Maximizing Profits: How Long Should You Own Before Selling?

I get this question from both new clients who are about to buy their first home, as well as clients who have owned there home for a few years: “How long should I plan to hold on to my home before I sell?” This is a special concern for anyone who is relocating for work, and who may be moving again in 5 years or less.

Whether you want to make a quick profit from continued high real estate prices in the Houston area, or there’s a move out of state in the near future, it’s important to know how long you’ll need to commit to owning your home for a variety of reasons.

According to Investopedia, it’s a better financial decision to buy instead of rent if you plan to stay in the home for 5-7 years in the Houston area.

However, Houston is more of a group of micro markets versus on large market. The answer to this question can vary widely based on if you’re in The Woodlands versus Humble. So how long do you need to own your home before it makes financial sense to sell based on your unique property and micro market? Let’s break it down here.

Break Even Basics

Every homeowner wants to make a profit when they sell, or at the very least to break even. A true break even point isn’t just what you paid for the home. You’ll also need to factor in additional costs associated with buying and owning, tax benefits you’ve taken advantage of during your time owning the home, and the cost of selling the home. Finally, you’ll need to evaluate any equity you’ve gained whether from mortgage payments of appreciation of the property.

Breaking Down the Details

To determine how long you’ll ideally need to hold onto you home, you’ll need to calculate the break even sales price by adding up the full expenses for buying the home as well as selling it. This is called your basis.

• Pull together all the expenses for when you purchased the home. That will be the purchase price of the home plus expenses. You’re settlement statement from when you bought the home will give you the full details.
• Calculate the costs of owning your home. Any repairs, maintenance, upgrades or updates you’ve made.
• Finally, calculate the cost of selling your home. You’ll need to estimate any commissions to your agent, any potential capital gains implications, and closing costs (including any buyer costs you may need to pay to make the deal happen).

Next, calculate any income/positive cash flow from your time owning the home.

• Additional equity from your mortgage payments.
• Tax refunds or benefits from owning the home.
• Any increase in value due to appreciation.

Once you have all of this information, you’ll have what you need to decide when it makes the most financial sense for you to sell your home. It comes down to whether your income/positive cash flow is more than your basis.

The Role of Appreciation and Equity

Every buyer wants both to build equity in their home through mortgage payments, plus the bonus of property appreciation. These two factors can help you get to your break even point sooner, or allow you to make a profit on the sale.

Equity = Ownership

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

One reason that a general guideline is that 5 years is the minimum point at which you’re likely to make a profit is that it takes time to build equity through your mortgage payments. In the first few years of a mortgage, very little of your payments go towards the principal balance.

As time goes by, more and more of your payments goes towards your principal balance, less goes towards interest, and that’s when the snowball of equity building starts to really get going.

Appreciation = Value Gained

Your home’s value will hopefully increase in value over time. You may also do improvements or updates to your property that can increase its value more quickly.

In an ideal market, the longer you live in your home, the more it will appreciate in value. That’s why at least five years can be a good rule of thumb as a starting point, to give the home some time to potential appreciate in value. The housing market can be unpredictable, so it’s possible your home will appreciate in value quickly, or it can stay stagnant or even go down, leaving a homeowner potentially upside down.

What Can You Do?

What can you do to protect yourself and make it more likely that you’ll make a profit or at least break even? Here are some strategies to help speed up that timeframe:

• Buy in the right location. This has a significant impact on your home’s potential for appreciation. Think carefully about the neighborhood, street, school district zoning, etc. Is the area up and coming, established, or going the other way? Consider resale value when choosing a home to buy to increase your likelihood of making a profit when you sell.
• Don’t buy the best house on the street. The best house on the street may never appreciate as much as you hope, due to the surrounding home values potentially negatively effecting the value of your home when it comes time to sell.
• Review appreciation values over several years. Look at the neighborhood to get a sense of its stability and long-term patterns. Are home prices rising? Your Realtor can help gather and analyze that data for you.
• Avoid having a large mortgage. Don’t overspend on your home, since it effects your ability to buy your next home. You’ll build up equity faster with a smaller loan. If you can’t make a large down payment, buy a home that allows you to take out a smaller loan.
• Make improvements to the property. Be careful not to do too much, since that can lead to losing money. You’ll want to get a return on your investment, so be sure to stick to updates that give the most bang for your buck.
• Quality for the lowest possible interest rate. The lower your rate, the less you’ll pay towards interest, and the more equity you’ll build faster.

Whether you’ve lived in your home for a few years or a lifetime, I’m here to help when it comes time to move. In the meantime, I’m your go-to resource for all things real estate, even if you aren’t buying or selling anytime soon.