“Buy low, sell high” is about the only investing advice you’ll ever need. For many investors, this means buying an asset when its value is low then waiting for the market to raise its value. If you’re like me, you’re not patient enough to wait for the market to do its thing: You’d rather have a little influence in how quickly, and by how much, that asset appreciates. This week’s show was all about using houses as investment vehicles—both as a primary residence and as investment properties.
I have spent dozens of shows discussing the economic and financial aspects of homeownership. For the vast majority of responsible individuals, there are no good reasons to rent instead of own. It just makes financial sense—especially with today’s low rates. For roughly what it costs to rent, you could be living in an appreciating asset that you’ll one day own and which can be turned into a cash-flowing property. But as with all investments, nobody should rush into homeownership without exercising caution and prudence.
The first thing to consider before purchasing a home is how much you can afford. Forget your dream home; you should only concern yourself with what your budget will allow. You need to consider not only the cost of the mortgage, but also taxes, insurance, utilities, and potential maintenance. Rather than visualizing your dream home, consider your current residence and think of things that would offer an improvement. Maybe an extra bedroom? A laundry room? A bigger kitchen or more spacious living room? These will be the qualities you look for when buying a home—not the wrap-around porch and Olympic swimming pool and ten acres of land that you see in your dreams.
Once you’ve found a home, you need to do your homework on it. You should consult with the assessor’s website for its ownership history. If there have been several owners over a short time, that raises questions. You should also pay for a home inspection and not be afraid to request fixes from the current owners. Going under contract and not getting an inspection is the most egregious error a person can make. You also need to consider the area the home is in and consider whether it’s a neighborhood that’s likely to appreciate, or whether it’s in decline. This could have severe implications ten or twenty years down the road.
That was advice for people looking to purchase a home to live in. If you’re more daring and are considering purchasing a home—or homes—for investments, there are further things to consider. The first is whether the home you’re looking at has qualities that make it a prime candidate for appreciation. It’s common today, and was especially common during the housing bubble, for investors to buy any old piece of junk and turn it into not-as-much-of-a-piece-of-junk. But it’s still a piece of junk. A coat of paint, hardwood floors, and new appliances don’t add $50,000 in value, but it’s common to see these as the only improvements a house flipper makes. They figure since the buyer won’t see the old pipes, cracked foundation, and old wiring, they don’t need to address them.
On the other hand, my mortgage company recently did a loan for woman who bought a flipped home, and the investor who sold it to her did an exemplary job flipping that house. He selected a home with obvious potential, completely renovated, made repairs, and finished the job with close attention to detail. He picked a house with a lot of potential value, rather than finding a severely distressed property and making it cosmetically appealing. This is the right way to do it. He legitimately added a substantial amount of value to the home.
This has only scratched the surface of this important topic. As always, I encourage you to check out the show in the archives for more details and a more thorough discussion. And stay tuned over the coming weeks as I come back to this and other topics. There’s no telling when the economy will improve, or when the housing market will be back in full swing, but when we finally turn that corner, you’ll be glad you tuned in.
To Flip or Not to Flip
To Buy or Not to Buy