Bruce & Pam Wachter, REALTORS
Whether you're buying or selling White Mountains Arizona Property, Bruce & Pam Wachter have the experience knowledge, and friendly attitude to make the process pleasant for you! Call us for all your White Mountains Arizona Real Estate needs!
Thinking of Investing in Real Estate?
Buying a second home as an investment can be extremely rewarding. But do your homework before you take the plunge!
Investors are attracted to the real estate market because it looks like a sure bet. And why not? In the last twenty-five years, average home prices in the US have climbed almost every year.
But itís hard enough for most people to carry just one mortgage. So is it really possible for the average person to finance a real estate investment?
There are many strategies for investing in real estate. Buying land and building new homes, condos, apartments and commercial buildings, are the realm of developers. But you donít have to have deep pockets like those to buy a second home as an investment.
Success at investing in real estate, like most other endeavors, depends on doing your homework first. There are plenty of resourcesóbooks, seminars, online courses, and lots of free help to get you started. However you choose to educate yourself in preparation to investing, put in the time. Youíll be glad you did. With the invaluable help of a real estate professional, a Realtor or real estate agent, learn how to locate a property, inspect it to make sure it isnít a money pit, go over the numbers to see whether rental income would cover your carrying costs, secure financing, negotiate a deal and close the transaction.
Buying a house and renting it out while it increases in value sounds like a plan, doesnít it? This strategy can be an effective way to invest in real estate: Buy the property, and sit back as it appreciates while someone elseís rent checks pay the mortgage, taxes and maintenance. But be prepared for the numerous headaches of being a landlord. Youíll have to deal with plumbing emergencies and such, as well as general upkeep and maintenance, or pay someone else to do it. Youíll also have to deal with tenants who are late with the rent, are noisy or upset neighbors and/or abuse the property. And you must ensure that your investment will be a paying proposition. A reliable guideline is that youíll need to charge 10 to 15 percent of the value of the property in rent each year to cover management costs. And remember that as a landlord, you can usually deduct management costs, taxes and mortgage interest from your tax bill. Consult your tax advisor to find out how this applies to your particular situation.
Buying and flipping
The handymanís dream is to purchase a neglected house in a good neighborhood, put a few thousand dollars into renovations, and sell it a few months later at a profit. This can be a successful real estate investment strategy for those who are very good at estimating renovation costs (or have a friend or family member who is), as well as pretty handy with a hammer and nails. But to come out ahead of this game, youíll also need business sense, or youíll have to buy some. Lawyers, accountants, and your Realtors will come in real handy. A rule of thumb, too, is that to make your investment worthwhile, add two dollars to the homeís value for each dollar you spend on improvements.
While real estate has always proven to be a reliable investment overall, there are risks attendant to each of these strategies. A slump in the local rental market could force you to reduce your rent to get tenants to a level that is not profitable. Or, your investment could stand empty without paying tenants for some period of time. If you are renovating and flipping, local employment layoffs, a downturn in the economy, or a sudden hike in interest rates could make your fixer-upper-flipper hard to resell and force you to take on the role of landlord to offset your costs.
Both these strategies demand that you arrange financing at the lowest possible interest rate to maximize your profit. That means timing your investment to coincide with low market rates, and shopping around to get the best mortgage deal available.
You can consider a long-term adjustable rate mortgage (ARM) or a traditional fixed rate loan if you are planning to buy, hold and rent out. If you are going to renovate and flip a property, you are probably better served choosing a one-year or two-year ARM, to take advantage of the very low initial interest rates currently available for these products.
You also need to think carefully about where the down payment for your investment property will come from. The most cost-effective source of financing could right in front of you-- the equity in your own home. You could take out a low-interest home equity loan to make up the down payment on a rental property, and then repay it out of rental income. But remember, that increases the debt on your primary residence.
If you are fixing up and flipping, think about a home equity line of credit that you can draw on for renovation/remodel expenses in addition to your down payment. Some lenders will lend as much as 125 percent of your homeís appraised value, less outstanding mortgages.