RISMEDIA, Oct. 22, 2008-Throughout our nation’s history, investing in real estate has been one of the fastest ways to build wealth, but news headlines on the subprime lending crisis and lingering “For Sale” signs on neighborhood lawns indicates that this once tried-and-true investing method indicates a down real estate market.
According to the Center for Responsible Lending, 2.2 million families with a subprime loan issued from 1998 through 2006 have lost or will lose their home to foreclosure in the next few years. That amounts to a projected maximum equity loss of $164 billion.
But according to John Checki, a Richardson-based independent financial professional, successful real estate investing is still a reality if an investor pays careful attention, conducts detailed research and has patience.
Checki provides these seven tips to successful real estate investing in a down market.
1. Focus on “home sweet home.” Many homeowners consider making renovations to their homes in a down market. And while home improvements can add value to your real estate, Checki warns that any major renovations should be evaluated from a pure return on investment perspective. According to the recent “Cost vs. Value” report from Remodeling magazine, this year homeowners won’t recover as much of the costs for remodeling as renovators did in the past.
2. Play by the new rules for buying or selling. The bidding wars of recent years where homes sold for more than the asking price are history and, in many markets, house flipping has turned into house flopping. “There are winners in this new environment,” says Checki. “First-time home buyers who have nothing to sell have plenty to gain as sellers stress over the glut of homes on the market. Although signing the purchase and sale agreement may leave you feeling flush at having cajoled a boatload of extras out of your builder or negotiated a steal of a price with a desperate seller, keep in mind that the home you purchase today may not increase in value and may even decrease in value in the years ahead.”
3. When selling a home, it has become increasingly important for sellers to work hard to impress buyers. “In addition to the traditional sprucing up the yard with a few potted plants, sellers may also need to do more to increase interest in a home,” says Checki. “In a slow market buyers are especially unforgiving and won’t overlook pealing paint or leaky roofs, so make these major repairs before putting your home on the market.”
4. Take advantage of the current 15% capital gains rate. If thinking about selling a home and are concerned that it has lost some of its value, all may not be lost. Any gains realized from the sale of a property will be taxed at the current capital gains rate of 15%. However, it’s worth calculating potential tax savings against what you may lose in a sale price, especially if you qualify for maximum exclusion which can be up to $250,000 of the gain or up to $500,000 if you are married and file a joint return.
5. Scoop bargains with care. Foreclosures abound, but keep in mind that many require major renovations. “Without doing your homework, you could end up making some costly mistakes and that bargain foreclosure could turn into a money pit,” says Checki. He advises that rather than chasing subprime fallout, consider researching local developers who might be feeling the market’s pinch and would be tempted to dump new property at a discounted price.
6. Consider becoming a landlord. “As you watch property values fall, you may consider buying that second home and renting for the weeks your family isn’t vacationing in it,” says Checki. “Although you initially may prefer a small house, look for one with adequate land to accommodate future expansion.” Checki adds that while in vacation mode it may be a good idea to think about the property’s proximity to recreational activities and a good school district. “Before you put on the landlord hat, you should also think carefully about your own skill set and the amount of time you can dedicate to managing your investments,” Checki says.
7. Use the right REITs for the right reason. Real Estate Investment Trusts (REITs) invest in commercial properties such as office buildings, shopping centers, apartment complexes and hotels and are bought and sold on the major exchanges just like stocks. Because REITs must pay out 90% of taxable profits in the form of dividends to avoid paying corporate income tax, they are an ideal choice for investors who want regular income. Additionally, REITs broaden your portfolio and can zig when equities zag. Those benefits aside, however, REITs’ last seven years of market-beating performance, before last year’s plummet, has investors overly focused on return.
John Checki, an independent investment advisor representative for Securities America Advisors Inc., has been a part of the financial services industry for over 20 years, and expects, with good reason, to be around for another few decades. The author of “How to Have Fun and Still Have Money” (forthcoming) and a dedicated outdoorsman and fitness advocate, Checki is a staunch believer in the value of the journey while not giving the destination short shrift.
For more information, visit http://www.johncheckijr.sarep.com.
