What are investors looking for these days?

In Buyers, credit, Distressed Sales, FHA, First-Time Buyer, florida, forclosure, foreclosure, foreclosure prevention scam, government, Home Buyer, home sellers, homeowner, Investing, Investor, IRS, Lease-Option, Leasing, lenders, Market Report, miami, miami beach, mortgage, real estate, REO, Roth-IRA, Self-Directed IRA, Sellers, Short Sales, Tax Matters, Trends on September 10, 2010 at 10:58 am

I often argue with a great friend of mine about the potential for making money buying real estate today.  This person is no newbie or stranger to investing. He owns several multi-family buildings and recently sold one.

He feels this is no time to buy – though of course…he had no issue selling to this buyer, who I’m sure he was glad to see buying HIS building  🙂

My friend also feels it may not be time to buy for several months, possibly as many as 12 or 18 months, fearing that taxes and rental income are almost impossible to calculate in this environment.

This, in spite of the fact that he was recently able to successfully increase the rents of two of his units by 20%. He claims to be unsure whether he can continue to do this consistently moving forward and attributes his recent ability to raise these rents as a temporary and unexplainable blip.

However, he agrees with me that this may have been due to (at least in part), the number of REO properties that are ‘off’ the market and the still thousands of unsold units developers refuse to rent, plus the fact that so many of the ex-home owners are now unable to buy and must rent.

Don’t get me wrong…we’re looking at the possibility of partnering on deals so, there is most definitely a side of him that’s willing to put his theory to the test and either proof himself or me wrong.

I also argue with him that, although he feels the way he does, that most buyers today could not only finally enjoy positive cash flow from renting their property, but also gain with capital appreciation if they choose to hold the property for at least 3 to 5 years or longer.

Such people will not care whether the property suffers added “paper losses” while holding the property in the next 12-18 months or so, as long as the property recovers its lost value so that, five years from now, they can make a nice chunk of cash in addition to the passive, rental income collected during that time.

Yet, he still feels emotionally unable to feel good about the idea that he may buy something today that in 6 or 10 months could still be worth less than he paid today, regardless of the fact that, if held it for at least 3-5 years or longer, he agrees it would be worth much more.

It’s that sense of loss, albeit temporary, that he seems unable to get passed. I tell him that this loss, may even be more temporary than the ‘gains’ of recent years, and much less damaging to those still holding these properties in 3 years than it has been for those who bought at the top of the market and must wait 6-10 years for their ‘old’ inflated prices to level off.

Here are 4 additional concepts I subscribe to:

1) Conservatively speaking, most investors I know, know that money invested in real estate is made when you buy and realized when you sell.

Although appreciation is likely over time (as proven by historical fact … although the SEC would make you say as in any prospectus that…’past results are no guarantee of future performance’), it is difficult to calculate any appreciation going forward and probably better if ignored and considered a ‘bonus’ when you sell.

The difficulty in calculating the numbers mostly stem (or at least in part), from potential changes in tax and other laws plus uncertainty about the economy and how long it will remain weak, unemployment and how much worse will it get before it is overcome and vacancies potentially worsening as more properties are recycled by lenders dumping their REO inventory into the market.

Obviously, if you are buying a property for personal use (your  primary residence), memories built within those walls and the family’s enjoyment are often worth much more than anything else to the typical home buyer whereas, investors look at that cash flow and appreciation as a way of measuring whether to buy or not.

Still, the issues listed above continue to be, among others, the biggest handicaps in the minds of some investors.

2) A point I feel is helping investors today is that many buyers simply…cannot afford to buy.

Financing is tough on them and if they are buying a condo unit, its even tougher on the buildings.  For those investors able to pay cash or even get financing, the loan-to-value ratios can help them make a monthly profit.

Ideally, the total cost of the purchase, fees and repairs should be no more than 70 percent of the appraised value of the property in good condition. This leaves 30% equity plus whatever the property value grows to while tenants cover all costs with rent.

Typically…this is much better than a CD or today’s 401k or mutual fund performances. As a matter of fact, many investors are pledging their funds in roll over IRA and other similar accounts as private money that grows their nest egg with much better velocity of return.

Finally, a vehicle for many to compensate and get ahead of the curve as they accumulate wealth for retirement in this uncertain environment. of course, this is tightly regulated under strict IRS guidelines and only competent administrators (i.e.: Entrust and several others), should be used.

3) Investors can also finally look at property that allows them to maximize their annual return.

They can choose properties that can be rented for at least 1.5% to 3% of the purchase price so that, if you pay $100,000 for a property that can be rented for $1250 per month for instance, the mortgage at today’s extra-low rates, taxes, insurance and everything else should be easily covered  by the rent and even leave some money on the table for unexpected repairs, etc.  Remember of course that, there is that 30% proverbial equity still sitting there, waiting for an opportunity to cash out in a sale.

4) Just the same, every investor knows they must have alternate exit strategies.

By finding properties that have intrinsic value added at the time of purchase, then no matter what happens to the market, they are likely to gain.

Some of the strategies an investor should always have available are to:

  • rent the property,
  • sell to other investors,
  • sell to end-users (primary resident owners), who plans to live there and are able to buy using cash, conventional financing or more creative methods like lease purchase.

In short, there are many ways to invest and many reasons to feel positive about it. Being on the fence or fearful of the unknown never makes anyone any money.




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