Tag: real estate

Focus on what you can control (housing market edition)

I’m a Realtor in Northeast Ohio, and just like so many places in the country, there are not many homes listed for sale right now, yet there are a lot of people looking to buy a home.

In the real estate industry, we call this a sellers market because there is such low housing inventory.

In economics, they call this supply and demand. There is too little supply (houses for sale) and too great a demand (buyers).

I hear people complain all the time about “no homes” being for sale or that the ones that are on the market are too expensive. While this is true to a certain degree, it’s the reality we face and that we cannot change.

Stoicism teaches us to focus on what we can control (our actions) as opposed to what is outside of our control (our surrounding environment/the housing market/other people’s actions). So in this case, as a buyer, what can you control? Luckily for you, I’ve come up with a list to share…

– Have you been pre-approved from a reputable lender? If not, you could put extra stress on yourself by trying to get this done prior to an offer deadline. Many sellers and their listing agents are asking for pre-approval letters or proof of funds (if it’s a cash deal) to be submitted with an offer to even be considered. They want to make sure that the buyer they choose to purchase their home actually has the ability to do so! Getting a pre-approval letter from a reputable lender will help reassure them that you (and that lender) can actually close.

– Do you have the rest of your financial picture together? Your lender will check your credit score, debt-to-income ratio, how much you have saved, etc. But once they’ve done that, you need to do your part and not make any big changes (unless they are adding to your net worth and/or increasing your income). Don’t open up another line of credit. Don’t purchase furniture for the new house or buy/lease a new car. Before making any sort of big purchase, consult with your lender. Also, be aware that there are costs to buy a house. This includes your home inspections and appraisal before you buy the home as well as your down payment, lender fees, and title fees at closing.

– Do you have a clear idea of what you want in your next home? You should have a must have list, a nice-to-have list, and a dealbreaker list. Basic things on this list are the amounts of bedrooms, bathrooms, square footage (sometimes), garage info (attached versus detached vs none, and how many cars can you fit in there), if you’re ok with an HOA, if you want/need a fence, a basement, etc.

– Have you connected with a Realtor? A local expert can tell you if your wants/needs are realistic in that area and within your budget. They can also help you understand what it takes to have your offer accepted in today’s market. Lastly, if you share with them what you’re looking for, they can set you up to receive email alerts anytime a property that meets your criteria hits the market.

– Are you prepared to act quickly on the right house? If you’re in a seller’s market and you find a great house – priced right, fits your needs, in the right location, etc – are you prepared to act? If not, it might be too late. Sometimes, speed wins…the first person to make an offer has the advantage.

Using cash or using debt?

Are you a “cash” only person (like Dave Ramsey) or do you prefer to utilize debt on your behalf?

Honestly, I see the pros and cons to both sides. Being more financially risk averse/conservative, I get the appeal of only using “cash” (or, even if I’m putting it on a debit/credit card, only buying what I can afford to pay at that very moment). It’s a safer position from the standpoint that you aren’t going to get yourself into massive debt. This strategy makes a ton of sense for those trying to minimize spending on things they don’t need (mostly consumer products that contribute to lifestyle creep).

But if you leverage debt to buy assets (like real estate), where someone else is paying the loan down for you, you can scale much more quickly.

Imagine wanting to buy a rental property. Let’s say you’re looking to buy a single family home for $120,000. If you have to pay cash for it, it will take you a long time to save up $120k. Even if you’re investing it, unless it’s in a self-directed IRA, when you pull your money out to purchase the property you’ll get hit with taxes. But if you only had to save up $30k (for a 25% down payment on an investment property) or even $4,200 (for a 3.5% FHA loan, where you have to live in the property for at least one year), you can get started much sooner.

Leverage works both ways. It can help propel you to success or drive you into the ground. But as long as you’re taking on appropriate risks (preferably starting small unless you have a ton of experience and expertise in what you’re investing in), you can build wealth at a greater pace by leveraging debt as opposed to paying all “cash” for everything.

What are your thoughts/how do you prefer to invest?

Thinking about diversification

Does diversification really make sense? I used to think, of course it makes sense! When you diversify, you are spreading out (aka minimizing) your potential risk. But you’re also minimizing your potential reward. So now, my thinking is…maybe. I think it depends on your level of knowledge in what you’re investing in.

Diversification for the novice investor can be thought of as risk mitigation, but for the expert in their field, instead of putting all of their eggs in the basket they know best, they would be putting some eggs in that basket and some in other baskets which they have limited information/knowledge on how to properly optimize their return on investment. An analogy would be to consider a generalist versus a specialist. A generalist might be a jack of all trades, but a master of none, just as diversifying your portfolio makes you “good” in several areas, but not excellent in any. This is because you have spread yourself too thin to truly become an expert in one area.

For the novice investor (which I am, so no judgement is being passed here), I think diversification makes sense. But if you are an expert in your field and you know something better than 99% of the population, why would you reduce your investment where you have an informational advantage? Does it really make sense to invest in things that you don’t know as well just so you are diversified?

Does a top-tier athlete try to go pro in multiple sports or do they eventually select one and try to be the best at that? When you are starting a business, will you get as far by trying to do a little bit of everything and serving every type of client or does it make sense to niche down and become the “go-to” person/business for one specific type of client? That’s where the saying comes from, “when everyone is your customer, nobody is.” You don’t differentiate yourself from your competitors who have either become the experts in their field or who have the name brand recognition and can afford to spread their resources thin.

On what it takes to sell…

There are three things you need to consider when selling. They are:

1. The right PRICE

2. Enough EXPOSURE

3. Good APPEAL

You can sell anything if any single one of those things is convincing enough for the buyer. But, you can sell it quickly and even get into a “bidding war” from the buyers if you get multiple of those items right.

For example, if you offer to sell a $300,000 house for $100,000, you’ll be able to sell it immediately. The price is so good that it can overcome the possible lack of exposure or appeal.

The opposite is true too. If you price a $300,000 home for $400,000, it doesn’t matter if you get a lot of interest in the house and it looks nice. If one thing sticks out too much (good or bad), it will help or hinder your ability to sell it accordingly.

That’s why you need to focus on moving any of these three items in your favor as much as possible. Even if the house is priced higher than it should be, if you get enough eyes on it, you still might sell it just due to sheer volume of people who see it. Or, from the appealing aspect of it, if a house is beautifully staged or you can help people envision living a happier/better life there, they will be more willing to buy it. If it is appealing enough, they may be willing to pay more than market value because it is promising them intrinsic value.

When listing a home, the sellers and I come up with the price together. Yes, they’ll mostly rely on my research and opinion for what the market value is, but ultimately they get to decide what we list the home for (the asking price).

The exposure is solely up to me. The sellers are paying me to sell their home, and with that comes the responsibility for me to get as many eyes on it as possible. The sellers can help by spreading word to their family/friends/co-workers and posting on social media, but really, it’s my job to get the word out to as many people as possible.

Lastly, the appeal is mostly up to the sellers. I can make suggestions on what to keep/remove from their home, how to stage the home, what needs more cleaning and what updates need to be done, but it’s up to them to actually do those things. If they have a messy house or if potential buyers leave feeling like they need to immediately wash their hands, the sellers just hurt their chances to sell.

These are the three basic items we need to factor in when thinking of selling anything. There are many other elements involved in selling, but if we get these three things right, we will have the best chance to sell that item quickly and profitably.

Financial freedom through real estate investing

Why I believe in using real estate to gain financial independence.

1. Passive appreciation. Historically, housing prices go up. There have only been a few exceptions to this case (such as when the housing market crashed in ‘08), but with time, the price always comes back.

2. Forced appreciation. Most people look to buy homes for themselves and want something move-in ready. But if you’re capable of renovating/rehabbing a home, you can invest money into a house and get a great return on your investment when you go to either sell it or refinance it (increasing your equity or putting more cash in your pocket).

3. Loan pay down. Where else can you buy a $100,000 property for $20,000 and have someone pay the balance for you? That’s what happens when you get a loan from the bank and the tenants pay off the loan for you. And that’s not even getting into more advanced strategies like the BRRRR method (where you buy a fixer upper, renovate it, rent it out for top dollar, refinance it – pulling out all of the money you had in the deal, and repeat the process). In theory, you could just keep recycling the same $20,000 to build your rental property portfolio.

4. Tax advantages. One of the biggest real estate tax benefits available for investors is in the form of deductions. These tax write-offs, which are generally geared towards rental properties, will include costs associated with mortgage interest, property tax, operating expenses, depreciation, and repairs.

5. Diversify your portfolio. Why keep all of your money invested in the stock market – something which you have no control over? I invest in the stock market, and I think it is important that you do too, but why keep all of your eggs in one basket? Even by investing in different sectors (energy, technology, medical, etc), different-sized funds (small cap, large cap), investing in domestic or foreign companies, etc., you still have everything in stocks. In addition being investing in index funds/mutual funds, I would want to truly diversify my total portfolio by buying properties at a great price and having them provide consistent monthly cash flow.