Some things get more valuable with age; the longer you keep them, the more valuable they get.
In real estate, this calls to mind the five-year rule, which states that new homeowners should generally stay put for at least five years before selling their property — or risk losing money.
The reason is that closing costs and real estate commissions will consume 7 to 15 percent of the cost of the house. Just to break even, your home will have to appreciate up to the costs of buying and selling. If you want to make money, then the value must exceed those fees.
Because real estate usually appreciates slowly and values aren’t an exact science, the longer you keep the house, the more money you stand to make.
"You can't guess how much a market is going to appreciate," says Tom Forker, SVP and market manager at Bryn Mawr Trust. "But generally 2 percent per year is an OK market, and 3 to 4 percent is a hot market."
While some people get lucky, it’s not the norm to see huge annual spikes in appreciation — especially significant enough to negate the transaction costs discussed above.
Most people understand that making money off real estate is a long game, says Richard Green, chair of the USC Lusk Center for Real Estate. “You’d have to be lucky to make 3 percent per year. If you go out to 10 years, then the amount of appreciation you need to cover your costs drops to about 1.5 percent [annually] and that’s more reasonable. If you go to one or two years, then you’re looking at an appreciation of 5 to 7 percent per year, and that’s just not going to happen.”
Buying and selling costs can crush you
When budgeting for a home, it’s important to factor in closing costs. This is especially true for people who don’t plan on staying longer than a couple of years. Closing costs are expensive, and you’ll want to get that money back when you sell your home.
Closing costs include fees from lawyer’s expenses to title-search charges and lender’s costs. Some of these fees are negotiable (lender’s costs), but most are set in stone. You might be able to get the seller to pay for some of these expenses, but this is not typical and you shouldn’t count on it — although it might not hurt to ask.
The average closing costs range from 2 to 5 percent of the cost of the house and depend on the taxes in your area and the size of your mortgage. That means closing costs on a $250,000 home can be $5,000 to $12,500.
Selling a house is often more expensive than buying one
The real estate agents' commission alone can suck up 4 to 6 percent of the sale price. So if you sell your house for $250,000 then you’ll pay up to $15,000 in commissions.
If you move out before you sell, you’ll continue to pay taxes and your mortgage, plus keep the water and electricity on for showings — expenses that erode your profits. You’ll also want to check your mortgage to see if it has a prepayment penalty. Basically, these are penalties assessed to mortgages paid off before a certain time frame, usually from one to five years.
Homeowners who want to move but aren’t ready sell
For folks who need to move before they’ve built up an enough equity to cover the fees, renting out their home can be a good option, says Alexander Sifakis, president of JWB Real Estate.
"If you're buying the right home in the right area, then you should be able to rent it out and at least break even on it. If mobility is a big concern of yours or the market has slowed down, you can still rent the property out and continue to build equity," Sifakis says.
Cities like Orlando, Fla.; Las Vegas; and Knoxville, Tenn., are seeing rent prices rise quickly, while Arizona took the prize for the state with the fastest-growing rent at 2.6 percent year over year, according to data from ApartmentList.
Homes in vacation-worthy locations, like on the beach or near popular tourist attractions, can also be rented out via platforms like Airbnb. Before listing your home, however, homeowners should educate themselves on local laws governing these kinds of rentals.