If you’re like most first-time homebuyers, the dwelling you just bought or are about to buy won’t be your permanent home. At some point, you will sell it.
Selling a home after a short time can be challenging because of a lack of equity, which is the difference between the home’s value and the amount still owed on the mortgage.
For starters, most first-time homebuyers make small downpayments. If you bought your home with a physician mortgage loan, you may have put zero down. Therefore, you’re starting homeownership with little to no equity.
One way to increase your home’s equity is to reduce the balance owed through your mortgage payments. But it takes years to put a significant dent in your loan balance. Most of a homeowner’s monthly payment in the early years pays interest. In fact, after five years, you may have only paid down 1 to 2 percent of your original principal.
For example, assume you obtained a physicians mortgage on a $300,000 home with no downpayment. You received a 4 percent mortgage rate on a 30-year fixed loan. After five years, assuming you made just the minimum payment each month, you would have a mortgage balance of about $271,340.
If you plan to sell the home after those five years, you would have to get enough to cover the mortgage balance plus the costs incurred in selling a home, which include the commission for your real estate agent. Those costs typically equal 10 percent of the amount the property sells for.
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Without being able to build much equity through monthly mortgage payments, it will be necessary for your home’s value to increase significantly if you plan to sell it in five to 10 years.
Some of what contributes to increasing value may be outside of your control. The general state of economy, the supply of homes for sale in relation to buyers, and local market forces greatly determine a property’s value.
But there are actions you can take in the selection of your home and while living in it to maximize your equity and the property’s resell value.
The bottom line is to buy and maintain a home that, when it’s time to sell, will be attractive to the greatest number of potential buyers.
As a first-time homebuyer, you’re investing as much as you’re finding a place to live. Therefore, you’ll want to look for growth potential. You don’t want to buy something that’s at peak value. At the same time, you don’t want a property that, while priced on the low end, has little appreciation potential.
As a popular real estate adage goes, the most important factor determining property value is location, location, location. Selecting the right location may be the most important decision you make today to generate a decent profit at resale.
If you choose a high-demand area or neighborhood that’s already selling high, the chance for short-term profit diminishes. The same goes for areas that have little chance of increasing desirability.
But if you can find an up-and-coming area, you can fulfill the basic investing strategy of buying low and selling high. Look for areas with steady population growth, emerging economic activity such as new jobs and retail developments, and places where crime is nonexistent or on the decline.
Most important is the quality of the local school system. Schools may not be important to a physician with no children, but chances are they will matter to your next buyer. Therefore, limit your search to school districts with strong reputations and, if possible, buy close to an actual school building to maximize your home’s resale.
Once you’ve bought a home, you can influence its value with improvements that increase its appeal.
If you’re planning to be a short-term owner, you will need to be strategic about home improvement projects. You don’t want to drop a large sum into improvements that won’t generate a short-term return. But you also want to do enough to increase its value when it comes time to sell.
One of the best and most cost-effective ways to do this is to increase the home’s efficiency. Energy and water usage have become important, especially to younger generations. As they move into homebuying, they will pay a premium for homes that save on utility costs and make them feel good about helping the environment. You may also qualify for tax incentives for these improvements.
If the home doesn’t already have these items, you can increase its value with:
- Energy efficient appliances
- Energy efficient heating and air conditioning
- Tankless water heater
- Better insulation
- Low-flow faucets and toilets
- A water filtration system to eliminate the need for bottled water
- Energy efficient lighting fixtures
New windows can also help energy efficiency. But the upfront cost means it can take several years to see a return on investment.
Kitchen and bathroom updates can also greatly impact your home’s value. You don’t necessarily need to undergo an extensive — and expensive — remodel. But you can make the home more appealing with updated fixtures, appliances, cabinets, sinks and other touches.
Also consider new flooring. Wood and laminate floors have wide appeal because they are easier to maintain and last longer than carpet.
Something to avoid is having a pool or spa as part of the home. The popularity of these options have faded over the years because of the high maintenance and the affect on homeowner’s insurance premiums.
For your first home that you’re planning to resell later, you should avoid a built-in swimming pool, as it will limit your potential buying pool later. And certainly don’t spend the money to install a pool or spa. If you buy a home with a spa or tub, you may want to consider removing it as part of a remodel to increase the property value.
Lastly, avoid over-personalizing. If you’re planning to establish your home as your permanent residence, you can be eccentric with your decorating, landscaping and remodeling decisions. But in thinking of reselling, any paint colors, fixtures, and remodels that don’t have a broad, modern appeal should be avoided.
Joel Palmer is a writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.