Investment

Five Trends to Watch in Real Estate

Friday, June 4, 2010

Home sales are surging. Don’t be left behind.

As a buyer, there are five trends you want to watch as you shop for your new home. The last one, though, is personal.

  1. Prices
  2. Sales
  3. Interest Rates
  4. Jobs
  5. Showings

Prices

In the Merrimack Valley and Southern New Hampshire, home prices have stabilized and are even ticking up. New homes are coming on the market all the time and they’re being priced more aggressively. The buyers, however, aren’t biting at the aggressively priced homes.

The buy side of the market is still of the mindset that foreclosures or other “distressed” properties are a bargain. As new buyers enter the market and face the reality of homes that require “too much work,” they’re starting to move up-market and considering more realistically-priced homes.

Buyers who are looking for a “deal” on real estate will find them harder to come by going into the Fall selling season.

Sales

Single-family home sales are brisk in this area. Not counting condos and multi-families, 34 single-family homes closed in the month of May in Methuen alone. Andover had 24 closings, North Andover had 19, Haverhill had 34, Lawrence saw 22, and Lowell recorded 39. North of the border in New Hampshire, Salem saw 14 closings of single-families, Portsmouth had 22 sales, and Nashua enjoyed an incredible 47 sales.

Across the nation, Lawrence Yun, Chief Economist for the National Assoc. of Realtors® (Bio) says that in the short-term, sales will decline as the effect of the home-buyer tax credit wears off but over the long-term, sales should increase as the market returns to a more normal equilibrium.

There is no question that the real estate market in the Merrimack Valley and Southern New Hampshire is alive and well. To see so many single-family homes change hands in a one-month period should encourage buyers and sellers alike to take advantage of this traffic.

Interest Rates

The market anticipated rates moving higher as the government wrapped up its purchases of bonds at the end of the first quarter. This buying program was part of the economic stimulus package that was designed to keep interest rates low. As luck would have it, the European economies ran into difficulty. The trouble in Europe has sent bond buyers scurrying to the safety of U.S. bonds.

Yields (or rates) move inversely to the price of bonds. As bond prices rise, yields go down. Uncle Sam was driving demand for bonds as part of its stimulus program. That demand kept prices high, and yields low. When the Treasury stopped buying, European investors stepped in to fill the void.

Interest rates are expected to stay low for as long as there is weakness in the European economies.

Jobs

According to The Boston Globe (Business Updates), the unemployment rate in Massachusetts moved lower to 9.2% in April from 9.3 percent in March and 9.5 percent in February. While still on the high side, the trend towards lower unemployment is becoming clear.

More people with jobs – and money in their pockets – means higher demand for everything from washers and dryers to cars and real estate. Clearly, the economy is on the mend: 90% of the people in Massachusetts alone have a job and the means to buy a home if that’s what’s important to them.

More jobs means more competition for buyers in the real estate market. Buyers should be on the lookout for bidding wars on the more realistically-priced homes on the market and be prepared to offer their highest and best bids on the home of their dreams.

Showings

If you’re working with a good Realtor® and they’ve shown you 6-10 homes that meet your requirements and you’re still not satisfied, you might be in danger of being priced out of the market (Is it Really a Seller’s Market?). There’s not a single buyer out there that doesn’t want to “fall in love” with a home. But, if you’re not feeling the love in the price range that you’re comfortable with, you might find yourself having to stretch a bit.

Don’t be afraid of stretching today in order to live the life you love for the next 10-20 years or more! Today’s investment in real estate can bring years of pleasure in the future.

Buyers will do well to consider that they’re locking in a lifestyle at today’s dollars and interest rates that will seem trivial only five years from now (How to Take the Risk Out of Buying a Home).

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How to Take the Risk Out of Buying a Home

Thursday, April 1, 2010

Not owning a home is risky behavior

There are far too many buyers sitting on the fence about buying a home. It’s understandable. Home prices peaked in the 2nd quarter of 2006 and have dropped over 30% since then! Who wants to buy something and watch its value plummet like that? However, buying a home is unlike buying anything else. A home is one of life’s necessities like food, water, and clothes on your back. You will always need shelter. Buying shelter today takes the risk out of buying it later.

Prices go up and down at the same time

Buyers understand that ALL home prices move up or down pretty much the same from one house to the next. That’s why they focus on “the market.” They’re always asking, “What’s the market doing? Where are prices heading?” They know that the overall market for shelter is what’s important. What they FEAR is whether they’re paying too much. They’re worried about a profit when it comes time to sell.

The ONLY time home prices matter
is when you no longer need to OWN shelter.

Deciding what to do with the proceeds of a sale

For the most part of your home-owning life, you’re going to move from one home to the next. You’ll exchange one form of shelter for another. Relocate from one area to another. Deciding what to do with the proceeds from the sale of your current home is elementary: You’re just going to plow them into the next home.

So, if you know that all home prices move up and down more or less in tandem, does it really matter where prices are when you sell? If you sell low, you’re going to buy your replacement home low. If you sell high, you’re going to buy your replacement home high. There’s no material difference. Read Here’s a Quick Way to Know When to Buy and When to Sell.

BUT! When you finally move back in with the kids or begin to downsize, THAT’S when you need to consider the proceeds of a home sale. The equity that’s left over should provide a good portion of your nest egg.

The study shows that equity is king

The Wharton School of Business at the University of Philadelphia just released a White Paper entitled “Drowning or Hedging? The Risks and Rewards of Owning a Home.” In it, they studied graduate students who were considering whether they should buy a house while they were attending school. The students knew that they’d be short-term owners in the Philadelphia area and that once school was over, they’d be relocating to a new job or going back home.

The study showed that the students were much better off buying a home as soon as they were able. When they did this, they “locked in” the cost of shelter. The students took away the volatility of the rental market since there is no way to know which way rents were headed. And, since the cost of rent varied tremendously from one location to the next and the students didn’t know where they’d end up, there was no way to “hedge” against sticker shock in their new location.

But, since home prices everywhere move up or down more or less in tandem, the equity they were building helped cushion the burden for the next stage in their lives.

Equity is king. Beware of leverage. Leverage is borrowing to own a home. When you’re over-leveraged with exotic loan programs or you’ve drained every last bit of equity out of your home with second and third mortgages, you’ve left yourself vulnerable to the market forces of homeownership. You’ve seen this with the current crisis in the housing market.

Building equity today minimizes risk tomorrow

The Wharton Study shows that it’s actually less risky to own a home than to not own one. Not “locking in” the cost of shelter is foolish with home prices as low as they are and with interest rates at all-time lows (Read about the cost of money and Great Rates). Throw in some government incentives in the form of tax credits for current homeowners and first time buyers and it’s a no-brainer if you’re in a position to act.

Sitting on the sidelines is not an option for those who wish to minimize the risk of homeownership.

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How to Flip a House Like an Investor

Friday, January 8, 2010

A Recipe for Success

To flip a house is to buy it low and sell it high in a short amount of time. It’s fun, it’s easy, and it can be quite profitable if done right. Without preparation, though, a lot can go wrong on the way to the bank.

Flipping a house like an investor is even more fun and easier because there’s a sure-fire process in place. Success is almost guaranteed because you control all the variables and you’ve set up a repeatable process. You can call it a recipe for success.

Ingredients

  1. 1 Lg. Plan
  2. 1 Lg. Team of Professionals
  3. 7 Properties, Revolving
  4. 1 Pile of Cash, Investable

 

Large Plan

Buy low and sell high. The difference between the high and the low is your profit – after ALL expenses – including paying yourself for the time spent managing the process. For mid-priced single-family homes, most investors are looking for a profit of between $20,0000 and $40,0000 per project. The profit is related to your risk. Some projects will lose money, some will fetch more than your target range. The range is important because it’s THE determining factor on whether investing in a particular property is worthwhile.

As an investor, you’ll be well paid but you’re going to EARN every penny of it. You’re risking YOUR capital. You’re also making all the decisions and are responsible for keeping the team of professionals busy. You also have to manage cash flow. Any part of this is no easy task. Juggling it all at once is the sign of a professional.

The goal is to get in and get out as quickly and painlessly as possible. And get onto the next project.

Beginners start with one house, experienced investors have at least seven properties in various stages of readiness. Some houses will be “on the radar.” Others will be in the process of being bought and sold. A couple of houses will be in active renovation.

When you’re buying the house, you’re evaluating the purchase price against what the house will sell for after renovation. Consider all expenses including the cost of labor and material (yours, too!) as well as carrying costs. Remember, you’ll be paying the mortgage and interest (if any), taxes, insurance, and utilities all during the time you own the property. Add in your profit range. If the purchase price plus all expenses and profit is greater than what you can sell the property for, don’t buy it. Move onto the next property. Read The Magic Number in Negotiations

It’s clear that buying property is going to take up a lot of your time – in fact, you make your money when you buy the property. This is the “investing” end of the business. The rest really takes care of itself.

Large Team of Professionals

Two schools of thought: Commit to a core nucleous of professionals or spread the wealth and diversify among a larger pool of professionals. You’ll need:

  1. Accountant
  2. Lawyer
  3. Insurance Agent
  4. Tradesmen/Contractor
  5. Real Estate Agent
  6. Lender

 
Here, you’re looking for reliability and cost containment above all else. If you commit to a smaller core of professionals, you’ll want to become one of their largest customers so that they drop everything to work on your account. You must insist that your team to be there when you need them. If you’re one of their largest customers, they’ll perform because they don’t want to lose your business. The drawback is that if one of them goes out of business or stops performing, you have to find a replacement. This ALWAYS happens at the worst of times.

If you diversify among a larger pool of professionals, you have a ready backup in case one of them goes bad. The drawback is that the replacement may not be any better than the original. TIP: In all cases, draw up contracts that include penalties for non-performance. Your deadlines are crucial and they MUST be met.

Try to strike a balance between reliability and cost containment. You’d prefer to become a large customer so that you can negotiate a quantity discount for their services. All businessmen place a high value on repeat business and they should be willing to strike a deal to win it. Your demands will be more intense than the average retail customer so show loyalty at all times and flexibily when possible. TIP: Buy as much of the material as possible yourself to avoid contractor mark-up.

Properties, Revolving

Investors are full-time entrepreneurs. House flippers are part-time hobbyists. The number of houses in play at any one time is often the deciding factor. Investors are constantly on the prowl for discount houses. The houses are usually abandoned, boarded up, and in bad shape. These houses are probably foreclosures. On the other hand, house flippers are happy working on one or maybe two houses at a time. Read Do You Know Why Location is So Important?> and How to Analyze the Layout of a House Like a Realtor®

An investor knows that foreclosed properties take a long time to buy – as much as three-five months. It’s unpredictable when the houes will finally belong to them. They’ll have offers on several properties and as soon as one deal closes and the house is theirs, they’re ready with a plan of attack. Their team is in place. The renovation plan was drawn up before they made their offer. They’ve executed the Large Plan countless times before.

The house flipper is carefully shopping for properties. They’re looking for something needing only cosmetic updating or minor structural repairs. They’d prefer not to deal with a “distressed property.” House flippers are at a disadvantage to the investor because their risk is greater. If one project loses money, they don’t have a fall-back project. The single biggest cause of failure is time. The longer a house flipper takes to complete a project, the higher the carrying costs pile up. Read The Secret of Sure-Fire Sweat Equity and Here’s a Quick Way to Know When to Buy and When to Sell

Investors have properties in the pipeline at all times. They’re shopping for the next project, negotiating a current bargain, renovating something for as little as possible, and marketing full-value properties for sale. All of this is done with a plan, a team, and investable cash already in place.

Pile of Cash, Investable

It’s a funny thing about money: It’s almost never a problem in America! This is not to dismiss the housing crisis that the country is just now coming out of, but it IS to say that if you have a plan – a workable business model – there will always be investors willing to risk their capital in your venture.

You’re still going to need some working capital. You’re going to have to put up your own money to fund your business. You’ll have to risk your treasure to pay the team of professionals in order to turn a profit. This money should disposable. That is, if you lost it all, your children should still be fed, your wife should have a roof over her head. Your family will not be destitute.

Beyond that, if your plan is solid, access to credit should come easy to you. Your contractors will extend favorable payment terms to you. Your lender will be willing to take a little risk knowing that overall, you’ve been a profitable partner. Your professional team will extend every courtesy and discount to win your repeat business because they know that you’ll be around for the long-term.

When you’re thinking of how much cash you’ll need, you come full circle to the list of ingredients. You start with the plan. You know how much profit you require. You know that you have to buy property far below full market value in order to provide that profit. You know what the full market value of the property is. You know what it’ll cost to renovate the property and how long it’ll take. You know that you’ll be paying carrying costs like taxes, insurance, utilities, and maybe a mortgage and interest. You know that there’s no guarantee of success but, with a solid plan and a reliable team of professionals behind you, making money in America with a wise investment in real estate can be just as repeatable as a recipe for apple pie.

Who Else Wants to Buy Real Estate as an Investment?

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Here’s a Quick Way to Know When to Buy and When to Sell

Thursday, December 31, 2009

Time IN the market, not TIMING the market

This one’s a “freebie” for primary homeowners who know in their guts that real estate is a good investment. And, they’re right. Problem is, when they’ve built their equity and it’s time to sell, they have a decision to make: What to do with all that equity. Most folks want to move. This one’s for them.

For the investors out there, you’re not sitting on a house long enough to have to worry about when to buy and when to sell. You buy, rehab, and sell – QUICKLY! For an investor, it’s the number of deals per year that counts; not how much of a killing you’ll make on one lonely house.

Consider the following chart. It’s simplistic but simple is good. It helps you get your head around the concept.

You’re in the middle. You bought your house for $100K. It was the most you could afford at the time. Still, you would have preferred the bigger house but it would’ve cost you $200K. You were $100K short so you bought as much as you could afford at the time: Your $100,000 dollar house.

Trading Up – The Effect of Price Changes
% Up/Down Current House Bigger House Difference
+10% $133K $266K $133K
+10% $121K $242K $121K
+10% $110K $220K $110K
Bought here $100K $200K $100K
-10% $90K $180K $90K
-10% $81K $162K $81K
-10% $73K $146K $73K

The chart shows 10% price increases over some period of time. Call it a year. Pretend that each year, prices increase or decrease by 10%.

Study the Difference column. Did you notice how your dream house got further and further away the more your own house increased in value? When you first bought, you were only $100K away from owning that nice, big house. Three years later, you’re $133K away. Not good if you’re looking to trade up.

On the other hand, as your own house dropped in value, so did the big one! Three years later, your dream house is only $73K away. MUCH more affordable.

  1. If you’re trading up, falling prices is what you want.
  2. If you’re trading down, rising prices are for you.

Trading down? Same chart, flip the numbers. The difference becomes your profit.

Trading Down – The Effect of Price Changes
% Up/Down Current House Smaller House Profit
+10% $266K $133K $133K
+10% $242K $121K $121K
+10% $220K $110K $110K
Bought here $200K $100K $100K
-10% $180K $90K $90K
-10% $162K $81K $81K
-10% $146K $73K $73K

If prices haven’t moved since you bought your big $200,000 dollar house and you sold it to buy the smaller one, you’d make $100K on the deal. If you waited three years and prices went up, you’d make even more: $133K. If, on the other hand, prices dropped over three years, you’d only make $73K. But, a profit is a profit, after all.

This is very powerful knowledge. Be careful with it. These are generalities. There are many other variables to consider. Chief among them are interest rates or the “cost of money.” This was discussed at great length in Great Rates. You must also consider what your dreams are and what your current cost of living is. If you’re dreaming of a big house, go out and buy it! Life’s too short. If you need to downsize, stop paying bills you don’t have to. Buy that smaller house! Life’s too short.

Knowing when to buy and when to sell trips up many homeowners. It needn’t be overly complicated. Waiting for the absolute top and the absolute bottom of the market will trip you up. You could lose money and get hurt when you’re frozen by indecision. If the full-time professionals can’t get it right, you don’t stand a chance (Read Can’t Predict the Bottom). Instead, getting it “almost right” can be just as good.

It’s been said that more is lost by indecision than by the wrong decision. This is true in buying and selling real estate, too. Waiting to make your purchase and missing an opportunity, or holding on too long and losing money can be disasterous.

A Quick Way to Know When to Buy and When to SellConsider the face of a clock. Anything from 11 o’clock to 1 o’clock is the top of the market. Anything from 5 o’clock to 7 o’clock represents the bottom of the market. Don’t worry about hitting the exact top at 12 o’clock or the exact bottom at 6 o’clock. Be happy with buying your dream anywhere in the 11-1 o’clock or 5-7 o’clock ranges and you won’t get hurt. Where do YOU think prices are in the current cycle? Why? Leave a comment below.

Who Else Wants to Buy Real Estate as an Investment?

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Do You Know Why Location is So Important?

Sunday, December 27, 2009

Location: Love it or leave it

It’s been said before: “Location, location, location.” No matter how nice the house is, it will always be affected by the surrounding neighborhood. If the town decides to locate a landfill nearby, even a gold-plated mansion will suffer a big hit to its sales price. Location is important because people want to LOVE where they live. For an investor, location is important because it’s the one thing you can’t change, no matter how hard you try.

Two Local Examples

In the Merrimack Valley, Andover, Massachusetts, is considered to be one of the most prestigious towns. Next door Lawrence is thought of as a place where you buy your first home, build some equity, and then trade up to a more desirable town. Quickly.

In a city like Lawrence, homes are commodities; it’s “a house.” Investors can only compete on price when it’s time to sell. Granite countertops, stainless steel appliances and hardwood floors will only get you so far.

A rehab in Lawrence should stop when you have a solid, clean house. It should be in move-in condition. First-time buyers can’t lay out cash to make it liveable. You’ll get top dollar in Lawrence for a decent house but anything fancier won’t bring a return on your investment. You’ll just make the lucky buyer very happy.

In nearby Andover, an investor can expect premium pricing for modern upgrades. Upgrades ARE the selling point. Sure, there are more desirable areas of Andover and there are lesser areas, but the town as a whole is costly to buy into. A home in Andover that doesn’t sparkle, starts to compete with homes in other towns. The same isn’t true for homes in Lawrence.

Are You a Dreamer or an Investor?

It’s rare that border towns are at such extremes. This drives home the point that an investor MUST consider location because they can’t change it. A dreamer thinks they can pick any old house, turn it into a sparkling castle, and sell it for Andover prices. An investor takes any old house and makes it the best one on the block. And stops there.

Most homes are somewhere in the middle between Andover and Lawrence. A wise investment choice gives future buyers what they want: A spacious home on a tree-lined street, a little privacy, and a decent yard. It should be a five minute drive away from grocery shopping and ten minutes from a mall. It’ll have a low crime rate and a great school system. Everything else is gravy.

When you’re picking your middle-of-the-road investment property, start with location. Take a macro-view. Pick your city or town first, then move into the neighborhoods. Things to look for include zoning and taxes. Zoning tells you what might be built next door in the future. Taxes directly affect how affordable it’ll be.

Check out the proximity to jobs, schools, and area amenities like museums, theaters, and other entertainment spots. Most buyers today don’t want to drive all over the place to buy groceries, communte to work, or get their kids to school.

Finally, you’ll need to know about the crime rate, noise level, and traffic patterns. The better locations are all on the low side of these measurements.

When you’re making an investment that you’re going to sell for a profit, you need a location that gives them what they want: Close to everything but with some peace and quiet. You can’t change location so make it a priority.

Who Else Wants to Buy Real Estate as an Investment?

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Who Else Wants to Buy Real Estate as an Investment?

Tuesday, December 22, 2009

There are any number of places you can invest your money: Stocks, bonds, gold, mutual funds, and collectible artwork are just a few that come to mind. None of these are as emotional as investing in real estate. Everyone needs a roof over their head. And everyone can relate – on a very personal level – to the intrinsic value of a home. In the end, though, when you’re making an investment, it always comes down to buying low and selling high.

Today marks the beginning of an amazing series of articles that will give you the tools you need to make a wise investment in real estate. Topics to be covered over the next couple of weeks include:

  1. Do You Know Why Location is So Important?
  2. Analyze the Layout of a House Like a Realtor®
  3. Here’s a Quick Way to Know When to Buy and When to Sell
  4. The Secret of Sure-Fire Sweat Equity
  5. The Magic Number in Negotiations
  6. How to Flip a House Like an Investor

Buying Real Estate Low and Selling High

Buy and Hold

Real estate has always been a great investment. Over time, home prices have steadily increased even though there have been fluctuations and corrections now and then. In the classic “buy and hold” strategy, an investor buys a house during a down cycle and sells it when prices have strengthened overall.

This can be tricky but it’s not impossible. When it comes to buying and selling, you have to be right TWO times: You have to know when to buy and you have to know when to sell. You also have to know which house to bet on.

When you’re looking at which house to buy, it’s important to consider factors that you can’t change: The neighborhood and the layout of the house. Everything else, really, is a matter of maintenance or further investment.

Sweat Equity

This strategy takes a lot more work and a lot more money but it is the SUREST way to a positive return on your investment because YOU control all the variables.

With this strategy, you’ll learn how to negotiate like a pro. You’ll also learn how to approach a property like an investor. You’ll analyze the property, determine where the flaws are, and calculate what it’ll take to renovate the project to full market value.

Finally, you’ll SELL your investment to realize your profit.

Investing in real estate is not something designed for your primary residence. Your primary residence is more suited to the “buy and hold” strategy where you’ll cash out when the property no longer meets your needs. At that point, you’ll have another decision to make: what to do with the proceeds: Buy another house or bequeath the proceeds to your heirs. This is a topic for another time but you’re encouraged to ask questions by posting a comment in the box below.

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Tax Credit

Sunday, December 13, 2009

The Last of Ten Reasons Why RIGHT NOW is the Best Time for Home Buyers

The VERY popular and VERY successful government program to offer an $8,000 tax credit to first-time home buyers has been extended to April 30, 2010. It’s also been expanded to include current homeowners who are buying a new or existing home between November 7, 2009 and April 30, 2010. Current homeowners may qualify for a $6,500 dollar tax credit.

This is great news for anyone thinking of buying a home, but you have to act fast.

If you buy your new home before the end of April, Uncle Sam will cut you a check if you qualify. Realtor.org has all the info you need.

Smart buyers will consider their options when they get that check in the mail. One good idea might be investing it in a solid mutual fund. Instead of going for the instant gratification, investing the money will have it working for you year after year. It’s the gift that keeps on giving!

While it hasn’t been the case lately, the stock market has averaged a 10% annual return over time. A mutual fund is a collection of stocks providing diversification, professional money management, and easy access to your money when you need it.

If you take your $8,000 check and put it into a mutual fund that gets 10%, you’ll have a fund worth $8,800 dollars at the end of the year. You’ve just earned $800 bucks just for being patient.

An average homeowner’s insurance policy costs just under $800 dollars. If you let your money ride, you could be getting your homeowner’s insurance for free every year! Use the mortgage calculator to see what free insurance does to your monthly payments.

Mutual funds are a great investment. Real estate is a great investment, too. The key is to diversify your investments.

You’re probably already investing for retirement. When you buy your home, you’re making an investment in real estate. Now, with the homebuyer’s tax credit, you have a once-in-a-lifetime chance to start an investment for TODAY’S needs, too.

Smart buyers know that they should have a “kitty” for an emergency. Start your emergency fund today with your investment in real estate. Buy your house during the slow winter months, get the tax credit and throw it into an emergency fund. Each year, siphon off enough to pay for homeowner’s insurance and feel safe knowing that you still have $8,000 bucks left just in case.

There are other great investment choices if you don’t like mutual funds. If you have a hot stock tip or think bonds are the way to go, please start a conversation in the box below.

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