Wealth Building Through Real Estate Revisited
Hello People,
If you've been watching the headlines in recent weeks, you know that the real estate market is taking a serious beating. Foreclosure are at record highs, lender rebates are increasing, and nationally prices have declined slightly. What all of this suggests, and what we've talked about, is perhaps its time to think about using current market conditions to build wealth.
To help give you a sense of how to go about doing this, I wanted to repost some earlier stuff we did from Adriane Berg. Some months ago, I read about an interesting procedure in Adriane Berg's Your Wealth Building Years for accruing real estate. Basically Berg says some simple steps will help you build real estate wealth*.
They are:
1) Buy an investment property.
2) Hold the thing until you have 20 percent equity (either by mortgage pay down or principal appreciation).
3) Take out a loan against the equity.
4) Invest the loan proceeds in another piece of real estate.
5) The cash flow after taxes from both properties must cover all expenses.
6) Repeat steps 1 through 5 as frequently as it is profitable.
There are a couple of ideas Berg says should be considered when doing this: 1) The importance of a taxes and 2) whether a property manager should be used.
For my part, this seems like a good plan. The major rub is pricing and cash flow. For example, its not sensible to purchase income producing property if rent won't cover expenses. My wife and I currently have an investment apartment in DC. Now that market conditions are pushing DC property down from its sky-high peaks, the idea of getting another property is becoming increasing attractive. If the credit tightness continues there will be fewer buyers and accordingly the chances of getting a good deal should go up.
In short, Berg's plan will probably work, but it requires some effort and critical thinking.
Best,
James
Berg, A. (1986) Your Wealth Building Years. pp. 151-152.
Check out Adriane Berg at Powells.com
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3 comments:
Thanks for the tips...particularly the "hold on to until 20% equity" - It has been so tempting for us to sell because prices are going up, up, up! But not quite 20% in 7 months!
What are your thoughts on using a property manager if you only have 1 or 2 properties?
I am a bit pessimistic about real estate prospects at this moment. I think we are far away from the bottom. I plan to wait until I see prices starting to go up. I don't think real estate moves as quickly as the stock market, so I think at that time there'll be plenty of time to react.
This is just a personal opinion. I don't have any special expertise or insider knowledge. I made some easy money on this bubble, but it was luck more than any kind of expertise. Besides I made some mistakes there as well, mostly by selling too early, a couple of years before the top. So, I am no expert.
I simply look at what happened in the 90s when the downturned lasted for years - since late 80s until the start of this bubble. I haven't investigated the reason for the 90s housing slump. I don't know if they were more serious or less serious than today. There was no mortgage mess then, but the rates were much higher.
Also, around here the property values are still several times higher than in the 90s. There are not too many purely rental properties around here, which leaves only condos and co-ops. With one bedroom condos starting at 250K, I don't see how I could get enough in rent to cover the costs, especially if you common charges and property taxes. Co-ops are cheaper (140K+), but they have rent restrictions. In the 90s, some co-ops were so cheap you could get one for cash (30K at the lowest point), lock it up without renting, pay maintenance, sell in two years and still come out ahead (wish I thought of that). Not anymore.
Maybe in other areas the market has bottomed out, but not around NYC.
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