2 safest ways to invest in real estate

[bob]

A while back Terry Sprouse wrote this post for ChristianPF.com and I think it is worth re-posting here...

In my opinion, the two safest ways to get started in real estate, are: 1) buy a home, rent it, then do it again, and/or 2) buy a home, live in it 2 years, then sell it without paying any federal taxes using the “homeowner’s tax break.” Over the past six years, my wife and I have used both techniques. We have several properties that we keep as rental properties and provide us with cash flow. In addition, we also buy houses in need of repair with the intention of selling them and utilizing the “homeowners tax break” to pay no federal taxes.
Turn Your Residence into a Rental Instead of Selling It

A system that I like to use is to refinance my residence six months to a year before I plan to buy a new residence. This gives me enough money for a down payment on the next house that I will purchase. When I locate a good fixer-upper I can quickly purchase it. During the 3-4 weeks it takes to close on the new house, I prepare the old house so it will be ready to rent. This usually involves some painting and landscaping. Then, before I close on the new house, the “for rent” sign goes up on the old house.

The 3 steps in this technique: 1.) refinance your residence. 2.) use the refinance money as a down payment to buy a new house. 3.) move into the new house and rent out the old house Instead of refinancing your residence, you can use savings or a loan from a relative as a down payment. As mentioned, an advantage of refinancing your residence while you are still living there is that you get a lower interest rate on your loan than if you were refinancing a rental property. Under this technique, you get the lower “primary residence” interest rate for both the old property and the new one, since each property is your primary residence at the time that you take out the loan.
Sell a House that You Live in For Two Years and Pay No Income Tax

The 1997 Taxpayer Relief Act was a great boost for average people who wanted to sell their home and buy a new one. It was also a great boost for investors. Couples are allowed to exclude up to $500,000 of the capital gain on the sale of their primary residence. Single individuals can exclude up to $250,000. In other words, the sale of the house is never reported on your federal IRS forms if the capital gain is less than the $500,000 and $250,000 limits.

This exclusion is based on compliance with two requirements: 1. The home must have been the primary residence for both spouses during two of the last five years. The two years do not have to be consecutive but if you rent out the primary residence for more than three years you would be required to occupy it again for two years. 2. The exclusion is available only once every two years. Utilization of this tax exemption is the safest investment strategy for the conservative investor who wants to take few risks. This is the type of investor who wears both suspenders and a belt to hold up his pants. They like to play it safe.

Under this strategy, the investors can quality for the least expensive loan, the owner-occupied loan. There is no need to worry about tenants destroying your rental property or not paying the rent. You completely control the investment by living in the property yourself. When you sell, you have the opportunity to bring in up to $500,000 tax-free money every two years. My wife and I didn’t sock away much money for retirement, but with our rental houses, we have a flow of income that will last as long as we keep the houses.

Many people stay away from rental properties because they don’t want to deal with renters. However, with practice anything is easy, including dealing with renters, and the rewards far outweigh the difficulties. If you really don’t want to deal with renters, just use technique #2, where you buy and sell every two years. Technique #2 is for people who like to play it safe. I have made real estate investing my hobby, as have many others, and you can do it too. For anyone who wants to learn there is plenty of room in the fix-up business. Grab a hammer and join me.

Anyone else use real estate as an investment?

[Fryguy]

Its very tempting given the current market situation and the kinds of deals that are available out there, however the risk is still too great for me to take that step.

Another option for investing in Real Estate and I would say is safer than the two mentioned in the article is to invest in REIT's. Using REIT's I can invest small amounts at a time and not have the hassle of being a landlord or the risk of not making mortgage payments and losing my home or more. Granted there are pros and cons to each option, for me the REITs are more attractive due to the lower cost of entry and the fact I don't have to deal with landlording.

[Clarinda Della]

I am considering getting into real estate investing in select markets, but have neither the credit nor the money to get started. I would like any suggestions on how to overcome this issue from any experienced investors out there....

[tony34]

Am also looking to get into real estate. Although there's lot of bad news in the media, in many markets, there are lot of good deals, especially on bank owned properties. According to one of my friends in real estate, in many markets, such properties are being snapped up fast, assuming the seller has priced it right.

[4jacks]

I am considering getting into real estate investing in select markets, but have neither the credit nor the money to get started. I would like any suggestions on how to overcome this issue from any experienced investors out there....

you're only sane option is to literally start saving up money. You don't want to go into debt on an investment property.

Also I'll be the lone pesimist. When I look at the numbers I see a crashing real estate market. I think it is extremely unwise to purchase something that is going to loose value the moment you purchase it. True we can't KNOW when the bottom of the market is going to hit. But look at the numbers.



Here is my market which I'm watching closely.



I mean honestly, It doesn't take a rocket scientist to look and see the bottom is coming and we ain't there yet!

I know the Dave Ramsey fans will not like that. But Dave Ramsey has been saying "It's a good time to buy" for over a year. And the fact is, if you took that advice and purchased real estate a year ago, you made an extremely DUMB decision, and your house is worth 10% less.

The housing market is JUST like gold right now, it's at an all time HIGH. (Well it's coming down from an all time high) Why would you purchase?

[pochax]

although i personally do not believe in investing in real estate (i am not the landlord type), i don't exactly agree with the reasoning of 4jacks either. i don't believe housing is like gold really at all. gold has not produced longterm gains over the last 3 decades whereas housing has clearly gone up (yes, even to the point of being a bubble)....there are signs that we are possibly bottoming out now as well and we are still well over the median house prices in the 90s.

i would agree however that one should not go into debt to invest in real estate....that is partially how we got into this mess in the first place. investing in real estate needs to be for the long-term, needs working capital to absorb the risk, requires the maintenance/upkeep of being a good landlord, and has risk associated with lack of diversification (much like investing in one stock)....but if all those risks are taken into account, i think there is substantial potential for gain.

[4jacks]

although i personally do not believe in investing in real estate (i am not the landlord type), i don't exactly agree with the reasoning of 4jacks either. i don't believe housing is like gold really at all.

I'm sorry, I was unclear. I didn't mean to compare Gold to real estate and say they were similar in many different ways. I agree gold and real estate are not similiar at all. However Currently Gold is at a 150+ year high, and Real estate is just coming down from a 150+ year high. In that way they are currently similiar.

there are signs that we are possibly bottoming out now as well and we are still well over the median house prices in the 90s.

This statment seems contridicting. Do you mean that there is no sign of bottoming out, becuase our prices are well over the median of 1990?

If so, I agree, even though 1990 had a small bubble. I would say 1995'ish or 1985'ish (with inflation) would be a better measure.

If you meant that there are signs of hitting the bottom becuase we ARE at 1990 prices, then what source are you using to compare todays market prices to market prices in 1990? Both the Shiller index and the Housing Price Index (HPI) from the FHFA, use to be the OFHEA both show the prices as MUCH higher than 1990.

[pochax]

However Currently Gold is at a 150+ year high, and Real estate is just coming down from a 150+ year high. In that way they are currently similiar.

this doesn't mean too much from an investment point of view in that gold has not shown growth in value over longterm periods of time (eg. 20-30 yrs) whereas housing has (ie. the "ups and downs" of housing have still overall gone up overall for housing...not the case for gold)...but i understand now that you are not trying to make an apples to apples comparison as you noted.

This statment seems contridicting. Do you mean that there is no sign of bottoming out, becuase our prices are well over the median of 1990?

actually i didn't mean either of your interpretations...i am saying that there are possibly signs that we are bottoming out after this particular crash (the crash of 2007-8) and, if we are (big if, i know), this particular bottom is STILL well over the median house prices of the 1990s which proves my point before with gold...that even though there are ups and downs with real estate, overall the value of homes goes up over long periods of time (just as with stocks).

[matt]

If you believe that big inflation is on the way (due to insane government spending and insane government printing of money), then converting your money into goods that retain their value (likes houses and gold) is a smart decision.

[4jacks]

However Currently Gold is at a 150+ year high, and Real estate is just coming down from a 150+ year high. In that way they are currently similiar.

this doesn't mean too much from an investment point .......

Are you joking?
There is nothing more basic then sell high, buy low. Why do we disagree on this?

...gold has not shown growth in value over longterm periods of time (eg. 20-30 yrs) whereas housing has

I disagree with your methodology here. Both gold and Real Estate have gone up and down. If you look at the long term graphs of Gold, it Overall has grown a bit less than inflation. (not a good investment, I agree) But with economical scare, Gold has rocketed up, to an all time high. So you want to say, that you can't count the current bubble. And that if you don't look at the CURRENT bubble then gold is a sub-par investment. Okay, that is fair.

But then you want to look at real estate, which also has huge bubble. A bubble that started in 2001 and peaked in 2006. And you want to count that bubble. Both have a huge bubble. If you don't count the gold bubble, you shouldn't count the housing bubble. and if you look at the charts I posted, we are clearly still in the housing bubble.

actually i didn't mean either of your interpretations...i am saying that there are possibly signs that we are bottoming out after this particular crash (the crash of 2007-8) and, if we are (big if, i know), this particular bottom is STILL well over the median house prices of the 1990s which proves my point before with gold...that even though there are ups and downs with real estate, overall the value of homes goes up over long periods of time (just as with stocks).

I believe the bottom we are seeing will be temporary due to the money being pumped into the economy. Nothing drops straight down, there are always some ups and downs.

If we did actually hit the bottom, and you are right. Then the 30 year growth of the overall housing market will be 478% (HPI of 368.28 in 4th quarter of 2008 & HPI of 76.98 in 4th quarter of 1978)

I just don't think that 17% a year is the real growth value of real estate. I think it's high and it still includes the bubble. That is what I use to base off of when I say, it is still going to come down.

[pochax]

4jacks,
i'm not so sure we're getting anywhere with getting into the minutia of eachother's points...my main point regarding gold is that one should not make a decision to invest (or not invest) in real estate based merely on the fact that it is coming off a bubble the way gold has gone. You seem to infer from your original post that the similarity between the gold bubble and the real estate bubble is a reason NOT to invest in real estate. the fundamentals of investing in gold (typically as a hedge against inflation) and real estate (typically as having potential to BEAT inflation) is where one needs to analyze...you allude to that in some of your later arguments and i commend you for that...that is the debate at hand: can real estate beat inflation in the long-run?

Which brings me to the second issue at hand...you don't believe the annualized 17% growth in real estate is real and that it is puffed up by the current housing bubble. that may be true, but each region in the country is different (look at coastal real estate vs. midwest/southern real estate or urban vs. rural or good school district vs. bad...there are countless variables here) and there is no denying that some places (manhattan for example) have CLEARLY gone up many times over during that time span. People who invest into real estate take these things into account...bubbles or not, there are deals to be had....finding them is the hard part and then having the capital to pull the trigger is the other hard part. i am not contending that what you say is incorrect (to be honest, i don't really pay attention to Schiller indexes and the like and i really don't care)...i am merely saying that generalizing that "real estate is not a good investment" is probably not uniformly a good investment principle to hold to.

[4jacks]

Pochax,

I apologize if you find my cutting up your quotes as aggressive or otherwise annoying. People have said that before. I don't mean for it to be. I just like using the quote tool so I can respond to different points in the conversation and there is no confusion as to what I'm talking about. I won't do it anymore if you don't like it.

It is not my generalization or philosphosy that real estate is always a bad investment. What I'm saying is that right now is a horrible time to purchase real estate as an investment. At a later point in time, when real estate is at a low point, I hope to purchase my house to live in, and possibly a small townhouse or condo to rent out as an investment.

Can real estate beat inflation. Yes, but not if you purchased in 2006!

Can gold beat inflation, Yes, if you purchased anytime before now, and sell it now!

How can you say that Manhattan has done well, when you admit you don't pay attention to the actual numbers? I don't know a lot about NYC, I've only been once. But the Numbers for NYC are bad, -6.6% in the past year. I couldn't tell you how Manhattan breaks down out of that versus brooklyn or anything. But I would bet you a soda Manhattan is not doing well.

Well I really shouldn't be hating on all the Dave Ramsey fans. It's not like I'm in a position to do some real estate investing myself. But I'm sure glad I sold my house!

[pochax]

4jacks...we're all friends here (or i'd like to think so)...i don't mind you cutting/quoting at all...if you've read any of my other posts you'll notice i do the same.

I'm glad we agree not to generalize about real estate's investment potential. there are clearly smarter people than you and i who believe there are bargains to be had, but, as i said, you need to do your homework AND have the capital to invest (ie. NOT go into too much debt). The other reason real estate can potentially be such a great investment is that someone else can actually pay for it (ie. rental income). it's an investment that not only will go up in value but you may not even have to ultimately pay for it if you play your cards right! i don't think anyone will rent your gold or your stocks for you so that is unique to real estate.

i can speak about Manhattan without knowing Schiller or Housing indexes because i live 20 minutes from it, i have friends who live there, who have bought there, and are looking to buy there. They are saying it is clearly still expensive. Only -6% down? in this market that is doing extraordinary. again, merely saying it is not a good investment if you bought in 2006 is very short-term thinking. in 2026, that $500k manhattan condo that went down to $450k in 2008 could be worth $2million or more. please take a closer look at manhattan prices especially in the nicer areas like upper west side, soho, and upper east side...you will be shocked at how much a 2 bedroom condo is going for (even in today's "crashing" housing market).

[4jacks]

I found this website for Manhattan Real Estate Numbers

http://www.millersamuel.com/charts/gall ... d&Record=1

Manhattan is the really nice part of NYC right? That's where everyone wants to live?

I dunno, I'd be real scared to buy there. From the looks of it, they haven't even started to crash yet. Once again it boils down to buy low and sell high, and it's high right now.

Real Estate doesn't ALWAYS make you money. I agree that RE Investing should be long term, and most of the time, for 20+ years it will grow a little faster than inflation. But not all the time.

if you purchased a house in 1905, then you had to wait until 1945, until you could sell your house to break even. And this crash could be very similiar. It could be 40 years, could be 5 years.

I have a good friend in my Wednesday bible study, and he is buying houses on debt right now, he just purchased his 4th house in Cape May NJ. All his houses are underwater in debt. He's gambling that the market is going to turn around and that he is going to make a killing. He says he is in it for the long term. But what is long term, is it 40 years, like it was in 1945? He's 30 years old. So it's very possible he could keep these houses until he is 70 and then sell then for little to no profit.

And now for those 40 years, he has to worry about having 4 houses rented out each summer in order to break even on his mortgage payments. That's almost a full time job.

I fight with him every time I see him. He will never listen to a word I say. I tell him the bible says debt is bad, and he insists that it's not. I do hope he turns out okay, becuase I do not look forward to saying "I told you so" when the poop hits the fan.

[pochax]

Great point....which is the exact reason why i WON'T be investing in real estate (at least significantly or ever go into debt to do it unless it's an absolute no-brainer deal), i have NO proclivity to be a landlord. i would hate to deal with tenants, being underwater on mortgages, keeping up maintenance/upkeep, etc. for someone like me who really enjoys his free time that would be a total headache. that's why it's stocks and bonds for me. don't get me wrong, i totally acknowledge there are people who are well adept at handling landlord responsibilities or are willing to pay a property manager to do it for them, but i'm not one of them. But then again, maybe that's why i'm not as rich as Donald Trump

[rockwell01]

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