Today's Housing Strategy - Don't Get Burned Again!

So, how would I approach real estate today?

Well, I've made several references in prior blog posts to having a well thought-out housing strategy so I will expand upon things here for a full perspective.  It is so important to be thinking long-term when buying, owning or selling real estate these days yet many give that little thought.  You don't want to buy, sell or even own real estate just based on current market conditions (e.g., you buy just because someone tells you "it's a great time to buy" OR you sell because you think the market has peaked OR you own because "housing has been a sound long-term investment"). These are not valid reasons to be a principal to likely the highest valued asset you'll ever own in your lifetime! 

Further, don't let the National Association of Realtors or anyone else whom has a vested interest in your doing something to tell you "now's the time!"  Get their input but make such decisions based on your timeline not someone else's.  What I'm referring to is having a minimum of seven years but prefer a 10 year window on your life.  I know that sounds difficult given so many variables and unknowns let alone all the good and bad surprises that life throws at you.  However, anything less suggests there is too much uncertainty whether it be your relationship status, the security of your income, your family size, geographic preference, climate tolerance and so forth.  If you know you'll be finally relocating to be closer to family in a few years or can't stand the cold weather for the foreseeable future you better start considering your options about housing today not later. The possibility of renting rather than owning during transitionary periods should be considered.

Be it as it may but renting is not such a bad option when not knowing if you could tolerate another winter or "hang with your job" for another few years let alone another few months.  Don't make the mistake of buying just to own nor renting long-term when you know you'll want to live in the neighborhood for the foreseeable future.  In other words, so many personal life choices need to be taken into consideration before transacting homeownership at any level.  And, therefore with the "clearest" window into the future of your life, here are my top ten housing tips for long-term success in real estate for the new debt-ridden American landscape:

· Don't pre-pay any additional principal on any home or investment property mortgage if your interest rate is 4% or less.  Take full advantage of these incredibly low rates for the life of your loan.  If you have a 30 year loan term and in 5 years interest rates were to double (it's possible given the economic backdrop of this "recovery") that money you have saved on prepayments will earn more than the mortgage rate and you've got 25 more years that it could do so.  You must be able to save that money though or this provides no benefit whatsoever.  If you're a compulsive spender, better to force yourself to pay off debt than to try and save when all is lost on the next credit card bill that comes in the mail.

· Don't get into 10, 15 or even 20 year term mortgages get the full 30 year mortgage term almost regardless of the interest rate differential.  Having the ability to pay back debt with "cheaper" dollars down the road due to inflation or loss of purchasing power of the dollar will put a mortgagee in a better position not worse.  This kind of cheap debt is a good "diversification" that matters when the future is more cloudier than ever.

· Don't have but the bare minimum cash or equity in your home or investment property.  Again, a low interest rate loan below 4% today would surely qualify for low and be much better than cash.  Don't get a 2nd or an equity line of credit to access that equity either. Typically, you'll pay much higher interest rates and the term of the loan will be much shorter.  Lock-up as much cheap debt as possible on a 1st mortgage only but don't treat the market's rise as another opportunity to get cash out - stick to the original cost or current market value, whichever is lower, as to what can be financed.

· If going to buy with all cash to beat out other buyers then state your intention to do in the contract to have the best shot to lock-up the property.  Then finance the purchase if escrow time allows (do the financing in the background of the escrow transaction - you always have the option to close with cash should it not play out as hoped).  Ask the seller for a time extension too if needed, it doesn't hurt to ask.  Lastly, refinance your cash out of the property ASAP afterwards if close with cash...don't leave so many eggs in one basket!

· Look at your business and ask yourself if your business failed or your business income were to get hit as it did in the Great Recession or worse, what house could you afford to live in with the reduced income or replacement job you'd be comfortable securing.  Need to be sure you're living not just within your means but at an income level that can be easily shaved by 30 to 50%, if necessary.  Having a mortgage payment and other housing expenses treated as though you make half of your current annual income or combined annual income is not only great expense management but it allows for savings and emergency funds too.  The freedom from being "married" to your mortgage is also liberating as well.

· Don't sell because you just got back to breakeven on market value from what you paid for it and you never thought that would happen.  Sell because you don't foresee yourself living in that home for an appropriate amount of time to be comfortable about what a changing real estate market might do when you're ready to make a lifestyle change.  Each year, go through that mental exercise of how long you can stay in the home you're in now.  The lucky ones say forever and never sell.  Think strategically not emotionally!
 
· Live closer to your employer and don't buy if commuting more than 10 miles each way - suburban life works if your job is around the corner.  At a minimum, live close to a large employment center if at all possible and consider a very high cost of fuel when determining if a rural or suburban home is affordable versus a more urban property.

 

· Consider downsizing, rightsizing or upsizing well in advance of actually being there in real time.  If you know this now, then this is the best time to act not later in hopes for a "better" housing market or for the better opportunity.  Today's market is really good and only because of the low interest rate environment.  Maximize the opportunity today presents and look as far in the future as possible.  Heck, maybe look for and buy that retirement home you want in Arizona now and rent it out for awhile until you get there.

· Seek out and/or hold rental properties that have a cost-to-income ratio of less than 15 times current annual gross rental income.  Many rental properties don't warrant holding them as such as they provide very low if not negative returns on capital when factoring in all costs of maintaining the property and the "renter risk" of additional damage occurring unbeknownst to you until much later.  Market values fluctuate but rents are more constant.  Properties at the lower-end of the price range will generally be the better investments due to rent affordability.  Holding high-end homes seeking rents above $3,000 per month starts getting dicey in my mind regardless of your ability to afford the monthly shortfall.  Housing is much more speculative when doing this.  Sell that property and buy two yielding $1,500 per month in rent each.

· Don't buy because the market seems right, buy when you're right.  Too many folks see what others are doing and they want to follow the crowd.  America has been about "keeping up with the Joneses" since the end of WWII but today just might be different.  Try to follow your own lifestyle path and not that of your neighbor's - it pays to be different!  We all know many of those that used their homes as ATM's during the housing boom this past decade and lost their homes for being so reckless with their spending. 

 

Remember, having a strategy for whatever you're doing is the most important factor not whether you've got it perfectly market timed or not.  Housing is not about making money anymore or even buying at the "perfect time" but simply living the lifestyle you desire and can comfortably afford.  Homeownership is way overblown in this country and will become another example of the American Way diminished by poor governmental policies and short-sightedness.  And, yes, there is some self-interest and greed by so many others that taints housing as a stable long-term investment too not just government.  Just be sure you're on a solid "affordable" housing foundation and that's the best you can do.  Future housing prices are anybody's guess up or down including mine.  But following my tips should keep you from getting burned or at least not burned too badly going forward provided your initial housing time horizon is realistic.