Now is the time to buy!
As expected, the FOMC announced its first rate hike of 2017 and hinted at additional increases throughout the remainder of the year. This survey was conducted prior to the Fed’s decision, the release of the February jobs report all but guaranteed a rate hike and boosted the 30-year mortgage rate 9 basis points to 4.30 percent this week. Increasing inflation, continued gains in the labor market and the Fed’s intentions for further rate increases—all three will keep pushing mortgage rates up this year.
I’ve personally invested in real estate. I love real estate as a tool to invest long term and/or build a cash flow business. What I hate about real estate as an investment is when first time investors read a book or see an informercial where you can get rich quick flipping houses using other people’s money and blindly take a huge risk. Yes, some get lucky but most learn the hard way that the risk is too high.
Here is the point of this blog and feel free to read further for explanation: It’s very risky to use other people’s money to flip properties. In great/low inventory/seller’s market areas the return is too low because you can’t get good deals when you purchase. In riskier/high inventory/buyer’s market areas the deal will be there when you buy but then after 3-6 months of rehab the buyers have dried up and you have to take a loss or break even to get it sold.
I get many phone calls from first time investors. They call and ask me to send them good properties that are great for investment. For the inexperienced investor that wants to flip a house in the suburbs of Philly it is difficult for me to tell them the truth: You’ll be lucky to make a 10-15% return on your money on a flip. That is assuming you are using your own cash for down payment and fix up costs. If you are not using your own money then that return goes down more.
So, how do you get the best return on a flip? You make your money when you buy.
- Cash is king. Investors who get the highest returns on flipping property in this area pay with cash and buy homes that are so bad that the average homeowner won’t touch them. Banks trying to unload foreclosures and distressed properties know how difficult and time consuming the bank loan process is. Banks will sell a foreclosure at a lower price to a cash buyer over a higher priced offer that is contingent on a loan. (I can set you up on a search where foreclosures and bank owned properties are emailed directly to you as soon as they hit the market)
- Buy at auction or on the court auctions. Getting deals at auctions with all cash purchases can be really good deals. Unfortunately, real estate agents do not have access to these so it is a process that needs to be researched on your own.
- Buy when everyone else is not. Winter is the best time to buy as an investor. There are much less buyers out looking due to holidays and cold weather.
- Find contractors that are fast and good prices. Velocity of money is important here. Get the rehab work done fast and for a low cost. If you have time do some of the work yourself then do it!
- Sell in the spring market. That’s when you have the most buyers looking for homes.
- Stay up on the latest trends and technology. Know what the buyers need and want in that price range when you fix up houses.
- Be sure not to overimprove for the neighborhood. Don’t take a split level home in a neighborhood with all split level homes and put $100,000 into it trying to sell it for $500,000. It won’t happen. You’ve overimproved it.
- Buy the worst property on the street. These have the most chance of making money because the nicer homes will pull it’s value up higher once the rehab is complete.
- The house needs to be in a neighborhood and not on a busy street or anything nearby that will pull the value down like a sewer treatment plant. Also, the better rated the school district the better chance you have of selling it for a higher price and selling it fast.
Is there another way to make money investing in real estate? Yes! Cash flow properties but again you need cash.
- Buy fixer uppers and rent them out. Buy a foreclosure with at least a 10% down payment but 20% is better to avoid PMI. Cash is better to increase cash flow.
- When you buy a fixer upper to rent just clean it up, paint, carpet and make sure everything is in working condition. Don’t fix it up too much until you are ready to sell it.
- If you buy and hold then assuming you buy in a great area you will also have appreciation. So when you go to sell it or if you decide to hold it long term and refinance out some cash to buy more investments then that equity will be there.
- You don’t want to be a landlord? Then hire a management company to manage it and watch the rent checks come in. Lower cash flow but more time to research more investment properties to buy.
- Depreciation. You can depreciate your rental properties for more tax savings and that provides an increase in cash flow.
- Research the rental rates for the investment as well as the resale value when you analyze investment properties. You want to make sure you are making the most cash flow per month as well when you need to sell that it can sell quickly and hopefully for a profit.
- Did you know for a married couple that $500,000 of capital gains is tax free ($250,000 if not married). Here’s IRS info on it: https://www.irs.gov/taxtopics/tc701.html If you buy a foreclosure, fix it up, live in it for at least 2 years of the past 5 when you go to sell it then the money you make is tax free. Do that! Fix it up enough to live in it then slowly fix it up over 2 years if you are low on cash. Do that every 2 years until you hit the maximum. Climb that property ladder.
Those are some quick tips and thoughts on investing. Feel free to reach out to me if you have any questions. Laura Laws firstname.lastname@example.org or 484-985-5222.
30 year fixed rates on mortgages averaged 3.48%. I researched the highest and lowest rates for 30 year mortgages. In November 2012 the rate hit an all time low of 3.31% and the highest rate was in October 1981 when they hit 18.44%.
So I thought it was a good idea to compare what that would mean in your monthly payment. The median price in Chester county is $325,000. I’ll use property taxes of $5000/year , $1000 year in homeowners insurance and 20% down conventional loan. Here are the monthly payments:
Current Rates: $1664/mo
Lowest Rate: $1640/mo.
Highest Rate: $4511/mo. (So insane!)
Now, what can you get for $325,00 in Chester county? There are 17 homes available priced at $325,000. 5 townhomes and 12 single family homes. Here is where they are located:
I found this cool chart on the 5000 year history of rates.
There are a lot of buyers in the market looking for their first home. They have lots of questions. It’s no wonder with so much to consider…how much can you afford? how much cash do you need? how quickly do you have to make a decision? what is the best strategy to negotiate? when do you get the keys? There is a lot of pieces to the home buying puzzle!
Here’s part 1 in a series on things you need to know when buying a home.
PREPARING FOR THE HOME BUYING PROCESS:
Area? Consider your maximum commute to work. If it is your dream home are you willing to make a longer commute? Research school districts. Schools are a big consideration in this area and they have a huge impact on resale values. However, you may get a better deal in school districts that are rated lower. If you have children go and tour schools & talk to school administrators ahead of time. Property taxes. Property taxes vary greatly by county and school districts and they have a huge impact on your monthly housing payment. Consider property taxes when looking at areas.
How much can you afford? Most likely you will be approved for more than you are willing to pay a month. So take a close look at your budget. If you are looking at a $300,000 purchase with an FHA loan & a 3.5% down payment your monthly payment will be somewhere around $2,000/month. If your current rent is $1500/mo. then each month take that difference and put aside $500 in savings. See how comfortable you are with the $2,000 payment each month. Many people are surprised when they carefully look at their budget that they can find an additional $200-$300/month by doing this.
How much cash do you need? The minimum amount of cash needed for most buyers to buy a home is 3.5% of purchase price. This is an FHA loan and the seller can contribute up to 6% of the purchase price for your closing costs. On a $300,000 loan that amounts to $10,500. You’ll also need cash for inspections ($350-$1200) and an appraisal (about $450). You can also get a gift for the down payment. There are loans with 0% down like VA and USDA but you’ll need to speak with a lender to see what the requirements are.
Tax Advantages! (I am not a tax accountant so consult your tax accountant for actual numbers) You can deduct your property taxes and interest on your loan from your income taxes. So, if you are paying $4,000/year in property taxes and $900/month of interest then you can deduct $14,800/year. If your effective tax rate is 15% then that is a tax savings of $2,220/year. Also, the principal of the loan is being paid down every month. Why pay your landlord’s loan when you can be paying down your own loan every month? Stop giving your landlord all your money! Here’s more info from turbotax on this: Click Here
Get Preapproved. Talk to a lender about your credit score, income and debt and they can preapprove you for a loan amount. You are not required to use this lender for your loan. Once you are under contract on a home you can shop around for the best rates. You want to talk to a lender ASAP to make sure there are no issues that would prevent you from getting a loan. If your credit scores are low you can most likely clear those up in 6-12 months by paying down debts or getting your income up.
MLS Automatic Search. Right away I like to set buyers up on an automatic search within their criteria. Even if you are waiting 6 months to buy it’s a great way to get to know the market and what you can get for your money. All I need is your price range, the area, minimum amount of bedrooms and any must haves. You will get emails as soon as a new home hits the market or if there is a price drop. Our MLS system is the multiple list service that realtors use to market and list homes for sale. It is the most accurate information and homes hit this about a day or two before other real estate websites (Zillow, Trulia etc…) I do recommend setting up an account on Zillow and the homes that catch your attention you should then save them and keep an eye on them.
As a buyer’s agent I am here as your advisor. You are the boss and make all the decisions! I’m here to help you make smart decisions. Stay tuned for Part 2…
Here is a great website by Freddie Mac. There are calculators on tax savings, affordability and information on all types of mortgages. http://www.freddiemac.com/homeownership/calculators/
The Department of Agriculture has a home loan program for rural areas where you can finance 100% of the loan. The great news is a lot of Chester and Montgomery County is eligible geographically for this program. Check out the map below:
The shaded areas are ineligible but the white areas of the map are eligible. You do need to speak with your lender to make sure you qualify. There are income limits based on how many people in your household. This is a great resource commonly overlooked.
You can find more information at their website here.