Whether you’re a first-time home buyer or planning to purchase your first investment property, you might find the process overwhelming. Many people mistakenly base their decisions solely on home prices or interest rates, but those factors only tell part of the story. To determine if now is the right time to buy, it’s important to consider the full cost of home ownership.
Consider the Full Benefits of Homeownership
Looking at the full picture gives first-time home buyers more information to base their decisions on.
Home Prices
First things first: home prices fluctuate throughout the year. Typically, prices increase in the summer and decrease in the winter. However, cumulatively, central Florida homes appreciate an average of 3-5% year over year. This means that during a typical year, a house worth $350k today could be worth $362k next year.
In 2021 and 2022, the Orlando metro area, like much of Florida, saw 15-25% appreciation. Low inventory and a high number of buyers drove prices up. It was not uncommon for people migrating to Florida to make cash offers well over the list price, which was part of what drove up home values. While the market has adjusted slightly since, prices never returned to previous levels and have climbed again.
For example, in April 2024, the median sale price in Orlando metro hit a record high of $388,000. It dipped to $385,000 in May, then hit a new high of $395,000 in June. This just shows why it’s risky to “wait for the market to crash” since predicting price dips is nearly impossible beyond normal seasonal changes, but even then, prices can vary month to month.
Interest Rates
Right now, hundreds of thousands of people are waiting for interest rates to fall. However, don’t forget that the 2-4% interest rates during those exceptional years were also historical lows. These record low rates make the normal range of 6-8% interest seem comparatively high, but they are not.
High interest rates are preventing many people from trying to buy their first home, but they cannot tell you how interest rates actually affect them. For example, depending on the loan amount, the difference between 6.5% and 5.5% rates might only be $150-200 difference in monthly payments. Rather than focusing solely on the interest rate, focus on the monthly mortgage payment and ask yourself if you can afford it.
Principal Payments
Based on the amortization schedule, in Year 1, typically an owner will have paid at least $3,000, if not more, toward the principal balance and that amount will increase slightly year after year. Additionally, making one additional mortgage payment a year toward principal will reduce the life of the loan on average 8 years.
Taxes and Insurance
Taxes and insurance largely lie outside an owner’s control, but they significantly impact the total cost of a home or investment. Understanding the taxes assessed and insurance costs associated with a property gives you a fuller picture of your overall financial commitment.
Property Management Insurance (PMI)
Based on average home prices, saving 20% of the purchase price for a down payment can be challenging. Yet, a smaller down payment increases the risk for lenders.
In response, lenders assess property mortgage insurance (PMI) on loans to borrowers who have less than 20% of the purchase price as a down payment. PMI used to tack on hundreds of dollars to a monthly payment, but now PMI can cost as little as $50 a month.
This means it might make more sense to focus on the monthly payment and buy now rather than waiting years to save up enough for a 20% down payment, especially as home prices continue to increase.
Financial Preparations
Now that you understand the main factors to consider, ask yourself the most important question: can I afford to buy a home? Before you even start the process, it’s crucial to ensure you’re financially prepared. Key factors include your credit score, income, and debt levels.
Debt-to-Income Ratio
A debt-to-income (DTI) ratio compares your monthly debt payments to your gross monthly income. It shows lenders your creditworthiness and can impact your loan approval and interest rates. Since an applicant’s DTI is a major factor in lenders decisions, make sure you know yours and take steps to improve it if needed.
Pre-Approval
Speak with a good lender and get pre-approved before you start shopping. A pre-approval not only helps you determine your budget, but it also allows you to make an offer on a home if you find one you love. A loan officer will also be able to answer any of the questions you might have and explain DTI and other important variables to consider. Getting pre-approved shows you’re a serious buyer and jumpstarts the closing process. In fact, some sellers’ agents will only accept offers from pre-approved buyers to support the purchase price.
Hold Off on Other Big Purchases
Once you start the home buying process, avoid making any large purchases until after you close. A big purchase before you close could change your DTI, potentially delaying or even jeopardizing your loan approval. Consider how you’ll prioritize other larger purchases to smooth the way to closing.
Risks to Buying
The biggest risk when buying a home is your situation changing. If you need to move or if your job is unstable, you’ll face tough choices, such as selling too soon or turning a primary home into a rental.
Selling Too Soon
Generally speaking, if you have to sell within 12-18 months of buying, you risk losing money. You may not have enough equity and given your closing costs from the purchase, combined with the closing costs to sell, you may be net negative. Plus, seasonal market shifts could lead to selling for less than you paid.
My First (or Next) Investment Property
Do you know any homeowners who have stated, “Man, I wish I wouldn’t have sold that house.” Often, that person looks back in 5-7 years later, sees the current value of the home they sold, and regrets selling because of how the home substantially increased in value. Conventional wisdom is to buy a house, live in that house while it appreciates in value, and then use the proceeds from selling the house to buy a bigger, better house. But what if conventional wisdom is wrong?
Turning a Primary Home into a Rental
Many first-time landlords use their former primary homes as their first rental property. Depending on when you bought and your interest rate, there’s a good chance that rent will cover your mortgage and provide substantial cash flow. If you purchased in 2023 or 2024, there’s also a strong possibility it won’t as the mortgage will likely be higher than market rent.
When buying a rental property, investors look at a few things differently than buying a primary residence. Features that make a home desirable to live in might increase the purchase price, but won’t necessarily result in higher rental income. Knowing what will give you the best return on investment takes experience and knowledge.
Down Payment
For a primary residence, you may need as little as 3.5% down payment with an FHA loan or 5% with a conventional loan. Investment properties, on the other hand, require 20-25% down payment.
Keep Your Own Funds
Don’t let those numbers scare you though. The beauty of real estate investing is that you don’t necessarily have to fund it all yourself. Many alternative financing options, such as seller financing or the BRRRR Method, have helped other investors get started and grow.
Know Your Market (or Partner with Someone Who Does)
Before buying your first investment property, do your research. What rent rates will a particular area support? What do tenants want from a rental home? Study formatting models and consider areas slated for growth and job accessibility. Understand local laws, including HOA rules where applicable.
If you’re not ready to handle all the details yourself, find someone who does. Finding a Realtor who specializes in investment properties is as easy as reaching out to your friendly neighborhood broker at The Realty Medics.
Ready to Buy?
If you’re thinking about buying a home, we’re here to help. The Realty Medics are not just property managers; we’re also licensed sales agents. When you’re ready to take the next step, we can assist you in finding your dream home. Plus, if you’re already a current tenant with TRM, enjoy a buyer credit of up to $1,000 when you purchase with us.
Call us today and ask about our Tenant Buyers Credit Program: 407-315-1126
We’d love to help you find the home of your dreams when you’re ready to buy in 3 easy steps:
Step 1: Get Approved For A Loan:
There are many mortgage options for buyers. We recommend contacting more than one lender to make sure you are getting the best interest rate and lowest fees. One option is to contact your bank but we have found banks are slow to respond and only offer one loan. Their loan. Working with a mortgage broker gives the buyer options. Mortgage brokers work with many banks to find the best rates.
The Realty Medics recommend two mortgage brokers.
*We have no financial benefit for a buyer using either mortgage broker.
Joe Manglardi
HomeBridge Financial Services, Inc.
500 Winderley Place, Suite 104, 108 & 112, Maitland, FL 32751
Mortgage Loan Originator NMLS 1128287 | Renovation Specialist (FHA, FNMA, VA) |
Hometown Hero Project Member
Office: (407) 618-0322
Mobile: (407) 963-0451
Fax: 877-622-2135
Email: joe.manglardi@homebridge.com
Website: www.homebridge.com/JoeManglardi
Jada Melendez
Caliber Home Loans
9145 Narcoossee Road, Suite A-209, Orlando, FL 32827
Team Loan Consultant | NMLS ID #1514904
Mobile: (321) 200-2888
Email: Jada.Melendez@caliberhomeloans.com
Website: WWW.CaliberHomeLoans.com
Step 2: Tell Us About Your Dream Home
When you’re ready to start your search for your dream home, here are some key factors to keep in mind:
- Location, Location, Location: The one thing you can’t change about a house is its location. Decide where you want to live first, and let that guide your search.
- Dream Features and Upgrades: If there’s a specific feature or upgrade you’ve always dreamed of, look for a home that already has it. Many people plan to make upgrades later but often never get around to it.
- Your Style Preference: Do you prefer the charm of a Colonial home or the flair of Mediterranean architecture? Knowing your style can help narrow down your options.
- Space Requirements: Consider how much space you truly need. Whether it’s an extra room for an office, a spacious kitchen, or a cozy man-cave, not everyone needs a massive home. Remember, more space means more to maintain.
- Affordability: Be realistic about your budget. Stretching too far can lead to being “house poor,” which is not a situation anyone wants to be in.
- Manageable Compromises: While it’s important to focus on what you want in a home, it’s equally crucial to know what compromises you’re willing to make. Identify deal-breakers early, such as not wanting close neighbors, and let that steer your search. For example, if privacy is a priority, you might need to look for a home with more land or in a less densely populated area.
Step 3: Let’s Go Shopping
Let the fun begin! We will email you properties currently for sale that match the data you provided about your dream home. You tell us which are your favorites and we will take you to go see the properties.
Contact The Realty Medics
Our team here at The Realty Medics looks forward to helping you purchase and manage your new home or rental property.
