Christine Benz: Hi, I'm Christine Benz for Morningstar.com.
Although the property market has recently taken a hit, investors looking for income through real estate may find a buying opportunity in the current environment.
Here to discuss tips for residential real estate buyers is Ilyce Glink. She is an author, a blogger, and a real estate expert.
Ilyce, thanks so much for being here.
Ilyce Glink: Nice to be here, Christine.
Benz: So, Ilyce, your book has a lot of tips for people who are looking at residential real estate for current income. Can you discuss some of the key tips that you think are important to know before getting into this market?
Glink: Well, first of all, a lot of investors have lost a lot of money. Everybody thought that home prices were just going to keep going up at 25% a year. We see that all the time in the equity market, but in fact, we've seen home prices fall, home values fall 30% to 50% depending on where you live and in some parts of the country, foreclosures are going for $0.10 and $0.20 on the dollar.
For those of you who have been sitting out there and thinking, I should be a real estate investor, it's true. Now is a great time to do that and jump in because there are plenty of houses for sale and plenty of deals to be had.
Benz: So much better to do so now than five years ago when everyone was flocking to this market?
Glink: You know, I hear from people all day long, both homeowners and real estate investors who are simply crying as they've given away millions of dollars worth of equity, which has evaporated, and they are giving these houses back to the landlords even when they have four-unit properties, six-, eight-, 10-unit buildings. They are just going back to the lenders because they simply can't make the payments on it. They are not getting tenants, and they are not able to get the appreciation and the flip and fix, or fix and flip kind of thing that they were looking to do. So being an investor here, it's a little bit scary, but I always feel that that's a good time to step out, but you have to be thoughtful as well, and so in the book Buy, Close, Move In! I talk about some of the ways to evaluate different property.
I think, it's very important that you buy in an area you know. I mean, I live in Chicago. I spend a lot of time in Atlanta. I'm not in Las Vegas more than once a year for conference, so why would I buy investment property there even though property prices are down 60%, 70% in value. But if I was a snowbird, and I lived part time in the north and part time in say Arizona, I might be familiar enough with Arizona to buy there and take advantage of some of those property prices.
Likewise, same thing about Detroit; it's an area where they have seen homes selling for $6,000 apiece. I mean, three-bedroom brick homes. But if you don't live there and don't know those neighborhoods, you could be walking into a trap. So really understand where you're buying.
Next step is what are you buying? Are you buying a single-family house? Are you buying a condo? Are you buying townhomes? Are you buying a four-unit building? Are you buying a 10-unit building? What's the strategy for it? Have you looked at how much people get for rent in that area? How easy is it to rent? What kind of work does the property need?
Big surprise for many people buying foreclosures today is that the people who lived there have stripped the property. Seriously, they've taken out the gutters. They've taken out the stoves. There are no sinks. There are no toilets. You walk in, and basically, it's a gut renovation, and that can be just frightfully expensive.
And then I would say to you the next question is, what's your budget? Because it's not just only the cost to purchase the property. There's going to be work that you need to do. You're going to have a time when you're paying the mortgage, but you don't have a tenant. You're going to have to get a tenant in there, so there is advertising cost. So you really have to sit down and make out a budget figuring out what the costs are going to be, and how does that factor into your return?
Now that said, I know people who are buying property for $100,000 in Atlanta, fabulous school districts. There are big houses, three and four bedrooms, in decent shape. They are spending $100,000, $120,000. They are renting them out for $1,000 to $1,500 a month. It's cash-flow positive from the get-go, so if you're thoughtful about it, careful about the money, you can make some money here.
Benz: So a related question, though, is: This is not a liquid asset, we've all learned, right. So what role does this play in an overall portfolio. How much wealth do you need to have in more liquid assets like stocks and bonds before you can consider this sort of thing?
Glink: I think, there are separate pools of investment resources, let's say. So you've got your retirement funds, and a lot of people are taking IRAs in retirement and they are really not happy with the kind of returns that they are seeing in the stock market. '09 aside, a lot of people have not seen their portfolios come back to where they were, or anywhere close to it. And so I think what you're seeing is people take that money, roll it into an IRA, self-directed IRA, and then they are using those funds to buy investment real estate, and you really have to be cautious here because you're talking about your retirement dollars. So if you understand this market, it becomes like a second business for you. It's the business you're going to do while you're in retirement. That's an investment that's a little different than just retirement funds that you're going to live off of.
Glink: Then also if you're younger and you're looking to augment income or develop a retirement business for 10 or 20 years down the line, you may be able to set aside money, separate from the 401(k) type money you're putting away, the qualified retirement money--separate money that you're going to invest as a weekend or a second business for you, and maybe dedicate that income to say college tuition or to building that retirement home somewhere in a community, or helping out some way with the household income or maybe this is a job that the spouse who stayed home with the kids is now going to take on to bring more money back into the family. So you really have to do a little financial planning and figure out what you have.
Now for many people, financial planners will say, you should never really have more than say a quarter of your total net worth in real estate, and that includes the house you live in. For many people, that will only be the house you live in, and then you have to decide if you went to put half of you money in real estate, which, as you say is not a liquid asset. You also have to see whether you're going to buy one property, or two dozen properties. You got two dozen properties, and you are managing the income from that, it's a very different situation then say one single family home that everything is riding on. So, I think it requires a little bit of thought and planning, and I do talk about that in my book.
Benz: So, you got to do your homework on the property and where it's located. You've got to do the math to make sure that that adds up for you. And you've also got to do some planning. What are some resources that you would direct people to if they are navigating this whole situation and trying to determine whether residential real estate makes sense as part of their portfolios?
Glink: Well, the first thing I would say is build your own team. The best kind of resources that you can have are somebody to help you run the numbers, an accountant, who actually has other clients and customers who do this. You want somebody who knows all the ins and outs for deductibility, when it comes to investment property, and it differs state by state in some cases.
You are going to want a real estate lawyer, because even in states where they don't use real estate lawyers to close house deals, you want one if you are an investor. There are different concerns here.
You're going to need somebody who is an insurance agent, who can help you with the insurance liability issues, and there will be several.
You're also going to want to have – let's see, you've got tax, you've got lawyer, you've got insurers, home inspector, real estate agent. There is really about a half a dozen different people, professionals, you are going to want to have in your circle, network with them, and then invite them all to your house for a barbeque or a dinner, something where they can get to know you better on a personal side and what your goals are, and then also talk to each other so that they are working in concert instead of butting heads and coming against each other.
Now, online, I think there are some wonderful resources. There is an organization I'm involved with called RealtyJoin, which is a social networking site for the whole real estate industry. It's free to join, and basically there you connect with all these different professionals in your area and other areas, and you can learn all about real estate investing.
I think, it's also important to look at your local real estate investors association, also known as REIA. They have a national, there is also locals in every state. Cities have them. They are relatively inexpensive to join, and then you can hear real estate investors who come and talk about their experiences. You are networking with other real estate investors. I think, those are some very solid places to start.
Benz: Okay. Last but not least, I just wanted to touch on areas that you think are really hot within this space. So areas that you think might be especially fruitful for investors going forward?
Glink: Well, short sales and foreclosures are sort of a natural place to start, and there are real estate agents, and people don't know this, there are real estate agents who now specialize in foreclosures and/or short sales, and it's important to work with them, and the reason it is, is that these agents are the first line of defense for the REO sellers, the lenders who have REO, real estate owned departments. And that's where their foreclosures goes, and then they hire real estate agents to represents those listings. You want to be right in on it, and so if you become connected to a couple of different real estate agents or one agent who specializes in your area, that's how you're going to get a great deal, that's why it's so important.
Now, if you're interested in HUD homes, HUDs are FHA loans that go bad, so they become foreclosures, and they become known as HUD homes. You can only buy HUD homes online, but there are agents who specialize in HUD homes, who are certified by HUD, and HUD has just in the last few weeks launched a whole new approach to selling HUD homes, and there are tens of thousands of them across the country. There is no shortage.
So you would to go hudhomestore.com and pick what state you're interested in, what city you're interested in. You can search what homes have sold and for what prices, what agents represent the homes that are – whose bids are selected. It's sort of a modified auction the way that they do it. Very, very good way to get an incredible price on a HUD home. And in fact, in some cases for the homes that have been on the longest, it's like Loehmann's or one of those discount retail outlets where every week the price keeps going down, and down, and down, so they want you to come back and just wait for the price to hit the point that you think it's worthwhile.
The other thing with HUD homes is they give you an inspection report right up front online, so you know exactly what you are getting into.
Benz: Okay. Well, thanks Ilyce for sharing your insights. I appreciate it.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.