Thinking about investing in real estate? Chances are your home is already your largest asset. However second homes, rental properties and even raw land can also play an important part of your investment portfolio. There are lots of things to think about: cash flow, appreciation potential, tax consequences.
For example, did you know that you may be able to defer paying capital gains when you sell an investment property if you roll the proceeds into another property? This is called a 1031 exchange and is an important tool for real estate investors. However the rules are complex and the IRS is very strict in its interpretation of the rules. If you think you might be interested in this tool, you should talk to an expert before you do anything! Contact me and I will be happy to explain 1031 exchanges and help you find a qualified intermediary to help you set it up.
Another tip for investors: make sure you have an agent who understands finance and the business aspects of investing. That is not to say that your real estate agent can replace your CPA, attorney or other professional advisors. However a knowledgable agent can help identify situations where professional advice is needed and assist you in determining the questions to ask. Make sure you check out your agent's credentials if you plan to invest in real estate. (See About Me.)
Contact me and I will be happy to help you think through whether real estate should be a part of your investment portfolio.
Real Estate Investing Information
If you are considering investing in real estate, the following articles may be of interest. It will be updated periodically, so check back from time to time. You can also find relevant information on my Real Estate News page which is updated daily.
Opportunities to make big, quick profits in residential real estate tend to come and go in cycles. When a local market is hot, families may find it possible to buy a house at an attractive price, fix it up, and watch its value rise in just a few years.
When the same local market is at the low end of the appreciation cycle, reaping a profit on the family home can take a good deal more time but the reward can be just as satisfying if price and location and carefully considered.
Even in uncertain economic times like these, history shows that real estate is one of the soundest investments a family can make. During the Great Depression of the 1930s when the stock market plummeted as much as 89 percent, housing prices dropped only 39 percent. According to most of the research on housing trends, prices continually stay at the same level as, and most often appreciate faster than, the rate of inflation. Housing prices actually rose an average of 10 percent during the recessions of the mid-1970´s and early 1980s.
CENTURY 21 statisticians report that the rate of home appreciation since 1990 has been around five percent nationally, with inflation hovering around four percent. Homeowners, obviously, are still staying ahead in the real estate game on average. And, with mortgage interest rates the lowest they´ve been in two decades, real estate today is a more attractive investment than it´s been in years.
First-time buyers are the big winners in this environment. Drawing up a budget can help you and your family decide on what you can afford. Once you´ve determined a price and picked your desired community, shop around to find the best house you can buy for your money. This strategy can help you realize greater appreciation two or three years down the road.
This is also a good time to purchase a second or vacation home. A bargain cabin in the woods today might bring an excellent return when housing prices move upward. Affordable second-home prices also allow you to purchase a vacation home that can serve as a stepping-stone to a larger retreat in the future.
But appreciation isn´t the only advantage to buying a home. The federal government thinks home ownership is so important to the future of our country that it allows mortgage interest to remain the last substantial tax shelter for families. Owners can also take deductions on their property taxes. And, the profit on the sale of your home remains tax free as long s you buy a house for a greater or equal price.
So before you decide that this is not a good time to invest in residential property, re-examine the financial benefits of owning your own home and put them to work for you.
How to Spot a Good Buy
Beauty is in the eye of the beholder, particularly when it comes to buying a home. Features that attract one home-buyer may repel another. However, the one feature of interest to every home-buyer is price. Getting the most home for your money is paramount. The real problem is figuring out whether that fixer-upper on one street is a better buy than the home in next-to-new condition two blocks away. That´s why knowing what to look for before you buy can save you time, energy and money down the line.
The first step is figuring out what kind of house you need. A good buy is only a good buy if it meets your current and future living requirements. Before shopping for a home, decide how much space you and your family require. How many bedrooms, bathrooms? Is a family room necessary? Do you need a layout that will accommodate a lot of entertaining? Do you prefer a spacious or compact work space in the kitchen? If you have small children, can the house easily be childproofed?
Evaluate the front and back yards. Is there enough space to accommodate your children? Do you want a park-like or garden setting? Do you enjoy yard work and gardening, or do you want a low-maintenance yard? Take into consideration the cost of extensive landscaping and upkeep.
Next, determine how much work is required to make the house you are considering livable. Make an honest assessment of your fix-it abilities. How much work are you willing to do or pay someone else to do? Do you have basic decorating, carpentry and plumbing skills? If you plan to learn as you go, make sure you have accurately determined what you are getting into. Ask an experienced friend, family member or your real estate agent for their opinion, and be sure to consider how much remodeling inconvenience the rest of the family can handle.
Unless you are ready and able to tackle a major remodel, look for a house or condominium that needs only cosmetic improvements. These include painting, wallpapering and replacing items like flooring, window treatments, bathroom and kitchen fixtures, light fixtures, cabinet and interior door hardware and appliances. Remember that even these simple changes can be costly if you have to make many of them.
Beware of improvements that seem easy enough at first glance buy may turn into major headaches and require a lot of money once you´ve moved in. Remodeled kitchens and bathrooms, changes to the floor plan, room additions and redesigned landscaping are examples of seemingly minor changes that can easily eat away the money you thought you saved by selecting a so-called "bargain priced" home. Of course, you may be perfectly willing to spend whatever money is needed to customize the house to match your tastes and needs.
Make sure major systems in the house are in good working condition. The furnace, air-conditioning and plumbing should be up to date, since repairs can be costly. Your agent can arrange to have a professional inspector determine whether the electrical wiring and any room additions are to code. Local utilities often offer free or low-cost inspections to tell you if the house is energy-efficient.
Look for a house with universally popular selling points. If you´re impressed, the next buyer down the line is bound to be, too. For example, a roomy, modern east-to-clean kitchen is the best selling point a home can have. A house with only one bathroom is less desirable than a house with two or more. Many buyers expect at least three bedrooms, with a master bedroom that offers a feeling of privacy. Lots of storage space and closets, especially walk-in closets, will be a real selling point. Family rooms or "great rooms" also are desirable. On closer examination, a house that looks like a bargain may lack some of these key features.
Don´t forget the old adage: location, location, location. Unless you´re looking for a fixer-upper, the house should be in a condition that is comparable to other homes in the neighborhood. Avoid buying the biggest or fanciest home on the block. Consider the amount of traffic or noise. Homes located in a quiet area away from a busy street will command a higher price. Make sure the schools in your district have a reputation for quality education and safety. Nearby supermarkets, gas stations, restaurants and theaters also will make a location more desirable.
Good community facilities also add appeal; pools, athletic fields, community centers, libraries and hospitals all add to a neighborhood´s value and desirability. Transportation needs also should be considered. Is local public transit available? How long are typical commutes to places of current and potential employment? Are there several alternate route? How close is a major airport? All of these can affect a home´s pricing.
Consider the cost of living in a home. It´s important to consider not only purchase price but the monthly cost of living in a home. Estimate your utility and maintenance costs. For example, will the house need to be painted on a regular basis and will you need to spend money maintaining a swimming pool? Ask your agent about the property tax rate and whether increases are anticipated. Will you have to pay special assessments for a homeowner´s association? Consider the point in the life cycle of major household systems, such as the furnace, air conditioning, roof and kitchen appliances.
You can find a bargain! Your first step should be to seek out a knowledgeable real estate agent with experience in the market areas where you wish to purchase a home. Your agent can help you locate those properties that truly are "bargains" and help find the home that most closely matches your desires and needs.
Avoiding a Bad Investment is Easier Than You Might Think
Human nature being what it is, none of us can get serious about the idea of buying a house without experiencing at least a few small twinges of worry. What we fear, of course, is making a mistake. And the mistake we tend to fear most is buying a "lemon" ? a house that doesn´t simply fail to satisfy our hopes but turns out to have so many flaws that it´s a disastrously bad investment.
The good news is that the danger of getting stuck with a lemon of a house is one of the most easily avoided dangers in the whole universe of personal finance. Prospective homebuyers are protected in many ways, and they can further strengthen their defenses by taking a few simple, commonsensical precautionary steps.
The first of your protections is the fact that in many places sellers are required by law to make problems known to potential buyers and are liable under the law if they fail to make adequate disclosure. For obvious reasons, however, most of us prefer to steer clear of legal entanglements even when the law is on our side. In the housing market we do this by identifying problems before closing the deal. And identifying problems isn´t necessarily all that difficult. Even a person who´s not an electrician or plumber or construction expert often can identify areas of potential concern simply by being alert when visiting a house that´s on the market. It´s a simple matter, for example, to turn on faucets and showers to test water pressure. In a bathroom it´s a simple matter to turn on the hot water both at the sink and in the shower at the same time and then flush the toilet and watch for drastic drops in pressure or temperature. This is highly likely to produce evidence of whatever problems are lurking in the plumbing system.
Most homes should provides at least 200 amps of electrical power, and it´s usually possible to confirm this simply by checking the numbers on the circuit-breaker panel. Check, too, for extra-heavy 220 volt outlets where they´re needed for a washer, dryer and other heavy appliances ? and for the grounded three-prong outlets needed for computers and power tools.
A house that´s been standing for years but still has straight walls and ceilings and remains free of cracks and the stains that indicate leaks is likely to be structurally sound.
Are the basement walls damp ? or even wet? Have termites left their calling cards ? tubes or tunnels where the walls touch the ground, or wood debris around baseboards?
Wherever you see such things, things that you wonder about because you don´t understand them or wouldn´t expect to find them in a completely sound structure, you can be confident that it´s time for further examination. Keep an open mind about what that further examination might lead to , however. Things that can look like big trouble to the amateur eye sometimes turn out to be quite trivial when an expert checks them out.
The word "expert" is a crucially important one to remember. Ultimately, before closing on the house of your choice, you should have it inspected by a professional ? one who has solid credentials and a solid reputation and whose work is guaranteed. Your purchase should be contingent on the results of the inspection. Your realtor can help you make all this happen, thereby reducing your risk to the vanishing point.
Vacation Homes Are Becoming a Reality for More Homeowners
Whether it´s a lakefront cottage or a log cabin in the woods, a vacation home often seems to be a dream that only the wealthy can afford. But these days, you don´t have to be a millionaire to own one.
A nationwide survey shows the median household income of second-home owners is $46,500. And, according to recent statistics, there were 7.2 million U.S. households in 1990 that owned some kind of recreational property or second home for vacation purposes. That number is expected to at least double and possibly triple over the next 10 years. With today´s continued low interest rates, the tax advantages a second home can bring, and a wide selection of areas experiencing solid home price appreciation, this is an excellent time to consider purchasing a second home as an investment ? and a great getaway place.
When searching for your second home, remember to investigate the area thoroughly. Ask a Realtor® and the local chamber of commerce to provide information packets, maps and brochures. Take time to visit the area several times ? a few months prior to and during its peak season(s). Are the crowds unbearable? Is the weather unpredictable?
Speak with a local Realtor regarding current and past home prices. Knowing the area´s sales history will help determine the market value of the homes and effectively predict their appreciation potential.
Once you´ve settled on a community, work with a Realtor and lending institution to determine how much home you can afford. Drive around the town and its neighborhoods. Experience the day-to-day activity around potential properties. Keep in mind you may decide to retire to the area one day. Will the property serve two purposes -- that of vacation and retirement home? More and more Americans are purchasing vacation properties in areas where they plan to eventually retire.
Remember, vacation homes remain a good investment and provide substantial deductions on yearly tax forms if they meet certain criteria. As the laws are ever-changing, complex and detailed, consult your real estate agent, who will usually work with a tax attorney or certified accountant, to calculate the tax benefits of owning a second home.
Relaxing in your own home in that dream vacation spot is not out of your reach. More and more Americans are realizing that owning a vacation home is do-able -- not to mention a good investment and a peaceful retreat for years to come.
How to Prepare Yourself for Owning a Second Home
If you are thinking about buying a second home, you are not alone. A 1995 survey by the American Resort Development Association found that 60 percent of households surveyed feel they have a likely chance of purchasing a recreational property in the next ten years, a figure that rose 30% from the survey in 1990. The average age for the majority of vacation home buyers ranges from 40-50 years old. Qualifying as the baby boomer generation, this group of second home buyers consists of 80.5 million people out of the U.S. population of more than 260 million. Demand for vacation homes is rising as a result of consumers´ increasing desire to capitalize on low interest rates, low unemployment rates and a strong real estate market offering many viable second home options.
When purchasing a second home, many baby boomers seek properties that offer access to recreational areas as well as amenities ideal for retirement living. Finding a fully functional dual purpose second home requires meeting a number of physical and emotional characteristics. A trained real estate professional can help you identify your short and long term needs as well as a home that provides the qualities you require.
When choosing the ideal vacation/retirement community, look for services and features which reduce the stress of owning a second home. Furthermore, finding a home with one floor living or limited stairs will be preferable as you age and as your home evolves from a recreational home to a permanent residence. For example, free standing homes require a lot of upkeep, so properties that include gardening services or rubbish removal such as condominiums or gated communities with town houses are an option worth investigating.
Once you and your broker have identified a second home, the following are tips to protect your second home investment:
Develop a trustworthy contact who lives near your new home, either a neighbor or a paid caretaker, to keep an eye on the property and collect mail that accumulates. Make sure this person has all of the necessary information to contact you.
To make the home appear to be fully occupied, ask your caretaker to park occasionally in your driveway. Timers are good for keeping lights on, but their schedule should be varied regularly.
Set up an answering machine. Change the message occasionally and check the messages often.
Make sure all doors and windows are locked and secure. Consider installing an alarm to protect your home when you are not there and to serve you when you live there in the future. A quality security system can be purchased through a reputable company like ADT.
Remove all keys hidden around the property.
Enjoy the time spent in your new second home, for vacation, recreation and ultimately for fulfilling retirement living.
