Investing in real estate now may very well prove to be the best investment you have ever made. The true definition of investing is buying at a low price, and holding onto it at least until house values improve. The length of time will vary. Sometimes it may be 5 or 10 years, or until the underlying mortgage is paid off, or even well past that time. The amount of “return on investment” or ROI also varies, depending on the length of time the investment is held, the costs incurred while holding the investment, and the state of the market when selling.
BUYING AND HOLDING BY RENTING
You can easily buy a single family investment property at a hefty discount today. This is mostly because of the lower appraisal values of real estate across the board. Many homeowners who need to sell find they cannot sell the home for what is owed, and therefore need a short sale negotiated with the bank. This allows them to sell the house for less than what is owed, and pay the bank the new agreed upon amount. This method is commonly used for homeowners who are behind on payments. However, the homeowner may not receive any money from the sale of the home. A home previously worth $160,000 may now sell for $110,000. The amount of discount depends on the new values in the neighborhood, the region of the country, and what the bank or the bank’s investor will allow.
Another way a home may sell for a discount is when someone seriously needs to sell their home even though they are not behind in payments. Some homeowners have put down a substantial down payment, and are willing to lose their down payment in order to sell the home.
Buying a home by short sale can be a very good value, but there is a process with the bank that can take months to a year. Some short sale homes need a lot of repair work, and some do not. A home that is not a short sale home, but the homeowner is willing to give up equity may prove to be the best buy, because of little repair work needed.
In choosing a property for investment, you should consider the average “blue collar” worker property. If you get a hefty discount on a $500,000 property but are unable to easily rent it for an amount that covers expenses plus gives cash flow, it will not be a good investment.
If you use good business practices you can rent the house, and the tenant is paying for the property. In this market there is a greater need for rental homes. But perspective tenants can be pickier. Making a very low cost home often not as good of an investment because of the competition in the market place.
There is the tax incentive of depreciation when holding investment property in this way. And the rent collected should cover the mortgage, taxes, and insurance, plus give cash flow. The cash flow can add to your income, or be held to use for inevitable repairs, or replacements.
BUYING A HOME “SUBJECT TO” and SELLING BY AGREEMENT
Buying real estate by “subject to” is when a buyer takes over the homeowner’s payments, and the deed is put in the investor’s name. There are cases where this can be an excellent way to buy real estate, and provides a solution to the original homeowner. The scenarios where this would be a good way to invest in a home are:
1. When a homeowner is not behind in payments, or very little.
2. When the mortgage is a fixed interest rate.
3. When the amount owed still represents a good value based on today’s fair market value.
4. When the second mortgage can be shorted, and the first mortgage taken over.
Selling by agreement is owner financing the property by wrapping a mortgage around the existing mortgage. The mortgage that was taken “subject to” stays in the original mortgagor’s name, but the additional sum for the selling price is in the investor’s name. Both mortgages are paid by the new homeowner who is buying the property. The deed is not conveyed to the new homeowner at this time, but is conveyed when the home is paid off, or at another time sooner than that, which is spelled out in the agreement. This type of agreement is called in some areas, “Agreement for Deed”, and in other areas, “Land Contract”.
Selling a property by this arrangement gives the original owner no obligation to fix toilets, and so on, and gives a more stable situation as to the person staying in the property, taking care of it, and paying on time.
There are other ways to invest in real estate. Speculation investing, and fix and flip were popular a few years ago, but are not generally good ways to invest in this market. Buying to Hold and Rent, and Subject To buying and Selling on Agreement are the stars of today’s market.