An idea for real estate investors...

From a recent Realty Times article by Ken Harney comes this report of the rise of investors as buyers in the current market

The quarterly "homeownership survey" by realty information firm Move.dot.com found that one of every eight buyers last month was an investor - someone looking to acquire property at a favorable price, planning to fix it up, rent it out or resell later for a profit.


The investor ratio is up from just one in 20 buyers as recently as March, and represents a huge turnaround in Americans' attitude toward real estate.

Buyers who target foreclosure sales are particularly active right now, according to the study, and account for 25 percent of all consumers looking to purchase houses.

Among these foreclosure buyers, fully 42 percent are investors. Thirteen percent say they're buying properties to convert into rentals. Eleven percent intend to rehab them and sell them as quickly as possible.

And interestingly, 17 percent say they plan to let a family member live in them for an extended period of time -- until market values have rebounded enough to sell the house at a substantial profit.

Certainly I see this in my market, especially with houses that banks have marked down to “dump it” prices. In that case I also see a lot of sleazy Realtor deals, too – those sales that take place just after a property comes on the market or just after the latest price reduction that somehow go to the friends and family of the listing Realtor, even if there are multiple offers. We’ve likely all hit those stinky deals. The recent HUD rules on giving potential owner-occupants first dibs on sales may help some, but the real sleaze-bags in our business will figure out how to get around that, too. Until such time as we get more transparency into real estate deals there will always be “Playa’s" scamming the system.

Those clowns aside, I guess I don’t see anything wrong with professional investors (and investor groups, which I see a lot) taking some of the excess inventory off the market. There seems to be lots of investor money out there right now and they are buying up some of the real dregs of the market, so more power to them. I do get a little concerned with the many amateur investors that are out bidding on houses. I know that they think they have done all the right homework – will the place cash-flow and all that – but many just don’t have a realistic picture of the cost to fix up some of these places, so that they can be rented or flipped. It’s from this group that I see the most “boomerang houses” – those that go back on the market within 6-8 months with half-finished fix-up projects.

I think that what some of these investor groups need to do is to put many of these properties back on the market as land contract deals. The investors could make great interest rates, if they would take the risks involved (and after all they were taking a risk on the initial investment). What they would find is a fairly large group of potential buyers, most of whom just went through a foreclosure, who now have steady incomes and manageable debt loads.

What a sweet deal, if some investor who has picked up a house for 20-30% below market value can now turn around and sell it for near market value at an above market rate interest rate. It’s sort of an investor double dip. Maybe that idea will catch on. It's probably too slow of a return for these fast movers.

Investing – buying without passion…

I have to correct myself a bit on yesterday’s post. There is a type of sale that I deal with where there is little emotion involved; where it truly is “nothing personal, it’s just business.” Those are sales made to investors. I was out recently looking with a young investor couple and it quickly became obvious how little emotion was in the process and how much it was about the ability to fix the place up and flip it. There’s certainly nothing wrong with that – more power to them, if they can pull it off.

You would think that buying without any passion in the game would mean that much better decision are made; and, for the most part, that’s true. Investors look at house dispassionately. They are investments, after all. But, they too can make major buying mistakes for reasons that somehow elude the logical process that one might think is in place with investors.

Investors need to understand the surroundings of the investment property. Is the neighborhood on it’s way up or down? Is it in a growth area or one that is shrinking? Are there any environmental issues in the area? Who maintains the roads and what plans are there in the Township, Village or City Master Plans for any changes to the roads or for sewer lines? What’s the normal turnover rate for the area – are there a lot of homes for sale and do houses sell quickly?

Those questions and many more are why investors, even savvy ones who have been investing in real estate for quite a while, need a good local Realtor to work with when entering or considering a new area in which to invest. It is especially important for young, first-time real estate investors to partner up with a good Realtor. There are just too many potential pitfalls to real estate investing to start off on the wrong foot by buying a troubled house in a troubled area that provides little potential for return.

Now is a great time to invest in real estate, either for your own use or purely as an investment. Prices and mortgage rates are at historic lows and there are plenty of properties out there that would make great investments. I’d advise that you not look just at foreclosures, but rather put together a model of what the ideal investment property for you would look like; especially for those looking to build a rental property portfolio. You can either buy a fixer-upper and put money into it or buy a regular house at the currently depressed prices and immediately rent it out without putting more money into it. Obviously those looking to “flip the house” need to find a foreclosure that doesn’t need excessive repairs and one that is marketable once it is fixed up. A good Realtor can help you evaluate the marketability of the house.

So, if you are an investor, let me help you with that purchase without passion by supplementing the data that you would otherwise have to help you make a better decision. I may be the only person grinning at closing, but that’s OK, too.

Good investments - a house or stocks

When it comes time to invest your disposable income there are a couple of tempting alternative pulling at you for attention. You can put money in real estate – buy a house - or you could take that money and buy stocks. Actually you couldn’t take all of that money for stocks, since you still need a place to live (there's an advantage to buying a house before we even get started here).

Admittedly I have a bias towards the real estate investment; but, here are five reasons why you get more for your money with a house than the stock market:

1. Leverage. With stocks, you put in all your money for a little piece of a company. With a house, you put in a little money to get the entire house. Wouldn’t it be great if you could put a few % of it’s value down and buy a whole company. I suppose a few savvy investors cold find a way to do that, by using the cash that the company already has, but the “few %” in the case of a company is likely to be several hundred million dollars. A house may be several thousand dollars. In fact, it is tougher, but still possible, to buy a house for zero down. In some cases you can actually get the seller to contribute your down payment. What company is going to pay you to buy their stock?

2. Tax benefits. Uncle Sam knows that owning a house is a big part of the American dream and he wants to encourage you to participate in the dream; that's why you get tax incentives. What other investment let you put in 5-10 percent of the cost of the asset, reap all the appreciation, and pay no capital gains? That's right: live in your home for at least two years, and you don’t have to pay capital gains tax on up to $250,000 in appreciation if you’re single and a combined $500,000 if you’re a married couple. And that's not all — consider the benefits of fixed-rate mortgages, property tax write-offs, interest rate deductions, and depreciation. Is this a great country or what?

3. Control. When you buy stocks, you're paying some CEO and a whole bunch of "company men" that you don’t even know huge salaries for unknown company performance that may end up driving your company (your investment) into bankruptcy and you won’t even have a say in things. With a home, you have control — what you buy, how much you pay, and where you live. You can improve the value with repairs and updates. Try comparing that to getting heard at the next shareholders' meeting! If you're into the environmental movement, you can make your house "green". Getting the big oil company that you have stock in to go "green" may be more a mission for Don Quixoti.

4. Lifestyle. Do you want to look out at a asphalt parking lot with a bunch of car ports or at your children playing in your own back yard? With a home, you're purchasing a lifestyle for yourself and your family. The neighborhood you want to be in, and the size and style of a home that fits your needs. If you want a pool in your back yard for the family, you can have that. If you want the best schools you can move to that area.

5. Value. Unlike some stocks, your house will seldom become worthless (a possibility that I am painfully aware of with 2-3 of my "holdings" and which I'm sure the shareholders of Enron can attest to with great pain). Barring a catastrophe, your home will retain a major portion of its value, even in the worst of times. So don't freak out about slight fluctuations in the value of your home in any given year. You'll make it up. Housing has lost value only a few years out of the last 35. It's more normal to beat inflation by 1 percent to 2 percent. It’s also an asset that you can insure against total loss, try that with your stock broker.

It’s all relative.

Try to keep things in perspective. You probably lost a greater percentage on the stock market this past year than if you owned a house. You lost more on your car. And you sure lost more on your iPhone. Almost everything material that you can buy, except your house, starts losing value the moment the cash register finishes the sale to you. Your house is one of the few appreciating assets that you will own and likely the only appreciating physical asset (unless you collect art, coins, stamps, collectible cars or some other rare collectibles).

Your home is also likely to be an asset that is more readily able to be liquidated that many other assets. You ever try to sell a piece of art? The market may be slow right now, but it is still there and people are still out there buying houses.

But what about real estate as an investment vehicle?

So, should you sell all of your stocks and buy a bunch of houses? No, that’s not what I’m saying, although there are people who have put most of their investment savings into real estate investments and they’re doing quite well, thank you very much. Like many things in life, a balance and moderation are the keys to success here. However, there’s an old saying much favored by entrepreneurs – “You don’t get rich by working for someone else.” The same could be applied to investing. Putting your money into someone else’s hands, i.e. in a stock, is like working for someone else; the people who get rich doing that are the ones with the wherewithal to buy the entire company. About as close to that as most of us can get is to buy an entire house – invest in real estate.

I know several older real estate investors who have amassed impressive portfolios of properties and who, on paper at least, are worth several million dollars. I know a few younger investors who are planning to invest in as many properties as they can safely leverage while the market is down. Are they both at risk? Certainly, but if they proceed with caution and with due diligence in their real estate investments, they are likely at no more risk than the millions of people in the stock market and perhaps at much less risk that the folks who invested in the exotic, mortgage-backed derivatives that Wall Street was so up about a year or so back. At least the people who bought real estate have a physical asset. All those people who bought derivatives have is a few lines of bad news printed on a report from their broker.

Give me a call and we’ll help you get started by finding you a home for yourself to invest in as the first step. Then spend some time on my Web site http://www.themilfordteam.com/ and read what’s there about real estate investing (look in the FAQ section). A lot of the information is contained in articles with warnings and scary stuff, but it’s best to get that out in the open up front. Map out the mine fields of real estate investing before you go into it and maybe you can avoid stepping on a few of them. Also avoid all of those TV "get rich quick" real estate investing shows. They are mostly about higher risk strategies that should be reserved for the pros who can stand to lose on those risks. After you've studied the landscape of real estate investing, call me and we can go look at the foreclosure opportunities that are out there for the investor today.