Monday, October 08, 2012

Now's A Good Time To Buy Property

If you've been paying attention to the news, you know that interest rates are at all-time lows right now. That means that if you buy a piece of property, you're payments are going to be less because you won't be paying as much in interest.

That alone should get you thinking about buying something. Or at the very least looking into refinancing if you already own something.

What you may not know is that property prices have bottomed out and are starting to rise again. That means that if you buy today, chances are good your property will be worth more next year and definitely in 5 years.

So, prices are affordable... Interest rates are affordable... that should really get you excited!

One resource for tracking price trends is the Federal Housing Finance Agency House Price Index. You can drill down to cities around where you live to get a feel for what the market is doing. Here are the 3 cities that surround our city. This chart shows the percent price change for Corvallis, Salem & Eugene. It's not the prettiest chart, but it'll work for what we're looking for.

You see that double dip at the very end? In finance, this signals the very bottom and a return to growth. So, that means buying now will hit as close to the bottom as possible on price. Yes, there are examples where this wasn't the case, but very often it's true. Plus, recent reports indicate that housing prices have hit the bottom. Finally, the price on our duplex has started to rise according to

Again, prices are the most affordable they're going to be in a while... and interest rates are the lowest they've ever been... That should really get you excited!

Jessi & I attended a seminar put together by our real estate agent, and friend, Lee Eckroth called "Wake-Up Money". It was at this seminar that he put these facts together. The idea is that if you can afford to buy, even if you have to stretch the rubber band a little, now is the time to do it. The main focus is buying investment property, but it's still just as valid for a primary home. I think he's still putting them on. If you're interested, let me know and I'll connect you with him.

Jessi and I attended the seminar, looked at the data, liked what we saw, and started looking for funding. In this particular case we were able to fund a property purchase transferring funds from different investments accounts. We've been able to save, and invest, by making decisions to not spend money in certain areas. For example, we don't pay for cable TV, I ride my bike during the summer when running errands, and we don't eat out too often.

Back to the purchase. We decided to focus on multi-plex properties since that's what we already own, are comfortable with, and it's easier to make it cash-flow positive.

We evaluated 141 different properties in Salem, Corvallis, Philomath, Albany, and Lebanon. We narrowed it down to a couple dozen, drove by each of them, and then went inside of the one we liked the most. The property was in great shape and the price was in the range we wanted. So now we're the proud owners of two duplexes.

I want to encourage you to look into investing too! Check the rates around your city. Do prices look like they've stabilized? If so, can you find the cash for a down payment? Buying a single family home isn't too bad, especially if you're planning on moving in. Why not move in for a year, fix it up, then rent it out? You get the best interest rate and the lowest down payment. Putting down at least 20% to avoid PMI is a great goal, but depending on your situation, less might be OK.

Some possible funding sources include:

  • Savings Account: It's not earning much interest right now. Maybe you can earn a better return.
  • 401K: You can take out a loan up to half the value. The payback is 5 years, unless it's your primary residence, then it's 15 years. The interest on the loan goes back into your account.
  • IRA/Roth IRA: A little more complicated. If you have a Roth, you can take out the principle penalty free.
  • Stock Investments: You might find the property's return is higher because you can leverage it with a loan. More on this later.
  • Home Equity: You might be able to pull from your existing property using a HELOC. Rates are pretty nice right now.
  • Family: Do they have funds from any of the above sources? Maybe they'll be willing to partner with you. They'll be investing in your future and theirs.

If you're looking for a personal residence, stick with your savings as your only funding source. If you're going to buy an investment property (or move out of the one you're in and turn it into a rental), then all the other sources are great places to look.

The process to determine your best investment is to compare your rate of return (ROI) across the different investments. The calculation is easy, you only need two pieces of information: ROI = money earned / money invested.

  • The stock market: ( price gain + dividends paid ) / amount contributed. Pretty much all places that hold your money do this calculation automatically for you.
    • Example: You bought 10 stocks of Disney at $45. By the end of the year it rose to $50.
    • ( 50 - 45 ) / 45 = 11% ROI
    • Even with recent history, the stock market typically returns 7-10% on average each year.
  • Savings: They'll often state the percent you'll earn. It's not much right now.
  • Real estate: ( rent income - mortgage - taxes - insurance - utilities you pay - maintenance ) / Down payment
    • Example: You buy a Single Family Home for $100,000 with 20% down ($20,000)
    • Rent = $1,000 per month = $12,000 per year
    • Mortgage = $450 per month = 5,400 per year
    • Insurance = $300 per year
    • Tenant pays all utilities = $0
    • Maintenance = 10% of rent income = $100 per month = $1,200 per year
    • ( 12,000 - 5,400 - 300 - 0 - 1,200 ) = 5,100 annual money earned
    • 5,100 / 20,000 = 25% ROI
A couple things to note:

First, in this over simplified real estate example you get a high return because you only look at the down payment. If you put down less, your mortgage will go up, but your ROI will actually go higher since your mortgage increase will be spread over 30 years.

Second, even in this over simplified example, it's clearly more complicated to work with real estate than it is with stocks. So if you jump in, be prepared. Yes, you'll probably get a better return, but you'll also have to put in some work and be willing to do some research (Youtube is my friend for repair projects).

Third, you'll notice the real estate numbers are bigger. For only $45 you can buy a single Disney stock (well... $53 as of today) and start investing right away. For the property example, you need $20,000. This is a HUGE reason why most people invest in the stock market and not in property.

I want to pause on this for a second.

Real estate has 2 major downsides, and 3 fantastic upsides. It's really important you understand these when evaluating real estate.
  • Downside #1: It requires a big chunk of money to invest. And it's all in one place. You MUST do your research to find good places to invest in.
  • Downside #2: If you don't higher a property manager, you'll need to do the repairs, deal with tenants, and track finances. There are many tools and resources to help, but it does require you to put in the time and energy to manage it.
If you don't like the downsides of property investment. The stock market is another excellent place to invest. There are many good index funds. You literally set it and forget it. If the downsides don't bother you, read on, because if you're regularly investing money in the stock market you'll eventually have that big chunk of money.
  • Upside #1: You can leverage your money with a loan. Basically, you can multiply your returns. Had you paid all cash in the above example, your return would have been 5%. Not bad, but with a loan it's 5 TIMES higher. And now your tenants are paying back the loan for you.
  • Upside #2: There are major tax advantages because you suddenly step into the realm of owning a business. Depreciation is a common example (which I didn't include in the above example). Writing off business expenses is another. Yes, you do have to track expenses, but trust me when I say it's worth it.
  • Upside #3: You're in control of your investment. You get to decide where to buy, what improvements to make, who to let live in your dwelling, and many more choices. For a control freak like myself, this is a major perk. I hate watching stocks fall for no apparent reason. At least if my tenant stops paying I can do something about it.

OK. One last time: Prices are as low as they'll be in a while... Interest rates are ridiculously low... if you're even semi-interested in real estate, this should excite you!

Give your real estate agent a call. Or call ours, he's awesome. With your agent, run some numbers on current listings to see if investing today makes sense for your situation. That's what we did.

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