I think buying and selling a home is expensive, and unless you think you might live in the home for at least five years (it’s even known as the five-year rule), you might be better off renting.
QUESTION: I am graduating from college this spring, and have already accepted a job with a very good starting salary. I want to buy a home as soon as I can, but my family says I should wait until I start working and get a year or two under my belt to make sure I like the job. What do you think?
ANSWER: I think buying and selling a home is expensive, and unless you think you might live in the home for at least five years (it’s even known as the five-year rule), you might be better off renting.
I can understand you wanting to buy a home as soon as you are able and start building equity. But I think your parents have a valid point about making sure you are in the right job and want to stay long enough to reap a profit on any home.
The five-year rule says that new homeowners should generally stay put for at least five years before selling or risk losing money. The reason is that closing costs and real estate commissions required to buy and sell real estate will consume an estimated 7 to 15 percent of a home’s value. Your home will have to appreciate this much to just break even. If you want to make money, then your home’s value will have to exceed those fees.
The longer you keep real estate, the more it appreciates. You might get lucky and be able to double your home’s value in a few years, but don’t count on it.
Closing costs, on the other hand, are a fixed expense that you will want to get back when you sell the home. Buyers should generally budget 2 to 5 percent of the home’s sale price for closing costs.
Selling a home can be even more expensive because the real estate commission you pay a real estate agent to market and sell your home can range from 4 to 6 percent of the sales price.
Of course, if you do want to move out before the five-year rule and before you build up enough equity to cover all of your costs of buying and selling, you can always rent the home. Ideally, you will be able to charge enough rent to break even on your mortgage payment, property taxes and insurance, and still build equity in the home.
Bottom line: Buying and selling a home is a costly endeavor. That is why potential homeowners should consider carefully where they plan to be in the next 5-10 years before they lock themselves into a mortgage. If you don’t plan on being in a home for more than five years, you should consider renting.
Linda Goodspeed is a longtime real estate writer and author of “In and out of Darkness.” Email her at: email@example.com.