Investing in real estate, like any other investment, should be approached cautiously and prudently. Wherever they invest, buyers should budget for monthly mortgage and principal payments, taxes, insurance, maintenance and unexpected repairs. According to several real estate experts, 2010 will be a good time to buy a foreclosure property as a home, an investment property or a vacation rental.
Here are ten investing tactics that can help you build wealth and financial stability in the years ahead.
1. BUY SHORT SALES
2010 will be remembered as the year of the short sale. Sales of properties in some stage of pre-foreclosure accounted for nearly 12 percent of all sales in the first quarter of 2010, up from nearly 11 percent in 2009 and up from less than 1 percent of all sales in 2006, according to RealtyTrac. Many of those are by definition short sales, given that nearly one in four U.S. homeowners with a mortgage — 25 percent — owed more than their homes were worth at the end of 2009, according to First American CoreLogic.
And with a wave of more than 3 million pre-foreclosure filings predicted this year, buyers can expect fire sales holding down housing prices in many parts of the county for years to come. Furthermore, a new federal government program called Home Affordable Foreclosure Alternatives (HAFA), which started April 5, will provide financial incentives to lenders and homeowners to do more short sales. The HAFA program might make short sales smoother and faster, which could in turn make them a larger portion of all real estate transactions nationwide. But the big question remains: Will the banks want to sell at a big discount?
2. BUY BANK-OWNED REOs
Short sales can be time-consuming and difficult transactions to complete, which is why bank-owned REOs are appealing to many investors who want a quick transaction and clear title. If you’re in the market for a home, an investment property or a vacation rental, you may be tempted by the low prices on bank-owned properties, which are selling for about 35 percent less than non-foreclosed homes, according to RealtyTrac.
3. BUY AT PUBLIC FORECLOSURE AUCTION
Buying at the public foreclosure auction is not for the inexperienced buyer or investor because it often requires significant amounts of cash and does not typically allow for a full inspection of a property prior to bidding. However, lenders are becoming more willing to discount opening bids at public foreclosure auctions, giving knowledgeable and careful investors an opportunity to buy far below market without the red tape of short sales or the bureaucracy of bank-owned sales.
4. BUY LOW AND RENT
With prices at 2003-or-lower levels, bargain-seeking buyers might want to consider buying low now and renting until the housing market recovers. Rental rates in many areas comfortably provide a monthly cash flow after mortgage, taxes, insurance and other expenses that come with owning investment property. Buy-and-hold investors can hold for the long-term or just until the market recovers and home prices start to appreciate again. Many economists predict that the national median price for a single-family residential home will dip another five to 10 percent before finally bottoming out by years end or early 2011.
5. BUY LOW AND FLIP
If becoming a landlord is not appealing to you, you might want to consider buying and flipping foreclosures. That’s what Jon Mirmelli, a Phoenix real estate agent and investor does. He buys foreclosed homes for cash at the Maricopa County courthouse and then quickly sells them for a profit to homebuyers and investors. Power-flippers are also making a comeback in Las Vegas, Nev., Cape Coral, Fla., Miami, Fla. and Los Angeles, Calif., where prices are at historic lows.
Flippers in 2010 will also benefit from a one-year reprieve in a Federal Housing Administration rule that is designed to discourage property flipping. This rule, which prohibited the FHA from insuring a loan for a home that has been owned by the seller for less than 90 days, was temporarily removed starting Feb. 1.
6. BUY A VACATION HOME
A well-purchased vacation home gives you an inexpensive place to land periodically throughout the year for some rest and relaxation, but it also can generate substantial rental revenue when you’re not using it. In hot vacation spots, demand is high for affordable alternatives to hotels and motels — especially from vacationers planning to stay a week or more. Filling the property with renters during just a few months of the year can often produce more than enough revenue to cover your annual property expenses.
7. BUY WITH CASH
Cash buyers are king in a real estate market where tight lending guidelines dominate and prospective buyers who use financing are restricted in their ability to make quick and flexible offers. Cash buyers appeal to banks and other sellers because their offers can be closed quickly and without the contingency of final loan approval. Even if you can’t make a full cash offer, you may consider including a statement in your offer that you are willing to pay any difference between your offer price and the assessed value of the property in cash. That way, the seller will not reject your offer just because the assessed value used to approve your loan is less than the amount you’re willing to offer for the property.
8. BUY WITH FHA FINANCING
The FHA, created in 1934 to heal the housing market during the Great Depression, doesn’t lend money to homebuyers, but insures lenders against default on loans that meet FHA criteria. FHA loans are popular with many buyers because it is basically the only loan product in the current market that still requires a relatively low down payment — less than 5 percent. The FHA also has a loan program called 203(k), which is popular with homeowners seeking mortgages for major renovations. The streamlined version of the 203 (k) loan program requires a 3.5 percent down payment, and covers up to $35,000 in renovations and repairs.
9. BUY WITH CONVENTIONAL FINANCING
An FHA loan works if you’re buying a property to live in, but if you’re buying investment properties you won’t qualify. Buying with cash is one option for investors, but another option is to use conventional financing, backed by Fannie Mae or Freddie Mac. Investors can buy up to 10 properties, including their primary residence, using conventional financing.
10. BUY WITH HARD MONEY FINANCING
Hard money financing can be a good option for a select group of investors who want to buy more than 10 investment properties and who are not able — or willing — to pay in cash. Hard money lending is most appropriate for the buy-and-flip investing strategy because the term is usually short, around one year, and the interest rate is high, often north of 12 or 15 percent. Investors are better off when they can pay back the loan in a few months.