Prospective Home Buyer:
Thank you for taking the time to read this report. I hope you find it valuable in helping you make the most of current market conditions.
A changing market can be a great time to buy a home or investment property. Regardless of market conditions, real estate has traditionally been one of the best long-term investments people can make. Now as the market has slowed from the record pace we experienced over the last few years, buyers have even greater opportunities and more choices when searching for a home.
My intent in creating this report is to help you set realistic expectations to best capitalize on the advantageous market conditions we’re experiencing.
Five Perks of Owning a Condo
There are advantages to owning a condo:
1 1) Supply and Demand The biggest reason residents buy instead of renting in Iowa City is that ideal rentals are very limited. A good rental in a quiet and desired location is difficult to find, and if you own a rental in such a location you will later be able to charge for that location. Less desirable areas with high concentrations of rentals can create pockets of noise and sometimes even a party atmosphere. The demand for rentals has also caused homes with low desirability to be rented even when they lack of amenities.
22) Homeownership Can Lead to Beneficial Income Properties For the reasons finding a pleasing place to rent is tough, finding a pleasing home to purchase is difficult—but when you find such a home and buy it to live in while in school, you will have a beneficial property to rent when you finish college. It is not uncommon for graduate students to keep their homes as income properties for an extended period following graduation. After paying down the mortgage for five years, the equity in the home can provide a down payment for purchasing a second home while generating an ongoing supplemental income stream. A homeowner can begin generating a second income stream even while living there by renting an extra bedroom. If you purchase a $150,000 home with a $750 monthly mortgage while renting a bedroom for $600 a month, your monthly mortgage expense is reduced to only $150.
33) Rising Rent, Locked-In Interest Rates Rent has continued to rise in Iowa City while interest rates remain at historic lows. Before the recession, the average homeowner was said to have needed to live in a home for 5+ years to break even (before tax benefits), but now with interest rates 1 to 2 points lower, the breakeven period is much sooner, as early as 3 years. People fail to appreciate how much impact interest rates have on home values. Even if prices were to come down a little more, it only takes a half-point increase in interest rates to make homes about 5-6% more expensive. People who decide to wait to purchase until prices come down will not benefit if rates go up.
44) Customize Your Space When you own, if you wish to knock down a wall to make a larger master bedroom or redo a bathroom, you have the freedom to do so without losing a security deposit. And well-done improvements can increase your home’s value when it comes time to sell.
55) Iowa Tax Benefits On top of receiving a homestead exemption credit, a buyer may deduct mortgage interest at a healthy percentage on the dollar (based on your tax rate that relates to income). When you rent a home, the rental payments you make are not tax deductible. But when you own a home, you get to deduct a good part of the interest you pay on your home mortgage from your federal and state tax income (depending on your tax bracket). Example: If you have a $300,000 mortgage at 5.0%, you’ll make about $20,000 in payments in the first year, of which about $15,000 will be interest. A portion of that interest comes off your income as a deduction, so if you are, let’s say, at an income level where you pay 28% federal and 6% Iowa state tax, you save more than one-third (28% plus 6% is 34%) of those interest payments because of the tax deductions. In this scenario that would be a savings of about $5,000 on $15,000 in interest payments.
66) King of the Hill (No Landlord) The hardest part about renting is being at the mercy of your landlord. If you want to have a new stove, get a pet, or even fix a broken dishwasher, you’ll need to get permission. Something as simple as wanting to change the color of a wall or hang a picture usually requires permission. If the house is for sale as well as rent, the landlord can give notice and the rental will be over. When you own your home, you can improve it as you see fit for your own needs (such as upgrading appliances or adding a new deck), and this can add value to your home when you sell. Finally, unlike rent, a fixed mortgage can’t go up (even if inflation and everything else does). If you will be living here for the three to five years, your monthly mortgage payment will remain the same, making budgeting easier.
77) Building Equity Over Time One of the reasons your landlord owns the property you’re going to rent is that you are going to help him/her build equity in the property by paying down the mortgage. More than 70 percent of Iowans own their own homes (2012 Census Bureau) and gradually pay down their principal month by month until they have significant equity that can be liquidated for other investments. Although you do not build equity quickly on a new mortgage (because payments go mostly toward interest at first), over the first seven years you likely will pay 10 percent of the principal. On a $250,000 loan that’s $25,000 in equity, built over only seven years.
88) Strong Local Banks and Other Financial Institutions Due to a strong local economy it is no surprise that our local financial institutions are able to provide some of the best financial resources in the country. Homes can be purchased in our area with low to, in some cases, no down-payment through local financing. In-house financing options often can provide more flexibility in requiring down-payment amounts and reacting to credit scores. In-house financing can also offer lower interest rates on fixed rates of 5, 7, and 10 years when compared to the 30-year option for homeowners purchasing short-term. For example, if you only plan to live in the home 5 years and purchase a $200,000 home with the current 30-year fixed interest rate at 4.25% compared to a 3.875% 10-year or 3.5% 7-year in-house loan, you would save $44 or $86, respectively, per month on mortgage payments.
99) History of Economic Stability in Iowa City Iowa City has a history of being recession resistant and has been recognized in a number of “top-10 cities” rankings with low unemployment during the recent recession (including in Forbes, USA Today, Business Insider, and CNN). With strong employment from the University of Iowa, Iowa City has remained a stable city through a number of uncertain economic periods. While sales in cities as close as 20 miles away have slumped, the total number of home sales in the area has increased each year from 2010 to the present by 4% to 17% to 20% of each previous year.
1010) Leveraged Appreciation The return you get on an investment such as stock is the increase in value of an investment over time. For example, if you buy $10,000 of stock, you own $10,000 in stock. If the stock appreciates by 5% you now own $10,500 of stock. But an investment in real estate gives you leveraged appreciation. If the same $10,000 investment put down to buy a $100,000 home (10% down) appreciates by 5%, the home is now worth $105,000. But the return on your investment is not just 5% because you are getting leveraged appreciation. You only put $10,000 into the home, so the $5,000 return is actually a 50% return on your $10,000 investment.
Note: For specific tax implications or legal questions, you should consult with your tax advisor or attorney.
Graduate Students Featured Neighborhoods
A Guide to Some Popular Neighborhoods 2/28/2014
Adam expertly assists graduate students -from dental to medical to law students, and others. Each year he helps make the buying process exciting and rewarding. He outlines some popular neighborhoods for graduate students throughout the Iowa City area.
Looking to buy? Homeownership is not for everyone. If you might move relatively soon, or you want the flexibility to move with only a month’s notice, or your job outlook is uncertain, then some rental arrangements can be ideal. And though renting can be more beneficial than buying in some markets, for graduate students who are relatively certain of the term of their studies--that they will stay at the University for a specific/minimum number of years–purchasing is a winning and popular approach in the Iowa City market.
Thanks in great part to this area’s market stability, low unemployment, and the strong, local financial institutions, a good number of buyers are purchasing rather than renting. If you are considering renting, you need to understand that you are foregoing some of the financial benefits of home ownership.
The American dream of owning a home is active and exciting in the Iowa City market. It can be a great time to buy with historically low interest rates. We hope this information has helped you prepare for the next transition in your life. Please feel free to call us if you have real estate questions. If you are leaning toward homeownership, contact the me–my sole interest is in getting you where you will be most comfortable and where you will most benefit. Move forward.