Investment Property…Is it a Good Idea?

5 Steps

As the cliché goes: location, location, location. No doubt you have heard this many times before. It is for good reason that that this popular saying has gained such publicity. Indeed, the location of an investment property is on of the single most important issues that determines and will determine the ongoing and increasing value of it. This is especially the case for a primary home. Nevertheless, real estate investing, you are able to venture away from the cliché.

While location is a prevailing factor in investment property purchases it is not the single overriding issue on which to base a decision. Furthermore, this is even more the case if the property is not a first home but rather an additional property bought purely as an investment not as a home for you and your family.

There are several ways of selecting an investment location. The following are the methods used by many to research and buy an investment property:

1. Be up to date on real estate news. The best way to do this is do read local newspapers and subscribe to Google alerts. By subscribing through key words to Google alert, the latest articles relevant to you will be directed immediately to your email in box. Furthermore, if you know somebody living in the area you wish to purchase your investment property question them about the atmosphere in that location.

2. Check out if there is much movement such as more people coming rather than going. A good place to find out this type of information is through local real estate agents and property managers. They can act as a mole who is up to date on the local going ons in real estate in the area you are hoping to invest.

3. Be up to date with investment property reports. For example you can purchase or subscribe to the National Review of Real Estate Markets report. While the report may cost more than your average magazine, nonetheless the information it reflects is invaluable when investing you money and making crucial decisions in the property arena.

4. It is highly recommended to visit the area and spend some time where you wish to make your investment. Whether you plan on investing locally, nationally or internationally, it is best to have a personal idea on the location and the people there.

5. Know that an investment in property is a major undertaking and commitment that you should be ready to be highly involved in, in order to reap the best rewards.

Buying An Investment Property

Buying a second home to use as an investment property is a pragmatic step to financial security. Real estate has helped make people very rich. So why shouldn’t everyone get on the bandwagon and earn some money through this channel? However fruitful such an investment sounds, it is nevertheless encouraged to do much research and take precautions and intensive planning. Making a home investment is a sure way to build up your financial value as well as your overall equity.

The future value of your home or investment property can be increased by making improvements and important renovations. Renting a home does require maintaining its condition and ensuring that everything is fixed and working. This will maintain and even raise the renting value of a home. Nevertheless it is important to maintain as much reason when approaching the idea of renovating your home. As the many reality television programs suggest, major home make overs can radically change the look of your house. However, they can also come with a high price tag and a lot of added hassles and headaches. The best is to maintain reasonable goals in regards to any renovations you are likely to undertake. Furthermore, your additions and alterations have to remain within the reasonable asking price of the property or potential interest will be lost. The work should remain classy and not be outrages as this too can put many buyers off.

For those fixing their apartments to be rented should take a different tactic to those renovating their apartments for sale. As a landlord you should renovate enough so the apartment is simple and well done. This will help maximize its appeal to potential tenants and the average renter. A thoughtful renovation that creates an area that is clean, where all the parts and pieces work as they are supposed to and appeals to tenants, will be able to rent out their investment property easily and for maximum returns as well as higher class tenants

While the ideal renter is someone who is neat, careful, quiet and pays their rent on time, these can often be more difficult to come buy. Until then you will probably have to go through a plethora of renters in order to find you long-term ideal tenant who will look after your apartment. The best arrangement is when your rent pays off the total amount of the mortgage required each year. In this way you will be able to accrue equity for the investment property.

Investment Property And Why It’s A Good Investment

Making an investment is far more than simply handing over lots of your money and hoping for the best. In fact, large investments carry with them certain specific rules and general processes and guidelines that help you ensure that you put your money in safe, profitable locations. For those interested in investing in real estate aka investment property, it is imperative to know what the initial investments will be.

For those hoping to buy a home the initial investments will begin soon after the first contract has been signed.

Real estate investments will demand, in general practice, that you place an initial down payment towards the investment property. This money belongs to the person selling the home and is a set and agreed amount.

The amount goes towards your credit and the investment. For those with additional cash, it is recommended to use this money in order to make the down payment as it will benefit you with final approval for the loan to be received for purchasing the rest of the home.

Additional investments include the team you will have to pay in order to inspect and verify the value and quality of the property. For example, it is important to have a home inspector view the investment property prior to purchasing. Similarly, there will be many fees linked to those helping with the related paperwork and contracts. Each of the people involved will require their fees or some percentage in the property itself. House hunting will take a slice out of your bank account, especially with all the additional initial investments and unexpected expenses, it is important to make this part of your investment calculations.

It is imperative to decide on a specific and affordable sum of money when purchasing you first home. Likewise, you will need to know how much is demanded in a down payment for additional investment properties. In this way you will be able to maintain financial security always.

The dream of owning your own home needs to be realized in a proper, rational and pragmatic fashion. This will help you not only create the home you desire, but keep you financially floating rather than sinking.

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If you have been living in your house for a few years, chances are that you have built up some equity, or “ownership,” in your home. With this value in your home, it is possible to refinance (or refi) your house and do what is called a “cash out.” This can be a very helpful way to help you pay off some debts or get a little extra money in your pocket.How it works

When you have paid some of your house off through mortgage payments, and when your home has appreciated in value, you have created a difference between how much you owe on your mortgage and how much the house is worth on the local real estate market. This difference is known as the equity. When you refi your house, you can usually borrow anywhere between 90% and 125% of the value of your home (although you should avoid borrowing more than your home is actually currently worth). What you borrow is used to pay off the original mortgage, and there is usually money left over. This is given to you either as cash, or directly used to pay off debts.

Using your “cash out” from your house refi

Your cash from your house refi can be used for a variety of things. Unless the lender has helped you stipulate a specific use for the money (such as home improvement or debt consolidation), you can use the cash out from your house refi for whatever you want. Here are some of the common things that people use their refi cash for:

· Taking a dream vacation or cruise
· Consolidating debt into a single, lower monthly payment
· Improving the property so it has greater value
· Paying for a wedding
· Covering the costs of a higher education
· Making a large investment with the likelihood of a high return

Watching out for pitfalls

When you refi your house for a cash out, make sure that you go about it carefully. Figure out how much you need, and try not to go over that. Borrowing too much can mean losing your home when it becomes too difficult to pay back. Also, watch out for lenders who try to convince you to borrow more than your home is worth. The assumption is that your home will increase in value to cover the extra, but borrowing more than your asset can cover is not good asset management. Finally, make sure you watch out for possible prepayment penalties for your old mortgage upon refinancing.

By Matt Woolsey, Forbes.com

May 11, 2007

No matter the locale, its denizens almost always gripe about the stiff cost of living, housing and doing business. But in some places the financial pain is clearly more acute than others.

Take San Diego. A slumping housing market, where only 5% of residents can afford the median home, and a high price-to-earnings ratio made the oceanfront city our most overpriced real estate market. Had weather been included as a statistical measurement, there’s no doubt San Diego would have avoided our list of top 10 most overpriced cities–but we didn’t factor in sunshine.

Arriving at the relative value of a given market isn’t as simple as calculating median home prices, income rates and cost of living. Instead, our list of most overpriced real estate markets incorporates a more meaningful methodology.

In Pictures: America’s Most Overpriced Real Estate Markets

Behind The Numbers

Using the 40 largest metro areas, we started by estimating a “price-to-earnings” ratio for each market. (Like the P/E of a stock, this value attempts to measure the price a homeowner would pay for one dollar of return.) Using data from the National Association of Realtors (NAR), the U.S. Census Bureau and the Office of Federal Housing Enterprise Oversight, we took each market’s median home price and divided it by annual rents minus taxes and insurance for those properties. (We assumed for this exercise that other costs don’t vary drastically from city to city.)

The average P/E for the 40 markets is 28. Note: Unlike, say, the S&P 500 index of stocks, ours is not a weighted-average P/E. If it were, certain cities with greater overall sheer market value would carry more weight.

We incorporated a second metric: an affordability index. Calculated from National Home Builder Association and Wells Fargo data, the affordability score is the percent of the population who can afford to buy the median-priced home, assuming a 6% mortgage rate. In a city like Los Angeles, No. 4 on the list, a wee 2% of homes are affordable for residents pulling down a median income.

Consider Detroit. Almost 88% of its homes are available to those with a median income, and its 17.5 P/E ratio appears relatively low, but that doesn’t make real estate in the Motor City a good investment. Already stagnant home prices have decreased at a rate of 1% over the last year and, of the major metros, Detroit is the only one on our list to have lost jobs since 2005 (other than New Orleans, which we left off; in the wake of Hurricane Katrina the city’s statistical figures were such anomalies that it wasn’t comparable to the rest of the cities).

So which markets are in bubble territory? Look for a high P/E ratio, low affordability, low income growth and a high cost of living.

San Francisco, ranked fourth, fits that bill. Despite home prices growing at a 2% clip over last year, according to the NAR, the city by the bay ranks third to last in expected income growth, reports Moody’s. Not good news in a market where only 7.5% of housing is affordable for the median-income earner. Combine that with a housing P/E ratio over 50, and it isn’t difficult to imagine some softening on the horizon.

The usual suspects littered our list: Miami came in second, followed in order by: Sacramento, Calif.; San Francisco; Washington, D.C.; Honolulu; New York; Los Angeles; and Boston. San Jose, Calif., rounded out the top 10.

DO NOT PROCEED WITH AN ADJUSTABLE RATE MORTGAGE UNTIL YOU HAVE READ THIS HANDBOOK WRITTEN BY THE FEDERAL RESERVE BOARD

Use C.H.A.R.M. when dealing with ARM’s- The MUST READ Guide to Understanding Adjustable Rate Mortgages

CHARM stands for Consumer Handbook on Adjustable Rate Mortgages. This publication was written in order to explain all the pros and cons of ARM’s. It explains topics such as:

Adjustment periods

How monthly payments work

Payment shock

How to calculate you fully indexed rate

At what rate your adjustable is capped at

Variation in ARM’s

How to avoid owing more money than you borrowed

Pre-payment penalties

Consumer Handbook on Adjustable Rate Mortgages

Please excuse me if this letter seems informal; it may duplicate the atmosphere of a backyard bar-b-q. There may be nodes of two old friends speaking candidly of the good old days. The days when people stood for something more than their own fragile egos. I’m a simple man, with a simple goal. Allow me explain.

I don’t want to sell you on any special products or rant and rave about how incredible our service is,…because that’s what everyone else is doing. I will not view you as a consumer, just as long as you don’t view me as a salesman. Below you will find some of my thoughts and observations, and the reasoning behind Access Granted.

You see my friends; I spent a lot of time trying to figure out what people wanted. Hours were wasted away racking my brain, doing research, and analyzing charts and graphs. I wanted to understand my clients and to figure out their needs. It’s a lot harder than you may think. Everyone is different and every situation varies.

I began to ask simple questions, like, “what information do you crave most?”, “if you could go back and do it all over again, what would you change?”, and “if you were a broker, how could you become more helpful”?

The answers were right in front of my face. “We want the truth, even when it’s bleak”. “We want answers to our questions, without a salesman ramming unfamiliar jargon down our throats”. “We want a person we can count on, and get in contact with easily”.

You see I began to notice this trend; it is human nature to inquire, before one acts. People want a place they can seek refuge, an environment they can breathe freely within, and a source of credible simplistic information.

So now that I figured out what my clients wanted most, I was left with no other choice but to build it for them. But of course, before the foundation is set, one should have blueprints…right? So I did research and tried to find an example of what I was looking to create. I questioned colleagues in the business, spent countless hours on the internet, and was astonished to find that no such platform existed!

After amassing a boat load of crucial information, must know techniques and tips, ways to avoid trouble down the road, and exposing the secrets the finance world values most it was time.

You see the mortgage and finance industry has built this impenetrable fortress; one where outsiders can not come in. There are secrets that should not be spoken outside these walls. Well, maybe I’m a trouble starter, maybe I go against the grain a bit, or maybe I was tired of seeing hard working people foreclose on their homes, but you know what…it’s time those doors were blasted off of that fortress with dynamite!

Access Granted my friends. The doors have been opened and you can come and go as you please. My website was designed to be enriched with answers to your questions. It’s time someone built a place to teach people, instead of selling them.

Now don’t get me wrong, I would love your business, and anyone at my company would do an incredible job, but that’s not the point. We’ve decided to take responsibility and become the trendsetters. We must lead by example and maybe others will reshape their methods of doing business within the mortgage world.

Please feel free to view this site as hands on. Someone is always available to answer your questions. If you want to buy a home or refinance right now…that’s great, but if you just need a little guidance, then come on in…ACCESS GRANTED.

The Cost of Peace of Mind 

by Laura Rowley

Posted on Thursday, April 26, 2007, 12:00AM

Jim Schenke, a 40-year-old writer/publicist for Purdue University in Indiana, is a conscientious saver.

Married with a toddler, Schenke has set aside a full year’s salary in an emergency fund, because he and his wife decided she would stay home after their daughter was born 18 months ago. That cut their $50,000 income significantly.

Where the Money Goes

Their cars and student loans are paid off, and they studiously avoid credit card debt. Schenke also makes an extra payment each year toward his fixed-rate, 30-year mortgage, which has an interest rate of 6 percent. But he doesn’t contribute to his employer’s 403(b) plan; Purdue sets aside $5,000 annually for his retirement.

“The only company I owe money to is my mortgage lender, and I’m going to be beholden to them for as short a time as I can be,” says Schenke, who follows the debt-free philosophy of the late Larry Burkett, founder of Crown Financial Ministries.

But a new study suggests Schenke might be better off putting that extra cash into the university’s retirement plan. Researchers found that at least 4 in 10 homeowners would build more wealth by putting additional mortgage payments into a tax-deferred retirement plan, such as a 401(k) or 403(b).

The Best Possible Future

An estimated 23 million households face the mortgage prepayment versus retirement savings dilemma, the researchers found. Switching the money to retirement savings would save U.S. households up to $1.5 billion a year, they estimate.

“We’re not telling people they should save more — the study is about making optimal use of savings,” says Gene Amromin, financial economist with the Federal Reserve Bank of Chicago, who conducted the research with Jennifer Huang of the University of Texas McCombs School of Business and Clemens Sialm of the University of Michigan. “If you were to move a dollar from here to there without increasing risk, would you come out ahead?”

Using data from the Federal Reserve’s Survey of Consumer Finances, the researchers examined individuals who had a fixed-rate mortgage with either a 15-year term or a 30-year term on which they made extra payments; were eligible to participate in a tax-deferred retirement account and weren’t maxing out contributions; and took advantage of the mortgage interest deduction by itemizing tax returns.

“The tax code subsidizes both mortgage borrowing and 401(k)-type investing,” says Amromin. Homeowners can deduct the interest paid on a mortgage, while workers who save in 401(k) plans reduce their taxable income by the amount they contribute, and the funds grow tax-free until they’re withdrawn at retirement.

Do the Math

That makes it important to do the math before you make a savings decision. Consider a homeowner who takes out a 30-year fixed-rate mortgage at 6 percent, and is in the 25 percent tax bracket; he effectively pays 4.5 percent on the mortgage. “If you invest in Treasuries in your 401(k) plan that are earning 5 percent tax-free, that’s a risk-free way of increasing your return,” Amromin says.

Researchers examined household goals for prepaying a mortgage, and looked at what would happen if they invested the money in a retirement plan instead. For example, in the interest of making an apples-to-apples comparison, the researchers considered two investment scenarios:

Scenario A: The investor puts an extra amount toward his mortgage each year, paying off a 30-year fixed mortgage in 25 years.

Scenario B: The investor puts the extra cash in his 401(k) instead, investing it in Treasury bonds or mortgage-backed securities. After 25 years of paying the mortgage at a normal rate, the investor withdraws a lump sum from his 401(k) to pay off the house — incurring income taxes (and a 10 percent penalty if the money is taken out before age 59-1/2).

Although mortgage rate, income tax brackets, and 401(k) contribution limits varied among households, in about 40 percent of the cases putting the money in a retirement fund beat paying the mortgage off early, the study found. “Basically, the investor met exactly the same goal of paying off the mortgage in 25 years by spending less money,” Amromin says.

Conservative Estimates

How much less? Working backward, the researchers figured out the average difference on an annual basis: The investor who chose a retirement investment over a mortgage prepayment got to keep $400 a year in his pocket.

Amromin says the study probably underestimates the number of households that would benefit from switching a mortgage prepayment into a tax-deferred retirement account, because the researchers made a number of conservative assumptions:

• They assumed investors didn’t get a 401(k) match from their employers. In reality, more than 90 percent of plans managed by Vanguard, one of the largest 401(k) administrators, offer a match.

• They presumed the investor would put the money into a low-risk investment — Treasury bonds or highly rated mortgage-backed securities. Someone investing in equities would likely do better: Between 1926 and 2003, stocks returned an average of 10.5 percent a year on investment, while government bonds averaged 5.45 percent, according to Ibbotson Associates.

• They assumed individuals had a constant income tax rate over time. But retirees often slip in a lower tax bracket, making 401(k) contributions during peak earning years even more valuable. According to Federal Reserve data, 41 percent of households are in the top tax bracket before retirement, while only 18 percent are after retirement.

• The researchers excluded state tax obligations, which would also make the tax-advantaged features of the 401(k) more worthwhile during peak earning years. Currently, 43 states impose an income tax.

A Matter of Choice

For many homeowners, including Schenke, it’s more of a psychological decision than a financial one. “If I own my house, I’ve got my stake,” he says.

“Housing is the single biggest part of your costs, and if that’s taken care of, I feel like I can get by on a modest income. Every dollar I put into a retirement account, I feel like it’s gone for at least 20 years.”

But if someone loses their job, no lender will offer a home equity loan, whereas money in a 401(k) could be withdrawn (albeit with a 10 percent penalty for someone younger than 59-1/2 as well as taxes). Meanwhile, the ability to sell a home in an emergency depends on market conditions.

An Outdated Approach

Why do so many people choose to put extra money into a mortgage when other options would likely increase their wealth? “This is really remnant of Depression mentality that has persisted from generation to generation,” says Amromin. At the time, most mortgages had one- to five-year terms, with a lump sum payment due at the end.

“Any shock to income meant you couldn’t afford your payment — mortgages were much more susceptible to economic uncertainty,” says Amromin, and roughly one-quarter of Americans were unemployed during the Great Depression. “It’s fine to pay down your mortgage if it gives you peace of mind, but you should recognize what that peace of mind costs.”

For more on the study, and a simple way to calculate the mortgage prepayment versus retirement savings choice, visit my blog.

As I was doing some research on the current state of our real estate market I stumbled across this very informative article in the Wall Street Journal. I think those of you that are looking for confirmation that we are smack in the middle of a Buyer’s Market, due to a surplus of homes for sale, need look no further. Please post any questions you might have. Happy Reading!

House Prices Slide as Property Glut Grows: The Buyer’s Market
The Wall Street Journal Online
By James R. Hagerty

Buyers Gain Bargaining Power in Busy Spring Selling Season; Auctions in Palm Springs

Tighter credit and a growing glut of properties are depressing an already weak U.S. housing market, wrecking the industry’s hopes for an early rebound.

That leaves buyers in a strong position to negotiate for bargains during the spring home-shopping season, the busiest time of the year for housing sales.

On April 24, the National Association of Realtors reported that sales of previously occupied homes in March dropped 8.4% from the prior month to a seasonally adjusted annual rate of 6.12 million units — the largest monthly drop since 1989. The trade group said the median price for homes was $217,000 in March, down 0.3% from a year earlier.

The data reflect sales that closed in March; most of those were negotiated in January and February. The Realtors said bad weather in February hurt March sales. The drop in March followed three months when home sales increased nationally.

Since March, the market appears to have deteriorated further in many parts of the country. Reports from builders show that sales in the past few weeks “have really plunged,” says Ivy Zelman, a Cleveland-based housing analyst for Credit Suisse Group. She says prices of new homes also are falling as tighter credit eliminates some potential buyers and builders struggle to shed excess inventory.

Lenders, stung by a surge in defaults, have rediscovered the virtues of caution over the past few months, eliminating many of their no-money-down loan offerings. That tightening is “really starting to bite,” says Ed Mixon, a real-estate agent for Re/Max Real Estate Services in Monarch Beach, Calif.

Mr. Mixon recently had to advise one of his clients, a young woman with a good job and credit record, to put off her dream of buying a $300,000 condo in Laguna Niguel, Calif., until she could come up with more than her current nest egg of $5,000 for a down payment. A year ago, he says, she could easily have obtained a loan to cover 100% of the condo’s price.

Stricter Lending Standards

Stricter lending standards will reduce demand for housing by 10% this year from where it would have been had credit remained loose, estimates Thomas Lawler, a housing economist in Vienna, Va. He expects housing prices, as measured by the national S&P/Case-Shiller index, to fall 7% in the fourth quarter of 2007 from the year-earlier level.

Standard & Poor’s reported April 24 that the S&P/Case-Shiller 20-city composite index in February was down 1% from a year earlier. The metro-area price changes ranged from drops of 7.8% in Detroit and 5% in San Diego to rises of 10.6% in Seattle and 7.7% in Portland, Ore. In 15 of the 20 cities, March prices were down from a month before.

All this has made many sellers more willing to negotiate. Shawn Gabbaie, a real-estate agent in Los Angeles who bought a new three-bedroom house in Las Vegas as an investment several years ago for about $275,000, is now trying to sell it for $299,900. He’s offering to provide partial financing to a buyer, or to lease the house for $1,200 a month. Mr. Gabbaie says he’s “definitely” flexible on the terms.

Where sellers are inflexible, buyers generally will find plenty of alternatives. The Wall Street Journal’s latest quarterly survey of residential real estate in major metropolitan areas — drawn from a wide range of sources in 28 major markets — found particularly large jumps from a year ago in listings of homes in Florida. Orlando and Tampa were both up 62%, closely followed by Miami (58%) and Jacksonville (49%).

In Florida’s St. Lucie County, current inventory is enough to last more than 34 months at March’s sales rate, says Mr. Lawler. The supply is 29 months in Palm Beach County and 25 months in both Miami-Dade and Broward counties, he adds.

Other cities with big increases in listings from the already swollen levels of a year ago include Phoenix (36%), Chicago (44%), Los Angeles (54%) and Las Vegas (30%). The inventory was little changed but still plentiful in the San Diego and Washington, D.C., areas.