I've talked to several agents, friends and clients and they have either asked this questions or have discussed it with others. So, when will be a safe/good time to begin investing in real estate again? The answer to this depends on your idea of investing and how much capital you have. Do you plan to rent the property and hold onto it? Do you plan to rehab the property and sell it for a quick profit? I will first discuss the goal of buying with a quick sale, or "flip", in mind.
When investing to "flip" a home, or sell it quickly after repairs/improvements are made, the first thing to do is to look at the sales statistics in the neighborhood or area you are interested in. The stats I've included are the April sales statistics for the Baltimore Metro area. The most important stats are obviously "Avg Sold Price", but also the "Avg Days on Market" and "Avg Sold to Orig List Ratio". The sales price for the homes in the area, comparable(comps), will tell you what the upper and lower prices homes are selling for. You must determine what budget you have for purchasing the home, improving it, carrying it while you attempt to sell it and closing costs(Realtor fees, transfer and recordation taxes and any seller concessions). Once you figure your budget You are now ready to determine a good purchase price. THIS IS WHERE YOUR PROFIT IS MADE! If you pay too much for a property, your profit will be where you lose. Purchasing a home at the right price is the most important part of real estate investing. If you buy a home at an appropriate price, you will have two things on your side:
- You will have flex room built into the transaction to address surprises in the construction/rehab process.
- You will have $$$ available to accommodate a buyer's request for cash contributions towards their closing costs or $$$ available for a price adjustment, if needed.
So, you made a smart purchase and now you're ready to rip out some walls and slap down some granite counters. Hold on there, cowboy. Let's make sure you are choosing the right improvements and upgrades. Consult your Realtor to find out how many baths the surrounding homes have, what types of kitchens are int he houses around you, how many bedrooms the other homes have and do they have a finished basement. You'll want to choose things that will set your property apart from the others in the area. If everyone else has 1 1/2 baths, then turn the 1/2 bath you have into a full bath with a shower. If the other kitchens are small "galley" type kitchens, then open up a wall and combine the kitchen and dining room to make an open feeling and better flow. If you indeed did buy the property at a good price, then these slight improvements should be within budget and will net you more dollars and possibly a quicker sale when the property is listed.
Another area that lots of investors forget to take into account are the taxes due from any profit. Make sure to consult a tax professional to see how you will report your earnings and what will be the ramifications of your flip. Take the info you gain from your research into account when calculating your return on the transaction.
Here is a newly released article by CNN Money. It actually gives some validation to my conclusion.
Well, to answer the question as to "When will be a good time to invest in real estate again?" , actually, for a flip project, now is a very good time. On a scale of 1-10, I would give the current market an 8 for flipping. Labor costs are down, property prices are down and there is a lack of good, well priced homes ready for occupancy. A lot of the homes available are in need of work due to the fact that they are foreclosures, short sales or the owners have not had the means to keep up with them.
Here is a USA Today article from a few years ago, but it is still very relevant.
INVESTORS!!! Here are links to custom search results for properties under $100,000. If anything interests you, give me a call.
Next week I will discuss the mentality of investing with the goal of having rental income.