While the housing market has slowly increased in value overall, there are still many undervalued areas. As a homebuyer, there are several ways you can take advantage of these undervalued housing markets.
To understand the potential benefits, you first need to know what it means for a housing market to be undervalued. A housing market is considered undervalued when home prices are so low that the local economy cannot sustain them. The majority of these areas have struggled with a loss of industry and thus job opportunities for residents, explains a June 2016 article in Forbes by contributor Kim Slowey.
Buying for yourself
The rise in occupations that offer remote work or telecommuting capabilities has made it advantageous to buy in areas with lower home values. You’ll have to consider the needs of your family (or your future family, if you’re planning to have a family someday) for that area, but if you can work from any location, why not do so from a home that will cost you less?
Scoping out local housing markets and buying where homes are undervalued could help you save thousands of dollars in a mortgage, suggests a July 2016 article in Bloomberg by reporter Patrick Clark—particularly if you are able to work remotely.
While it may mean having to send your children to another town for their primary education, or having a longer drive to commercialized and retail businesses, the costs can still work in your favor overall with a lower mortgage. As an added bonus, you have the potential to claim a portion of your home expenses (like mortgage, electricity and heat) as business expenses, depending on the income taxes of the state you live in.
Buying for resale
Many investors are taking advantage of an undervalued housing market by purchasing a property that they can fix up and sell for a higher price, says Clark.
If you’re purchasing the home to flip it, undervalued properties can help you increase your profit margins. While TV shows for DIY home flips focus on the remodel of the house, the profit margins after putting in your own money to fix the house are not as great as the shows make it seem, advises an April 2014 article on Bankrate.com by contributor Michael Estrin.
“By sticking to properties that are undervalued, flippers build themselves a small cushion, which can be critical because surprises pop up when you rehab a home,” says Estrin.
Conversely, “When you leave 10 percent or more on the table, or overpay the market by 5 or 10 percent, those errors drop to the bottom line, and what looked like a profit quickly becomes a loss," adds Re/Max agent Bruce Ailion in an April 2014 article on Bankrate.com.
Buying to rent
A third way to take advantage of an undervalued housing market is to purchase the home with intent to rent it.
Although some mortgages require you to put 25 percent down for your initial payment, there are many mortgage options out there that require much less—as low as 5 percent—in a down payment to qualify, reports a July 2016 article on Investopedia by contributor Andrew Beattie.
You can leverage these lower down payment options to your advantage. In this instance, the homeowner is buying a home with little money down and is using that home to take out a second mortgage, in the form of an equity loan or line of credit, to purchase and put down payments on a second or even a third property, explains Beattie.
If you’re buying in an undervalued housing market, you could make this work to your advantage by collecting rent as income to pay off the mortgage, which eventually would become profit after the mortgage has been paid.