Become a master home buyer with these key criteria

By: Alvaro Mallarino MBA, CFA

Become a master home buyer with these key criteria

Tags: Toronto real estate, real estate buyers, real estate sellers, real estate investors, real estate Toronto

In the world of real estate, there is a house for every family. The right property will come to you when you have done your part to make it happen and have asked yourself the necessary questions.

Nevertheless, the home buying process can be challenging. Some buyers believe that this is due to their budget, but buyers grapple with their needs and wants regardless of their budget, from $500 thousand to $4 million dollars. Due to this challenge, buyers must weigh the most important factors:
  1. Price
  2. Location
  3. Size
  4. Level of newness or renovations
 Likewise, understanding the balance of the four criteria, and analyzing the trade-offs amongst them, is one of the best exercises a buyer can undertake to confirm their wishes and capabilities regarding the home purchase process.
There is no secret that buyers favour newer, lower-priced properties that are located in the best neighbourhoods, with the largest living areas and bedrooms. Although there are exceptions where the buyer prefers a smaller size for convenience or prefers to preserve the character of old over new and modern, or does not care so much about the location, many buyers will find that their four criteria already take into account these "advantages" or trade-offs within their budget, meaning the price. For example, buyers with a smaller budget are already aware and comfortable with a smaller property or with a location that is not necessarily the most desirable.

Accordingly, buyers would greatly benefit from thinking through, balancing and analyzing in depth these four criteria, as they relate to their preferences and ability to pay, in order to better focus their search and succeed sooner in a competitive real estate market. If it came down to it, what are the things that a buyer would not be willing and able to compromise on?

The following questions may help buyers to gain clarity on what they really want, what they don't want, and how flexible they are when it comes to fitting their criteria within their budget, or fitting their budget within their criteria.
  1. In the same price range and location, would you prefer something larger but older, or something more modern but smaller?
  2. Are you aware that you might purchase something older, but you could renovate it to make it more modern? Would you consider this, or is it an absolute no? Do you think that scenario will affect your budget and if so, will it be much less than in principle or will you add a separate budget for a renovation? 
  3. Would you consider a completely different location at the same price in order to find something larger, or would you accept something smaller to avoid compromising your preferred location? 
  4. In the same manner, would you consider a completely different location to find something newer, or would you accept something older to avoid compromising the location?
Given that a very common answer is the preference to stay within the preferred location, the question is therefore, how much are you willing to spend on something newer and larger versus something older and smaller?
In the event that the same property exists in two parts, would you accept something that is not exactly in your preferred location? How much more would you pay if the property were in your preferred location? In other words, are you aware of a possible price reduction if you chose a different location?
There is no right or wrong answer, as these will depend on the buyer's profile and personality, but in analyzing those factors, the buyer can reach valuable conclusions.

Buying a condominium unit

In the case of condo buyers, there are additional considerations that could lead to very convenient conclusions. In order to assess the preferences of condo buyers, one should ask: would you prefer a unit with a high monthly maintenance fee, but with many included amenities? Alternatively, would you prefer to have fewer amenities, but pay a lower monthly maintenance fee? For many buyers, certain amenities are an absolute requirement, for example, a concierge, a gym, or a pool, so you must decide which of these would be important to you.
Similarly, some condominium buyers claim they would prefer a low-rise over a high-rise building. These properties usually come with a higher maintenance fee, due to the fact that there are fewer units to share in the operational costs. Would you be willing to pay a higher maintenance fee if you lived in a low-rise or medium-sized building? Knowing this, would you prefer to purchase a condominium in a larger building, in order to minimize the risk of high maintenance costs?
When the purpose of the purchase is clear, many of these questions can be answered easily. Why are you moving? What is your motivation for the purchase? For example, you may need more space, prefer a central location, or are simply tired of living in an outdated residence. On the other hand, if you’re investing, what are your goals and objectives? Do you intend to invest for the long term or for the short term?

Purchasing an investment property 

For investors, some additional key criteria to consider include: 
  1. Return from capital appreciation
  2. Return from cash flow
  3. Level of involvement required: in terms of time (energy) and capital 

Again, the most common answer to these three questions is obvious: higher, higher and lower. However, there are trade-offs between these three options. Typically, properties with high appreciation potential have low cash flow returns. Likewise, investments with a high cash flow return are limited in their appreciation potential.
The return from both appreciation and cashflow may also be affected if you do not wish to put in much time and effort, although some geographies and segments within the general market offer a good balance between all three.
Real estate investors generally seek a moderate to low level of involvement, as well as a medium to long term perspective that is centred on capital appreciation. While others have a specific need for cash and a medium- to short-term perspective, which may be in better alignment with the returns from monthly cash flow.
If cash flow is the priority, then the leverage needs to be lower, and the down payment needs to be higher in order to produce a positive cash flow monthly. Usually, the capital appreciation from an investment is limited when these two factors occur.
If you are a real estate investor willing to invest time, energy, and money into your purchase, then a renovation project might be right for you. There is greater risk associated with greater rewards, and more effort would be required to realize the investment's full potential. However, capital appreciation would also be greater.
In the case of a more typical investor, who does not wish to be actively involved, a condo investment might be more appropriate if you have a limited budget. If your budget is high enough to purchase two separate condominiums, a luxury townhome might be a better choice.
You may be better off purchasing a house on a large lot in a large metropolitan city if your primary objective is long-term capital appreciation, rather than cash flow. Although most investors find that they receive greater returns in terms of cash flow and appreciation in luxury townhomes, provided they are owned freehold (you own the land) as opposed to condominiums (you own the building but not the land) - these appreciate less in the long run.
No matter which type of buyer you are, it is necessary that you understand these criteria, priorities, and the trade-offs between them during the purchasing process to receive the most value from your purchase both now and in the long run.

At In Black and White Real Estate Team, we are here to partner with our clients during their real estate transitions. We continuously strive to match their evolving needs by bringing insight that makes a difference. We provide innovation, expert advice and we enable our clients to focus on what is important to them. 
If you are interested in buying a home, please give us the opportunity to show you all that we can do for you. Let us do the heavy lifting so that you can enjoy the experience.


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