Real Estate Investing

For the longest time, I didn’t get that.  But the brutality of the housing market these last two years should be enough for home owners to have that realization sink in.  Unless you’re an investor who buys, flips, rents homes for a living … when you buy a house, do so as a home not an investment.

“But Kathy!” you might argue “when we find the place to live, shouldn’t we be looking at resale value?”

Yes, BUT that shouldn’t be your only factor.  Because resale value may or may not hold up in one year, five years, ten years.  The neighborhood may go downhill, the economy may boom or bust, the world may end.  You can’t predict what the future will hold.  You can make your educated decision to buy based on the pattern of the past and what’s happening in the present, but don’t bank on the future.

Buy based on where you will be happiest raising your children, watering your flowers, taking your dog for a walk, letting your cat sharpen her claws on the privacy fence, where the kitchen is biggest for Thanksgiving meals, where you feel safe.  Your house is not an investment.  It is a home.

But enough of the squishy talk.  Let’s look at it in black and white numbers.  Generation X Finance gets low down and dirty on what a house actually costs you - when you buy AND when you sell.

All said and done, when you factor in the down payment plus 10 years worth of mortgage payments, you’ve invested over $146,000 into your home. When you subtract the outstanding mortgage balance with the sale proceeds you’re left with just a $22,684 return. That comes out to only a 15.5% cumulative return over 10 years, or just a percent or two average annual return on your total investment. And you thought savings account and CD rates were bad… Here you just had your home increase in value by 50% in ten years that only nets you a 15.5% real return.

This may be disturbing to people, but it’s reality.  If after you sell your home you DO make a profit, then fantastic!  Just don’t be lulled into thinking that you will automatically make money when you sell.  Go into home ownership for the right reasons - shelter and enjoyment.

Photo by ellie via Flickr Creative Commons.

I just read on a Wesabe message about a guy who bought a half acre of land 1000 yards from the Caribbean Sea using a credit card.  I’m only linking here to the Wesabe site because it says (and emphasis is mine to respect privacy rules), 

Wesabe is unique because it combines easy-to-use budgeting tools with a thriving community of smart, supportive people, anonymously sharing ideas and advice with each other to help everyone get more value for their money. And, your information stays private and completely secure, so you can take advantage of Wesabe’s many benefits without worry.

The commenters were very insightful urging the buyer caution in dealing with local customs, laws, and regulations, along with the challenges of local builders and codes.  However if the buyer did purchase in the Dominican Republic, it’s a place I’ve heard is FANTASTIC for people considering investing or retiring.

Homes are incredibly affordable according to this article which sourced Realtor Juan Perdomo of Century 21/Juan Perdomo Real Estate Company,

… along the north shore, prices of well-built residences are highest in Sosúa (approximately $15 per square foot), up to two-thirds less in Cabarete ($4 to $5 per square foot), and much less the further away you get ($2 to $2.50 per square foot). 

You can buy a magnificent ocean-view house in Sosua measuring 3,766 square feet, with three bedrooms and four bathrooms for $340,000. The property sits on 1.7 acres of land with a swimming pool. Or, how about this—a seven bedroom/six bathroom home with 5,380 square feet, on 1.11 acres of land with a swimming pool, waterfall, and Jacuzzi for $330,000—it was originally listed for $550,000. That’s on the high end of the property scale. $179,000 will buy you a two-bed/two-bath house in a good location, with a swimming pool. Or an apartment in a secure complex with swimming pool for $43,500.

The article went on to explain that foreigners have the same right to buy and own homes as natives to the Dominican Republic, as long as the Title Registry Offices have a record of all purchases made by foreigners.  In the DR, buyers must first come to a purchase agreement verbally and then the verbal agreement is written.  In dealing with any foreign purchase (or domestic, for that matter), hiring a good honest attorney is key to having a successful transaction.  In Tennessee, for example, our escrow offices - or title companies - must have an attorney on staff to oversee all transactions.

This article offers a huge amount of great information if you’re considering purchasing a home in the Dominican Republic.  At the end, it also names reliable builders, attorneys, real estate agents, schools, and more.

This home is listed at $286,000 and has an in-ground pool, 5 bedrooms, 3 baths and over 2300 square feet.

Here’s one for $168,000 and a few minutes walk to the beach.  It has 1600 square feet, 3 bedrooms, and 2 baths.

There is a huge disparity between the wealthy and the poor on the island.  I don’t know how this would affect a purchase and living in the area, but it’s something to note.  I could see myself living in the sunshine of this beautiful island.

Photos from here.

While we all know that a bear market is not a good thing, you get the feeling today that it was the bull that just came up from behind you and horned you in the rear-end.  With Wall Street giant Lehman Brothers filing for bankruptcy, the “Lynch”-pin Merrill Lynch sale to Bank of America, and giant insurer AIG gasping “ARG” (like a caveman, not a pirate), then you know the piper is now being paid from the overly enthusiastic investing of the companies these last few years.

The Wall Street Journal has a solid summary of what’s happening this Black Monday.  And let me just say I hope we don’t see stock market investors and other money managers begin to leap out of windows like they did during the Great Depression.

Who’s to blame?  Fingers are being pointed directly at real estate…. well on real estate investing, anyway.

Lehman Brothers, a 158-year-old bank burdened by $60 billion in soured real-estate holdings, filed for federal bankruptcy protection in U.S. Bankruptcy Court after attempts to rescue firm failed.  … The demise of the independent Wall Street institutions comes six months after the collapse of Bear Stearns and 14 months after the beginning of the credit crisis, sparked by bad mortgage finance and real estate investments.

Ouch that.

I won’t argue that these investment firms took too many risky loans.  But my question comes from a different angle and I’m talking bigger picture here.  As firms like Lehman Brothers fall, what happens to the states that have money invested in them?  I worked for an organization once upon a time that served state finance officials and I can tell you that states invested BILLIONS of dollars in different companies throughout the world.  States take their extra funds and investment both in long- and short-term products.  Because if two million dollars can make just $2000 overnight, for example, why not?  It definitely serves the best interest of taxpayers. 

So I’m wondering how much state money is tied up in these financial giants.  In Florida, the State Insurance Pool has $400 million invested in Lehman Brothers.  Last week, they lost about $84 million.  If other states lose this kind of money, what kind of trickle down effect will that have on everyday people?  Will school funding be slashed more than it already is?  How about roads and bridges?  Programs to help the uninsured?  These giants could cause major quakes in state finances as they fall hard, but I’m hoping that most state treasurers and chief financial officers have invested with the wisdom of the word “DIVERSIFY” in mind.

Photo from NatGEO.