Flip Thy House

House Flipping Advice and Home Renovation Projects

“Is Now a Good Time to Invest in Real Estate?”

No? Yes? Hell no? Maybe?

Via comments and emails generated here, as well as through random conversations, it seems that a lot of people are trying to peer into ye olde crystal ball and determine if now is a good time to buy a house, whether as an investment or as a primary residence. And that’s only natural any time you see the ginormous declines that we’ve seen in the last year in most housing markets, as the market has to bottom somewhere, and if you pick that bottom correctly you stand to make many American dollars.

The only catch is that it’s very difficult to read the tea leaves and peg the true bottom, and trying to catch a falling knife usually results in a trip to the ER for stitches. To be brutally honest, I don’t think the US housing market in general is anywhere near the bottom, and that 2009 is going to be another tough year. We’re in a pretty nasty tailspin as far as the larger economy and the real impact has yet to be felt, as far as the effects of printing money to prop up unproppable endeavors that are going to inevitably collapse (and collapse hard).

Like anything, though, the answer to the title of the post really is “It depends”. Depends on your financial situation, your goal, your long-term plans, yada yada yada. But if you put a gun to my head and told me to answer the question “Is now a good time to invest in real estate?”, my one-word answer would be “No.”

The reason, though, isn’t so much my belief that most US housing markets will show further declines in 2009, but that most people asking the question simply aren’t in a place to be considering investing in real estate. That sounds judgmental, and, well, it is. I’m in a state of constant amazement at the seemingly inexhaustible supply of people looking to make a kajillion dollars in real estate, but who have no related experience whatsoever, have no savings, a job they hate, and a mountain of debt. If there’s any recipe for failure in real estate, it’s those qualities; yet, somehow, the lure of getting rich quick continues to draw many, many flies to the honey pot.

That’s not to say, though, that you’re somehow doomed to fail in real estate investing if you have debt, or if you don’t particularly enjoy your day job, bad credit, or don’t know a hammer from a screwdriver. It just means that there’s work to do before you should ever consider real estate investing.

2009 Checklist For the Complete Real Estate Investing Newbie:

1) Get your financial house in order. Your credit score will be more important than ever, especially if you’re trying to get financing for an investment property. The days of 0 down loans for investment properties are over, and forget about using credit cards for renovation costs and paying them off when you quickly flip the house and make gobs of money. Do everything you can to reduce debt and build up your savings. And I mean everything, even to the point of taking on a part-time job for extra money. If that sounds less than fun, well, it is less than fun.

2) There is no real estate investing course or training that you can buy that will overcome bad credit and debt. At the very best, you’ll simply shift your Achilles heel to, say, your elbow, as even if you succeed at real estate you’ll still ultimately fail.

I know that sounds harsh, and I know you can find testimonials from all sorts of people who used real estate investing to get out of debt or a dead-end job. It’s not impossible to do. What I am saying, though, is that if you have the tendency to spend more money than you make, you need to address that first before you do anything else. Any success you have at real estate will mask the real trouble, and in many cases escalate it, as far as a quickening ruin when you start throwing gobs of money at someone who has had trouble managing their money in the past.

Buying expensive real estate courses or attending seminars is, for the vast majority of people, a complete waste of money. It just is. That’s not to say all of the courses or seminars are useless junk, but that the people who get the most out of them already have their ducks in a row, and are ready to put the information to use. Getting a successful start in the world of real estate investing has everything to do with you, and very little to do with how much you spend.

3) Get your hands dirty. Tackle those home improvement projects you’ve been putting off. Even the simplest projects will help you later on down the road, as far as understanding how houses are built, what it costs to fix them, and how to estimate repair costs. If you currently rent, volunteer with Habit for Humanity or help a friend with a project. You don’t have to be a master builder but a basic understanding of what goes into a house is invaluable for any real estate investor, regardless of whether you end up flipping houses or not.

4) Learn your local market. It may take some digging, but you can usually find a realtor’s website in your local market that lets you see what’s currently listed on the MLS in your area. Check it every day. If you can search adjacent areas, keep an eye on those as well. While you won’t be able to see the actual sales prices, you will be able to see what’s selling, and over time develop a very good feel for what homes are worth. I do this every day, even when I have no intention of buying anything. Over time you’ll be able to see a price for a 3-1 in a certain neighborhood and immediately know it’s a great deal and start drooling, or chuckle at some naive seller wanting way, way too much for their house. With the wonderous Internet tubes, you can do this from the comfort of your chair, for free, and don’t have to spend hours and hours driving around town.

5) It’s never too early to start lining up funding. The biggest obstacle to success in real estate is that it’s very capital intensive, even more so these days with requirements for higher and higher down payments on investment properties. Even if you don’t plan on buying anything for a year, start exploring your options now. Talk to local banks and see if they’ll extend you a line of credit. Explore any relationships with potential private investors that you may know. Look into the option of using a self-directed IRA for investing in real estate. If you own your home and have equity available, talk to a loan agent about the possibility of tapping that equity to invest in real estate. It may seem like you’re wasting all of the above people’s time, if you’re not ready to buy, but believe me, people waste their time each and every day and they’ll be more than happy to talk to you, as that’s part of their business.

6) If you own your own home, strongly consider buying a new primary residence and renting your old home out. I think 2009 will offer some amazing opportunities for people who ease their way into real estate investing by buying a home and renting out their old residence. Not only will you avoid having to sell your home in a down market, but you can pick up a new primary residence at a great price (even more so if it needs work).

The new primary residence can help you get your feet wet on the rehab side, and renting your old home is a great way to get experience as a landlord, as it’s always easier to rent a home that you’re very familiar with, as you know more what to expect on the maintenance side of things, what’s been done, what needs doing, etc.

As long as you sell your old home (that you’ll be renting) within five years –assuming you lived in it for at least two years previously — you can can exclude up to $250,000 in profit (or $500,000 for a married couple) from the sale of your old primary residence when you do sell it, as far as avoiding capital gains taxes.