Sunday, February 8, 2009

A completely different way to think about real estate

Due to the downturn in the real estate market, many people who have long wanted to buy their first home or invest in real estate are wondering if they’ll ever get to fulfill that dream. But I want to encourage you to think of it in a different way: real estate is on sale. If you don’t have to sell a house to get into another one, this is a great time to buy.

Prices on real estate are lower than they have been in quite some time, and bargains are available. I just purchased a condominium for a second home after finding the market rich with property and opportunity.

I’m not a Realtor® and I’m not in the mortgage or lending business. Our firm specializes in managing traditional investment portfolios. But we help a lot of people with overall planning and investing and it would be a mistake to overlook financial opportunities in other arenas. Now looks like a pretty good time to buy a house for people with money to spend or solid credit.

The magic of real estate borrowing

Buying a house is one of few nice financial leveraging opportunities that comes to a family. Think about it; you borrow at a low interest rate and pay it off monthly over a long period of time. Every payment reduces the loan’s principal amount, and pays tax-deductible interest to the lender.

At the same time, property usually goes up in value. Maybe not month-to-month or year-to-year, but it’s fairly reliable over longer periods. To get a sense of this, print a mortgage amortization schedule and look at the reduced principal value in 2019. Now, estimate the likely value of the property ten years hence. That future equity was enhanced by a low interest loan and subsidized by Federal tax laws.

It’s also comforting to note that future payments – while locked in with a conventional loan – will seem smaller in a decade as inflation shrinks the value of dollars and as your family income rises.
It’s not genuine magic, but a mortgage is as close as you’ll get in personal finance. In fact, I recommend to most folks that they take the longest term possible, and resist the urge to pay off early. The low payments add flexibility to your situation, and extra money can often be invested more profitable elsewhere.

First-time homebuyers might find that the zero-down or interest-only loans of yesterday are no longer available. But traditional loans, which call for a down payment, are available, even plentiful, with low rates. Traditional homebuyers who want a starter house, and have decent credit, can start shopping now.

Fewer bad loans is really good news

It is really good news that those riskier loans are gone. In the long run, that type of lending was not doing consumers any favors, and many of those people who were given interest-only or zero down payment loans have lost their houses. Today’s consumer will just need to understand that lending practices are more conservative, and be prepared for the new realities.

Baby boomers seeking a second home, perhaps in a resort or near a lake, may find this is an ideal time to invest in that second house, or income-producing rental property. Investing in real estate may be one way to help bolster plans for retirement.

Investors need not choose between a second home and saving for retirement – investing in real estate can be one tool to help achieve both dreams. That real estate investment could appreciate as much or even more than other types of traditional investment, especially if you buy it at a bargain price. So start shopping. But as always, don’t jump too quickly. Examine all of your options in terms of property and loans available. The purchase of a home, including a second home, could become a solid step towards planning your future.

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