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How long do you need to own a home before you can sell it profitably? The answer depends on your individual situation, but generally speaking, the longer you own a house, the more you’ll net from its eventual sale. Sometimes life intervenes, however, and you need to sell after owning a property for only a few years. Here’s how to decide whether buying a home for the short term is right for you.
Length of ownership affects profitability
Conventional wisdom says that you always make money in real estate. Decades of steady population growth in Canada and the United States have generally put upward pressure on prices. But owning a home is not always profitable; sometimes it turns out you’d have been better off financially if you’d rented for the same period.
Interest rates and national and local economic conditions affect property values. Another factor determining whether you’ll make money when you sell a home is the length of time you’ve owned it. Conventional wisdom has it that you need to own a home at least five years before selling it. To make money when buying a home for the short term, your costs of buying and selling that house must be less than the equity you’ll accumulate during the time you own it.
Recovering costs to buy and sell
Making money on a property comes from building equity in it. Equity grows in two ways. One is when property values appreciate because of external factors, allowing you to sell the house for a relatively higher price than you paid for it. The other type of equity — called paid-in equity — is the amount of a property you actually own because of the down payment you made and the principal you have paid during your ownership.
To make money on the sale of a home, your total equity at the time you sell must exceed the costs of having bought and sold that home. These costs include:
- The closing costs you paid when you bought the home you’re now selling. You can find these costs listed on your closing statement.
- The interest you have paid on your mortgage during your short-term home ownership. Mortgage payments are the same amount each month, but the proportion of that payment that goes toward interest rather than principal shifts over time. In the early years of a mortgage, most of that payment goes toward interest, not toward the mortgage’s principal. This means that you actually build little paid-in equity through your first few years of payments. Check with your lender to determine how much interest you’ve paid.
- The costs you’ll incur selling the home. These include money spent to ready the house for sale, real estate commissions, and the closing costs you pay as the seller.
For any home sale to be profitable, the total of all these costs must be less than the price you sell the home for.
Improving your chances of profiting in the short term
If you are shopping for a house and think that because of job changes, a growing family or other reasons you may be buying for the short term, there are a few things you can do to improve your financial prospects.
- Buy a home you can more easily afford. Don’t strap yourself buying at the maximum that you can pay. One way to do this is to look for a home being sold by a distressed seller.
- Someone who needs to sell quickly because of a job move, divorce, or other difficult circumstance may discount the sales price to speed things along.
- If you think you may be buying for the short term, find a home that is offered at a discount because it needs fixing up. But research repair costs before you make an offer. If they’re high, you may not be getting a bargain.
- If you put down 20 percent or more on the home when you buy it, you will finance less and save on interest costs.
These tactics can help make it more likely that when you sell after buying for the short term, the equity you recover will offset your costs.
Not intended to solicit buyers or sellers currently under contract. The article was revised from HOUSEOPEDIA’s original article.