At the start of every year, real estate experts and financial analysts throw out their predictions for the next 12 months, and advise home buyers and investors on how to make money on real estate. The problem with this mindset is that real estate investments require much more than a one-year time horizon.
The following observations will help you establish a more reasonable approach to your real estate future.
Real estate is a long-term asset
The average value appreciation on real estate assets isn’t really all that high — typically 2 percent to 3 percent per year, which is nothing to brag about.
In addition, transaction costs on investments of any type can significantly reduce one’s wealth. For real estate, transactional costs include purchase cost, renovations, holding period costs, repairs, and sales costs and commissions. These expenses could eat 20 percent to 40 percent of your invested equity. That’s money you won’t have when you retire.
Due to these transaction costs and low appreciation in value, it’s highly unlikely that a person will earn much wealth on real estate if they don’t own their property for at least seven years. That timeframe is a minimum, however. Most people who earn net profit/monies from their properties have owned them for 15 to 30 years or more.
If you want to earn wealth from your real estate investment, buy something you can afford and hold on to it for the long term.
You must do your homework
Doing the proper due diligence when purchasing real estate is vital to your financial future and retirement. Unfortunately, most folks do an inadequate job of it. Here are some basic due diligence issues that many buyers fail to consider:
- Making sure buying property makes financial sense for you
- Getting a proper home inspection
- Reviewing HOA documents before you buy to avoid problem HOAs
- Obtaining two financing bids and properly comparing your options
- Reviewing the title abstract and the title insurance policy and exceptions
- Keeping the proper type and amount of insurance in place on your property
Make sure you take all these steps, and you’ll be an extraordinary, rather than average, buyer.
If it sounds too good to be true…
In real estate, if a property sounds too good to be true, you can bet that it is. “Great deals,” fix-and-flips, fixer uppers, rent-to-own, off-market deals — none of these arrangements ever seem to work out for the average real estate buyer.
Avoid get-rich-quick schemes or any notion that real estate is going to help you attain wealth overnight. You’ll be better off if you maintain realistic expectations.
Low interest rates work to your advantage
One thing is for sure: Mortgage rates have been ridiculously low for the past few years, hovering in the 3.5 percent to 4.5 percent range for a 30-year amortizing mortgage. Rates had never been below 6.0 percent before 2009.
It’s amazing that bondholders — like grandmas and grandpas (via mutual funds), foreign governments (such as Japan and China) and risk-averse investors — are willing to take such a low rate of return on their money for the risk they are taking.
But don’t worry about the bondholders, because they make their own decisions about where to place their money. Your best bet is to take advantage of their generosity by purchasing some real estate before they start to figure out that they should be requiring a much higher rate of return on their money.
Pay no attention to predictions about how the real estate market will do in 2015, 2016 or 2017. Buy real estate when you personally are ready to buy so you can enjoy the long-term spoils of low housing costs and property equity in your retirement.