You must buy real estate was the battle cry last year, unfortunately this was very bad advice at the top of the market. Yet, many people believed prices would never go downward again? For those who have lived decades and followed the real estate market they know full well and good these cycles and trends come and go. It is almost a known fact and the decade-long cycles are so commonplace to real estate.
Well today it is a buyers market, which could mean you can expect more shopping, longer waits to sell your home and many more mandatory inspections with the house offers. Additionally, people will be shopping and getting much better deals and demanding much more as well. They will be expecting to pay a lot less and if you keep your price high, your home simply will not sell at all.
The housing market generally has new homes come onto the market after Labor Day and therefore there is more competition after Labor Day for sellers and more bargains for low-balling buyers. This could add a 10% increase in houses on the market and that could mean a 10-20% reduction in prices too.
What does all this mean for the economy? Well consider if you will the consumer confidence levels which are so important and the Wealth Affect; how people feel about how wealthy you feel.
If people find eroded equity they think they are poor and stop spending so much or pulling money out of their home for paying off credit cards or buying luxury type items. This means people spend less money on consumables. But one thing is for certain and that is in a buyers market - Price Rules! Consider this in 2006.
We’ve been talking about investing in the down real estate market for a while now, but there are so many people out there who are afraid to plunk down the kind of money it takes to get going in a down real estate market. Here are five things you should keep in mind when investing in a down real estate market:
First, do not ever pay full asking price. The majority of people will be asking for prices at or near the amount of their mortgage, as if they held all the cards. They don’t, especially now that we are all facing a down real estate market. Seriously appraise the property and decide if you want it. If you really do, and it seems like it has the potential to be a return on your investment, then you should make an offer. Some places can be had for as low as a 20 per cent discount on the asking price; that is the beauty of purchasing in a down real estate market. If they balk at your price, you can walk away knowing that they will eventually come down to earth and realize that in a down real estate market, there are very few buyers.
Second, think location, location, location. As the real estate market boomed the last couple of years, the locations for some housing developments started to become really whacky; out in the middle of nowhere, down one lane roads, and with the barest of infrastructures, housing tracts sprung up like mushrooms after a rain storm. You need to think strategically; the desirable houses will be more centrally located when people finally realize that the credit crunch and real estate market is making a come back.
Real estate in a down market is a long term investment. You will probably not be able to unload your investment any time soon, but you should keep in mind that eventually, people will want to purchase new homes again, and when the credit markets do open back up, you will be sitting pretty. Be patient and you will make a tidy bundle when you finally do sell.
You aren’t going to be able to flip a house in a down real estate market, so why bother. Don’t put more into a house than to make it habitable; some people may be lucky to flip in some areas, but flipping is quickly becoming a thing of the past. Maximize your dollars and invest in multiple properties while rehabilitating them only if necessary.
Become a land lord. Land lords are holding all the cards right now. Just because someone loses their house doesn’t mean they are going to become homeless. In fact, in many rental markets, there is a shortage of landlords who can rent to all the people needing houses. Being a land lord can be seen as an interest return on your investment since a 200,000 dollar house rented for 1,000 dollars a month returns 12,000 dollars, or 6% on the investment per year!
This is hardly the right way to look at this. A 30yr loan for $200,000 at 6% is $1199.10 for just Principal & Interest. Then add on property taxes and insurance as your KNOWN expenses. On top of that, let’s add some other landlord expenses: management expense (estimate 10% of gross rent for this), vacancy, repairs, maintenance, advertising, wear & tear on your car and gas to work on and show the place (if you manage it yourself), any utilities you may provide, lawn care during vacancies, and so on…
Even if you owned a $200K house free and clear, it cannot be successfully argued that renting it out for $1000 per month is an effective use of your money.
5) Become a land lord. Land lords are holding all the cards right now. Just because someone loses their house doesn’t mean they are going to become homeless. In fact, in many rental markets, there is a shortage of landlords who can rent to all the people needing houses. Being a land lord can be seen as an interest return on your investment since a 200,000 dollar house rented for 1,000 dollars a month returns 12,000 dollars, or 6% on the investment per year!
I was about to take issue with this, but I see justin already beat me to it. Leasing out a $200K property for $1K/mo is a bleeding ulcer. You won't be in business long if that's your strategy.
I also think that you CAN flip in a down market. It depends on if you can afford to hold on in a down market. I still think you should make your product better than the competition. This is a buyers market (generally). So that means your property should stand out. The flippers who can use their own funds to purchase & rehab will be in the best position to hang on. They can rent the properties out until the market changes or there’s a buyer.
As far as offer price. The asking price is absulutely meaningless. What’s the point of paying a 20% discount of a property that’s has an asking price that’s 30% above the comps that ACTUALLY sold. It’s laso meaningless in regards to purchasing a rental. There’s no sense buying at a big discount if the rental income won’t support the property and give a profit.
One last point. If you have a rental property and want to get cash out. You don’t have to sell it. You can do a cash out refi. As long as the income can support the increased loan pmt. I’d rather not sell a good performing rental. It gives you great options. You can live off the rental income when it’s paid down or tap the equity.