How to Invest in Real Estate
The ideal real estate investment is investing in a home that is undervalued. The most undervalued home is a foreclosed home. I am not the Real Estate pro in this article, but rather my old landlord was. It was lessons I learned from observing him amass a fortune in real estate. He runs no seminars or anything like that; he is just a real estate mogul. The rest is my research. The most valuable part is my online resource guide at the end. I have spent countless hours on these sites, so if you have any questions, ask. The forum at the end is an excellent resource that is almost as good as knocking on your neighbor’s door to ask about the area.
Investing in foreclosed homes and distressed homes
My old landlord Chris Bunker was one of the most grounded businessmen I knew, in addition to being a good man. Over his lifetime, he bought old homes in Beacon Hill, Boston, and renovated them. He did this because he had an interest in history as well as some hands-on experience with renovation and building management.
At last count, he had over 100 units in an area where homes go for 350,000 dollars. You do the math in terms of his portfolio’s net worth. He was not a slick-looking investor type. He looked more like the unsuspecting millionaire next door.
He said his formula for success was simple. He bought run-down homes in down markets. He fixed them and never sold them. He just collected rent. His whole family was involved. He also restored them to their old historic glory. I lived in one and really enjoyed him telling me the history of the building. It was on 65 Hancock street and once owned by John Hancock. The beams were actually from dismantled Wooden British ships. He bought it after a fire destroyed it, and the previous owners left it to abandon. He took pride in his renovation and was not looking to flip real estate.
- He was a trend investor with a yield and value focus.
Is it ethical to buy distressed homes in a down market?
Are you and everyone else out there selfless philanthropists?
Chris is a man of compassion and not someone who flipped properties. He bought old, abandoned and run-down units and with toil made them livable for people at a fair price. I can not see anything unethical about that.
Money in perspective – Money and material goods in this life come and go. It is how you treat people with fairness; that is what counts. If someone can not pay the bills and loses their homes, it is often for reasons like health or job loss; buyers often feel real compassion for these people. However, you personally are not taking their home; instead, the bank does. You simply want a chance to own a home, too, like everyone else. Almost everyone who loses a home in a couple of years bounces back. They learn the risks of real estate.
Why do people lose their homes? In addition to the true hardship reasons mentioned above, it is more often a case of overextension. People often lose their homes because they overextend. It is human nature to extend often, look at Ancient Rome or Spain. Why did Germany attack Russia or Japan, the USA? Because humans are wired to overextend, they buy too much home. Know the risks of buying a home.
Therefore, if you are buying where someone else has failed, there is nothing wrong with this. You just want the American dream of homeownership and should not feel guilty about buying something that someone else has abandoned. Especially if you move your family in and take care of it like Chris did, and make it nice for everyone to enjoy.
It was some of the best years of my life living in one of his flats, and I am grateful he had the initiative to buy homes that were distressed.
Homeowners with a sense of entitlement
Also, let’s check in with reality. Just because you live in a home does not mean you own it. The bank owns it, unless it is 100% paid off. They are lending you the right to live there in one sense. Do not feel entitled. I do not.
I live in Poland, and many families I know personally live in 300 square feet of homes. So homeownership is very relative to one’s expectations. In Eastern Europe where I live a lot if not more people than not, pay homes with cash. They take small homes and over time, add-on to them. What is a small house? A family might build a 250 square foot house. I kid you not. I see a lot of these in the countryside. Then they add to it. In the USA, credit is king. But just because credit is available, you only have equity in a small part of this house — most of the residence the bank owns.
My message is if you want to feel safe at night, do not buy too much house — plan for the worst-case scenario when it comes to financial loss to mitigate the risk.
Some things Chris did right with real estate investing:
- He bought historic real estate, which over the long terms, rarely loses value as it is history. There is always a premium associated with this property and Chris said a lot of rules that have to be followed to keep it historical, but it is worth it.
- He bought homes that were distressed, not homes that were ready to move in. Americans put a too large premium on ready-made things in packages. And they pay the price. Most things good do not come in ready-made packages. Ready to move-in homes is premium homes, homes where market value is over book value.
- He did not flip real estate but rather generated conservative rental income and was patient with each purchase. He was not looking to make a quick buck in real estate but rather was content on building a portfolio of dividend-yielding investments. Handpicked investments that appreciate but bought for income. Many people build stock portfolios this way. Dividend-yielding investments are safe and steady compared to assets bought for appreciation, which depends on supply and demand and closer to zero-sum investing.
- He did this for fun more than for profit. Perhaps this is the most important point. Warren Buffet himself says the only thing different from most guys and himself is not their lifestyle, as he lives in a conservative, frugal way. But rather, he gets up in the morning and invests because that is his passion.
Where to buy Real Estate?
I am not an expert at buying distressed properties. I would say I know what I am talking about when it comes to stocks, but I am not an expert at real estate investing. But many experts are now bankrupt, so what does it mean to be an expert? It means understanding the economics of investing. From my 10,000 feet level flying over in the sky looking down, listening to others who are, here are some takeaways about where.
- Location – Consider demographics – What is happening, where are people moving. Are they moving to Detroit or upstate New York, I think not. These are like the penny stocks of Real Estate. If the property is that cheap in these cities, it is for long-term supply and demand reasons not oversold in the short-term. It is like a trend analysis. Good stocks do better in up markets than down. In a down market, a good stock will appreciate let’s stay 5% while in an up 50%. The same is with real estate. Pick markets that have long-term positive demographics. People will always move to sunny California, Florida, or Hawaii. These are not historic properties but something similar; they have an intrinsic appeal.
- Location – Do not buy in a slum or an out of the way forest, unless you want to live there. These areas might take 100 years to appreciate. I remember my father use to comment as we drove through the Poconos, back from my Grandmother’s house in Philadelphia, that the land out here will be worth something in 100 years. It is true. That was 40 years ago, and the forests are still empty and not the most desirable places to by land. Again the trend is your friend. Choose places where there is potential for life and appreciation, something that is very cyclical and down for cyclical reasons, not demographic. Look at someplace that is in stage 1 or 2 in trend analysis.
- Location – Chris targeted the higher end. I would target the lower end because of capital constraints. But I would do it in nice areas. Like in the game Monopoly, I would rather own Park place ( the cheap on in good area) than Baltic Avenue (the expensive one in a cheap area), unless you are living there for your primary residence. For a living, it is a different story than investing. I would live in a reasonable area in terms of safety and buy a modest home with as little mortgage as possible.
The main take away is, find a cyclically down area and fix them and build a portfolio rather than flip them.
Americans like turn-key package deals
Real Estate agents will tell you, everything too cheap is junk. But again, it goes under the idea that Americans like the package deal.
See, I think the secret to making money in Real Estate is this. In a down market, if you want to make money in real estate, just for profit, is to target homes on the lower end of the market (middle class home, not thing fancy, the Wal-Mart shoppers homes, which most Americans, including myself, are) that need to be fixed up with about 10,000 dollars of repairs. Why? Americans place a large premium on comfort. Ten thousand can make a run-down home look good.
There is a huge inventory of homes coming on the market. This will happen this year. Do not believe the market is stable; there is still a lot of downside risk.
Good homes have come down, but there in my evaluation the low-end market of homes that are not falling apart but look on the outside as they are and are really undervalued. There are scores of homes in the USA that have potential.
Again the reason is we Americans have a significant premium on comfort. We pay too much for this economic concept of ready-made. Why do people use Windows instead of Linux? Windows is a push button, Linux is free but requires a little bit of work. That is, they love to buy food in packages or houses that you can just move into. Also, fear and horror stories are big with real estate as they are often leveraged investments. But if you pay cash and buy at a value, your risk is less. If you do your homework, you will have less risk than the average guy that buys a ready to move into the home. Think about all these guys who are underwater now.
So look for fixer-uppers. If you clean one room and slowly work on the house, you can get great value. All you need is the water to work basically, and you can live in rustic conditions with a little imagination.
Trust, but verify in Real Estate investing
Things to be wary of when investing in foreclosed homes or short sales
- The title is the most important part. Make sure you are the only owner on the title, make sure there are not junior owners, or you are buying into a junior partnership holding. Make sure there are no other liens on the title, including tax. Ask the title company you are using for a 24-month history on everything about the house, minimum.
- Find out the whole history of ownership behind the homes, so you know the real story.
- Talk to the neighbors and find out the real story. Did something go wrong and are haunting (figuratively) this old house that friendly real estate agents are not telling you. Be a social butterfly. I am fairly anti-social, but to find out the real deal about a location or property, you need to be a detective or at least look behind the numbers. Real Estate agents are basically your enemy in many cases.
- Look with your own eyes – Be a nitpicker when it comes to looking at the house and ask a lot of stupid questions.
- Get a home inspector – This is a given.
- I am not interested in forsaken houses – This is pure speculation on my part, but I have observed friends that have bought homes that were distressed and bad energy from the last seller (they were bad people), and the new owners also live subsequently had problems. Maybe this is a coincidence, but maybe not. For example, I knew a family that bought a house that was lived in by a powerful guy that was captured by the law for doing bad things (importing not legal things from southern countries, use your imagination). The legal authorities, too the house to auction. The couple who bought it started on the road to divorce almost the moment they moved in and their son started to take those substances in a big way, while before he would never have considered it. They were living in an upper-middle-class area.
- All toxic red flags devalue property even if you do not care. – Lead paint is important to know about as well as Radon, Chinese dry wall if the former site was an industrial site (this causes health problems even 100 years later like the tannery district in Boston). They may not be important to you, but to me and someone else they are — nothing near power lines or anything else unusual. I remember a Real Estate agent tried to sell me a home that was near a power line and said there is no evidence this causes health problems. I said no, thank you and got another agent. Please do not buy it near an airport. In East Boston, the Real Estate agent tried to sell me something near Logan airport. She said people have special soundproof windows. But you know cancer rates are higher in this area too so it is not worth it and those property values never fly high in price.
- Go to the unit during rush hour – Real estate agents take you to the place at 2 p.m. In the afternoon, when it is the most peaceful. Go during rush hour, when cars and noise are buzzing, see if you would like it then.
- Price history is all found online. Look at the price and know your maximum you would pay before you negotiate or talk to anyone. There is too much inventory now even to consider the sellers price.
- Community and maintenance fees – Many homes such as Florida homes make you pay a community fee. Well, if the community is not robust in two years or so, your fees can be astronomical. I would not get involved in anything like a community unless I knew a lot about it. In an aging population with no new blood, the fees can get too high to make it worth it.
- The trend is your friend. Markets move in patterns, not just stock markets but real estate markets. Use 12-month moving averages to observe where turning points and where prices are in what stage of the cycle. This is better than listening to speculation in the Real Estate market on the news or from a realtor. I do not understand why people do not consider moving average turning points with real estate prices?
- Trailer homes and manufactured homes – Nothing wrong with these if you have no money, but the significant danger here is you have to pay high monthly fees for the land it sits on.
- Property dossier needs to be put together.
- Do not go for hooky real estate seminar ideas – I remember this neighbor of mine want me to lend her money on a promissory note, and she would buy real estate to rent to others. Do not get that complicated. Also, housing for government assistance families gets tricky, skip it. Please keep it simple. Buy undervalued properties mostly with cash if you can and fix them.
- Do not believe late-night TV ads that you can get rich fast with foreclosed homes – It takes patience, do the research and hire not just any attorney or specialist but someone who has done these type of transactions before.
- Pre foreclosed, during foreclosure and post-foreclosure homes. I think most are best to buy. Maybe you will not get the ultimate value as things get more competitive, but buying pre-foreclosed homes can have complications I do not understand.
- Price should never be what the real estate agent wants – Not even close, it should be based on supply and demand. Economics is about the subjective theory of value, not absolute; it is essential to understand this.
- eBay homes– It is a great place to start and ask questions to sellers to get you familiar with the activation process. Auctions are no different from eBay items. Get used to buying and selling on eBay, and it will get you familiar with the home auction market also. It is the same with a few extra checks.
- HUD homes are in some ways like eBay homes. Try to watch HUD homes in your area and make your determination on if you feel they are valued correctly. Often they are only slightly discounted from market value, but there are again some deals.
- If you plan to sell the house – Your profit should be at least 20% than you bought it for. This is a rule of thumb on short sales and foreclosed properties.
Resources online to look at for getting a good deal on real estate
When it comes to buying real estate, you can 99% of your research online. The extra 1% is the really important research like the walkthrough and title search. However, there are resources where you can start looking:
Online tools for finding a home on the Internet
- Your credit score for mortgages – equifax.com, experian.com, transunion.com – Credit reports to check your credit. Or www.annualcreditreport.com for the combination, you can get this free once a year.
- www.dontborrowtrouble.com – against predatory lending
- www.nachi.org – home inspectors
For sale by owners
- www.forsalebyowner.com, craigslist.com, realestate.shop.ebay.com
Government-owned homes for sale
- HUD homes_for_sale
- Freddie Mac real estate
- www.treas.gov/auctions/irs/ http://www.treasury.gov/auctions/irs/cat_Real7.htm
Best resources for finding homes generally
- www.city-data.com/forum/ – Largest forum from real people what an area is like. Well monitored and moderated.
- www.realestate.yahoo.com – Browse all day and send messages about homes you are interested in.
- Use street view whenever possible and webcams on the area. Note what is going on and be a real estate sleuth.
Last words of advice for beginners, do not be desperate. Use your intuition about if the other people are desperate. I noticed something about people who wait and are patient about price; they usually get it. If you can not walk away from a house, you already paid a premium.
Let me know if you have any trusted resources to add or your 2 cents based on experience or knowledge about real estate investing.