The Right Income or Investment Property

Today’s Real Estate market is loaded with foreclosed properties that sold for $600,000 or so three years ago and the property value is now in the low $300,000s.  The question is, are they good investment vehicles?  That depends on why you might want to purchase one.  If you or your kids are going to live in the home and you like the floor plan and location, it should be a good value.

The question you must ask is where is the investment potential going to come from?  Please see 707Realty.com Investment Page for, the Big 4 of Investing. 

If you are buying a property because it sold for $600,000 a few years ago and now the homes price is down to $325,000; you have to ask yourself what will make it go back up in value and how long will that take?  Depending on how you finance the property, the rent you collect may not cover the principle, interest, taxes and insurance payment.  Now your investment property is a negative cash flow property; you must take money out of your own pocket to cover the short-fall.  Now the question is how long you can afford to keep making up the short-fall.  If the market takes 10 years to get back to where it was 3 years ago, you may find yourself rather far extended.  We call that “Staying Power,” can you stay long enough to see the profits you think you saw when you purchased it.  What happens if you lose your job, do you have the savings to carry it?

What actually drove the market that pushed the price of this property to $600,000?  The answer is simple:

Inexpensive mortgage money, given out to many, many people, some with questionable credit and incomes; all the while chasing a low inventory of properties. 

The question you now must ask yourself is:

“What will drive the market up this time?”

The days of cheap money are still here, but getting an easy loan are gone.  In my view this won’t be back for many years, if ever.  Investment property loans are even more problematic.  You must actually have a down payment, a good credit score, and a strong source of income. 

The streets don’t have long lines of these types of buyers.  Granted, there are properties being sold, mostly as a primary residence, that have multiple offers being generated on them.  However those are bottom end properties and the majority of these buyers are just squeaking-by to get a loan.  Evidence of this is the large number of FHA 3.5% down loans being used today.  Ask yourself this:

“Are these the people who are going to create enough pressure to push prices back up?”

It is questionable at best…

Before you buy “because prices are low,” have a real analysis of your investment done.  It is called an Internal Rate of Return Analysis.  It is free, it is in writing and you can take it to your tax advisor or accountant.  It is what sophisticated investors use to look at properties; why would you want to use anything less?