Would you like to own investment property in areas of the country that have not yet experienced the kind of price inflation that has made California real estate so expensive? It’s not a question of whether or not California real estate will appreciate in the future once the current multi-year correction is over. California real estate will always respond to forces of supply and demand and so will likely appreciate quite nicely in the future. It is a question of the affordability of real estate. As an investor your goal should be to have your money working for you in markets that are affordable and safe and secure and appreciating over the long haul. That certainly is true of multiple regional markets in the US that have good rental demand and good employment prospects for tenants. While some of these regions are inside California there are many others that are outside of California.
In this buyer’s market it is a good time to make your moves to invest. Builders are eager to move their brand new properties and work with you to offer an attractive investment opportunity. There are savvy investment networks that have emerged that help you do the research and make the investment decisions appropriate for your needs.
Here’s a strategy for a working couple in their 50’s who have owned their home in the Bay Area for years and have substantial equity accumulated. They have paid off their mortgage or almost paid it off and since the home is now worth seven figures they are sitting on top of substantial equity. Dave Andrews, author of Missed Fortune 101 suggests that the value of the home is the same whether or not there is a mortgage on it. That really does seem to be true. The value of a home is more based on comparables in the neighborhood. So is it smart to leave the equity in the home by paying off the mortgage and owning the home free and clear or is it smarter to position yourself to be able to tap into the equity of the home? Of course, the answer depends on your personal financial situation and your future goals.
Let’s digress for a minute to note that “tapping” the equity of the home means doing something like refinancing a full first mortgage or taking out a HELOC (home equity line of credit). It is possible that even in this new market of higher lending standards homeowners with one or two good jobs in the household can tap that equity on good interest rate terms. Most people in their 50’s or 60’s would not want to incur another 30 year mortgage obligation first mortgage and so they think a HELOC that has minimal upfront cost, but higher interest rate is better, since HELOCs are limited in the percentage of the home equity that can be tapped typically to 25% and are designed to be paid off in 10-15 years. There is a new home finance tool that is designed to be a ”power tool” that enables tapping up to 80% of equity and is also designed to be paid off in 10-15 years. It is the Home Ownership Accelerator. www.cmghome.com Keep this in mind as you read the rest of this blog.
The FED is expected to continue lowering interest rates to fend off or reduce the effect of a recession. The European Central Banks are expected to follow suit. So fixed and variable mortgage rates are expected to trend downwards in 2008. Homeowner investors are using the Home Ownership Accelerator to refinance their mortgage at these anticipated low rates. The HOA enables homeowners who are savers to pay off their home loan in a short time, since it treats the daily balance of the homeowner’s accumulated bank deposits as reduction in the home equity line of credit. These funds are compounded daily instead of monthly like a regular mortgage. Their bank deposits work hard for them in the HOA account and are so beneficial that the homeowners are motivated to transfer surplus funds from CD’s and money market funds into the HOA . This further reduces the amunt borrowed and lowers interest expense on the HOA. The working couple can thus pay off the new home loan quickly AND use the equity freed up from the refinance to invest in their investment property portfolio. With the HOA they do not have to draw more than they need from their home equity. They have access to 80% of their home equity, but do not need to draw on it until their investment needs require. So their cost of capital is minimal.
For homeowners who have the bulk of their child rearing costs behind them and who are now focusing on catching up with their investment plan, aiming for retirement in 10-15 years, this is a good time to catch up. Prices of investment properties are lower in this buyer’s market and interest rates are lower to fight recession. Take advantage of builders’ needs to move their newly completed homes. Be selective and invest only in areas that have solid rental demand. Use the latest finance tools to help you make good decisions and manage your investments. Work with property managers in the destination locations to help ensure high occupancy of your rental properties.
I am working with investors who are actively pursuing the investment strategy described above and will be blogging on what we are learning in the process. Here are a couple of investment clubs focusing on out-of-state investing. Conferwithus.com ICGRE.com
