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  • Writer's pictureYour #1 Phan

Strategies for Buying Real Estate

Home transactions are expensive, totaling as much as 14 percent of the purchase price, by the time you buy and sell your home. That means the length of time you live there has a lot to do with how you can sell your home at break-even or a profit and buy another home.

Adjustable rate loans are ideal for short occupancy because they are often a point or two lower than fixed-rate loans, but make sure the reset period is far enough away that you can sell the home before your payments increase. If you're planning to occupy the home for years to come, or turn it into a rental after a few years, a fixed-rate loan is much better. While it costs more, your payments will always stay the same. (Keep in mind that hazard insurance and property taxes can still change.) It may take living in the home two to four years or longer for you to break even at selling time. Your lender can help you run the numbers.

You have three options once you own it - live in it, lease it as an investment, or sell it. The terms of your loan may dictate what you can do and how soon you can do it. Mortgage interest rates, property taxes and capital gains taxes are more favorable to owner-occupants than non-occupying owners or investors:

  • To qualify for a homestead interest rate, you must occupy the home you are buying. Otherwise, non-occupying buyers are typically required to put 25% down and pay a higher interest rate as investors.

  • FHA loans require you to occupy your home on a continual basis for one year after closing. After that, you can rent or sell it with no restrictions. The reason for the restriction is that low FHA rates are intended for homesteaders, not as a subsidy for investors.

  • If you have to move for any reason, you can rent your home or sell it at any time, but tax consequences may apply. If you live in your residence for an aggregate of two years out of the last five, you are eligible to exclude up to $250,000 of capital gain on the sale from your income as an individual ($500,000 for couples that file jointly), as long as you haven't excluded the gain from the sale of another home during the two year period before the sale of your home.

It takes time to build equity in a home. The longer you occupy your home, the more equity you will build. You'll pay down your mortgage, and over time, your home's value should rise. But to even have the option of such a large return, you've got to get into the game. Work with Your #1 Phan to buy with a strategy that fits your goals.

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