Note: This is my latest post in my ABCs of buying, selling and investing in real estate. I make up a story about real estate centered around a particular letter (R this week). The story is fact, but the advice is real.
Rachel called me late one Sunday morning asking me to come down to the local coffee house where she was sharing some time with her best friend Monica. I had just thought about relaxing with a nice cup of coffee so I off I went. When I arrived, Rachel and Monica were siting on a couch, involved in a deep conversation. As I sat down in the chair next to the couch, I overhead some of their conversation. Apparently, Monica had decided to leap into real estate investing (REI) and Rachel was trying to talk her out of it. Monica said now was a perfect time to get into the business while Rachel was strongly against the idea. When they finally took a moment to breath, I coughed slightly. Rachel finally noticed me and asked what I thought about Monica getting into REI. Rachel didn’t let me respond before launching into her own reasons for waiting on investing. She said the best move was to stick with the stock market and wait for the real estate market to turn. Monica said she felt it had already shown signs of turning and wanted to get into the action now so she would be ready to move when more homes were available. They both wanted to know my opinion. When I finally had a chance to comment, this is what I told them.
When does one invest in real estate? This question has plagued people for the last couple of years. Back when the market crashed, it was an easy answer without too much thought needed to be given to it. Homes were in distress and investors could have their pick of any homes on the market in the MLS and off market available through the REI community. Deals were plentiful. Now, it wasn’t so cut and dry. The tight inventory of homes available, both on market and off market, make it a tough chore to know if now is a good time to invest in real estate. I told the Rachel and Monica that I couldn’t answer that question for them as it was really an individual decision. Their first task would be to figure out what they wanted to get out of the real estate investing by drawing up a business plan with goals and objectives. They needed to know where they were going before taking the first step. Once they had this figured out, it was best to find someone experienced in the field who could help them see and experience first hand the good, bad and ugly of investing in real estate. If they couldn’t find a mentor, they should at least make some contacts in the field who can answer their questions. Despite this, I told them that are some really good reasons for investing in real estate right now. Here are three of them.
1. There are more buyers than sellers – Rachel and Monica look confused by this first reason for entering the fray of REI. Don’t you want to wait until the market is more favorable for buyers so more deals can be found? I told them that this is good solid sage advice and should be followed by most individuals. However, if you have the patience and fortitude to compete in this market, the end results can be quite rewarding for you. Deals are difficult to come by right now, but that does not mean they don’t exist. Some savvy investors have figured out that it is a waiting game and they just need to be patient to wait for that needle in a haystack to be found, because if the right deal is found, then selling the house in a market with such high sales prices with buyers making outlandish offers on homes, investors can really cash in on the sell side of the transaction. Of course, the numbers still have to work. I have seen some investors get a little crazy with their bids in a desperate attempt to get a house under contract. . If you spend too much on the buying side of the transaction, the whole cashing in big is nullified on the sell side. Patience is the key. It is always best to just wait for the right deal versus throwing your money away on a deal just to get the REI experience.
2. There more renters than ever before – Lately, you can’t read your news feed on your phone without getting hit with an article about how there are more renters than owners in this current market. It seems as the housing affordability crisis deepens, more and more people are being forced to rent versus buying. If you are fortunate enough to own several rent properties, you should be living large in the market, because rent has ballooned up to almost insane levels as rent properties are difficult to find. The pent up demand is driving up the monthly rents for a majority of Americans. I know from my dealings with several investors this year, that they are seeing hundreds of applications flow into their inboxes on each of their properties. When looking over rentals, you do have to take into account all the various expenses involved with owning rentals including capital costs, insurance and taxes. There are some really good calculators on biggerpockets.com that will help you to analyze rentals. I have some access to some long term spreadsheets as well on the value of renting a particular property. Once again, if the numbers makes sense, it is a great time to own rentals.
3. You are about to retire – My last reason for investing in real estate didn’t really apply much to Rachel and Monica as they were both in their 20s. However, it is never too early to think about your retirement plans. Old age sneaks up on you so it is best to be prepared for it. I told Rachel and Monica that if you are retiring and want to possibly get a better return on their retirement funds, than investing in real estate might be a good option. Retirees should look closely at Self-Directed IRAs that allow an individual to invest their retirement funds in something other than the stock market. You have to find the right custodian to be able to carry this out, but there several you can contact about this option. For example, I am an officially partner in the Sterling Revenue Group’s self directed IRA program(I do get a referral fee paid to me with each referral I send their way) and they have some programs that are earning anywhere from 8 percent to 20 percent return a year. Are you currently getting this kind of return on your IRA funds? If not, I would recommend checking out this option. It can be quite rewarding.
Rachel and Monica were glad to hear about these reasons for investing in real estate. They liked to know that if they do happen to find a deal that they should jump on it because we might not see these kind of sales prices again for awhile. They knew that owning rentals can be quite lucrative for investors in this current climate. Finally, they noted that they should see where they stand with their retirement funds to see if they can take advantage of the self-directed IRAs. They then went back to their lively discussions, both claiming that I supported their side. I drank my coffee in silence and watched the people walk by.