Basics to Real Estate Investing

Basics to Real Estate Investing

 

  With interest rates being so low, putting your money to work at the bank just doesn’t provide the desired return.  The uncertainty and recent decline in the stock market makes such investments risky, and to employ a broker with quality knowledge is expensive per trade.  Real Estate is the other common alternative.

  Today, you can’t turn on the radio or television without hearing someone advertise about their program for easy real estate investment with little or no money down.  I wish it was really that simple. The plain truth is that it is not easy or simple, and if it were, those same people would not be selling their program.  They would be sitting on their private island counting their money.

But don’t let me discourage you completely because I confidently believe real estate is one of the best available investments.  Why do I believe this?  

                                     Let me give you four core reasons:

•             Real Estate is finite.  Meaning, we cannot make any more land, so the supply is limited.
•             Demand is constant.  It fluctuates for sure due to the current economic conditions, but there is always demand.
•              Values for the most part always appreciate.  Like all things, they go up and down, but historically speaking land values ultimately only go in one direction.
•              Real Estate has utility.  You can use it unlike a stock or bond.

  So what do you really need to know to be a successful investor?  First you need a plan. Second, you need capital to support you investment.  Third, you need experts, and I would recommend a seasoned Realtor, a trusted lender and a qualified contractor.

 

The Plan – Your plan has to have both an entry strategy and an exit strategy.  Most failures occur due to not following the entry strategy, and not having an exit strategy. By the way, buy low and sell high is not a plan. 

  Any investment plan revolves around the capital available to invest.  You must anticipate all costs associated with the investment.  Down payment, insurance, taxes including income taxes on profits, repairs and maintenance, association dues, city and county permits, selling and closing costs. 

  

Each investment has to have a timeline.  House flippers typically do not account for delays to their timelines, and wind up making no return or even losing the investment entirely.  Your timeline has to be practical, and it must account for unexpected delays.  If there is no margin for error, there will be no profit in the end.

An exit strategy is the way you will realize your return.  The obvious answer is to sell for a profit, but a good strategy has a contingency plan such as rental income.  So during the investment evaluation process, the investment must be able to cash flow as an income producing rental property.

This article scratches at the basics of real estate investing which is a personal passion of mine.  I have been at it for over 20 years, and I still don’t have all the answers.  I do encourage those interested to jump in, and I enjoy assisting my clients in establishing their own person investment plans.  

So, if you have been considering becoming a real estate investor, let’s schedule a meeting. I won’t tell you it is easy.  I won’t promise that you will soon be a millionaire, but I will help make sure you have made the best investment decisions based on your plan and capital, and I will be with you every step of the way.

Bill Barkley, President and Broker of  River Valley Real Estate
19202 Huebner Rd, Suite 100 San Antonio, TX 78258
210-853-5327
www.rivervalleyre.com

 

1% Matters - How Mortgage Rates Impact Your Buying Power

A history on mortgage interest rates and what it means to your purchasing power.

You have decided it is the right time to purchase your first home, or maybe it is time to get a new home.  Thousands of people make this decision every day.  The first step begins with your lender, and the pre-approval process unless you are paying cash.  When getting a mortgage, the price you quality for is directly related to the current mortgage interest rate you can lock.  Obviously, this impacts you when you are selling as well.  Low interest rates increase purchasing power.

Imagine getting a pre-approval letter saying that you have been approved for a home with a 30 year mortgage with fixed interest rate of 13.7 percent? Believe it or not, those were the average mortgage interest rates experienced in the US in the 1980s for 30 year mortgages. Interest Rates in the last four years have been the lowest we have experienced in over a century. The all-time low historical rate for a 30 year fixed mortgage was in 2012 at an average of 3.7 percent. That is an astonishing 10 percent drop from the average rate seen in the 1980s. The second lowest average rate was in 2013 at 4 percent. So far in 2014, the average rate is at 4.4 percent for the months of January, February and beginning of March. The graph below illustrates the fact that the last time we experienced rates close to the ones we have today was in the 1950s, after World War II. Even then according to the National Bureau of Economic Research, the average rate on a 30-year, fixed-rate, FHA-insured mortgage was 5.15 percent as of December 1956. That was the only point in time when rates even came anywhere near the rates being seen today.

Information courtesy of Dr. Steve Sjuggerud & Federal Reserve Bank of St. Louis

How would you like your buying power going from $300,000 to $267,000 based on an interest rate change of just 1 percent? According to Dan Green, of The Mortgage Reports, he states that a 1 percent change in mortgage rates means a significant change in what you can afford. With a 1 percent change in interest it will mean a 10.75 percent change in affordability for the home buyer. This change in affordability will be seen across the board at any price range and will affect anyone looking to buy. For instance, if you are seeking to purchase a $200,000 home, the 1 percent change in interest rate would lower your purchasing power to $178.500. These examples of the decline in purchasing power are dramatic, and our examples only reflect a 1 percent change.  Can you imagine the effect of a 3 or 4 percent change in interest rates?  It is important to note, that although the Federal Reserve has held interest rates fairly constant over the past few years, interest rates are unpredictable and change on a daily basis.

The chart below provides examples of 30 year fixed rate mortgages and the effects of increasing rates on purchase prices of $300,000 and $267,000.

What is the take away from this article?  With regard to your personal purchasing power, right now is a very advantageous time to purchase a home.

Authored by: Cynthia Cure & Bill Barkley, Broker

Additional Sources: bankrate.com