Is now the time to invest in Real Estate?

[Kjackson25]

All real estate is local. One person's success in say Phoenix has absolutely nothing to do with another person's success in Kansas City. You need to fully understand your market.

For those that are proponents of sinking a bunch of cash into real estate because it is safer probably hasn't ever needed to get that money in an emergency. It is next to impossible to pull cash out of investment properties unless you sell and selling when you have to have the money may not be the best time for you to sell and optimize your investment.

One school of thought is instead of sinking all your money into one or two properties, sink less into a few more properties, but keep at least 12 to 18 months of payments and a certain percentage of the value for repairs and maintenance per property in a safe and liquid vehicle. Save your positive cash flow until you have enough to buy another property (assuming you want to keep investing in real estate.)

Real estate investors with huge equity positions and weak cash positions are at more risk of losing "THEIR" money than those that have less in equity and more in safer vehicles.

Research your market to see how strong the rental market is and what you can rent houses you buy. I think to get the best financing terms you'll likely need 25% down. I'd be really cautious on creative financing deals that allow lower down payments they could contain surprises.

Oh, if you are looking to hold the properties for a significant period in hopes of the homes appreciating I would highly suggest buying houses that the median income in your area can easily afford. In my opinion the houses that have the best opportunity to appreciate will be ones that a majority of the people in your market can afford NOW and as their incomes go up your real estate has a better chance of going up in value too. Homes well above what the median income can buy will serve a much smaller pool of potential buyers since people ACTUALLY have to PROVE they make enough money to afford the house. The new financial reform bill has stipulations in it that it will be federal law to prove income on all mortgage loans.

Hope this helps.

[disneysteve]

Real estate investors with huge equity positions and weak cash positions are at more risk of losing "THEIR" money than those that have less in equity and more in safer vehicles.

So you are a proponent of debt and leverage, and there is something to be said for that. I totally agree that you don't want to be real estate rich and cash poor. However, you also don't want to be buried in debt. As Dave Ramsey is fond of saying, 100% of homes in foreclosure have mortgages. When you own a property outright, you won't ever lose it. The value may go up or go down but you own it no matter what. You don't have to worry about being upside down.

What got people into deep trouble in recent years was buying homes with little to nothing down and hoping the appreciation would create equity. When the property values fell, they were destroyed because they couldn't afford the places and couldn't sell or refinance.

So less equity equals more risk if you look at it that way.

[Kjackson25]

Steve,

I am a proponent of leverage and SMART debt. I am not a proponent of buying investment real estate without having cash. I just don't think that you want your cash in the form of equity in the property. It is not liquid and it is not safe. If someone wants to pay off a mortgage faster, while I may not agree with that idea in all cases, 100% of the time I will disagree with paying it off by paying the mortgage down faster thus losing choice and control with that money. There are other vehicles to put that money into, let it grow and then once it has grown to enough to pay off the mortgage, if you still want to pay it off, then scratch one check and pay it off. (That still may not be the best strategy- but most of us make our decisions based on emotion and how it makes us feel and it is extremely difficult to combat the peace of mind from having a free and clear house.)

Dave Ramsey offers a lot of good advice, I am with him on consumer debt, I absolutely love his snowball technique on getting rid of debt, but when it comes to real estate and how to best handle it, we go in two different paths. From what I understand he used to own a lot of real estate, real estate with a lot of equity (he poured all his money into paying them off as fast as possible), thus leaving him in a cash poor position. When real estate went south since he didn't have enough liquidity to ride out the storm he lost it all. My argument would be he was stupid to have all his cash tied up in an illiquid and unsafe position (real estate equity.)

"100% of homes that get foreclosed on have mortgages." That's what Dave says. He is 100% incorrect. There are homes every day that get foreclosed on. Heck there's even a safe way to invest in these types of properties with guaranteed minimum returns. Delinquent tax notes. If you don't have a mortgage (and thus not a partner with a vested interest in your property-you still owe them money)don't pay your taxes the county/state will sell that tax debt to an investor with a guaranteed return (in Missouri it's 10%) so if you want to keep your house you have to pay back the amount you owe in taxes plus the interest or the holder of your tax note can boot you out of your house and since tax debt supercedes any other liens (if those liens don't pay off the holder of your tax note) they get your house free and clear. The truth of the matter is in the United States of America you NEVER really own your house- don't believe me, well then quit paying your property taxes and see what happens.

You are right that home values go up and down without regard to how much or how little you owe on the property- but that is an argument FOR leverage not against it.

Steve, you are partially right on the state of real estate today. People did buy homes with little or nothing down hoping for appreciation, but that is not what caused this. What caused this was people buying homes that they will never, ever be able to afford. People bought homes that haven't proven that they are responsible enough to handle their finances. Wall Street and the Banks created crazy loan programs that they got the rating agencies to call AAA Mortgage Backed Securities when they should have been Triple FFF (ok I took advantage of a little writers embellishment for effect). People bought houses with no money down and NO OTHER CASH AVAILABLE. All of that is what killed housing.

The no down payment wasn't the culprit. If that was the case then why are VA loans the best performing loans on the planet? They are mostly 100% financing? Does the military teach money management classes? They actually prove incomes, they don't allow people to allocate too much of their TAKE HOME PAY to their home and other debt so they have loans that perform well. Hmm, quite a novel idea, don't you think.

So you are telling me that only people with no down payments were hurt by not having equity? All those folks that bought homes with 20% down are safe and sound, not underwater on their home, were immune from losing their jobs, etc? Steve, everyone that owns a home bought in 2007 or before has been hurt by this economic and housing collapse.

So in 2005 we have Mr. and Mrs. Leverage that have $40,000 to put down on their $200,000 house, but decide to use the 100% financing options available to them.

We have Mr. and Mrs. Traditional that have the same $40,000 to put down on their $200,000 house and put it all down on the house and have a $160,000 mortgage.

It's 48 months later, the Leverages owe $189,229 on their house and the Traditionals owe $151,008. Their home values have plummeted to $150,000 and they both lose their jobs. Who is in a better situation? The Leverages who have put their $40,000 into a vehicle that has been protected from loss, is accessible without penalty and was up 3.91, up 11%, up 4.49% and flat so they had access to $66,851 without taxes. Or the traditionals that invested the $266 lower monthly payment into another vehicle that was up 3.91%, up 14.79% up 4.49% and down 38% so they had $10,511, but had to pay a 10% penalty and taxes (though since they lost their jobs their income tax rate is likely really low.) Who is better off? Who has more choice and control? Who can go longer with a job loss?

Now assume both lose their homes foreclosure, the Leverages lose the equivalent of 48 months of payments and $11,000 in PERCEIVED equity where the Traditionals lose their down payment 48 months of $266 lower monthly payments which equated to $49,000 in PERCEIVED EQUITY. Who lost more?

Steve, I'll be honest with you here. I treat the home as a business decision, what is best for my clients and not what society thinks or what Dave Ramsey thinks. Since my client is the home buyer/owner I will advice in their best interests and if they were to lose their house I would much rather they lose the bank's money and not their money. It's not like the bank is in it for the client, they are in it for themselves and make business decisions to boot my clients out. It's just business, it's nothing personal.

Does that make sense? Do you see where we just look at it from different viewpoints? Is your viewpoint wrong? In my opinion yes. Is my viewpoint wrong? In your opinion- perhaps (I can't speak for you). I just know that if I had a really astute Lawyer that fully understands these concepts I would rather be on my side of the equation than the other side.

I enjoy these conversations and since I'm new here and I see that you have been here a long time with many, many more posts I hope that I am being respectful in my responses.

[disneysteve]

Kjackson, I do not think your point of view is wrong. In fact, I agree with a lot of what you said, especially in this last post.

People did buy homes with little or nothing down hoping for appreciation, but that is not what caused this. What caused this was people buying homes that they will never, ever be able to afford.

This is absolutely true. The lenders went insane and made loans that they knew couldn't possibly be paid by the borrowers. For example, giving someone an interest-only loan that they could afford on day one but couldn't afford when the principal payments kicked in. They sold it by saying they could just refinance before that happened. They forgot to mention that if the value of the property fell, that wouldn't be possible.

Buyers were just as much at fault because they listened to the lenders and didn't due their homework to figure out what they could actually afford.

If someone wants to pay off a mortgage faster, while I may not agree with that idea in all cases, 100% of the time I will disagree with paying it off by paying the mortgage down faster thus losing choice and control with that money. There are other vehicles to put that money into, let it grow and then once it has grown to enough to pay off the mortgage, if you still want to pay it off, then scratch one check and pay it off.

That is actually a plan that you will see recommended here regularly. Save outside of the mortgage and then when that savings equals the mortgage balance, pay it off if that's what you choose to do.

I've posted many times that my wife and I have more than enough in savings to pay off our mortgage and we have been in that situation for years. We could pay it off this week if we chose to, but we feel our money is performing better elsewhere. That said, over the past couple of years, we have started prepaying the loan. Perhaps it isn't the ultimately best decision but given the state of the market and economy recently, I felt that guaranteed return of prepaying the loan was a worthwhile place for a portion of our savings. We invest upwards of 25% of our gross household income so putting a piece of that toward the mortgage isn't unreasonable in my opinion.

[amarowsky]

Go for it but don't bite off more than you can chew. I'd say start small and if it goes well keep your eyes peeled for other opportunities for rental properties as the market begins to rally back up .

[zhuwh]

Investing on the clothes store

About investing on the real estate , i think you have to run the risk of losing the money , it's not little money , but much money , if you really want to invest on something , you can consider selling clothes on the internet , it can earn more money as long as you choose the right clothes in your market .

[97guns]

i may have said it in an earlier resonse it is my opinion that at these depressed prices your risk of losing money is pretty low. i'll just throw out an example of prices in my area, a home priced at 85-90K was once a 275-300K property. if it drops another 20% like all the doom and gloomers say then you'll be out 18K, the only way you'll be out alot of cash is if it takes a huge plung which it already has so i dont see it in the real estate cards. if you enter the market right now your buying at the very bottom of the peak definatley not at the top - that is where your risk is greatest. when the general population says buy - you sell, when they stress doom and gloom for a certain industry then its probably the time to buy. imo the time to buy was last year, in my market we've come off the bottom which was last year. sure there could be a new bottom but im bought in very close to it -

disclaimer - only my opinions

[Stuartthomas]

inspite of the current recession in the global economy...real estate still is the best and the most profitable industry for the investment...

[Wystan]

I believe it is time to buy in certain markets, but not all.

[financebanter]

Re: Is now the time to invest in Real Estate?

Thanx for your info buddy..

[curtis.lesa]

I would wait for few months to jump in to RE.