Most consider real estate a sound long term investment. Real Estate can also be used to create cash flow, either though rental property or quick turn. Quick turn real estate is buying a property low, fixing it up and reselling it at a profit, kind of like trading.
So, if real estate is a sound investment, what keeps people from purchasing either investment real estate or a home? Here are five main fears or objections identified:
1) Property Value Loss – We are all aware of the huge loss in value that many have suffered because of the economic downturn in the last several years. What else affects value and what can you do to prevent taking a BIG hit? Some of the things to avoid:
- Neighborhoods that are on the decline
- Older homes in areas where there is a lot of new building which is more attractive than the older homes
- Direct neighborhoods that have public or unpleasant developments such as prisons, freeways, factories. Better to be a bedroom community away from these industries
Here are some things to look for:
- Areas with low-crime
- Property that is well kept
- Good school districts
I share some great websites in class that can help you easily get this kind of demographic information.
Historically, real estate has an 8.6 percent rate of return a year, over a ten year period of time. So, if you took the above precautions, you might have to wait for an up turn in the market but in the long run your investment will have gained in value.
2) Maintenance Cost and Fix-Up Cost – If you are buying an investment property, one of the things you must consider is ongoing maintenance and fix-up cost. One of the first things that should be done when buying a property is get an inspection. There is often an acceptable period of time (five to ten days) in which to have this completed and still cancel the contract. Once this is complete; you will have a much better idea of the cost to repair the property and maintenance cost. There are also a few things you can do to avoid additional fix-up and maintenance costs:
- Purchase a property that has been well-maintained
- Purchase a property that has recently had major components upgraded or replaced, such as roof, water heater, plumbing and electrical etc.
- Purchase new construction, often comes with a warranty
- Purchase a home warranty
- Have an emergency fund
3) Buyer’s Remorse – The fear you’re going to make a mistake and buy the wrong property. If you have a clearly defined list of qualities and know your limitations, you will make a better decision. Have a list of features you must have and ones that aren’t acceptable. Then make sure you view several properties and revisit the list. When you find a property that feels right, run the numbers and then sleep on it. Don’t exceed your budget, nothing will bring remorse faster. Also remember that if one gets away there is always another one around the corner.
4) Not being able to make the payments on the property – If the property is a quick turn property, you should have at least six months of mortgage payments at your disposal. You should have also run the numbers (an exercise we do in class) to see if the property will break even if rented. It’s important to have a plan “B.”
If it’s a rental property then you should know what the expected vacancy factor is and have that calculated into your monthly budget. This will let you know the affordability of the property.
5) Finding the Money – If you feel that you lack the financial sophistication to manage finding the right loan there are a several things you can do.
- Educate yourself on the different loans that are available. There are many resources online, in book stores or the library (yes they’re still around)
- Make sure your resources are in order
- Have a Statement of Financial Position
- Use a Mortgage Broker with a good reputation who has been in the business a long time
- Look into using retirement funds if this is an investment (we cover this in class)
The message: Being prepared eliminates fear.