The Perils of Real Estate Investing

The Perils of Real Estate Investment Real estate has appreciated, 12.4% annually between 2001 and 2006 Hazards of Investing in Housing 15% GDP • Housing accounts for about 15% of gross domestic product (GDP) in a typical year. • More than 70 million Americans own their own home. - U.S. home ownership in 2006 reached a record high of 68%. = 10 million Housing Trends •..... ..... •....•....•.. THE GOOD THE BAD Foreclosures A home or property that has been repossessed by the bank or mortgage company because the previous owners could not make their payments. Sometimes, especially at auctions, foreclosures are sold "site unseen." Property may require many fixer upper projects. The home is sold or auctioned at a price considerably lower than its market value. Sometimes the house is worth lesser than the amount of money owed. If there is a lien on the property such as unpaid property taxes, the new owner may be expected by the state or county to pay these fees. You can get a great property a great price. House Flipping An investor will buy a rundown or foreclosed home, renovate and remodel, and then sell the house for a considerable profit. A high-risk endeavor. - Cost of renovations, mortgage and time ends up costing more than your eventual profit margin. Frequently, these homes need a lot of work. Know if you can afford the property in advance. - You'll need to be able to pay the bank, the contractor, landscaper, and real estate agent. Sometimes investors bankroll two or three times what they originally put into the property. Flipped homes, usually several years old, often have unanticipated problems such as foundation cracks, termites or mold. The investor usually has to pay the buyer and seller realtor commission. Flipping a home to0 quickly may result in a tax audit. - If the profit from a house flip does not immediately roll into a similar investment, your profit may be subject to a capital gains tax. There is great potential for learning how real estate works. Buying a Newly Constructed Home Everything is still shiny and in top-notch shape. New homes cost more. New homes are typically larger than existing homes. Contractors allow future owners to customize many amenities. New homes usually appreciate faster than existing homes. The finishing touches, such as the landscaping and basements, are usually left unfinished. Interest Only Loans With an interest only loan, you only pay the interest on your home for the first 5, 10 or 15 years of the loan. Payments are significantly lower in the first few years of ownership. Your payments are 100% tax deductible for the term of your interest payment. 100% There is the possibility of getting a return on your investment. Your house payment could double once you start paying the principal. If you are able to sell the home within your interest period, usually 5 or 10 years, and the home has appreciated. You could owe more than the home is worth if your home doesn't appreciate or the market levels out. Reverse Mortgages • Only available to seniors over the age of 62 and they have to have their home completely paid off. • The mortgage company will assess the house and pay you what it is worth in payments, a lump sum or credit. • You do not have to pay it back as long as you continue to live in the home. No monthly payments to a bank or mortgage company. Only available to the elderly. You don't need an income to qualify. As the equity in the home decreases, the debt increases. The loan must be paid in full when the last borrower dies, sells the home or moves. The homeowner retains full ownership of the property and can stay in the home as long as they want. Receiving money from the home may have tax consequences and may affect eligibility for federal or state programs. The Risks of Rental Property Disadvantages of Investing in a Rental Property You take on the responsibilities and challenges of a landlord: • Rental units need repair – sometimes on an emergency basis. • Dealing with tenants can be challenging, especially if they don't pay their rent on time and cash flow is tight. • Salary of a property manager is an added cost. It may be difficult and costly to sell the property later: • Real estate can take time to sell, depending on market conditions. • It can also be costly to sell due to real estate and legal fees. It may be difficult to finance the purchase: • You must have a down payment of at least 20% when you buy a second property. • You may need a mortgage. • You will have high monthly expenses to cover when you own a building. A Closer Look at Commercial Property U.S. remained as the top choice of most global commercial real estate investors in 2012. 13 billion sq. ft of industrial property $5 trillion 4.4 million approximate worth of U.S. commercial real estate hotel rooms 4 billion sq. ft. 33 million sq. ft of office space of rental apartment space 9.5 billion sq. ft of shopping center space Sources: http://money.cnn.com/galleries/2007/real_estate/0704/gallery.stocks_v_realestate.moneymag/index.html http://www.rer.org/Media/Statistics_About_the_Real_Estate_Industry.aspx http://online-real-estate-sites-review.toptenreviews.com/real-estate-trends.html http://www.getsmarteraboutmoney.ca/en/managing-your-money/investing/real-estate/Pages/investing-in-a-rental-property-the-pros-and-cons.aspx#.UTBVxTBHKds http://www.reuters.com/article/2012/01/01/us-commercialproperty-survey-idUSTRE80002P20120101 http://realestate.about.com/od/realestateinvesting/p/reits_advantage.htm http://www.forbes.com/sites/investor/2012/06/01/is-it-safe-to-return-to-real-estate-investing/ al MVP MORTGAGE Brought to you by: