I like the idea of buying real estate because there are tax advantages, it is one of those investments that have emotional appeal, and it is a great way to build equity and earn income (albeit when it comes to second homes it is often better to invest the same money into the stock market). I have always been a big advocate of people buying homes instead of paying rent (since your money earns interest and you can leverage a much larger cash flow than your own–assuming the housing market increases and you have a low interest rate on your loan). However, with the current market conditions I am starting to reconsider my position. I came across a great site on the housing bubble. It has some great rationale as to why you should rent instead of own. I keep trying to think some of the arguments could be wrong or have other explanations (like what if you buy real estate in a developing area, or modify the house in a way that increases the value–in those cases wouldn’t an investment earn more interest and possibly still be a good investment?)–perhaps that is because I bought a house not too long ago before the bubble really popped.
I do believe housing prices are only going to decrease. I definitely think that is the case over the next year to two years–but what if it is longer? How much lower are housing prices really going to go? I know we would love to buy another piece of property–particularly if we can get a great deal on it (I would like to live in a bigger house at some point–and buying real estate is a lot like shopping for me). We have also even talked about buying a vacation property on the coast of Washington (since staying at hotels when you have 4 dogs is nearly impossible). How will we know when is the right time? I am beginning to think though, that if we do decide to buy anything we should buy a multi-family property that has a net positive income. This is a financial topic I find particularly interesting and want to spend more time thinking about this in the future. Anyway I am thinking about these things more and more and I will continue to post as I find things that are interesting. Here are some things I have learned so far:
- If you are going to buy make sure you look at FSBO (for sale by owner), bank owned property, and pre-foreclosures.
- Don’t use a real estate agent. This gives you more negotiation power. Buyers agents benefit when you lose (they get their commission based on price–it isn’t like a stock where they get a fixed price per sale) and even though they say buying with an agent doesn’t cost anything you are the one buying the home and all the money is coming from you–you are the one paying the commissions.
- Clearly understand the economics of your purchase. It can costs 6-10% to sell your home. Understand the market conditions, average appreciation, and how long you will have to own your home to see a profit.
- Negotiate fees. You can always negotiate fees on a loan. Make sure you see the bottom line and understand what your mortgage broker is getting on the loan. These things can be negotiated (and should be!).
- Make sure you do an inspection and pick your own inspector. If you aren’t sure who to use, do research. Find someone thorough. Do not rely on agents or the seller–these parties are only interested in getting the house sold. Make sure you feel good about the purchase and have done your homework.