A house is usually the most expensive purchase that any person makes. To many buyers, purchasing a home is a permanent decision, and the plan is to live in the house for decades to come. For others, purchasing a house is a financial decision made for the short term, with the understanding that it may be sold a few years down the line.
If you plan to buy a house and live in it for a decade or more, the breakeven point is likely of little importance to you. However, if you are looking into buying a house as a short-term or medium-term investment, the breakeven point is one of the most crucial things to consider before buying a home.
This post is meant for those people who are looking at buying a home with the understanding that they will probably sell it in less than 10 years. It contains everything you need to know about the typical breakeven point of a home purchase, including how to estimate it on your own.
What Is a Breakeven Point in Real Estate?
The breakeven point is the moment in time when selling your home would become profitable for you. When you buy a home, there is a lot more money involved than just the sale price. Closing costs, moving costs, and furnishing costs all can add tens of thousands of dollars to the sale price, and they are all things you are responsible for as a home buyer.
If none of these things existed, all you would need to do to turn a profit is sell your house for more than you bought it for. However, to truly make money on a house, you need to consider all of these other elements. Houses usually appreciate in value over time, and the breakeven point is the point in time when your house has appreciated enough in value to offset the money you’ve put into it.
How Do You Calculate the Breakeven Point on a House?
To calculate the breakeven point on a house, you need to consider the costs associated with purchasing and owning the house and compare them to all of the potential or earned gains. To do this, you should consider each of the following elements:
1. The total cost of purchasing the house, including the sale price, closing costs, and any other expenses related to the sale, like moving costs
2. The ongoing costs of owning the house, including monthly mortgage payments, property taxes, maintenance and upkeep costs, homeowners insurance, and utilities
3. Any gains you experience from owning the house, including rental income and any appreciation in its value
Once you have considered each of these elements, you should divide the total purchase and ownership costs by the total gains. This will equal the number of years it would take to recoup your investment, which is your breakeven point. This calculation method is very general, but it can be used to estimate the breakeven point of any house.
What Affects the Average Breakeven Point on a House?
The average breakeven point on a house varies broadly depending on many factors. These factors may include location, property size and type, the average interest rate, the state of the housing market, and the financial conditions of the mortgage. On top of these, many other factors influence each individual case, like the dynamics of the neighborhood, the quality of local school districts, and more.
Every homeowner’s experience is different. Some homeowners luck out and are able to turn a profit on their house within just a couple of years. Other homeowners are doomed to never make a gain on their home.
At the end of the day, you shouldn’t pick a home solely in the hopes of making a gain. You should purchase a home because it is a suitable place for you to live, and everything else should come later.
What Is the Average Breakeven Point on a House Purchase?
Due to all the factors impacting the house prices at both the moment of purchase and the moment of sale, it is impossible to calculate an actual average breakeven point. Each homeowner experiences different things while owning a home, and all of these can greatly impact the home’s appreciation or the costs required to maintain it. Natural disasters, large maintenance projects, and accidents can all drive up the expenses of owning a home, and these cases all extend the breakeven point further into the future.
Similarly, changing personal preferences can push the breakeven point further into the future, too. Replacing the carpet and cabinets more frequently than necessary adds thousands of dollars to the homeownership costs, which can make the breakeven point occur several years later.
With that being said, there are a few common estimation methods out there that can be used to loosely guess your breakeven point. One common rule of thumb is to expect it to take around 5 to 7 years to break even on a house. This is often when enough equity is accrued to recoup the money you have sunk into the house. This idea considers factors such as property appreciation, mortgage payments, tax benefits, and maintenance expenses.
Ways to Breakeven Sooner on a House
There is very little within your control that can make the breakeven point of a house come sooner. Most of the conditions that dictate whether or not you will make money on your home are external, and have to do with the market, the local neighborhood, and the economy. While there is only a little bit that can be controlled, there are a few things you can do to make your breakeven point as soon as possible.
Firstly, shop around for the best possible mortgage before you purchase the home. Low interest rates are important if you plan on living in a house for the duration of its mortgage, but low closing costs may be a higher priority if you plan on moving out within a few years.
Secondly, make high-quality, infrequent renovations. Renovations cost a lot of money, which extends your breakeven point further into the future. If you renovate with low-quality materials, you will have to renovate more often and you will also probably sell your house for less. Renovating infrequently but with high-quality materials preserves the value of your house while also reducing the amount of money you put into it.
Thirdly, keep tabs on the market and your home’s value. A large part of making a gain on your house is selling it at the right time. Market conditions change all the time, and one of the best ways to break even sooner is to sell your house when its value peaks.
Thanks for reading our post on determining the breakeven point of a home. Every homeowner’s circumstances are different, which means every homeowner’s breakeven point is different. However, 5 to 7 years is often a good estimate for the average homeowner.
If you visit Myrtle Beach or any other place in South Carolina and fall in love, we’re here to help. We at The Boyd Team are committed to helping you find the right property for your needs and dreams. Any question that you have about moving to the area and finding your dream home by the beach is our pleasure to answer. Feel free to send us an email at eddie@boydteam.com or text or call us at (843) 222-8566, and we will get back to you as soon as we can. Being true natives of the Grand Strand and Horry County and with over 25 years of experience in the local real estate market, whether buying or selling, we can help you make your dreams a reality.
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Written by Greg
