Currently, most financial news we hear seems to be bad news. Markets are down and most investments are not paying decent returns.
Talk of double or triple dip recessions are more common than per per view Kim Kardashian appearances at Las Vegas.
The cause of our double dip recession situation, as most know was greed. Greedy main street was tricked into taking loans that greedy mortgage brokers knew they could not pay. This debt was then sold like a bad used car for an enormous profit. In the end, the little guy is the one who lost the most.
However, among the doom and gloom is a hidden goldmine. A unique set of circumstances makes real estate a hot ticket for any investor looking for a safe, sustainable, fixed return. Those circumstances are: low interest rates, a pricing vacuum, a record inventory of foreclosures and a high demand for affordable housing.
Briefly, we will discuss each element and why it adds to the attraction of real estate as an investment.
Low rates:
With pressure on the Fed to help keep inflation in check, Bernake and company have stated their intent to keep rates as low as possible. As of today, it is not difficult to have a rate of 4.5% (if you have a 620 FICO score or higher).
Record foreclosures:
Due to the massive bubble burst, banks are foreclosing on toxic loans at an aggressive pace. As the inventory builds up, prices fall. The falling prices help perpetuate the pricing vacuum.
Pricing vacuum:
Historically, fall and winter see a slowdown in the real estate market. With fewer buyers, the ability to have highly favorable terms assists with keeping your acquisition costs low. Banks and private sellers are paying closing costs on behalf of buyers. Not every offer will have all of the buyers costs paid, however, with a little diligence; you can find sellers who will pay up to 4% of the buyers closing costs. For the right property, this means the buyer will not have to pay any money out of pocket for their own costs.
High ROI:
You can buy property for a deep fraction (some instances 50%) of what it was just a few years ago. If you look hard enough, right now, you can buy property with little or no money down and turn a decent profit.
The Demand for Affordable Housing:
For each home that is foreclosed, there is a need to find replacement housing. Because you cannot obtain a new loan for a period of 2-3 years with a foreclosure on you r credit report, the replacement housing needs to be a rental. Buying a property with a tenant in it already is always best. Occupied properties will have data that you can use to determine what your ROI will be. Additionally, with an occupied property you do not need to worry about vacancy issues.
For example:
Currently, in San Diego, you can buy a 1 bedroom condo with a total payment of $615.71 per month that is leased for $850.00 per month. This is purchasing the condo using a 30 year fixed conventional with 20% money down at a rate of 4.5% (today's prime is lower). This yields a profit of $234.29 per month or an ROI of 17.1% off of an investment that is less than a Scion or used Mercedes. This is not a bad return by anyone's metric.
Conversely, if you are active duty military stationed in San Diego, you can buy the same 1 bedroom condo with a total payment of $698.81 per month. Eventually, you will get out of the service, need a bigger home, etc.. When you move from this home, you can lease out that condo for current market rent of $850.00 per month. For this example, we will presume that the rental amount will not increase within the next 3 years and you move within that time frame. Purchasing this condo using a 30 year fixed VA loan with no money down at a rate of 4.5% (today's prime is lower), yields a profit of $151.19 per month or an ROI of 275% off of an investment of $450 (the cost of a VA appraisal). A 275% return is something you will never be offered on most any legitimate investment account.
In a long enough time line, real estate historically appreciates. Once the housing markets rise again, another level of profit comes from the ability to sell the property and either; tax defer the profits via a 1031 exchange, leverage the funds, or occupy the property and use the $250,000 / $500,000 capital gains exclusion.
Because of the returns proffered, the recent bubble has created vast investment opportunities for anyone looking for an alternative to devaluing and volatile stocks.
Talk of double or triple dip recessions are more common than per per view Kim Kardashian appearances at Las Vegas.
The cause of our double dip recession situation, as most know was greed. Greedy main street was tricked into taking loans that greedy mortgage brokers knew they could not pay. This debt was then sold like a bad used car for an enormous profit. In the end, the little guy is the one who lost the most.
However, among the doom and gloom is a hidden goldmine. A unique set of circumstances makes real estate a hot ticket for any investor looking for a safe, sustainable, fixed return. Those circumstances are: low interest rates, a pricing vacuum, a record inventory of foreclosures and a high demand for affordable housing.
Briefly, we will discuss each element and why it adds to the attraction of real estate as an investment.
Low rates:
With pressure on the Fed to help keep inflation in check, Bernake and company have stated their intent to keep rates as low as possible. As of today, it is not difficult to have a rate of 4.5% (if you have a 620 FICO score or higher).
Record foreclosures:
Due to the massive bubble burst, banks are foreclosing on toxic loans at an aggressive pace. As the inventory builds up, prices fall. The falling prices help perpetuate the pricing vacuum.
Pricing vacuum:
Historically, fall and winter see a slowdown in the real estate market. With fewer buyers, the ability to have highly favorable terms assists with keeping your acquisition costs low. Banks and private sellers are paying closing costs on behalf of buyers. Not every offer will have all of the buyers costs paid, however, with a little diligence; you can find sellers who will pay up to 4% of the buyers closing costs. For the right property, this means the buyer will not have to pay any money out of pocket for their own costs.
High ROI:
You can buy property for a deep fraction (some instances 50%) of what it was just a few years ago. If you look hard enough, right now, you can buy property with little or no money down and turn a decent profit.
The Demand for Affordable Housing:
For each home that is foreclosed, there is a need to find replacement housing. Because you cannot obtain a new loan for a period of 2-3 years with a foreclosure on you r credit report, the replacement housing needs to be a rental. Buying a property with a tenant in it already is always best. Occupied properties will have data that you can use to determine what your ROI will be. Additionally, with an occupied property you do not need to worry about vacancy issues.
For example:
Currently, in San Diego, you can buy a 1 bedroom condo with a total payment of $615.71 per month that is leased for $850.00 per month. This is purchasing the condo using a 30 year fixed conventional with 20% money down at a rate of 4.5% (today's prime is lower). This yields a profit of $234.29 per month or an ROI of 17.1% off of an investment that is less than a Scion or used Mercedes. This is not a bad return by anyone's metric.
Conversely, if you are active duty military stationed in San Diego, you can buy the same 1 bedroom condo with a total payment of $698.81 per month. Eventually, you will get out of the service, need a bigger home, etc.. When you move from this home, you can lease out that condo for current market rent of $850.00 per month. For this example, we will presume that the rental amount will not increase within the next 3 years and you move within that time frame. Purchasing this condo using a 30 year fixed VA loan with no money down at a rate of 4.5% (today's prime is lower), yields a profit of $151.19 per month or an ROI of 275% off of an investment of $450 (the cost of a VA appraisal). A 275% return is something you will never be offered on most any legitimate investment account.
In a long enough time line, real estate historically appreciates. Once the housing markets rise again, another level of profit comes from the ability to sell the property and either; tax defer the profits via a 1031 exchange, leverage the funds, or occupy the property and use the $250,000 / $500,000 capital gains exclusion.
Because of the returns proffered, the recent bubble has created vast investment opportunities for anyone looking for an alternative to devaluing and volatile stocks.
To apply for a VA loan, or other government insured mortgage, call or click VA Home Loan Centers today. To apply for a conventional home loan, call 888-573-4496 and ask to speak with a conventional specialist.
Philip D. Georgiades II is licensed by the California Department of Real Estate and is the Chief Operations Steward for VA Home Loan Centers.
Philip D. Georgiades II is licensed by the California Department of Real Estate and is the Chief Operations Steward for VA Home Loan Centers.
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