[NA] Real estate investing, second home or land?

[PoAdeleted5]

My wife and I have been thinking about aquiring some property or a second home, perhaps in AZ. She's very fond of several areas, like Prescott and Sedona (yeah, I know but compared to $ilicon Valley..) Since I fly and own a plane, it's not out of the range of reasonable travel to enjoy it. Eventually, we may want to relocate.

Also looking at it from an investment standpoint, maybe time to pull some cash out of the stock market and move it into real estate. I'm not looking to become a house flipper or speculator - though it seems to be the fashionable thing to do these days. Now that everyone is doing it, I expect that bubble to burst like tech stocks did a few years back. Of course, tech came back, at least the ones that made sense in a business way.

Thoughts, rants, tips, anything to further my edufication?

 

[Brian Austin]

Sedona is expensive for a decent home. Prescott and Prescott Valley is booming right now, with prices going up every day. Oddly, it's mostly CA folks who are moving there. Not sure if they're retired or what because there isn't a lot of industry there.

 

[Skip Miller]

How is your cash situation? Perhaps the best advice is to open up a home equity loan - as large as is available - on your first home now, but don't draw it down just yet. That is your equity for the second home.

I would not buy a second home right now. There is a definite bubble, worse in some areas but pretty much nationwide. The key is the high number of speculators - people buying residential real estate with no intent of ever living there. As soon as rates go up, the economy stumbles, etc etc. these flippers will leave the market and many will be locked in to losses. Wait for that time, that's the time to buy. Sure, rates may go up some by then, but if you can bring substantial equity to a purchase, the mortgage payments you will get even at the higher rates then, will be affordable. Use your home equity loan on your primary as a substantial part of the down payment.

Having said all that, don't over extend yourself. Be patient, do your homework to identify what you want and where. Soon you can be a rare commodity - a buyer with cash in a cash starved market. Someone desperate will sell you your dream for a very good price.

-Skip

 

[PoAdeleted5]

They kept saying the bubble was going to burst here in $ilicon valley. But we bit the bullet and bought a home to live in. Turns out we bought in the lull and things have come back fiercely in the area. There's hardly any inventory, when there is, we are back to the days of "accpeting bids for this property on such and such day" and things routinely selling far above asking price. We're locked in on 30yr mtg at a very attractive rate on our home. Debt load is very low for us both. Cash - we have some and stocks and 401's and so on. I'm thinking adding some real-estate to the mix, especially as we get older is a good idea.

 

[Dave Siciliano]

Of course, real estate is very regional and site specific.

Here in the Dallas area, and in Texas as a whole, we haven't had a big run up in home prices. However, land with utilities available or where utilities are being put in, has run up quite handsomely. As a single family lot developer, I see a lot of out-of-state investors rushing in to purchase these developable tracts at prices I can't make work for development. Then, a lot of folks say, gee, I didn't know it cost that much to develop. They are upside down to begin with, but say they'll put lots on the ground because the market will be there when they are finished with development. So, I'm not a purchaser now unless for a homebuilder that is executing a very strong purchase commitment and putting up money with me. I am a seller. It just confounds me how out-of-state investors think they can rush in and pay more than folks that have local insight, connections and are experienced in the development process.

Can't speak to other regions, but the developmental land here is getting over priced, seller expectations are very high at the same time cities are stacking on development fees and restrictions. Lots of NIMBYs (Not in my Backyarders). Homebuilder margins are very thin.

In our market, for every two jobs created, one home is purchased (at least that's the historic relationship here). Now, low interest rates are creating a demand. As rates increase, we should settle back to norms. Check to see what drives the housing prices in the area in which you intend to invest. If it's folks moving from another area, that's a thinner market that an area where jobs are driving growth (in general).

Can you say shakeout here in North Dallas??

Best,

Dave

 

[wsuffa]

Dave,

I think it's all going to shake out at some point, perhaps soon. I also think that the federal deficit is going to force interest rates up. Heck, they're already talking about bringing back the long bond. And there is talk of new/additional regulation on appraisers because of the pressure to appraise high.

These - plus the lack of local knowledge - are key reasons that I didn't jump on the opportunity to put together a real estate investment thing in Las Vegas.

I am, however, going to continue to keep and enjoy the place I own in Virginia. Value is up, but I don't care to sell.

You've got the right mindset.

regards,

bill

 

[Ken Ibold]

I was fortunate enough to buy a waterfront vacation condo near Sarasota Florida two years ago. We rent it out, and it pays a substantial portion of its carrying costs, though we do have to pay some. Recently a similar property sold for twice what we paid for ours. We're quite happy with it.

While it's been a good investment so far, we bought it because we liked it. It's like buying art. You hope it appreciates, but when it's all said and done you have to enjoy owning it or eventually it starts to feel like a millstone.

 

[Richard]

Listen to David, especially his point about the market being very regional and the uneducated buyer.

My sister the industrial trader/land speculator in Phoenix advises me that the price for AZ dirt hasn't changed very much in the last several years. Oh sure, it continues to crawl upward, but for spec it's a flat mkt out there. For a buyer for an owner occupied SFR, that's a good thing. But you won't have a positive cash flow if you try to rent it out until you make the big move. This because very favorable rates and relatively easy qualifying plus so many loan products on the market right now are allowing a higher percentage of the population to realize the American dream.

I must say it is hardly true to say housing is in a bubble. At least nowhere in CA I know. There are all kinds of reasons why prices will only continue to not just rise but shoot up. Also, to compare a commodity like housing to single market shares in tech stocks is a fallacy.

Our primary residence and several undeveloped parcels have all risen dramitically. Our home has enjoyed at least a 750% price increase since 1995. The parcels have increased a minimum of 300% in <8 years. It's not tied to finding the right buyer, we get unsolicited offers 5-15 times/year to sell and those offers have always been more than last year's valuation. Late last year a commercial developer offered almost 4 times the 1998 purchase price for a 3 acre undeveloped parcel outside of any incorporated township or utility service district. What would compel him to do that? It's rhetorical, I know the answer. I only mention that to illustrate that it is the continued influx of qualified buyers who are driving the market--but they are there own worst enemy.

It is interesting that it seems the CA market and selected areas of the AZ market seem to parallel each other. Brian alluded to the reason why.

For anyone considering making a permanent move to another region I suggest you do some homework. Search for clues for what is the next upcoming market, having ID'd that, get in early and hold for the explosive growth. It is going to continue for quite some time.

 

[PoAdeleted5]

Hmm, maybe a vacation home in some popular location, perhaps that can be rented to generate some revenue while not occupied.

I can't see myself as a developer, just don't know the business. I'd get sliced and diced before I knew what was happening.

 

[woodstock]

Interesting conversation folks. I've been thinking of buying a rental somewhere myself. Currently thinking of Hilton Head Island b/c the prices are still fairly attractive (unless you are on the water) and while it's risen it hasn't gone nuts so I don't know if it's "in a bubble" or not. apart from getting a good realtor, what other things do you look at locally (complete newbie here). thanks (sorry to hijack your thread Larry)

 

[bbchien]

Interesting conversation folks. I've been thinking of buying a rental somewhere myself. Currently thinking of Hilton Head Island b/c the prices are still fairly attractive (unless you are on the water) and while it's risen it hasn't gone nuts so I don't know if it's "in a bubble" or not. apart from getting a good realtor, what other things do you look at locally (complete newbie here). thanks (sorry to hijack your thread Larry)

Can you say Bubble?! Careful out there...

 

[woodstock]

Can you say Bubble?! Careful out there...

exactly... sigh. but the prices there from what I can tell have not gone up much at all in the past year, so I was hoping it was a little less bubbly. plus I'd buy, hold and rent - not flip.

there's no way I'd buy an investment property in the DC area now. a year ago, sure. now, wayyyy too precarious. maybe the next cycle.

 

[Ken Ibold]

Can you say Bubble?! Careful out there...

I liked Greenspan's comment to the effect that it's not a bubble, more like a froth. There are some markets that are ready to pop, for sure, but plenty of others in which the underlying fundamentals justify to some extent the activity.

Our Orlando house goes into multiple listing today. If the bubble is gonna pop (or the froth dissipate), I hope it doesn't happen before we get a contract AND close!

 

[Dave Siciliano]

Elizabeth:
Try to look at what drives the market: is it job creation, vacation homes sales, relocations; retirements, etc. Think about whether those trends will continue and what could disrupt them.
Vacation homes are discretionary. If the economy gets soft, they are some of the first to feel it. If it's relocation, like a lot of Florida housing and AZ, what's causing it and what could cause it to change. A job driven economy seems to be more stable.

There are folks that have market research; target where you wish to be and find it. (You're obviously a bright lady; although, see to drink a LOT of coffee ) You just need the facts.

I have Dallas info, but really don't focus a lot of other regions. If you'd like some facts about our market, I could send you some for general perspective. Generally, there are markets that are more mature: fewer new homes, more existing to purchase and markets with a lot of new home activity. Here in Dallas, there were 44,681 new home starts last year. 41,466 closings, 89,657 vacant lots developed (about a 24 month supply which is normal). Existing homes had about a six month supply until you got over the $300,000 price point: then the amount of existing inventory increased. There are lots of sub-markets where the numbers can be better or worse.
If one looks at where the largest annual change in housing prices occurred: (4Q03 v 4Q03) it was in the following areas:
CA 23%; HI 24%; NV 32%; DC 23% FL 19%; VA 16%.
Best relocation markets: D/FW; Detroit; Chicago; Los Angeles; New York; Atlanta; Houston; Columbus; Cincinnati; Philly.

Dave

 

[wsuffa]

Interesting conversation folks. I've been thinking of buying a rental somewhere myself. Currently thinking of Hilton Head Island b/c the prices are still fairly attractive (unless you are on the water) and while it's risen it hasn't gone nuts so I don't know if it's "in a bubble" or not. apart from getting a good realtor, what other things do you look at locally (complete newbie here). thanks (sorry to hijack your thread Larry)

Beth,

Very market specific.

Nags Head/Hatteras is (imho) overpriced.

I don't know the Hilton Head market.

A friend of mine recently bought a place on Galveston Island near Houston at a great price, renovated it, and is generating good cash-flow. It is 90% booked through the summer, and it's now worth more than the purchase price. That lot can be subdivided and another house added.

Remember that there is risk on the barrier islands from hurricanes, and insurance is expensive (if available). Generally, however, if you have a place that's really desirable (location, number of rooms, maintenance, furnishings, etc) it will rent.

 

[woodstock]

Elizabeth:
Try to look at what drives the market: is it job creation, vacation homes sales, relocations; retirements, etc. Think about whether those trends will continue and what could disrupt them.
Vacation homes are discretionary. If the economy gets soft, they are some of the first to feel it. If it's relocation, like a lot of Florida housing and AZ, what's causing it and what could cause it to change. A job driven economy seems to be more stable.

There are folks that have market research; target where you wish to be and find it. (You're obviously a bright lady; although, see to drink a LOT of coffee ) You just need the facts.

thanks Dave! I'm thinking HHI is mostly about vacation homes. a realtor there advised me not to buy a weekly rental but to buy something to rent out year to year - less hassle and more stable. we'll see. wish I had jumped into the DC market a lot earlier. at least my own place is moving on up.

btw - not a coffee drinker. tea. (unless of course, it's in Italy. )

 

[woodstock]

Beth,

Very market specific.

Nags Head/Hatteras is (imho) overpriced.

I don't know the Hilton Head market.

A friend of mine recently bought a place on Galveston Island near Houston at a great price, renovated it, and is generating good cash-flow. It is 90% booked through the summer, and it's now worth more than the purchase price. That lot can be subdivided and another house added.

Remember that there is risk on the barrier islands from hurricanes, and insurance is expensive (if available). Generally, however, if you have a place that's really desirable (location, number of rooms, maintenance, furnishings, etc) it will rent.

Nags Head is pretty expensive - it's DC south. I think a lot of DCers buy there actually. likely that drives the price up.

 

[Alan]

We bought a condo on Boca Grande (just S of Ken in Sarasota) because we liked it. It is on the beach and I figured with the boomers retiring and the beach pretty much covered it would likely appreciate. Wow, has it ever. I have some commercial RE in KY that sometimes works and sometimes doesn't but I've never seen anything like the FL beach market. Will it last? Who knows. My wife loves the beach and wouldn't sell anyway so I suppose it doesn't really matter.

 

[corjulo]

Boy, maybe its my economics degree (a minor at that) but this looks, feels and smells like a big ass bubble. I know Economist Paul Krugman is generally viewed as a liberal partisan but in this case todays column on the Real-estate bubble should be given some consideration. A lot still depends on China. If they pull back on the US bond market then all hell brakes loose. That or re-value their currency. Lots of factor in play right now. Be carefull


http://www.nytimes.com/2005/05/27/opinion/27krugman.html?hp

 

[corjulo]

Elizabeth:
Try to look at what drives the market: is it job creation, vacation homes sales, relocations; retirements, etc. Think about whether those trends will continue and what could disrupt them.
Vacation homes are discretionary. If the economy gets soft, they are some of the first to feel it. If it's relocation, like a lot of Florida housing and AZ, what's causing it and what could cause it to change. A job driven economy seems to be more stable.

There are folks that have market research; target where you wish to be and find it. (You're obviously a bright lady; although, see to drink a LOT of coffee ) You just need the facts.

I have Dallas info, but really don't focus a lot of other regions. If you'd like some facts about our market, I could send you some for general perspective. Generally, there are markets that are more mature: fewer new homes, more existing to purchase and markets with a lot of new home activity. Here in Dallas, there were 44,681 new home starts last year. 41,466 closings, 89,657 vacant lots developed (about a 24 month supply which is normal). Existing homes had about a six month supply until you got over the $300,000 price point: then the amount of existing inventory increased. There are lots of sub-markets where the numbers can be better or worse.
If one looks at where the largest annual change in housing prices occurred: (4Q03 v 4Q03) it was in the following areas:
CA 23%; HI 24%; NV 32%; DC 23% FL 19%; VA 16%.
Best relocation markets: D/FW; Detroit; Chicago; Los Angeles; New York; Atlanta; Houston; Columbus; Cincinnati; Philly.

Dave

Great analyses. To what degree do you think this is interest rate driven?

 

[Dave Siciliano]

Since I don't have great national perspective; and haven't kept current with Econ Micro theory, please take this as the observations of one small, metro developer.

Capital is always seeking higher returns. Bond and stock markets haven't offered much lately. Real estate has; especially because of the low cost leverage. So, much is interest rate driven. Look at the real cost of money in light of inflation. Our fed chairman has stated one reason the cost of federal funds is being raised is because they are historically cheap in terms of real cost after inflation.

Many markets have had good job creation, add that to the availability of low cost leverage and you have excellent returns. As to how much is attributable to low interest rates visa vie other factors like jobs being created, that would be a market by market consideration.

Lots of folks with large profits in homes are withdrawing funds to invest in other areas. Some of that money is coming here because of the relatively cheap prices.
Here in Texas, a home mortgage is non-recourse. So, one can lose their home, but no judgement should be attached to the loss.

You are legally barred from using the same amount of leverage when investing in stocks and bonds.

Interesting huh?

Dave

 

[wsuffa]

Great analyses. To what degree do you think this is interest rate driven?

Dan, I'm not Dave, but....

I am of the opinion that some of this is rate-driven. It has to be, as the major componant of mortgages (at least over the first few years) is interest.

Here's why I'm concerned. Lenders have created all kinds of mortgage structures that never existed before. Some of these were created in direct response to home-price inflation. For example, Zero-down mortgages, interest-only mortgages, balloon-payments, etc. bring a lot of buyers into homeownership that would otherwise be excluded. A very large proportion of mortgages now are variable rate... the average downpayment is much lower... and the maximum payment-to-income ratio is much higher. This does raise the risk of forclosure if housing prices don't rise - or interest rates rise a lot when adjustments take place.

The housing boom took off when rates went down. I recall a time where 13% mortgages were all that were available (my first home, for example, was at that kind of rate). After that time, inflation was lowered and a concerted effort was made to reduce the federal deficit. By reducing demand for money by the Government, a lot more was made available for private sector investment, reducing rates. Interest rates are subject to supply-demand like anything else.

The other factor, of course, is demand. If the cost of commuting gets out of hand, then companies will look to locate in places that reduce their costs, and folks will look to relocate to areas where costs are lower. You can only "drive till you qualify" to a certain distance. I, for one, don't ever want to go back to 1.5 hour commutes. I expect we'll see retirees cashing out at some point and moving elsewhere. The sunbelt will probably remain good markets. But I find it interesting that a number of inner-city neighborhoods are becoming desirable again because the cost of a house + renovation is less than the cost of owning in the suburbs. I have this crazy theory that cities can do a lot more to improve their financial situation if they encourage this behavior through appropriate tax abatements and/or reduced property taxes.

 

[s35pilot]

Larry,

It sounds like you are in the San Francisco area. So am I. Real estate investment at Lake Tahoe made the most sense to me. I bought some property there, but I'm not just in it for the investment. I enjoy getting up there and it's only a one hour flight. There are a lot of fun activities to be enjoyed there (mountain biking, hiking, boating, the casinos, skiing, etc) and the summer time weather is great. Not only that, it's a great excuse to go flying.

From an investment point of view it's been a lot of fun too. Home values have been going up about 20% a year there. If things ever get tight financially I shouldn't have any trouble turning it into a vacation rental. Look at Aspen Colorado for an example of how high home prices can go in a vacation area. I think the proximity of Lake Tahoe to the bay area, the shortage of buildable land, and the beauty of the area will keep an upward pressure on home prices there.

If you are thinking of getting into residential real estate with the purpose of renting it out long term (as in allowing somebody to make it there home) you should talk to a few people who have experience with that. I have a couple of associates who do that and I have heard a few horror stories.

Good luck whatever you decide to do.