On the top of the list for the biggest household expenses is housing. Regardless if you have a mortgage or rent your primary residence, the estimated expense for housing for an average household in the United States is 32% of income - of course, it varies up or down based on your household's circumstances. In any case, I believe that when clients come to me to purchase a residential or commercial property they are smartly investing in their financial future. This also means that more Americans are finally recognizing how critical it is to keep their housing and real estate investing affordable.
HOW MUCH REAL ESTATE CAN YOU COMFORTABLY AFFORD?
Don’t bite off more HOME than you can chew.
For most real estate buyers the answer is a house or investment with a purchase price of no more than 3x their annual income. The cost of real estate ownership includes much more than the monthly mortgage payment. You have property tax, insurance, maintenance, repairs, marketing for investment properties and legal expenses that add up. Typically these costs can run 3% to 5% of the price of your home each year. These are all essential things to consider. This is why I ask my clients to seek professional advice from a mortgage broker, financial advisor or accountant on how much they can comfortably afford before going to view properties.
Oftentimes, a client calls seeking to buy foreclosure properties or a property that requires major repairs. These clients seek to flip a property but do not consider the many factors that have to fall into place to be successful at it. They have never changed a leaky faucet, have never installed sheetrock or unclog a toilet. They often suck at painting as well. Note: the peeling off paint, quirky lines, paint splashes gives away an inexperienced painter. This symbolizes that they have to rely on contractors to get the job done and if you have dealt with contractors in the past, you have probably experienced first hand how much fun that is. As time goes by into a renovation project, flipping buyers realize that they have to up-keep their expenses for a property that is not producing any income or they have to live in a property that is not ready while renovations take place.
Real estate investors and home buyers also find that getting approved by a lender could be a stressful process. Not knowing how much house you can afford before placing an offer could be a very costly mistake for real estate buyers.
REAL ESTATE FLIPPING, FORECLOSURES, REO PROPERTIES
Are they worth it? It all looks very good on TV when they flip houses in 1-2 months and make a very nice profit on the sale. Have you wondered how they really do it?
Real Estate Anecdote 1
For over 15 years, I worked with a contractor for all my rental income investment properties. He showed up to my house so happy, unannounced, because he wanted to share his great news. His business was in the uprise. This was a direct result of the work he did for a flip-homes TV show. His name was everywhere with the local people and he could not keep up. I asked him about his experience with the show and his feedback was that the guys running the show know little about real estate construction and that they are primarily TV show people. When asked how it was financially working for them, he proceeded to tell me that his payment was drastically undercut in exchange for the advertising exposure. He also claimed that the crew took longer than they show on TV reports but in order to meet reasonable deadlines he had to hire extra help which cut into any profit he projected. This validated my belief that these flip real estate TV shows are in many cases not 100% transparent. In one show, I could not understand how a flip-homes TV show completed a house upgrade for a brand new kitchen, new patio, new sheetrock, painting and new floor for just $12,000. It is unreal unless the contractor was doing it at a loss. Note: feel free to call the same TV contractor and get an estimate for a similar job and see if you are able to get the same price. Those numbers are impossible to get as I know I spent $35,000 doing just a kitchen renovation of similar size. This is not including all the extras that go with it.
Real Estate Anecdote 2
I was once approached by a real estate flipper, let's call him "Jack" - not the real name. As a real estate investor myself, you learn over time through good and bad experiences what works and what does not. It has been my experience that most first time real estate flippers lose money in their first deal. They will not tell you so in friend gatherings as they always want to feel smart about their dealings. But the reality is different. In Jack's case, he wanted to invest in flipping properties with me. Knowing his property management background, some real estate flipping experience he had, his good character, his good credit and that he had over $1mil to invest it all sounded like a perfect match. We met over dinner and discussed the various possibilities. Jack was eager to tell me all about his two real estate flipping dealings. He bought a couple of distressed properties, lived in one of them, did some of the work and sold the property 7 months later. It all sounded really good. Right? After I asked Jack to run the numbers for me, I came to realize that he made a profit of $5000 on the first property and $3000 on the second property. This was before capital gain tax and before his divorce. Based on the info, I felt Jack had lost money, his numbers looked sketchy, but he did not know it. My first question to Jack was "You were willing to risk all that money to make just $8000?" For obvious reasons, I declined to invest with jack. I clarify to Jack that I don't believe in flipping but I believe in what I call "Real Estate Farming" - I will explain later.
Real estate flippers eventually graduate to better success as they learn how to do some of the work themselves, manage budgets/time better and establish better connections with contractors they trust. However, just about the time when they are profitable a crisis hits: the economy takes a downturn, divorce, illness, coronavirus pandemic, loss of income or other.
Sounds very negative, doesn’t it?
Being prepared is what makes a real estate flipper successful. This has been my experience as a real estate investor and what I have seen as a professional realtor.
Real Estate Anecdote 3
In 2006, a friend decided to do a real estate flip after watching TV shows. It was the 4th property he owned at the time. He certainly had plenty of experience in real estate rentals and repairs. He hired a crew and assisted in the renovation of the property therefore saving some money. He turned a property that was 1200 sq feet into 2700 sq feet. Housing market was going up and everything looked very good. However, time was not on his side as he ran out of money for a project that he estimated to cost $125k turned into $185k. He had to put a hold on finishing the project and had to up-keep the property empty for several months. Months later, as he is ready to place the property on the market, the economy collapsed. He then decided to live on the property as his divorced was also inevitable. Two years went by, the house got finished, property was rented and the house prices started to go back up again. As the client is ready to place the property on the market again the Sandy Hook shooting happens. House is in Sandy Hook and prices collapsed one more time. He finally sold the property using a lease-with-an-option-to-buy at a loss of $85k roughly 13 yrs later. It may look like he lost money in this transaction, he did. However, he used a 1031-like-kind-exchange and used a cash-out refinance on this property to make other purchases that made his money produce. Too many details and too complex to cover here. Feel free to contact me if you would like to talk more about these options.
Let me be clear, it is not all bad. Let me summarize real estate flipping for you: I believe that some people make money in real estate flipping, but I do not believe the vast majority do. I believe those that make money are experienced contractors that have access to money and skilled resources. I believe it is a better investment, based on my years of experience, to buy a property that needs minimum work, up-keep it, rent it and wait for the right time to sell it down the road. Your equity shall grow overtime as you pay towards your equity in your mortgage and prices go up as inflation kicks in. In most towns, population continues to grow and land continues to be scarce. This correlation eventually drives prices up assuming a normal course of events. I called this "Real Estate Farming". You can see this in action when your grandparents sell a property they owned for a long time. Chances are, they sold it for a nice profit. My Real Estate Farming also includes doing 1031-like-kind-exchanges and cash-out refinancing to get the equity out to purchase other properties. Too much info to cover just in this article. Feel free to contact me if you would like to talk more about these options.
FIRS TIME HOME BUYER
I am an experienced professional expected to maintain a higher level of knowledge of the process of buying real estate. Home buying may seem to be a very simple process: find the house you like, negotiate the price, pay for it and move in. However, there is much more to home buying than just that. There are laws, research, disclosures, inspections, appraisals, negotiations and other requirements that have to be met.
You need to take a break and think about all the questions to ask when buying a house. And as I always tell our clients: “If you have a question, ask it, no matter how foolish it sounds in your own head. There are no such things as stupid questions.” After all, you are making one of the biggest financial investments of your life, so it’s an excellent opportunity to tap into our expertise as real estate agents.
Everyone deserves to own the home or investment property of their dreams, and you can certainly be next. As your real estate agent, I can help you understand and guide you through the process. I am very proud of the work I do for my clients. As real estate professionals, we are committed to treat all parties to a real estate transaction honestly and subscribe to a strict code of ethics.
Location, good local schools, great municipal services, convenient public transportation - these are a small number of factors you may consider when choosing where to live and which home you want to buy. No matter your budget, I can help you find the perfect home for you. As real estate agents, I will be with you every step of the way, from helping you narrow your search to guiding you through the negotiation process and closing the deal.