When the housing market turns around, a select group of individuals stands to make some significant cash. But it won’t come easy, and it won’t come without a cost.
Those making investments in the housing market might have to wait to reap the benefits from their purchases.
It’s a buyers’ market, and with a glut of foreclosed homes and short sales on the market, homes can be bought for lower-than-ever prices, and coupled with low interest rates, it’s a good time to buy. Some are riding out the wave of low prices in the hopes it will bring long-term benefits once the market turns around.
“Anyone not buying in this market should have their head examined,” said Don Prigge, branch manager at Crystal Lake’s Baird & Warner.
In the not too distant past, buying homes was viewed as a safe investment. And people were buying them up like candy. But not everyone should have. And now, not everyone can.
To invest in homes, flip them or use them as rental properties, it takes cash and it takes credit, things that elude many people. Many buyers are having difficulty obtaining loans or meeting higher down-payment requirements. But as Prigge puts it: “If you have cash, cash is king.”
Real estate agent Bryan Firth of Re/Max Unlimited Northwest was a retired police sergeant before he turned real estate into a full-time job. Firth first got into the game by buying homes about eight years ago. At the time, he paid a premium.
Now, he’s getting great deals on distressed properties – all of his homes are foreclosures and short sales. Some need extensive rehabilitation; others just need a little TLC.
“Now I’m getting really good deals; eight years ago, the purchases were a good deal for the time,” Firth said. “The price I’m purchasing them for now is so low. The rents are exceeding the mortgage by a considerable amount. ... The properties I purchased more than three years ago, I overpaid, and those properties are not cash flowing.”
Firth plans one day to sell the homes, of which he has about 25, either independently or with a partner. Like others investing the same way, Firth knows he can’t expect to turn a profit right away.
“If you can flip a property – good luck,” said financial adviser Allen Bronton at Wealth Preservers in Crystal Lake. “I think those days are over, and I don’t think they’re going to be here for a long time.”
There still are some risks involved with real estate as a long-term investment opportunity, Bronton said. From the start, investors need to objectively look at the property to see whether it will make money.
Not all properties are the same, and it’s important for investors to determine whether that fits their strategy and ask themselves whether they plan to rent it out or sell it outright.
“I would certainly advise buying real estate very carefully,” Bronton said. “It has to make sense from a cash-flow standpoint.”
If a property is mortgaged, investors should remember that they might have to pay up in between tenants. It’s recommended to have enough cash to cover the ups and downs of rental properties.
Being a landlord on so many properties comes with its own set of surprises each day, as Firth knows all too well. If things break, they must be fixed, and fixed fast.
“The repairs are constant,” he said.
Furthermore, when tenants don’t pay, Firth is forced to evict. He requires a credit check, proof of income, and referrals from previous landlords.
He’s seeing a lot more tenants who had homes foreclosed upon, and they oftentimes make good renters.
“Just because you’re foreclosed upon doesn’t mean you’re not going to pay your rent.”
Still, rents are increasing, and in some places, Prigge said, by double digits. With a fresh batch of renters, there are some landlords and property owners ready to cash in on this supply and demand.
“I’m the one taking all the risk. I’m investing my own money to purchase these homes and taking a huge risk,” he said.
Without a crystal ball, it’s difficult to say when the market will turn around. Until then, mortgaged buyers might have to wait some time to sell a home and thus see a profit.
“You don’t have to be wealthy. Just don’t have the expectation that you’re going to be making a ton of money off these anytime soon,” Bronton said.