How To Take Advantage Of Warren Buffett's #1 Investment Idea

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Photo: Theo Wargo / Getty Images

Earlier this week, Warren Buffett suggested that the top investment right now is in housing—specifically, buying distressed houses with cheap leverage and renting them out.We wanted to talk to someone in the know about just how good an idea this really is.

So we spoke with Lester Argus—President of the Argus Real Estate Development Company based in Southern New Jersey—and he told us that simply rushing into making a distressed home investment would be a really bad idea.

“Just because you can buy it doesn’t mean you should buy it,” Argus points out. “The big problem with Warren Buffett’s advice is that a lot of people who did this the last time and got into trouble. They took out home equity loans and ran that all the way up, got a mortgage on the new property for a higher [interest] financing, and then they ran into a glitch and got themselves knee-deep in a bear trap.”

That said, he thinks it’s a wonderful time to invest in distressed homes—if you do so intelligently.

“Rents are starting to [rise] again where they didn’t before,” he told Business Insider. “You also have the added advantage that a lot of people can’t purchase right now, a lot of people have had issues with their credit because of the economic crisis, so a lot of people aren’t buying they’re becoming renters, which is making the landlord business fairly strong right now.”

And circumstantial experiences—as well as his belief that we’ve just passed a housing bottom (at least in his own locale)—lead Argus to believe that would-be investors will face some competition in getting the best deals. “I probably say [give advice] twice a week to different investor purchasers that come into my office, and a lot of first-time homebuyers are trying to come into the market right now, too.”

First, there are three different times of distressed home purchases...

Short sales can be frustrating, but are straightforward.

'If you see an advertisement that says, 'Asking 299K, subject to lender approval,' that means that the owner actually owes more than what they're asking for the property...

It's important to remember that when you make a contract, you're making a contract with the seller not the bank, so it is contingent upon lender approval. Different banks are taking a really long time to approve short sales,' and they don't approve every offer.

However, a foreclosure auction is NOT a place for amateurs.

Distressed properties—particularly foreclosures—are typically in bad shape.

'They're usually pretty beat up. They usually need a renovation and repairs. Accumulated maintenance has been building up over the last few years because people don't tend to pour money back into their properties--carpets, appliances, paintings. Christ, I go into properties that don't have a working light bulb.'

So do a thorough assessment of the condition of the property.

Know the area.

'Do your homework about the rental market in the area, in regards to what homes are going for, what the rate is for different apartments, for houses if it's a multi-family property versus a single family home. Go through what the rents are, what your capitalisation is going to be on the property, just like anything else. What are you going to get as a return on your money if you invest a higher sum?'

It's often worth spending money to make money.

Know the state of your own accounts.

There are three ways investors should value a property.

Other ways of calculating value are just speculation.

'People use a very, very long prep sheet to calculate five-year appreciation schedules, but let's face it--that's why they call it speculation. If it were me and I were purchasing, it would be a home run if...I invested $100,000 and, after everything was said and done, I could put 6 per cent in my pocket. Anything above that is a bonus.

My tax bonuses, my appreciative benefit? I would rate that as my gravy, as my cream on top. But my base line, bottom line, is that...if I take $100,000 cash, I want--after taxes are paid, insurance is paid, and everything else--I want the rent to produce a net profit of approximately 5-6% minimum.'

The old rules still apply.

'As far as purchasing is concerned, you're looking at the same exact standards as you have all through the years. You still need to have good credit. You need to have the ability to borrow. Structurally, the sales haven't changed--it's just the mood that's changed. Home values have come down and it's more difficult to find a funding source.'

It all depends on getting the right financing and the right deal.

'With investment properties you're going to be looking at 20 per cent down, maybe 25 per cent, and/or you're going to make cash purchases...

It is a wonderful time to buy. There are programs now with interest rates below 4%. You can get interest rates, you can get fixed rate mortgages, and as long as you are patient--that's the key...Right now, there are 3.5% down, 3% interest programs out there.'

You need to have the ability to close quickly.

Be patient.

'Don't look at the first hurdle in the 100 meter dash, you want to look at the last hurdle: 'How am I getting out of this property?'

Out of it can also include getting it to the point where it's rented and you're now creating an income.'

Don't underestimate the value of professional advice—and professional help.

Now that you know what you're doing...

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