Real Estate Is One of the Best Investments You Can Make
Despite the slowdowns in some real estate markets over the past several years, real estate investing will always continue to be a sustainable long-term investment. Demographic demand continues to favor real estate investment over the long term.
Homeownership offers immediate benefits and long-term value. Homeowners accumulate wealth for the future while enjoying the benefits of a home that they can utilize, improve and sell. Even if value decreases periodically, it is never a total loss and market value will eventually stabilize. You only lose if you sell a property for less than your total invested. Rental properties continue to be in high demand. This is true in certain areas more than others.
Choosing a real estate professional is an important decision. If you are buying or selling a home, you need a grounded agent to help make the experience less stressful, more exciting, and hopefully even a little fun. Your agent should understand that persistence and patience are key aspects of the entire process and they should handle every aspect of the transaction, minimizing stress while maximizing satisfaction.
An example of an ideal investment is as follows:
Mary specifically looks for foreclosed properties and/or properties that needs work, but where most of the work is cosmetic. This means that it looks worse than it really is. The systems (electrical, plumbing, etc.) are in good working order and the skeleton of the house is well-maintained (no structural, termite, etc. damage). The work can be done at low cost. It may need paint, fixtures, switch plates, cleaning, carpet, tile, vinyl, molding, refinishing walls, patching holes, etc. These properties can often be purchased below market value because the bank (foreclosed) wants to relieve themselves of the burden or because the owner doesn't want to fix it up. These homes are what you call "fixer-uppers" or "handyman's special". They are ideal for those who have some knowledge of working on houses, but may have limited expertise of carpentry, plumbing, electrical, etc.
The benefit on property ownership verses other investments is that if you need money, even if you don't want to sell due to market fluctuation or other reasons, you can obtain an equity line without having to sell anything, like you would have to with stocks. When you are invested in stocks and need access to funds, you are forced to sell even if prices are down. You lose money. Stocks are also higher risk because a company can file bankruptcy and you lose your entire investment. With real estate, you can wait and sell when it goes back up or rent it. It will still rent even if market selling prices are down.
An example of a return on investment equation is as follows:
Mary pays $125,000 for her foreclosed property and another $12,000 on general repairs, maintenance and cosmetic work. She has a total investment of $137,000. Let's just say property taxes are $1,200/year and insurance $1,400. She rents the property for $1,200/month, but has to pay the property manager a 10% management fee, which equals $120/month. Her yearly rental income would be $14,400 - $1,440 property management = $12,960/year - $1,200 property taxes - $1,400 insurance = $10,360 = 7.56 Return on investment. I feel this is a conservative figure.
This figures will obviously vary according to your area, but I will give you a real life example. I purchased a house at foreclosure for $86,500. We spent $7,200 on repairs and did everything ourselves. Our total invested is $93,700. It rents for $975/month and has no problem staying rented. It was only vacant two weeks between tenants last year in June and has been rented since. Income from this property is $11,700/year - approximately $750 taxes/year = $10,950 (not in city limits which is beneficial for investment properties because those in city pay both city and county taxes) - $1,025 insurance = $9,925/year / 10.59% return on investment. Ido not pay a property management fee because I happen to be a licensed real estate broker, however, you can attempt to negotiate fees with your agent. I strongly urge you to use an agent because, typically, agents have professional knowledge of the real estate market, landlord/tenant law, eviction process, tenant procurement and background checks, lease agreements and other forms and advertising properties, among other things that unlicensed individuals don't.
There are ways to decrease expenses associated with return on investment. As mentioned previously, in effort to acquire a property for a lower purchase price, try to select properties that have minimal damage that is not cosmetic. Cosmetic is usually inexpensive to remedy, but repairs that involve systems and structure can range from moderate to very expensive. When repairing cosmetic appeal, select supplies that are attractive, neutral and functional. Refrain from paying more for a fixture because you like it more than the one that was only slightly less "likable" for half the price. You are not living there.
An example is my friend Robert who purchased a property in which the carpet and vinyl flooring had to be replaced. I agree that the very cheapest was not functional because it looked "cheap" and "cheesy", however, there was a decent grade carpet available at Home Depot for $1.20/sq ft. It has held up well in our rental house for three years now and still looks to be in excellent condition. Robert chose carpet that was over $3/sq ft because he liked it better. We also put the Home Depot bargain tile in our rental house and it looks great! Robert chose tile that was probably 4x more expensive.
As mentioned earlier, choosing a home in the county as opposed to city limits will likely cause the taxes to be significantly more because, in the city limits, you pay county and city taxes. Location can also affect insurance premium. For example, a coastal area is more expensive due to the possibility of hurricane force winds. A property located in or near a flood zone will likely result in mandatory flood insurance if you have a mortgage.
The carpet and tile in these pictures was one of the inexpensive alternatives and it looks great!
You want everything to be neutral because neutral doesn't account for style tastes which vary greatly between individuals.
We chose yellow paint because yellow is fairly neutral and it is a "happy" and "friendly" color that creates a warm and inviting ambiance.
Although no investment is without risk, real estate is a lower long-term risk than it's alternatives and has the ability to help investors build and sustain a higher degree of wealth. Many of the wealthiest people have made their fortune in real estate: Warren Buffet, Donald Trump, Barbara Corcoran and Stephen Ross, among many others. This just goes to show it can be done. If they can do it, so can you.