The real estate collapse is a distant memory. Investors are hot on the trail for profitable property.
Real estate investing is starting to look sweet again. Historic low interest rates won’t be around forever, and it’s just a matter of when, not if, they’ll go up. Pair that with a volatile stock market that has many spooked, it’s not surprising that real estate investors’ memory of the meltdown in 2009 is fading, and the possibility of profit has moved to the forefront. Real estate investing is surging. Overall, housing demand is strong, according to Realtor. com. Although real estate values have been increasing in many areas, they are still 15- 20% below their 2006 peak, leaving plenty of room for continued appreciation and high rental demand, says Kevin Ortner, CEO of Renters Warehouse.
First-time as well as experienced investors will find a decidedly different market. While some of the rules of the game are the same, much has changed. Here’s how to play now and win. Take a reality check “The market today is nothing like it was five years ago. In 2010, we were at the bottom of the market and in the middle of the largest economic downturn since the Great Depression. In 2010, no banks were lending, and buyers were sitting on the sidelines preying on foreclosures and short sales like vultures,” says John William Barger, of Barger Real Estate in Tampa.
It was not uncommon to see a home priced at 50% of its pre-recession value sit on the market for years with no activity. Today, it’s a totally different ball game, says Barger. There aren’t tons of foreclosures or short sales, so it’s tougher to find bargain basement deals. “Buyers are paying cash and demanding homes be move-in ready, and sellers are delivering,” says Barger.
Don’t wait to make an offer.
“There is no more time to ‘think about it’ because houses are here today, gone tomorrow. If you see something you like, make an offer and get it under contract before someone else does. Buyers’ best deals today are being the first one out of the gate,” says Barger.
Know the market.
Really get informed and look at lots of properties before you buy. This way you know if a new listing you love is priced right. Before you make an offer or even walk through, be fully approved for the specific property you’re interested in and not pre-approved for a price range, advises Tom Landry, broker/owner of Benchmark Real Estate in Portland, Maine. “Once you know the market and its values, act quickly.”
Forget flying by the seat of your pants like in the past.
If you don’t do extensive research these days, expect to pay for it later. “You may know the house is a good deal for a market or neighborhood, but what might affect its value and appeal in the foreseeable future? Check to see if there are any known or rumored changes that might affect the living conditions and marketability of the property,” says Martin Archacki, team leader with Atlanta Homes Team.
While fix and flip looks good on HGTV, don’t assume real estate investing equals flipping foreclosures. “The method that works more often at building personal and generational wealth is accumulation of rentals,” says Gregory Rand of OwnAmerica.com.
Where to put your money
For an investor looking to make a profit, the best play right now is in speculative new construction. “This has been and continues to be my bread and butter, especially in established, desirable, upscale neighborhoods. Because we are still coming out of the recession, inventory of new homes is at a 35-year low, and demand has never been higher. “I consistently put together deals that have yielded a short-term return (9-12 months) of 40-80%, and that’s a net gain,” says Barger.
Some still like to bet on the fixer-upper or worst house in an area. “You get instant and even double return,” says Landry.
He’s also big on multifamily properties. “Don’t be afraid. A 2- to 4-unit building is usually easy to manage and can make a great investment.”
However, buy rental properties with tenants in place. The biggest risk in rental property is the cost to make it rent-ready, what the rent will actually be, and how long it stays vacant. “Buying a rental with a tenant in place solves all three,” says Rand.
Stay up on demographic trends. Good investment is forward thinking. What’s going on? “We are upon a trend of child-bearing millennials moving out of the major cities to seek better schools, lifestyle costs and community within their families. Similarly, baby boomers are aging. They are likely to downsize their homes but upsize their comfort and services,” points out Trevor Ewen, a financial blogger with pearoftheweek.com.
What’s right for you?
While all real estate investments can be good ideas, deciding on which type of investment is right for you takes thought. “Not every investor and property type are suited for each other,” says Michael O’Nan, a mortgage banker with Private Bank of Buckhead in Atlanta.
For example, he says vacation homes are a great purchase, without the extra work involved with rental properties. Financing for a second home closely mirrors financing for your primary residence, with only a slightly higher down payment requirement. If you want the benefits of owning an investment property without putting any elbow grease in the rehab or time in finding a renter, then a turnkey property might be a good option for you. Purchasing a turnkey property is a lot like a take-and-bake pizza. All the ingredients are there. All you have to do is buy! The house is updated, you have a property management company in place for any middle of-the-night repair issues and they find the qualified tenants for you. The downside is that they are not quite as lucrative and are a bit more expensive.
The bottom line: “Weigh the costs and benefits before you take the plunge,” says O’Nan.
Do the math
Another new reality is that as an investor you may not have as much wiggle room for things to go wrong. “What are your short and long term plans for the property? Always have a Plan B in case things change. Know how much risk you can take on. What if you lost your job? ” warns real estate broker Karyn Anjali Glubis.
Realize, too, that a real estate investment is not a stock substitute. “The stock market offers diversification, which protects against the irrationality of the market. Very few individual investors can achieve the same level of diversification through real estate,” says Eleanor Blayney, CFP Board consumer Advocate.
Be ready for less lenient lenders
Long gone are the days when lenders bent backwards to give you money. Today, they have tightened guidelines and require more reserves and larger down payments to offset the added risk, says Scarlett Tassone, a vice president with Private Plus Mortgage. “Be prepared to have a minimum 20% down payment and at least 10 months of full mortgage payments, including taxes and insurance, for each rental property and six months for your primary residence. You must disclose and document monthly payments on all properties you own with and without mortgages.”
While much has changed, when it comes to real estate two golden rules remain, location, location, location and buy low, sell high. Finally, says Blayney, “Making a profitable real estate investment takes skills beyond the average investor’s. While there is plenty of upside–in the form of ongoing income and appreciation–it does not come easily or cheaply.”
By Sheryl Nance-Nash