When is the right time to upgrade your residence?

Other than “What is my property worth?” there are many questions that home owners, or prospective home owners, will ask a real estate agent, some of those most often asked are:

·         When should I buy?

·         When should I sell?

·         How should I sell?

·         What should I do to my property to achieve a better price?

The answer to these questions can be very subjective and not straight forward as the right answer often depends on the underlying objectives of the person seeking advice. This requires answering the question with another question and delve a little deeper to uncover more information.

One question which I have been asked many times is “When is the right time to upgrade?”

Of course, the answer in this situation can also be subjective if it relates to a specific need such as a growing family in need of more space and a larger home or more storage or more garaging facility. In these instances, the best time to upgrade is when you NEED to upgrade.

However, there are instances when the motivation for the upgrade is purely financially based – moving up the social ladder and securing prime real estate in a better neighbourhood. In this instance the answer is only conditional upon the state of the market – Is the market improving or is it in decline?

Upgrading when markets are improving

In an improving market where prices are regularly increasing it is best to upgrade as early as you can and not wait. Waiting will cost you money. The following case study demonstrates why you should not wait.

Tom and Mary have a small business. Business has been very good to them and allowed them to pay off their home much earlier than they had anticipated and they now also have extra savings set aside. Their home is worth approx. $1,200,000 and Mary is keen to move into a better neighbourhood, so Mary starts looking around in search of upgrading into a better area, one that she has aspired to for many years. She finds a home that she really likes and its asking price is $2,000,000.

Ready to sign on the dotted line, Mary rushes home to convince Tom they should make the move. Initially the idea appeals to Tom. The additional savings they have tucked away will cover the stamp duty payable however the notion of the new $800,000 mortgage is not so appealing, so Tom convinces Mary that he is willing to upgrade but not until their house price increases to approx. $1,400,000. He feels that if he can pull an additional $200,000 equity in the value of his current home he will only need to borrow $600,000 rather than $800,0000.

Tom has missed one very important point. Whilst he waits for his own home to increase in value, it is most likely that the home he wishes to purchase will also increase in value and when both homes have increased the margin will grow wider and cost Tom more money. Tom is waiting for his home to increase by $200,000. This is a gain of approximately 16.67%.

For the purpose of this exercise I will assume the increase in the new home will also be at the same rate of 16.67%. Often better areas may appreciate at a higher rate, but we will stick to the same rate for this example.

Current home:
$1,200,000 + $200,000 (16.67% increase) = $1,400,000

New home:
$2,000,000 + $333,400 (16.67% increase) = $2,333,400

The difference grows from $800,000 to $933,400

It is clear that waiting for the extra $200,000 will cost Tom an additional $133,400 in net earnings or $242,545 in gross earnings.

Clearly the time to upgrade in this instance is earlier rather than later.

Upgrading when markets are declining

When markets are declining the opposite is true. You can afford to wait as the margin will decrease in your favour and save you money. Or better still, in a declining market you might consider selling early, rent for a period and wait for prices to hit rock bottom before you step back into the market.

Something to consider – maybe for some and not for others, but a little planning can stretch your dollars a little further for you and your family … or be the difference in some cases of being able to afford to do it at all.

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