Buying a home in todays market has some unique challenges. Here at BEAL Real Estate we get many questions regarding home ownership. The experts at BEAL| RE Bay Area are here to help answer those questions with insightful and creative solutions.
Your first question may be: “But how do I come up with the 20-percent down payment required to buy a home?” That is a great question, and this article will briefly describe four options for you to consider if you do not currently have that 20-percent down payment readily available.
The first option to consider is using an FHA loan to purchase your home. The main benefit of using an FHA loan is that you can purchase a home with a down payment as low as 3.5 percent. The main limitation of an FHA loan is that the maximum loan amount here in the Silicon Valley is $636,150.
A second option to consider if you do not have enough money for a down payment is an “equity share” arrangement with someone you know well, like your parents or another family member who happens to have the funds available. This investor may be much better off by investing money in your home as the down payment and splitting the increased equity 50/50 when you sell the home in the future. Your equity investor would benefit from the power of leverage being applied to a Silicon Valley home. Based on a 20-percent down payment and the power of leverage, if the home appreciated at just five percent per year, that would work out to an average annual pre-tax return of roughly 12.5 percent for your investor. Many investors would be very happy with that type of return.
A third option to consider if you do not have enough money for a 20-percent down payment is partnering with one or more friends to purchase a property together, after reaching an agreement to sell in the future at a mutually agreeable time and split the proceeds. This would require each of you to come up with much less for the down payment.
The fourth option to consider for your down payment is selling any of your employer’s company stock that you may already own. In the event you may be concerned about missing out on the future growth of that stock, please consider the following scenario. If a married couple had sold Google stock in 2007 to purchase a townhome in Mountain View, they would have netted more money by selling that townhome in 2017 than if they had kept the original Google stock and sold it in 2017. What makes this especially noteworthy is that, during this ten-year period, Google stock appreciated at an average rate of 14.1 percent per year while Mountain View townhomes appreciated at an average rate of 5.8 percent per year.
Two primary reasons the townhome investment was more profitable than keeping the Google stock are the power of leverage and capital gains tax exemptions. The power of leverage means that, when the married couple purchased the townhome with a 20-percent down payment, the appreciation they earned was based on 100 percent of the value of the townhome. Generally, the capital gains tax exemption allows a married couple to earn up to $500,000, or a single person to earn up to $250,000, tax-free on the sale of a home, as long as they lived in the home for two of the five years prior to selling it.
There you have it, these four options can help you transform your housing cost from a monthly expense into a monthly investment.
Beal Real Estate does not give tax advice, please consult your own CPA or tax advisor.