Top Tips for Residential and Investment Property Purchase in the current Economic Climate
With the volatility in housing markets around the world, it’s very hard to know what action to take. Economists talk one day of a possible fall of 30% in the housing market and the next day they’ve changed their minds and they predict just a 15% drop. Whom can you trust and how reliable is the information we receive in the media and in our papers?
I have many clients around the world who are just dying to get back into property investing – why? Because they see that they are getting a very low return on their money in the bank – very often only 1, 2 or 3% if they are lucky. They want to have something that brings them an income for their retirement and also hope that the value of the property will go up over time.
I’m going to examine the various options available to you and their respective advantages and pitfalls.
The first thing to say is please do not be fooled by the media’s constant reporting of “green shoots” of recovery and that the recession is now behind us.
The economy is still not stable enough. Right now, in many countries, the housing market appears to be reversing. There seems to be a flurry of activity that is showing that houses are being sold. But the market is far from stable. So for those people who are trying to sell during this momentary recovery – do it fast because the housing market may yet again fall.
One of my clients had to relocate to another state for employment reasons. They left their house in Illinois and put it on the market 2 years ago. It was very reasonably priced – but they kept on reducing the price, offering all kinds of incentives, yet they couldn’t sell it nor could they find a tenant. Just this week, they finally have a tenant in there – not paying enough rent to cover all the mortgage, but still saving them $2000 a month. A flurry of people who wanted to rent appeared in the last week, but for the last two years, there was no one who wanted to rent.
So for right now, if you are able to take advantage of this flurry of activity in the housing market, do so. Don’t wait around for prices to go up substantially. Chances are that over a short period of time, they are going to be right around where they are now – maybe a little higher – but if you wait too long, chances are the economy will again turn. There are signs that the economy will not support an active housing market after the middle of next year.
It’s difficult to predict when the market is going to turn, but if you look at cycles and you look at the economy in general, my guess is that we will see an improvement for the 1st part of 2010 and then the housing market will collapse again. I will be pleasantly surprised if it doesn’t collapse before the end of 2010, but from everything that I’ve seen, that likelihood doesn’t exist.
With this in mind, should you rent or should you buy?
It depends largely on your financial situation.
There are five conditions upon which I would consider buying a property to live in right now:
– You find an absolute bargain. This would be based on you having done extensive research on all the other properties in the area. For example, if the average price right now is $200, 000 and you find something for $100, 000 that is a foreclosure, then that might be a good buy. However, it is only a good buy if you can afford it.
– You have at least a 20% deposit AND 12 months emergency funds in savings to cover unexpected situations
– If you are buying the property with a spouse or partner, you calculate your outgoings for just one income or even no income for a period of time – what happens if one or both of you gets laid off for an extended period of time and you cannot find other employment?
– You include in your calculations, the possibility of other costs rising such as property taxes, maintenance fees, utilities, telephone, food etc. Many Councils are saying that your property is worth $1M and they are charging you taxes on that amount when in fact you could only get $200K for your property if you sold it.
– You are willing to hold onto the property for at least ten years before you may see a substantial increase in its value.
Keep in mind that if you buy now, you may be sorry as the property you buy for $300000 may only be worth $250000 within a few months. I have a client in Michigan and her property a year ago was worth $1M – now she has it on the market for $250K and she still cannot find a buyer. If you do buy a property, don’t have expectations that that property is going to go up in value anytime soon.
If you can satisfy all these conditions and you are not going in by the skin of your teeth – then off you go – happy house hunting!
If you cannot satisfy all those conditions, then I suggest you stick to renting for now. In fact, rents should also start to come down too and you may be able to negotiate a better deal with your landlord. I know a lady in the uk who not only got her rent reduced by 10%, but she also negotiated with her landlord for him to pay for a gardener and to give her the first months’ rent free! The advantage of renting is that you are not tied into any mortgage agreement and you can be more flexible. If prices continue to fall, you may find that you are in a better position to pick up a bargain when the time comes.
For those of you who are struggling with your mortgage payments at the moment, try to negotiate a better deal with your bank. They would still prefer to have you in the property paying part of the mortgage rather than going through the procedure of foreclosure which usually costs them a whole lot more money. I knew someone who was having trouble paying her mortgage and she managed to negotiate a year’s holiday from paying the mortgage while she got herself back on her feet. It’s a bit like the negotiation we talked about in an earlier show – you have to be willing to ask. Also, if one bank does not want to negotiate, try to find one that will.
Depending on the size of your mortgage, you may consider moving to a smaller property so that you can either free yourself of debt altogether or at least reduce your monthly payments.
If you owe a lot of money on your property and you can still get some equity out and get rid of your mortgage altogether, I would suggest that you seriously consider taking that option. Then you are free to buy later when the prices have come down further.
If you have a property in a block of flats, or a condominium, where you are sharing the service charges – if many people in that block of flats have their apartments foreclosed, then the people who are still living there have to take on the added burden of those maintenance costs and if there are a lot of people out of work and not buying merchandise, then cities have to make up the money that they are not collecting for taxes in some other way. Chances are that one of the first things they will do will be to increase your property taxes substantially.
Let’s take a look at investment properties and land.
People really don’t know what to do with their money and because property investment has been such a good bet in recent years, there are many people itching to get back into the market. But is this the right time? It’s very difficult to pick the top and the bottom of any market – even the experts will tell you that that is almost impossible, but what you can do is to see the trend.
When I had my property investment company in the uk, things were going beautifully and I had a very impressive portfolio. All of a sudden, I started to get glimmers of an economy that was just on the brink of starting to fail. While everyone else was still rushing around buying properties, I thought this would be a good time to sell off everything that I had. I didn’t want to unload all my properties at one time because I was well-known in the field and I did not want the other real estate agents to think that I was doing poorly and they might try to take advantage of me by persuading me to sell my properties for less than I thought they were worth. So I unloaded them two or three at a time, quietly took my profits and just as quietly I got out of the real estate market just before the economy really started to fall.
With the degree of change that is happening right now, trends are much more difficult to predict, and for the average person, who is not well-informed on the housing market, it is best to reassess your finances, the type of mortgage that would best suit your needs in the coming years, identify what your possible needs may be for housing in the coming years and wait for the market to stabilise a little before you make that ultimate purchase.
For those of you who are looking to invest, remember that during a recession or depression, people have less available funds and may not be able to afford to rent. Many people either share a property or they move back in with their parents. So you may need to drop your rental price. This is all right is you have no debt on the property and you have paid in cash – then you will not be too affected if you cannot find a tenant or if rental values go down for a few years.
I know a landlord who during the severe downturn in the 1990’s in the uk who had three properties that sat empty for over a year. Luckily he had no debt on those properties, so it did not lead to financial ruin for him, but it was still very frustrating that he had to pay all the property taxes and bills on those properties whilst they sat empty for such a long period of time.
Buying land is even more risky as you do not have a property on it to bring you a regular income. You would either have to hang onto the land until such time as prices go up – which could be many years away – or you could build on the land and hopefully find tenants to bring you an income. However, I know people who own sections around the world and they are having great difficulty selling them right now. In NZ, I know of a couple who have reduced their section by 50% and they still cannot find a buyer. I see this happening around the world. Land, unless you are using it for yourself, is largely unproductive and does not bring you an income. So unless you are using it yourself e. g. to grow vegetables, for farming, livestock and you have a business that brings you an income from your land, then it is not the best investment during a downturn economy.
– If you are having trouble making your mortgage payments try to negotiate a better deal with your bank
– consider downsizing in order to reduce your debt
– don’t take out too much debt and make sure you have plenty of buffer funds
– If you rent – you are flexible, you can move quickly and you will be able to pick up the bargains at a later date
– If you are buying, try to pay cash for the property
– If you are an investor, this is not the best time to be buying – rental yields are low and large future capital gains may be several years away
Barbara Goldsmith, MBA, CeFA, Cergi, CeMAP, is a professional financial adviser. She has run her own property investment property company in the uk for several years before moving to NZ three years ago. She advises people and businesses around the world.