How to know whether buying a home is a good or a bad buy

How to know whether buying a home is a good or a bad buy

You might want to quiz yourself on a few issues before deciding to buy a home. Depending on your answers, you can decide for yourself whether or not buying a home now is a good buy or a bad buy. The first issue a home buyer needs to address is whether real estate prices are still going down or whether they’ve already stabilized? If real estate prices continue going down, then buying a new home is not a good buy now. On the other hand, if prices begin to rise, then buying now, when prices are low could be a good buy, as the market value of property will appreciate.

What capitalization rate makes an income or rental property a good investment?

Capitalization rate, or cap rate, means the rate of return on a real estate investment. It is calculated from the net income that remains after your loans and interest are paid on the property. If you pay $100,000 for a house, for example, and the net income after your expenses are paid comes to $8,000, then you divide this $8,000 into the purchase price of the property to get the cap rate. This gives you an 8 percent return. If you have taken out a home loan at 6 percent interest, then this is a good investment. But, if you are paying 12 percent interest, it would be a bad buy.

How long do you plan to live in the house?

For a real estate investment to be worthwhile, a potential first time homeowner needs to answer the question of how long they intend to keep the property. A good buy is a house that you plan to live in for a period of five to ten years before reselling. This has proven to be the best kind of investment and it gives the property time to appreciate in value.

How secure are your cash reserves?

Before deciding whether a real estate investment is a good buy or a bad buy, ask yourself whether you have a comfortable cash reserve equal to about six months’ worth of living expenses. You will have to meet the mortgage payment each month and there could be unforeseen expenses arising from illness, disability or divorce. All these factors need to be taken into consideration before deciding whether you have the financial reserves for buying a house.

Quiz yourself on these matters of vital concern, and you can then decide whether investing in property would be a good buy or a bad buy for you right now.