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6 Factors To Consider Before Buying Real Estate

By Martin Dasko

What To Consider Before Buying Real EstateExperts are always trying to tell us when it’s the right time to take action. There’s always a right time to work out. A right time to eat your food throughout the day. There’s always a right time to shop for certain things. And, of course, there’s also always a right time to invest in real estate and to purchase a home. Let’s take a step back for a minute on that last one. Is there really a “right time” to purchase real estate?

Ultimately, it comes down to not only the real estate market, but also your personal situation and where you are at in life. Before you purchase your own piece of real estate, below are six things you need to consider before making the decision to invest in real estate:

1. Income Stability
How stable is your income? When your company or business is doing well and you’re making lots of money, it’s very easy to get excited and feel the desire to buy yourself a piece of property. The question that you need to seriously address here is: “How stable is this income?” What’s the likelihood that your income will remain the same or increase in the next six months? What about the next year? If you’re unsure of your future income situation, then picking up a mortgage isn’t the brightest idea at the moment. You’re going to want to wait a few months until you have a clearer picture of your future earnings or you’ve at least built up your savings a bit more.

2. Your Credit Score
This will determine what interest rate you’ll obtain on your mortgage if you get approved. A few points up or down on your interest rate can be the difference between thousands of dollars over the lifespan of your mortgage. Make sure that your credit score is where you want it to be before you even apply for a mortgage. If it’s not, then you need to start thinking about ways to raise your credit score.

3. Life Situation
Are you single at the moment? Are you in a long-term relationship? Your life situation can change in a few months or overnight. Your company can offer to transfer you to a warmer part of the country. You might get the instant urge to quit your job and travel to Europe for a year. We all have different life situations. This is why there is no one-size-fits-all advice when it comes to buying real estate. Make sure that buying a piece of real estate fits your situation.

4. Goals With The Property
We all have different goals when it comes to real estate. Some of us simply want a shelter. Some of us want to live in the booming part of town. Some of us just want to be able to walk to work. Just make sure you think about these goals ahead of time and decide if buying real estate is necessary to achieve these goals. Also, make sure the price matches your budget; if you overextend yourself, your financial life will become a lot more stressful.

Perhaps most importantly, it’s almost always a bad idea to buy real estate purely as an investment decision. Sure, it’s great if the real estate you’re buying seems like an awesome deal, but this shouldn’t be your sole criterion. If your goal with your property is to make some money off of it or to flip it quickly, then you strongly need to reconsider. There is just too much risk involved. Look at everyone who invested in real estate during the recent housing bubble and now can’t get anyone to even consider buying their home.

5. The Real Estate Market
Are you tracking housing prices in your area? Have real estate prices gone up or down? Once you know where you want to live, it’s important that you see for yourself how housing prices have changed in that area. If real estate prices have drastically gone down and your finances are where you want them to be, then you could find yourself in an amazing position to become a homeowner. On the other hand, if housing prices are at an all-time high, you may want to be patient so that you can avoid buying into a bubble that may burst soon.

6. Future Goals
There are plenty of situations where you don’t want to tie up your cash in a physical asset. For example, if you want to engage in long-term travel in the near future, you won’t want your savings tied up in a property. If you want to quit your job, start your own business, or take a break, it’s going to be extremely difficult if you have mortgage payments to make.

Final Word

The point of this piece is to stress that no “expert” can predict the right time for you to invest in real estate. You, and only you, will know when the time is right to take that next leap in life to purchase a home. Don’t let any supposed expert advice become the deciding factor in your home purchasing decision.

My Confession
Now it’s time for me to make a little confession. I purchased a piece of real estate as an investment a few years ago and planned on renting it out. The first bad decision here was that I broke my “don’t buy real estate as an investment” rule. I think you can guess what has happened to the value of this property during the recent housing crash. To make things worse, after filling out all of the paperwork associated with the condo closing, I was informed that the developer put in a clause in the documents stating that the owner must live in the unit for a year prior to leasing out the unit. I had no idea this was a part of the contract but it was already too late. Two more lessons learned here: get a quality lawyer, and thoroughly read through the paperwork. Luckily for me, things worked out in the end because a buddy moved in with me to split the costs, and I had the best summer of my life.

But, even today, there still remains a negative that has resulted from my decision to buy that real estate. I desperately want to work and travel abroad this winter. Instead, I’m going to have to delay my plans by over a year because so much of my capital is tied up in my condo mortgage payments. Don’t let this happen to you!

If you’re considering buying real estate, you need to consider these six factors before making a decision. Learn from some of the mistakes I made.

Have you recently invested in real estate? How has the decision worked out? Do you have any additional tips for people to keep in mind when evaluating whether to make the leap?

(photo credit: Jellaluna)

Martin Dasko
Martin is a 22 year old personal finance writer that attempts to make money talk fun. After taking many finance courses in college he realized that this stuff is completely boring and that nobody cares about complex calculations. He started his own personal finance blog in November of 2008 and has been passionate about making matters interesting ever since then. His goal is to show you how to get the most out of life, while still saving a buck or two.

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  • http://www.investwithpassion.com Freddie @ Real Estate Investing

    if this were me and I were considering the real estate market right now, I would pass. The reason is because I think the market isn’t done declining in the next 3 years or so. Even the most optimistic of us out here know it will be at least another 12 to 18 months before prices level off around the country. Therefore, there is no incentive to rush here for anyone. Take your time…consider all the things in your article, but also consider waiting.

  • Martin Dasko

    I agree Freddie. Waiting can be extremely powerful with any investment, especially real estate.

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