Has the real estate crisis created opportunities for savvy investors? Is there light at the end of the tunnel if you’re hoping to sell your home within the next few years? For an expert opinion on these questions and more, I recently sat down with real estate guru Ilyce Glink. Glink is a nationally syndicated columnist and author of Buy, Close and Move In!: How to Navigate the New World of Real Estate–Safely and Profitably–and End Up with the Home of Your Dreams. She also writes about the latest in the world of real estate on ThinkGlink.com; on her Home Equity blog on CBS Moneywatch.com; and on the Equifax Personal Finance blog. In addition, she is the chief content strategist for realtyjoin.com, a social networking site for those in the real estate industry.Your book has a section called “10 Things That Have Changed in Real Estate, 10 Things That Haven’t.” What are the key things that have changed?
The biggest change is that you need to have “skin in the game,” a phrase coined by celebrated investor Warren Buffett. That means that if you want to buy real estate today, either to live in or to invest in, you’ll need to put down cash, and sometimes a lot of it. The FHA minimum is now 3.5%; for conventional financing you’ll need 5%. You’ll need to have a 30%-plus down payment for investment property, and if you’re buying anything expensive, you might have to put down even more than that.
Another big change in the world of mortgage finance is that we’ve gone backward in time, and lenders will now verify every piece of information you give them at least once. You’ll also find lenders nixing deals for the oddest reasons. I just heard from someone who said the lender refused to fund the loan without a better explanation of an errant $300 check. On a $500,000 mortgage, it’s tough to understand why that’s important, but it’s an example of how nitpicky lenders are and how they want to understand everything about the most minute detail of your finances.
So what’s hot and what’s not in the real estate market? Any tips for buyers in this market, especially those who might be looking to real estate for current income?
The very low end of the spectrum is hot with investors right now. You’re seeing people get all excited about buying property for $15,000, $25,000, and even $50,000. And, those deals exist all over the country. I recently posted a couple of blogs on MoneyWatch.com about how much you can buy for $35,000, and they got thousands of views.
Low purchase prices may seem appealing, but you have to take the same precautionary steps to evaluate a value of property, whether it is listed for $35,000 or $350,000. The only difference is that if you buy something for $35,000, you can rent it out for very little money and still have positive cash flow. In the book, I talk in great detail about how to think about value, how to analyse cash flow, and how to think about the investment overall.
If you’re buying a place for income, you need to understand the numbers in a deal. If you don’t understand income and how income affects investment property value, then you shouldn’t be investing in real estate. Savvy investors hire a team of professionals (realtor, lawyer, accountant, 1031 company, mortgage lender, inspector, and so on) to assist them in creating a proper valuation for a property. If you want to invest, you should build your team and get them to interact with each other. That’s how they’ll help you make smarter decisions.
For example, if you’re buying a warehouse or a retail strip centre, you probably aren’t an expert in commercial building construction. You won’t know if an interior wall is failing or if it’s likely the roof will leak. You’re far better off hiring a commercial property inspector to walk you through the property and help you figure out what it will take to keep it maintained and in good working order. If you buy the property and later decided to sell it and buy a different investment property, you’ll need a top accountant and 1031 exchange specialist to help you complete the transaction and meet Internal Revenue Service rules.
It’s really hard to do it on your own and be profitable. It’s one of the biggest mistakes early investors make. At the very least, find an experienced agent who represents other investors to help you identify property and get yourself a great real estate attorney who can help draw up documents that will protect you and your other assets.
The trend in residential real estate is to build smaller, more energy-efficient houses that are cheaper to own and maintain. All of the McMansions built in the 1980s and 1990s could become white elephants that see their value erode, even as the larger market recovers.
Do you have any advice for those looking to remodel? What types of upgrades are prudent?
The remodeling industry was hit extremely hard last year, and while more people are planning to fix up their homes this year, the problem is one of financing. You either have to save up enough money to fix your house or you have to charge it on your credit card. You can no longer take out a home equity loan, use the proceeds to fix up your house, and then refinance the balance into a new mortgage. Home equity lines of credit are hard to come by these days because the federal government wants lenders to keep a percentage of every HELOC on their own books. As a result, they’re few and far between.
This isn’t the time to make big, flashy improvements to your home. The economy is still extremely fragile, and we may be heading for a double-dip recession. If you can live with your grungy carpet for another year, you should do it.
When it comes to fixing up your house, you want to spend as carefully as possible. Figure out what amenities are standard in your neighbourhood, and then build to that level–not a penny more. If you have to sell for some reason, you don’t want to take a bath financially.
What’s your advice to people who are thinking it may be time to consider buying a second/vacation home? Key pointers?
I do think that now is a great time to buy. I’ve just blogged on the three reasons why people buy vacation homes: as a place to create family memories, as an eventual place to retire and rent out until retirement hits, and for pure investment reasons. Decide which kind of vacation home buyer you are and then reverse-engineer the process to figure out what kind of vacation home you should be buying. If you can’t afford the cash down payment or have a lot of excess cash to keep the place running and in great shape, don’t buy a vacation home. It’s easy to think you’re getting a great deal because of the purchase price, only to find yourself snowed under by management costs, cleaning expenses, and resort fees. If you’re going to rent your vacation home, here are nine things you should know.
How about sellers–any advice for them? Is it a good time to trade up to a larger or better home if you can swing it?
Can you sell your home right now? Can you get enough cash out of your primary residence to be able to trade up to a larger home? What most buyers forget is that a larger home means larger utility bills, maintenance costs, and upgrading costs, as well as higher taxes and insurance premiums. There’s more to maintain, cool, and decorate. Can you afford all that?
Right now, those homeowners who can sell their property, whatever size and wherever they live, control the market. The problem is that many of those sellers are so freaked out that they don’t really want to buy anything right now. So, they’re thinking about renting or are moving in with family or friends. We’re seeing the housing market continue to shrink at the moment, but it won’t always be that way.
Property values might not rebound until 2020–or later, depending on where you live. You can’t make a decision about selling based on when you think the housing market will rebound. That’s like saying, “Should I sell my stock today or wait for the company to rebound?” We don’t know when that will happen, if ever.
If you want to sell, and have a compelling reason to move, you should figure out an exit strategy. If homes are selling in your area, then you should try to sell your house. If homes aren’t selling, and you’re 40% underwater with your mortgage, you’ll have to either do a short sale, a deed-in-lieu of foreclosure, or a strategic default.
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