The real estate market is booming. Some prices are up to pre bubble prices. Is it too late to buy real estate? The short answer is no! My theory is prices are always higher than you like it. If you are one of those people who are looking to buy at the bottom, you missed your chance! Interest rates are the lowest in sixty (60) years. What are you waiting for?
Real estate is no different than the stock market. It goes through corrections or cycles. It would be great, if real estate values would always go up, but it doesn’t. The most recent real estate bubble was artificially created with relaxed credit policies. Housing prices increased because of demand, speculation, low interest rates and easy lending policies. What has changed? Lending policies has tightened up considerably and demand continues.
In the stock market, you can always find an undervalued stock. I believe you can find undervalued homes or income property in a rising market. You should approach it similar to finding undervalued stock. When you are looking for undervalued stocks, you might start with a list of stocks. You may put them through a stock screener based on your financial criteria. You perform analysis based on research to determine value.
It should be no different with real estate, however buying a home is an emotional purchase. It doesn’t have to be! When you go to a real estate broker, they will qualify you. What can you qualify for in terms of a mortgage? Do you have a down payment? What are your needs in terms of location, size or number of bedrooms, etc? When I bought my first home, I used value investing criteria although there is always an emotional component to buying a home.
When I bought my first home, I could have fallen into the usual routine. Instead, I found a broker (friend of a close friend) who listened to what I was looking for. I was looking for something undervalued! I had the cash, credit and willingness to do it. I did not mind a fixer or distressed property as long as I could see value. I ended up with a home that was 25% below value for the neighborhood. It was a divorce sale and a fixer. It just needed cosmetic repairs and replacement of carpet and drapes.
Having some financial criteria gave us parameters that kept the emotional side of buying a home in perspective. It is just as easy in fall in love with a home that meets your financial criteria as it is to just fall in love with any home. It had to meet both otherwise it doesn’t make sense! Matching both made it a win/win! How do you apply this value investing principles in today’s market?
There are still bank owned homes, foreclosures, short sellers and homes that are underwater. There are less today than there were several years ago, but you are only looking for one. I think it is always good to look for the undervalued home in a good neighborhood. It may have deferred maintenance, needed repairs or remodeling. Does it make sense to invest more money to see its value? This is the criteria for flipping a home. I am a value investor not a speculator!
Finding income property that is undervalued is a bit harder. I was start with the broker first. Real estate brokers hate first time buyers because they have to spend more time educating the buyer. Learning the lingo and what is involved is very important. This is no different from buying stocks! You need to do the research and learn about the stocks. You should learn all you can about income property before you talk to your first broker just like learning about stocks before you make your first trade. What is next?
Start with the broker! Interview them and find one you can work with and understands your goals. It may take some time. I interviewed thirty-five (35) brokers before I could find one that would work with me and I felt understood my goals. This broker is important because he/she will negotiate for you and you need to trust him/her. This is a longer range relationship than the occasional residence purchase. Doing the front end research pays off handsomely later.
Whether you are looking for an undervalued residence or income property, you want to have a set of financial criteria before you start looking at property. In a good or bad economy, finding undervalued property is not easy. It may be easier when the supply of homes were high and no one was buying. You still need to go through the properties and make sure it matched your financial criteria. You still need savings for a down payment and good credit. That makes the search easier because you can qualify for the lowest interest rates. Real estate is the largest component of wealth and has been estimated to represent approximately one-half of the world’s wealth. Real estate is still a good investment for the long term!
Photo by: David Paul Ohmer
Yakezie Carnival at Money Life and More
Carnival of Financial Planning at Hurricanes, Panties
Finance Carn. for Young Adults at WILDaboutFinance
Carnival of MoneyPros at My Personal Finance Journey
Y and T’s Weekend Ramblings at Young and Thrifty.ca
Real estate is still a good investment for the long term!