After food and water, shelter is the next most important asset for survival. In the modern homes are more than a place to protect us against the elements. They are places we grow up, raise families, and make memories. Homes represent financial security and stability. They become a source of wealth.
Any property whose primary purpose is not for business is considered residential. This encompasses condominiums, townhomes, co-ops, villas, multi-family houses less than four units, and single-family homes. As you can imagine, residential real estate is a large segment in the greater property industry. According to one source, the United States had almost 128 million households in 2018. “Household” means all the people occupying a housing unit intended for living quarters, so that term could include several generations under one roof.
Local zoning ordinances define residential real estate cannot be used for commercial or industrial purposes. However, with the right permitting, running a home office is allowable. The City of Fort Worth Code of Ordinances explains the home occupations acceptable for running out of a home and the required standards, as detailed here.
Owning residential property, whether for personal use or with the intent to invest, comes with benefits and challenges. This article summarizes the advantages of residential real estate ownership, and provides insights into buying and selling residential property.
Benefits of residential real estate ownership
The cornerstone of the American dream has long been to own a slice of those fruited plains and purple mountain majesty. It’s the idealized “two-story home with the white picket fence” stereotype.
Home ownership may not be right for everyone, but it does have a few notable benefits.
- Tax breaks for ownership. The federal government allows homeowners to write off the interest on their mortgage payment. It's possible to write off certain home repairs, interest on home-equity loans or lines of credit, and some state and local taxes (SALT). Another benefit when it comes to the sale of an owned residential property are the special rules regarding capital gain taxes. You might pay zero in capital gains taxes, within certain rules, meaning you keep the profit.
- Building equity over time. Land cannot be created. Real estate is a finite asset. This means real estate is one of the few investments that will grow over time. While natural fluctuations to supply and demand influence real estate prices, when you take a long-term approach, a home that is kept in good condition appreciates in value over time. For example, the Federal Housing Finance Agency (FHFA) House Price Index (HPI) found that home values increased an average of 6.9 percent over a five-year period ending December 31, 2017. For perspective, if you bought a home for $200,000 in 2012, that means it potentially was valued at $213,800 in 2017 simply for existing. The lesson: the longer you own your home, the more appreciation gains you stand to earn when it comes time to sell your residential property.
- Stability for families. Studies, like this from Harvard’s Joint Center for Housing Studies, have found correlation between that homeownership and psychological benefits for families, children, and the community. Studies find connections between ownership and education for children, lower teenage pregnancy rates, and a higher lifetime annual income for those children. People who own their home are more likely to participate civically in their communities, such as through voting and volunteering.
As noted, residential real estate comes in many forms: homes, condos, town homes, etc. All these help owners build wealth, take advantage of tax breaks, and provide a sense of stability to the household.
Before purchasing residential real estate, it's important to understand the process from the buyer's perspective and a seller's perspective. Selling may not seem important now, but whether it’s three years or twenty, you will sell the property to tap into its financial equity. Plus, it’s always helpful when negotiating with sellers to understand their perspective on the process.
What does it take to buy residential property?
Purchasing residential real estate is a more elaborate process than, say, buying a car. For one, it’s the usually most expensive purchase people will make in their lifetime. That alone means due care is needed. State and federal laws have protections in place designed to prevent real estate fraud, but these slow down the time needed to close a transaction. Here’s the basic process behind buying residential real estate:
1. Understanding your finances
Have you ever heard the term “house poor?” This is a slang term that means someone is spending a large portion of their income to maintain their home. You'll hear hints of being “house poor” when owners make comments like they don't have money for a family vacation because they're putting it into their home. Overspending on a residential home is detrimental to your financial security and mental health.
Before buying residential property, understand how much home you can realistically afford. The rule of thumb is housing costs should not exceed 1/3 of your monthly income. Look at how much money you have available for a down payment and closing costs. You might want to buy a $300,000 home, but lack the $60,000 needed as 20% for down payment to get your mortgage to an affordable payment.
2. Understanding the market
No two residential property markets are alike. New York City and San Francisco are completely different from Dallas, which is different from Fort Worth. Check out this comparison of what $250,000 will buy in residential real estate in different markets. You’ll see a huge spread, from a 3-bedroom 2-bath 1900 sq.ft. open-plan home with patio in Austin, Texas to a studio with one bath at 421 sq.ft. in Washington, D.C.
Plus, real estate markets change over time. Sometimes we are in a buyer's market, a scenario where a large inventory and low buyer interest allow negotiations to favor the buyer. In a seller's market, high demand and low inventory drive up the medium price point. Or, we could be in a balanced market, where the interest is nearly equal between the number of available properties and the buyers currently looking.
Plus, just because the city might be experiencing a seller's market doesn’t mean that certain pockets couldn't be in a buyer's market. Even within Fort Worth, certain neighborhoods have different real estate activity because of supply and demand.
Look at what homes are going for right now, how long most residential properties have been on the market, and what the trends over the last six months to a year. See North Texas trends, or consult a professional real estate agent for hyper-local market information.
3. An interest in home ownership
Residential property ownership is not an asset like gold or minerals that buy and store for years. You or your potential tenant(s) are going to live in the home. The property will show natural wear and tear. Its features must be maintained to ensure the comfort and safety of the occupants. When the HVAC dies or the neighborhood kids break a window, you need to have the financial capabilities to fix these items. Anything could go wrong at any time: a roof leak, termites, water heater busts–and as homeowner, it’s your responsibility to oversee the repair.
In short, residential properties require ongoing labor. We bring this up because not everyone is interested in doing the work to maintain a home.
4. Research on financing options
Most homeowners finance a portion of their residential property purchase. Different loan programs are available. Special financing options exist for low-income families, rural properties, military veterans, first time home buyers, and a slew of others. This is on top of more traditional mortgages programs, like fixed-rate and adjustable-rate mortgages. Beyond the interest rate, look at the different loan program requirements, such as percentage down, years of the loan, and prepayment penalties. Learn what programs you potentially qualify for and best fit your needs.
5. Time and patience
A home transaction is much more complicated than buying furniture or purchasing a car. To find the right property requires a lot of research and time spent looking at properties. Some people do get lucky and find the right home within a matter of weeks. Other spend months looking for the right opportunity. Whatever your scenario, expect the home-buying process to take several months.
Interested in learning more about buying residential real estate? Read deeper into the details about purchasing residential real estate.
What does it take to sell residential real estate?
Eventually you will sell your home. When that time comes, know how residential real estate is sold.
1. Understanding the market
As long as your property is in good condition, you should have experienced appreciation. How much appreciation will depend on how long you owned the home and the local market conditions.
When you prepare to sell, know your hyper local circumstances. Not only are you looking at comparable closed sale prices from the last year, but you are also learning the overarching conditions. Knowing the average days on market tells you about how long to expect to have your home listed before receiving an offer. This tempers expectations and helps you decide on a listing price.
2. Ability to market
Listing a home isn't as simple as taking photos and posting them on the Internet. If you want to receive top dollar for the property, put a little work so its best foot steps forward. What you need to do depends on the home’s condition, which we discuss in greater detail in our article on selling residential property. Generally speaking, you want to clean the home, look at home staging, and position the property through quality photography and descriptions.
It's also a matter of putting your home in front of qualified home buyers. The home must be on the right channels where people are looking to buy real estate. Real estate agents are professionals at marketing properties and figuring out the best story to attract solid perspective buyers.
Few people buy a home without looking at it. If you plan to stay in the residence while it is listed, you've got to open your home for people to see it at any time.
You need the patience to wait for an offer to come. Not all properties are in a hot neighborhood where contract offers come within hours of being listed on the market. Depending on your price point and current market conditions, it could be a few weeks before a viable buyer comes along. All properties can sell, but some take a little more elbow grease than others.
4. Negotiating skills
Selling residential property requires negotiation skills. You're trying to get the most value from your home, but the buyers are aiming for the best deal possible. The conflict of interest is obvious.
When a buyer sends an offer, study the contract carefully. It will contain contingencies, an earnest money deposit, estimated close date and the purchase price. All these are negotiable. You have a right to make counter-offers with terms more favorable to you. It's all about give and take.
Of course, there's more to selling residential real estate then what's outlined here. This article that breaks down the selling process.
Why we have real estate agents
Thus far, we haven't discussed the role of a real estate agent in the buying or selling process.
Typically, real estate agents specialize in residential or commercial real estate. From there, residential real estate agents will specialize as a listing agent or a buyer's agent, in specific neighborhoods, or with specific buyers.
As we've said, the buying and selling residential real estate usually takes several months at minimum. A real estate agent is a helpful resource during this time. They have specific training and experience in guiding buyers and sellers during a real estate transaction.
A buyer’s real estate agent helps you find the right home, write a contract offer, and enter negotiations. They are a resource when it comes to finding the ideal neighborhood or looking at a contractor, such as a mortgage lender or a home inspector. The agent will write a counter proposal after an appraisal or home inspection. They help track the paperwork required to successfully arrive at the closing table on time.
A seller's agent or a listing agent is someone who advises you on the sale of your home. They provide you with local market data, advise on how to position the property for the best marketing, and help get top dollar for your home sale. They represent you during a contract negotiations and are your source of encouragement if things don't go as planned.
While some homeowners choose to do a For Sale By Owner transaction, the vast majority of home sales in the United States use a real estate agent. We are service-oriented professionals whose mission is to make a complex and emotionally-ridden process easier for you.
At Chicotsky Real Estate Group, we work with residential real estate buyers and sellers. We entered real estate because we wanted to leverage our knowledge, negotiation skills, and love of the challenge to the advantage of our clients. Our clients come from all backgrounds and represent a variety of property types. We're very knowledgeable about Fort Worth’s neighborhoods and the real estate service professionals working in the area.
If you're interested in knowing more about buying or selling residential real estate, both as a homeowner and a real estate investor, we encourage you to check out these resources: