How First Time Homebuyers Build Equity
After you buy your first home, you need to look forward to the profit you can make when you sell your first home. You will frequently hear the term “equity” and I will not bore you with a long winded explanation of how it is derived from the legal term “equity of redemption.” What it means is the value you have in the house. In other words, take the money you would get from a sale, subtract the amount necessary to pay off the loans, and the money you have left over is your equity.
How do you build equity? Make the home more valuable, and avoid problems that make it less valuable.
We have discussed home maintenance in another post. If you keep the home from deteriorating, you will preserve the value.
To make the home more valuable, do some home improvements. The most cost effective improvements are carpet and paint. This is why many homes get a fresh coat of paint and have the carpet replaced just before they are placed on the market.
Upgrading the light fixtures and the plumbing fixtures will keep your home looking current. Just like wearing clothes that are out of fashion gives the wrong impression, light fixtures and plumbing fixtures can make a house feel dated. If you are handy, these improvements are inexpensive, as most of the cost is labor for a plumber or electrician.
The kitchen and master suite are some of the most important parts of the home for adding value because they are the parts of the house that are the focus of the buyers’ attention. Remodeling the kitchen is one of the biggest improvements in terms of increasing value, but it is also one of the most expensive. Replacing the cabinets, counters, appliances and floor coverings can get very expensive very quickly. Similarly, remodeling the master bath involves changing cabinets and lots of plumbing, so it can add up quickly.
If you want to get seriously involved in changing the house, you can add on a bonus room, additional bedrooms or additional baths. If you finish off a basement or an attic, you might think that the value goes up by the same cost per square foot as the rest of the house. However, appraisers are not kind when valuing finished attics or finished basements, and they sometimes get as little as $50 per square foot while the rest of the square footage in your house gets two to three times that value.
If you are adding bedrooms and bathrooms to a home on a septic system, be sure to check the capacity of the septic system, because it is sized for a certain number of bedrooms. You may have a house that physically has five bedrooms, but it can only be sold as a three bedroom house if the septic system is sized for only three bedrooms. If your home is connected to the sewer, you will not have this problem.
Overbuilding the neighborhood is a concern if you are increasing the size of your home. If all the other homes in your area are around 1,800 square feet, and you are increasing the size of your home to 4,000 square feet, you will have a hard time getting the money back for your improvement. The little homes in your neighborhood will be riding your coat tails to hold back your value. If the entire neighborhood is changing to much larger homes, you may be alright, but it is hard to count on all the neighbors remodel their homes.
If you are going to live in the home for an extended period of time, and you are going to really enjoy the improvement, you may not care if it adds equity. For example, adding a swimming pool rarely gets even a fourth of the money back from the cost of the improvement. But, if you swim as often as the weather permits, your health and enjoyment may make the investment worth it to you.
If you are thinking of adding value to your home, give our team a call at 919-812-5111 or send an email to tim@TimBurrell.com and we will be happy to guide you.