How long should you own your home before selling it?

This is a question often asked by new clients who are about to buy their first home as well as clients that have owned their home for a while, “How long should I plan to hold on to my home before I sell?”

Whether you want to make a quick profit from appreciating real estate prices in Colorado or you’re facing an impending move out of state, it’s important to know how long you’ll need to commit to owning your home for all sorts of reasons.

According to Zillow, it’s a better financial decision to buy instead of rent if you plan to own your home for 4.2 years or more.

However, buying a home is very neighborhood-specific. So how long do you need to own your specific home before it makes financial sense to sell? 

Break-Even Basics

Everyone would like to make a profit or at least not lose money — break even — on their home when it comes time to sell it.

A true “break-even point” is not simply what you originally paid for a home. There’s more to it. This number also includes the costs associated with buying and owning, tax benefits you’ve taken advantage of during your ownership, and the cost of selling your home.

You also have to factor in the equity you’ve gained in your home and any appreciation in its value since your purchase date.

Let’s Break It Down

To determine how long you need to hold onto your home, you have to calculate the break-even sales price by adding up the total expenses when buying and selling a home. This is often called your BASIS.

• First, tally the total expenses for your home purchase — original purchase price plus your closing costs.
• Second, calculate the costs of owning your home — maintenance, repairs, and upgrades.
• Then, figure out the cost of selling your home. Generally speaking, you will need to estimate about 6-7% of the selling price — to account for agent commissions, sales taxes, and potential seller concessions.

The next step would be to determine INCOME:

• Equity in your home (principal paid toward your mortgage)
• Tax refunds you received while owning the property
• Any increase in appreciation

Once you determine the figures above, you can make a better decision when it makes financial sense to sell your home.  Is your INCOME greater than your BASIS?

Appreciation and Equity

Every homeowner wants to build equity in their property and have a home that appreciates in value. These two factors help you get to your break-even point sooner and potentially make you profit from the sale of your home.

Equity = ownership. The more equity you have, the more home you actually own.  You gain equity when you pay down the principal of your loan.

The primary reason the “five-year rule” exists is that it usually takes time to build equity when you have a mortgage. In the first few years of your mortgage, a huge chunk of your monthly payment goes toward the interest on the loan and not the principal.

As the loan matures, your principal slowly goes down causing your interest payments to be less. This is when more of your payment goes toward your principal.

Appreciation = value gained. Your home’s value will hopefully increase in value over time. You might also do improvements to the property to increase its value more quickly.

In a perfect market, the longer you live in your home, the more it will appreciate in value. That’s why it is highly encouraged to live in your home for at least five years to reap this gain.

But as we know the housing market can be unpredictable – homes can quickly appreciate in value like they are right now or it can be a bust, leaving many owners with homes underwater.

So What Can You Do

Here are a few strategies to keep in mind to speed up your break-even timeframe and to make your homeownership a financial plus for you.

Pick the right location. This has the biggest impact on your home’s appreciation. Carefully consider the neighborhood, street, community, and accessibility. Is it an up-and-coming neighborhood or one that’s going the opposite direction?  Always think about possible resale value before you purchase.

Avoid buying the best home on the street. This type of home may never appreciate as much as you would like because of the surrounding homes (which benefit from yours!).

Look at appreciation values over several years. Study the neighborhood to get a sense of its stability and long-term patterns. Ask your Realtor about this. Check whether home prices are constantly rising and if condo units are gaining value.

Avoid a large mortgage. Don’t overspend on your first home since it will affect your ability to buy your next home. You’ll build up equity much faster with a smaller loan. If you can’t put down a large down payment, buy a home where you can afford a smaller loan. You don’t want the bank to own more of your home than you do for a longer time than necessary!

Make improvements to the property. But also be careful not to over-improve otherwise you’ll just end up losing money! Find out what upgrades help improve home values in your neighborhood.

Qualify for a low-interest rate. The lower your mortgage rate, the less you’ll pay toward the interest, and the sooner you can OWN your home.

A good rule of thumb to follow is to plan to own your home for about five years or longer. But also keep in mind that this time period may increase or decrease based on everything I’ve just explained.

Whether you’ve lived in your home a few years or a lifetime, I would love to help you when it comes time to move.  In the meantime, never hesitate to reach out for all things real estate, even if you aren’t buying or selling anytime soon.