down
To determine how long you need to hold onto your home, you’ll need to calculate the break-even sales price by adding up your complete expenses for buying and selling a home. This is often called your basis.
- First, pull together the total expenses for your home purchase — the original purchase price plus your closing costs.
- Next, calculate the costs of owning your home — repairs, maintenance, and any upgrades.
- Then, figure out the cost of selling your home. Generally speaking, you will need to estimate about 6-7% of the selling price — including commissions for both agents, sales taxes, and attorney fees.
Now determine any “income”:
- Equity in your home (principal paid toward your mortgage).
- Don’t forget about the tax refunds you received while owning as well.
- Plus, any increase in appreciation needs to be included.
Once you have the figures above, you can determine when it makes financial sense for you to sell your home. Is your “income” more than your basis?
What Do Appreciation and Equity Have to Do with It?
Every buyer wants to build equity in their home and own a home that appreciates in value. These two factors can help you get to your break-even point sooner or allow you to make a profit on the sale of your home.
Equity = Ownership
The more equity you have, the more home you own. You gain equity when you pay down the principal of your loan.
The “five-year rule” exists because it takes time to build equity when you have a mortgage. In the first few years of your mortgage, more of your monthly payment goes toward the interest on the loan, and less goes toward the principal. So you’re not really building much equity early on.
As more time goes by, your principal slowly goes down, causing your interest payments to be less, and that’s when more of your payment will go toward your principal. With lower interest rates, it’s making it less costly to pay down your loan!
Appreciation = Value Gained
Your home’s value will hopefully increase in value over time. You might also improve the property to increase its value more quickly.
In a perfect market, the longer you live in your home, the more it will appreciate in value. That is why you’re encouraged to live in your home for at least five years to reap this gain.
However, the housing market can be unpredictable – homes can quickly appreciate as they did from 2020-2022, or it can be a bust, leaving many owners with homes underwater.
What YOU Can Do
So what can you do to protect yourself and hopefully break even or make a profit on your home? Here are some strategies to keep in mind to speed up your break-even timeframe or make your homeownership a financial plus.
Pick the Right Location
This has a HUGE impact on your home’s appreciation. Think carefully about the neighborhood, street, and community of your home. Is it an up-and-coming neighborhood or one going the opposite way? Always think about possible resale value before you purchase.
Avoid Buying the Best Home on the Street
This type of home may never appreciate as much as you would like because of the surrounding homes (which benefit from yours!).
Look at Appreciation Values Over Several Years
Look at the neighborhood to get a sense of its stability and long-term patterns. Are home prices rising? Are condo units in the building gaining value? You can find out the average appreciation rate from your realtor.
Avoid Having a Large Mortgage
Basically, don’t overspend on your first home since it affects your ability to buy your next home. You’ll build up equity faster with a smaller loan. So if you can’t put down a large down payment, then buy a home where you can afford a smaller loan. You don’t want the bank to own more of your home than you do for a longer time than necessary!
Make Improvements to the Property
But be careful not to over-improve, or you may lose money! You want to get some return on your investment and can find out what upgrades get the most in your neighborhood.
Qualify for a Lower Interest Rate
The lower your mortgage rate, the less you’ll pay toward the interest and the sooner you’ll be “owning” your home.
A good rule of thumb for buying in Northern Colorado and the Front Range is to plan to own your home for about five years or longer, but this time period may increase or decrease based on everything I’ve explained above!
Whether you’ve lived in your home for a few years or a lifetime, I’d love to help you when it comes time to move. If you’re thinking about a move, let’s get in touch!
In the meantime, I’m your go-to resource for all things real estate, even if you aren’t buying or selling anytime soon.
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