That question can determine your future more than you would have ever thought. If it always has to look good to you before you act your finances probably will never look better. The one with the uncommon courage is the one who rises to the top. It is as true in real estate as it is in politics, and business. You must go against the trend to make the major returns that we all hear about, wonder about and never seem to find. This is most likely the best real estate market we have seen in 15 years to attempt to set yourself up for unbelievable success. Why do I say that? Everyone thinks real estate is finished and won't come back for years. That makes is "the perfect storm"!
You can approach real estate your way or mine, but the first step is definitely to make the approach. At this point the nay sayers are sharpening their pencils and looking up some words that can show you my ignorance, my position as a shill for the real estate industry and/or my indifference to something that is as clear as can be: an industry that is on its last legs and will never recover. We will see!
I am not going to cover the same old points except in this one list that should show you why real estate is not down and out, but forming a new base to to start another upward trend that we all will be talking about in a few years.
1. Weak dollar = foreign investment at a huge discount.
2. Population growth (net) = growing demand for housing.
3. Demographic changes = new growth opportunities in climate friendly areas.
4. Design changes = demand for new Eco-friendly houses.
With the above as a reality it is time to show you what few ever stop to think about in the field of real estate finance. There are four ways to make money in the real estate arena:
price appreciation, cash flow, tax savings and amortization. The industry has a myriad of loans to help accomplish these wealth building ideas, but the 30 year fixed loan is not the answer for all of them and I dare say, maybe not the answer for any of them.
The one thing I can say for sure is the insistence of a 30 year fixed can increase the risk when entering the real estate market at this time. Simply put, it is neither the lowest payment you can achieve nor the fastest way to pay off your mortgage. Both are important when you dive into troubled waters and are trying to make it through. If you can get past this point you have an excellent chance of changing your financial life, to a better one, forever.
When beginning this intrepid adventure it helps to have a plan. What are you trying to accomplish considering the above four ways to make money. Three of them can work as one goal, but not all four. Cash flow, classically, is reserved for an investment property and not an owner occupied one. But whether you choose one, two or three goals for yourself you must at least choose one.
Price appreciation is both a function of time and participation for total success. The real estate market is greatly depressed in some areas, down 10% in the majority of American cities and actually doing fine in a few selected areas in this country. One can simply go in and purchase a property to live in and wait until the market turns and sell it for a profit. Is that the best and brightest move at this time? Not if you are looking for the maximum return. The majority of people fail to realize the total upside that can be achieved by renovating a property, and or by adding on to it which will increase its utility. Change your thinking and you can change your return.
Understand your plan and you can identify a mortgage that will enhance your chances at a profit. If the goal is to be accomplished in 3 years, and you figure that it could require 5 years, then a 5 or 7 year (fixed) arm will be better for you financially than a 30 year fixed.
If cash flow is to be king then you need a long term fixed loan, 30 or 40 years and let inflation keep your cash flow rolling in for you. You needn't worry about price appreciation if cash flow is what you are seeking. The price will grow as the cash flow increase.
Tax benefits come from mortgage interest and real estate taxes primarily. If this is what you are looking for then an interest only loan, for as long a period as you desire should be the best loan for you. Why? Because your entire payment is deductible.
Amortization, the paying down of the loan, is the best way to protect yourself in a dangerous market. See "Come On In The Water Is Freezing" and you will understand why I feel this is as important as anything else you do. Not only does it protect you but also enhances your profit position.
There are really only two thoughts you should take with you from this column: You always make more money doing what takes the most courage, going against the popular trend. That doesn't mean that every time the majority are going one way you should go the other.
It does mean making a plan before you decide on moving forward and carefully execute it all the way to the finish. Each are important and both need to work together. Without one or the other you are really limiting your chances for success.
Now, it is time to decide! Your time, not mine.