If you’ve been keeping track of the latest news on real estate, home prices, and the inventory of unsold houses you’re confused, encouraged, or perhaps dubious. For example, in Los Angeles, California the average house price is anticipated to drop yet another 7% during the second quarter of 2012 when compared to the second quarter of 2011. The median home price in the second quarter of 2011 was $343,000 according to a CNN report. So that would mean the second quarter 2012 median price should drop to around $319,000. Yet we continue to hear the tired old bromides, “Home prices have hit bottom” or “Home price correction has ended”.
The National Association of Realtors reported that the median home price in January fell 2% from December to $154,700. That’s the lowest price reading since November 2001, before the most powerful surge in home prices that led to the top of the housing bubble.
Making Money While Housing Conditions are Still Bleak
First as a Property Manager, you can be the visionary who helps your clients see the “break in the storm” and focuses their attention on the money-making opportunities that still exist. A colleague of mine who is the incredibly successful editor of The Palm Beach Letter recently wrote me an example of one way smart people are finding and owning rental properties that need good managers.
Here are his exact words which he wrote to me at the beginning of this year; “Please be open to what I’m about to propose. It is, as I said, the best way for anyone who isn’t wealthy to build new wealth now. Real estate, more than anything else – including stocks, bonds, and gold – has the capacity to give you a safe and comfortable financial future. In fact, my brother recently did just that for a friend of his, Suzie. Suzie is about 50 years old. She has a good job but a bad credit rating, and she has only $10,000 in savings. My brother Justin found Suzie a very nice property, just steps from the beach. (This is prime property in Florida.) It has two structures on it: a two-bedroom/one-bath house and a cottage. The property had appraised for more than $400,000 during the boom. My brother helped her get it for $195,000.”
To buy this his brother made it work by getting Suzie a loan from the FHA (Federal Housing Association). What the FHA did was clever and impressive. First, it loaned her the money to cover the closing costs. Then it required a down payment of just $7,500! Her interest rate was fixed at 4.375% for 30 years. That means her principal and interest payment came out to about $1,000 a month. She also pays about $100 a month in mortgage insurance, $500 in monthly real estate taxes, and $200 in insurance. Add in $150 a month for maintenance, and her total monthly cost is about $2,000 a month.
He explained that Suzie also gets to deduct her payments of mortgage interest and real estate taxes. That brings her monthly cost down to about $1,700, which is about what she was already paying to rent a similar house. The bonus for her is that she gets $800 for the studio. That $800 is extra income for her. If she saves that money she could accumulate about $150,000 in less than 16 years. Extra income and saving it is the key to building wealth. “If real estate prices recover at just 3% a year over the next 15 years, the value of her house will grow to about $312,000. Since the principal on the mortgage by then will be about $100,000, Suzie’s equity in the property will have grown to about $212,000”, he reminded me.
Another point to remind your owner-clients is if they (like Suzie did) add a few hundred dollars each month to their mortgage payments they could pay their entire loans off in fewer years. At that point, their net worth would be increased, and they may look back and give their property managers some credit for suggesting it in the first place.