How To Purchase House

Sales of US homes rose for the third consecutive month in June 09, suggesting that Property investors are flocking back to pick fruitful deals as the US property clock has wound prices back to the same levels as in 2003, according to financial researchers Standard and Poor’s.

‘’The US Housing marketing is bottoming out and now really is the time to invest. We have come across some super bank owned properties, which yield as much as 25 % rental on a three bedroom house that can be picked up for under £25,000, in Detroit which include costs of property Aquistion, all legal costs, property refurbishment and placing of a tenant. Prices, are staring to rise due the massive amount of overseas investment. Last month over 2,800 properties sold in Detroit mainly to overseas investors “The June sales number appeared to confirm the stabilisation, down a mere 0.2% from a year earlier.’’

‘’Prices also showed signs of stabilising. The average price of existing home sales was 181,600 in June, 15% lower than a year ago but up from 174,700 in May.

Now that the meltdown has happened, the new emerging market is the United States,” Tom Shapiro, president of real estate investment firm GoldenTree InSite Partners, said at the Reuters Global Real Estate Summit in New York.

The company are looking to sink up to $1 billion in to property, and are ready to return to the US market and take advantage of the rock bottom prices.

Directors of the London based Mayfair Group said “ Areas like Detroit have fallen by as much as 60 % making Detroit a very popular place to invest with overseas investors. ‘ CNN recently voted Detroit as one of the top places to invest in the US, due to rock bottom prices and high rental yields. We recently sold one property to an investor which had sold in 2007 for $180,000. A typical investment package we would offer would be for a round £24,500, with a tenant in place paying from $800 – £900 pm or higher in some cases. This investment will pay for itself in 4 years, making this a great income or pension. A lot of our investors have previously held funds in high interest bank accounts. The bank interest has become so low they have come to us because of the high 25 % rental yields offering a huge return on investment.

Though with prices starting to rise and Obama keen to stop the Foreclosure market, these amazing bargains may not be around for much longer.

For further information contact us

email: info@mayfair-group.comweb:   www.mayfair-group.com

It seems that the prices of home insurance has shot-up over recent years, with both weather conditons and house prices making an impact.
The cost of home insurance can go up by as much as three-times its original fee if the property reside in an expensive area. Think of the following ways to make a steal on home insurance.
The cost of home insurance varies dramatically in accordance with your area. Obviously, the more upmarket the area, the more expensive the insurance is. A recent survey suggested that postcode is most instrumental to determining insurance premiums for buildings, building contents and mortgages. The cheapest average cost, for example, is Llandrinod Wells, where insurance for contents and buildings is only £200, while in Peckham – in the more affluent South London – the same insurance costs over three times as much, at a staggering £700.
Another variable affecting the cost of home insurance is the increment in changeable weather conditions as a result of global warming. The number of winter storms has doubled over the past 50 years and has, logically, made an impact on the cost of cover.
The warmest periods of the 90s were towards the later-end of the decade; the supposed threats to homes has led to a nerve wracking rise in home insurance. The unprecedented high temperatures in the UK last year, for example, boosted subsistence claims to nearly £400m and the Association of Insurers states that if nothing changes the value of insurance claims could double and even triple in price by the middle of the century.
Given these influences, the first rule when you choose your home insurance is to be scrupulous about getting the amount of cover that you need. Utilise your area thoroughly, and find out the average premium costs that people in your area pay, and don’t get duped into giving more.
At the same time, make sure you are getting the cover you need, especially if your house is likely to be damaged by storms or heat.
Lastly, with differences of up to £150 a year on protection for mortgage specific to the company, make sure you browse. Online comparison tools help you to find a good bargain, allowing access to quotes and coverage details and offers from numerous insurers in a matter of minutes; you can be confident you have sought and found the best deal, and can keep an eye on annual changes in cost. Don’t get attached to one particular company if another offers a better price. Your loyalty is to the bargain, or deal, not the provider.

With interest rates rising rapidly, it is more important than ever to make the most of every loan. As refinances begin to dry up and you begin to deal more with purchases, you will undoubtedly encounter new roadblocks and hurdles on the way to the closing table. It’s a fact–purchase loans are far more time consuming and stressful than their refinance counterparts.

Borrowers are emotional, erratic, demanding, panicky, unsure, deliriously happy or sad and a whole host of many other emotions. In their minds, they’ve picked out the carpeting and wallpaper and have mentally already moved in! Geesh! Try dealing with a person who thinks they’re the landlord and they don’t even have the keys yet!!!

Keeping this in mind, here are some tips when dealing with purchase loans. These come from my years of experience and many number of loans (I’ve lost count.)…

1. Don’t show your hand too early (meaning the interest rate you can offer). Explain to the borrower that it is up to them when they decide to actually “lock-in” the interest rate. If they press you for an actual rate, tell them what today’s rate is you can offer, and that you will watch the interest rates for them. If they drop, you will call them at the first moment. What you really want to do here is knock the borrower off their “rate” short-sightedness. Say something like, “Well, as you know, the interest rates change every day. With purchase loans, time is critical. What we can do is get the process started, so that you don’t lose the house, and when the interest rates get to a point you feel comfortable with, we can lock it in for you. We will be working hand-in-hand through the entire process. Now, how do you spell your last name?”.

2. Explain the difference between a pre-qualification and a commitment letter. Borrowers think just because they have been pre-qualified somewhere, that it guarantees them the loan. This isn’t the case. As you know, the underwriter has the final say. If the property does not appraise for the correct value, the borrowers’ situation changes, or the seller pulls out, the deal is dead. These are things entirely out of your control. What I tell borrowers, is that we are going to go one step further than a simple pre-qual letter. We want to give them an advantage with their loan, and get them a full commitment letter from a lender as soon as possible. This lessons the chance of them getting their expectations set too high and not getting the loan in the end.

3. Phone the real estate agents early on and explain you are in control of the process. Call them BEFORE they call you. You want to show that YOU are in control—NOT them. Doing this, puts you at a higher level and they will respect you for it. Believe me.

4. Set expectations with the borrower upfront. Explain the entire loan process from start to end. First-time homebuyers just simply don’t know. Emphasize to them, if they have any questions, to call you first—NOT the realtor.

5. Make it known that you are the point of contact for all parties involved in the transaction. This includes the seller and buyer agent, appraiser, lawyer, title companies, etc. Usually, the realtor thinks they are in control for the whole process, but remember the sale is mostly out of their hands after the purchase and sales contract is signed. Then it is entirely up to you—the loan officer—to succeed! By being the “driver” in the process, you can minimize any confusion or crossed signals that may arise.

6. If you get a sales call from a borrower looking to purchase a home, ask if they have already been pre-qualified elsewhere. Most of the time they have been and are simply shopping around for the lowest rate. (In other words, go back to rule number one above… don’t show your hand too early). If the borrower shops behind the other loan officer, they will certainly do it to you too.

7. Explain to the borrower whether you are acting as a direct lender or broker. Each has pluses and minuses. Explain what you are and the role you play. Sell yourself. For example, you can say “As a lender, we have direct control of the process, we make the final decision and can tell you upfront whether you qualify.” or “As a broker, if you get denied by a lender, we can easily shop you to another lender, saving you time and effort. This will help you ensure you get the house you want and not jeopardize the process”. Sell your advantages…don’t mention your weaknesses.

8. Factor in all payments for the borrower, including the full principal, interest, taxes and insurance and be certain that the borrower is well aware of these entire costs upfront. If they can’t afford the house, you want to know as soon as possible. Or you’ll be left with nothing!!! I always say, it’s best early on to kill ‘em or keep ‘em. Don’t let timewasters run away with your income.

9. Watch critical dates, especially rate lock expirations and underwriting turn-times. Be well aware of the “commitment letter” date as stated in the purchase and sales contract on the property. Oftentimes, borrowers wait until far too late in the process before deciding to move ahead and these contract deadlines can be impossible to meet. Get an extension on this ASAP with the seller’s agent on the property.

10. Finesse your way through the process. Don’t lie. Only tell each individual party involved in the process what they need to know. Don’t share too much information…it creates confusion. And don’t tell someone something unless you are absolutely certain. It always comes back to bite you in the rear!

11. Stop the shopping. Make the borrower understand that once they decide to move ahead with the process, they risk losing the home, if they decide to leave you. Another broker/lender will be unable to meet the tight deadlines in the contract. They have to make a decision and stick to it.

12. Stop the shopping—part two. If the borrower is qualifying for a home based on a special program that your company is offering, tell them the criteria upfront. Not every loan officer has what you can offer. In other words, you have a specialized program and are making an “exception” just for them. Not all rates are created equal. The other “competitors” for the loan may not have all the correct information upfront, to be able to properly quote them an accurate interest rate. Let me emphasize that again—an ACCURATE INTEREST RATE. Educate the borrower on this, show them you’ve done your homework, and are quoting accurately. Ask qualifying questions that others don’t.

By keeping these tips in mind, it should make your next purchase loan go a lot smoother.

If you are looking for a firm step-by-step process to help you get your purchase loans to the table faster, please…please…please…take a minute to read about my Sink or Swim Loan Closing System at http://www.loanclosingsystem.com

And, as always, best of luck in your business. This is STILL a wonderful industry to be in! Stop being discouraged and go get ‘em!!! I know it’s tougher out there, but you can do it!

Buying a new home can be an exciting time, whether it´s your first home or your fifth. However, your savings, your credit rating, and your financial freedom are all on the line when purchasing a new home.

You want to feel comfortable when it is time to sign on the dotted line and feel good about the home you are about to purchase.

It´s important not to let your emotions cloud your judgment when you set out to buy what is most likely the largest single item of your life – your new home.

Before you get to actually looking at homes, take the time to establish your needs and wants. Make a careful assessment of what you absolutely must have in your new home compared to what would just be nice.

Be as specific as possible when determining your needs prior to purchase. It will save you much time and concern to do this before looking rather than getting into a new home only to discover that it doesn´t meet your needs.

Determine how much you can afford in a home loan and get pre-approved. Set up a budget for monthly payments and be realistic. By assessing your financial situation and getting pre-approved, you can be certain that when you select a new home, you will have the financial backing to get you in as quickly as possible.

When considering the purchase of a home, don´t just look at your current financial status. You will probably be in this home for years, and many things can change. Take your future into account as well, looking at such things as job changes and a growing family.

Once you begin the process of searching for a home, don´t let emotions cloud your judgment. Just because a house has a nice lawn or some interesting architectural features doesn´t mean it is the perfect one for you. While it is important to consider the aesthetics of a property, consider that much of what you see can be changed.

Never judge a house by how the current owner has decorated. Most likely, whatever is inside the house will be gone when the seller leaves, and it will be up to you to paint and decorate.

Take the time to view several homes. This doesn´t mean look at every house available on the market, but look at enough properties to get a good feeling that you aren´t just making an impulse buy. When you find the right home, all the work you do in this process will pay off.

Once you have selected a home that you feel is right, inspect it thoroughly. Be sure the home is inspected by a professional home inspection company, and go over that report with a fine-toothed comb. By taking the time to do this before making the purchase, you can save yourself an endless amount of stress after the fact.

Don´t take anything for granted. There are many pitfalls that can surface during the process, and it´s vital that you take care of these problems before you move in. When inspecting your home, check for working utilities so there are no surprises later on. Check out all costs and expenses before you sign anything.

Taxes, insurance and homeowner dues may appear, and you need to know all of them. Ask as many questions as possible and be very conscious of details.

Use your home-buying team as much as possible. Align yourself with the right real estate professional and you will have an entire team of reliable lenders, title representatives and home inspection companies available to you. Each of these people should work hand in hand with you and each other for your benefit.

Be sure to do a final walk through once all the previous owner´s furnishings have been moved to be sure of no surprises. Be absolutely positive the property is in exactly the same condition that you agreed upon in the contract. Things that could not have been spotted before are often unintentionally overlooked.

Plan for flexibility. Closing dates are not carved in stone. Allow for certain contingencies and always have a back-up plan in the event that delays occur. These types of circumstances are not at all uncommon in real estate transactions, so it is important that you are prepared for them.

Any and all promises and agreements must be written. If it is not in writing, then assume that it doesn´t exist. Even the best of intentions can be unintentionally misinterpreted, so take the time with your REALTOR to be certain that all agreements have been signed on paper.

Remember, your team will work best for you if you are honest and up front with them. Take the time to select the right team of professionals to get you into your new home and do everything possible to make this an enjoyable experience. They will return the favor by getting you into your new home as smoothly as possible.

Are you becoming wealthy on your house? Is your home your best performing investment? Is your house the only area that of your investments in which you are making money?
Red danger signals should be appearing in your mind. The housing market has gone up, up and up. Many people believe that they “have made x dollars from their house”. Is this true? Is this realistic? Will they ever be able to see or use their new found wealth?
It is true that. Even in 2004 it was said that housing prices had risen the most in 2004 in the past 25 years – that the OFHEO price increase was 13.4 %. Prices have been double digit and seemed to be able to go up and up forever. Indeed the price run-up from 1997 to 2006 was the largest in history.
What fueled this seemingly endless run-up in housing prices? The answer in 3 words was “low interest rates. China it seems wanted to maintain high employment figures for political and economic reasons. In order to maintain high employment levels the price of Chinese goods – at Wal-Mart or wherever had to remain low. If the Chinese currency remained low relative to the U.S. dollar or if the U.S. dollar remained at relatively high levels in relation to the Chinese currency this would be accomplished. It amazing that in our small global world decisions made by someone or a group of people in China can affect yours and mine economic position and future so greatly.
As a result China chose to pump money back into the U.S. buying U.S. treasury bills enmasse. The Amerian dollar remained high , the Chinese currency low. You could buy Chinese made goods cheaply at Walmart or Target stores. And interest and mortgage interest rates were at historically low levels.
As a result you could now purchase a house , upgrade your house or purchase a much larger and expensive house than you could of previously. Your banker or mortgage lender was only too happy to loan you the money for the mortgage – after all the loan , or mortgage was secured by good old fashioned real estate as collateral.
The housing market soared. People who could never of afforded to buy a home , condo or land could now afford one. So many new and additional buyers were entering the real estate market that not only did the demand for homes and other real estate increase but there were bidding wars for properties and sale and the supply for more and more houses and other forms of real estate diminished and housing prices soared. You may well of heard stories of people putting the proverbaial shingle on their home one morning and having it sold for unbelievable sale prices by the end of the day.
Along with this home builders were building scads of homes and selling them at these high sale prices. Mortgage lenders and banks were facilitating the process by selling and marketing low priced mortgages called “subprime” mortgages which offered an initial period of lower rates, the rate charged reverted to regular rates after the introductory period.
The key to all of this was that prices kept going up, up and up. There was no end in site. Not only that but what fueled the boom further was the fear that if you did not get in that you would be locked out in the future. The same house had risen from say $ 200,000 a number of years ago to $ 400,000 to $ 500,000 in one year, if I do not get in the market now; the reasoning went that home could be $ 600,000 or $ 750,000 next year. By getting in now I will get equity and be in the game. If I stay out – my family and I may be locked out of owning a home ever.
So went the logic. As well it seemed that the only place the family could make money in their investments was in the value of their home. One could not seem to “make money “in other traditional investments such as the stock market or their retirement plans.
Which brings us to the basic question? How is money being made? Can you ever spend this money for enjoyment or other goods? At coffee a Mr. Brown may tell you “I made $ 250,000 on my house.” It is true that profits on the sale of your home are treated different and better than other moneys made but the question is how did Brown come out ahead? He will be purchasing another property in the same market. As is said you “have to live somewhere”. If your house sold for a good dollar, that it was desirable, and was a nice home located in a nice neighborhood. It is highly unlikely that you are going to move to a much less desirable, more dangerous neighborhood where housing is much cheaper. You may be going to downsize somewhat but you are not going to move to a slum after enjoying luxury. So it goes this is not liquid profit that you can easily cash out. Even if you or wife decides that it is now time to sell the house since you can get a good price and “We can live in an apartment. So what!” you may well find out in a year that apartment living is not all it is cracked up to be. It was no accident in the past that you scrimped and saved to buy a house and move away from that noisy small, cramped apartment to a house. So it goes that after being reminded of your lesson that you find out that being out of the house and into an apartment for a year that it will cost you substantially for being out of your home for a year.
This all brings us back to our first question. Are you becoming wealthy on your house?

Many people don’t realize that there is a big difference between buying a condo and buying a house. Depending on your home owner style, you may prefer to buy one or the other, but the fact is, going with a condo may actually be the better idea.
When you buy a house, you are purchasing not only the actual home, you are also purchasing the land it sits on. You are responsible for the upkeep of the house, its exterior and yard, if any. This can get rather expensive, and, in general, houses are more expensive to buy than condos. While you can customize the exterior of a house fairly easily and usually without complaints, you have to decide if this is important enough to take on the responsibility of a house.
Condos, on the other hand, are homes that share common land and walls. Though there are now instances of detached condos, the majority are still built in rows, somewhat like townhouses, with a common wall between them. When you buy a condo, you are purchasing the interior and will become part of a homeowner’s association. The homeowners are jointly responsible for the property, requiring you to pay a monthly fee for upkeep and maintenance.
It’s important to read the legal documents carefully because there are a lot of rules that go along with joint ownership of the condo complex. Each homeowner’s association will have different rules and the paperwork can get pretty lengthy. There may be regulations against changing the exterior appearance of your home, even by planting flowers. If you don’t do well with such strict guidelines, you’d be better off looking for a place that has looser ones.
That being said, there are some distinct advantages to purchasing a condo, over buying a house. For busy home owners, not having to actually deal with the upkeep and looks of their home can be a very good thing. In some cases, utilities such as water, gas and electricity are included in the monthly homeowner’s fee, meaning a big savings in the long run.
In addition, condos tend to be cheaper to buy, in part because of the monthly fee requirement and in part because they are smaller than a regular house. Still, a condo is an excellent choice, particularly for young, single people or young couples who are looking for something comfortable that requires minimal upkeep. This can be an excellent way to start out your life in your own home. You have the benefits of home ownership, without all the responsibilities that go along with owning property. Security and living stability, but the maintenance is taken care of.
Condos are not right for everyone, but they can be a good choice for anyone looking to own a place without having to take care of it much. Just be sure to look carefully at the documents before signing anything and you’ll be fine.

There is no better place than home. Whether you live in Paris, London, Switzerland, Tokyo or Los Angeles, your heart always longs for your home. Your home provides you with all your needs and fulfills your wants. No place can replace your sweet home. It is paradise for you.
Your ideal home must meet all your needs so it’s necessary to do a lot of shopping until you find the place that’s just right. The best way to be assured that you’ll find your dream home is to compare several homes shown to you by different agents. It will enable you to zero in on the positive and the negative points of each.
It is very difficult to find everything you want in a particular home. Begin my checking the design and size of the structure and note if it will enable you to fulfill your wants and needs. If not, renovation may help.
When looking for a home, it is tempting to buy something that has some of the features you like, but it is advisable to wait, and continue looking until you find the home that has all, or most of the features you require.
For instance, when shopping, sometimes, it is tempting to sacrifice your preference in terms of number of rooms because of something else you like in the home.
Don’t be afraid to buy a home that has a good floorplan, and all of the square footage you need, just because the house is old, or is in need of remodeling.
An older home that has a good floor plan, has the right square footage, and also the right number of rooms could be ideal, but not attractive because it is outdated. Be prepared to spend time remodeling, or hire a contractor to make small changes that will make the home liveable, and also a place that you will want to stay long term.
The size of your home must be big enough to live comfortably. You may want to add a garden to outdoor enjoyment. Color also plays a very important role mentally. You may dislike the color of your roof, interior, exterior, or carpet. There should be enough bedrooms and bathrooms for the members of your family to live comfortably. There should be proper garage and basement space for extra storage. Apart from the home itself, you may need to check out the various amenities and facilities in the surrounding area like parks, children’s entertainment centers, proximity of office, school, market, bank, proper drainage systems, well-built area roads and smooth traffic, and proximity to public transportation.

House prices continued to rise over the course of June, new figures have indicated.
According to research conducted by Halifax, typical property values across Britain increased by 0.4 per cent during the month. With the average home now costing some 197,461 pounds, borrowers may well find their loans secured loans costs increasing. Over the second quarter of 2007 – the three-month period from April to June – house prices were reported to have risen by two per cent, in comparison to the three per cent rise noted in the fist quarter. This rate was also below the 4.2 per cent recorded in the final three months of 2006.
Chief economist Martin Ellis said: “The increases in mortgage rates and the persistence of negative real earnings growth in the early months of 2007 are expected to cause annual house price inflation to slow further over the coming months. Solid economic fundamentals and a shortage of housing supply will, nonetheless, continue to support house prices.”
Over the second quarter, properties in Northern Ireland and the Greater London area were reported to have driven growth, up by 8.5 and 4.9 per cent respectively. Halifax also showed that the Irish principality has seen the largest price rises in the country over the last 12 months with a home now costing an average of 228,790 pounds – a rise of 46.7 per cent from last year – homeowners in the area could be set to face increased pressure when making repayments on secured loans. The combined effects of demand from second homebuyers and buy-to-let investors, a “strong local economy” and rising immigration levels was reported to be the force behind the rises.
Meanwhile, homes in the north of England were said to have surpassed the 150,000 pounds barrier for the first time during the last three months. As a result, the Yorkshire and Humber region and Scotland are said to be the only parts of Britain to have an average property price under 150,000 pounds.
Figures from the financial services firm also reported the effects of mortgage rate increases over the past year are set to curb annual property inflation over the coming months. In addition a fall in real income growth could well see borrowers struggle with making secured home loan repayments. Halifax also indicated that disposable income fell by 0.3 per cent over the first quarter of 2007. A successive fall from the previous three months, it is the first consecutive quarter decrease to have taken place since 1999.
Commenting on the figures, Oliver Gilmartin, senior economist for the Royal Institution of Chartered Surveyors (Rics) claimed that although a rise in housing activity is generally noted over the summer months the most recent Halifax study had indicated moderate price growth. “The softer trend in this months housing data will not prevent the MPC from raising interest rates tomorrow as the economy continues to show solid expansion with price pressures remaining a worry,” the Rics analyst added. He pointed out that despite even growth slowing to 0.5 per cent over the last three months “this still equates to around 250 pounds a week with affordability deteriorating by the day”.

Who says living in the desert region is just too dry and hot? Whoever said that must have not experienced the good life brought about this region, particularly in Arizona. This state famous for the location of the Grand Canyon is not only a perfect spot for tourists to visit. It is in fact one of the growing states wherein you can find the best homes to live. You can establish your families in here; retire at your old age and even a perfect place to stay temporarily when you are having a vacation. If you love the hot climate, this is the perfect place to stay. Despite being dry and hot, this place has all the action needed for a person to have a life.Now if you want to settle in a place there are several things that you need to consider before making a purchase. Arizona is a big place and you might want to get to know the various cities in it. For one, Phoenix is the capital that has the most population and is the fifth largest city in United States. However, if you want to retire in here, you can go to a more laidback cities where you can find the best homes are and that is in Gilbert.Power Ranch is one of the the best communities that you should be looking for as the community offers you all types of homes that can satisfy your needs. As mentioned a while ago, several things needs to done before you purchase a house. The following are:1.    Look for a house online and see what you can like. Also, check the prices and see if it fits your budget.2.    You can have yourself pre-qualified so that you will know how much loan you can make to purchase the house.3.    Once you have fixed your mind on what property you want to buy, you can formally apply for a loan. This is the time wherein you have to be ready for various documents to be reviewed. Once approved you will have to select a loan program that you think you can afford. Once you have chosen, you can start the processing but it could take some time.4.    Once the load is approved, there are three documents you will be signing and that include the deed. You might have to settle some fees but once it is done then you can have the keys to your new Power Ranch or Gilbert Home.It might not be an easy process and it may take some time, as lending companies are very vigilant in reviewing your profile, as well as your finances. However, if you have great credit history and a stable job, then this should not be a problem. You can have your dream house in no time.If you have bought a home before, probably this process is not new to you. However, if this is your first time to purchase, this outline is just a summary on what is going to happen when you want to purchase a home, particularly in Arizona. Happy house hunting and good luck in purchasing your dream home.SummaryBuying a home in Arizona is a good thing to do because most of the real properties in this state are really affordable. In case you want to purchase one through loan, these four steps can give you a simple explanation on the step-by-step process of purchasing a house through loans.

Intended Audience

Individuals looking to purchase a home for personal use or as an investment. As well, looking into conventional wisdom’s statement that buying a house is one of the best investments someone can make.

Summary Points to Take Away

Analysis

Conventional wisdom states that buying a house is one of the smartest and best investments an individual can make. This article is geared towards challenging this conclusion to see whether this statement rears any truth to it.

Why a House is a Good Investment?

Forced Savings Plan

Most individuals claim that the purchase of their personal home was the best investment they’ve ever made, which is true in most cases because it is the only investment they’ve ever made. The general public struggles with saving for retirement; thus, purchasing a house assists in that problem as it forces individuals to continuously pay down the mortgage (or lose the house in a foreclosure to the bank); therefore, allows the storing of equity for the owners. This built up equity (i.e. market value of home minus remaining mortgage) can be borrowed against during their retirement years or they can downgrad into a less expensive house in order to provide some retirement funds to the owner. If individuals take a disciplined approach to saving, then the benefit of being forced to save in order to pay for a house diminishes

Leverage

Typical real estate purchase require only a 5% deposit, while the remaining amount can be borrowed through bank debt. Few alternative investments outside of real estate can the acquirer obtain such significant leverage, which can enhance investment returns.

Example, suppose that you purchased a home for $200k, for which you made a 5% deposit down ($10k). During the next few years the house appreciates in value and you sell it for $220k (10% higher than the level you purchased it). Though the return on the house is only 10%, the return to the investor based on invested funds sunk into the home ($10k) is 200% ($20k earned over $10k investment) –  that is the power of leverage. On the negative side, more debt means higher fixed monthly mortgage payments; thus, higher risk of being able to make the monthly mortgage payments. As long as cash flow is not a concern and the mortgage payments can be met – investments should be leveraged to maximize returns to the investor. Could you imagine walking into a bank and asking for $100k to invest in equities while only putting 5% down – likely to never happen, this is a major benefit of real estate ownership.

Inflation Resistant

Real estate holds its value during inflationary periods; thus, acts as a hedge against the investors other assets that aren’t protective against inflation (ex. Currency). The asset will continue to hold its buying power (store of value), which is difficult to get outside of investing in precious metals. The reason real estate holds its value is there is the same number of houses that the increased monetary supply of dollars are chasing; thus, it’ll take more dollars to purchase the houses as the supply of houses stays stagnate while the demand rises (due to the increase in the number of dollars in everyone’s hands). This can become critical given the current economic times and numerous expansions of monetary supply across many nations, which will have the aftermath affect of higher inflation.

Capital Gain is Tax FreeIn Canada, every home owner is provided with a capital gain exemption on amounts earned in excess of cost for their principal residence. Only one piece of real estate can be claimed as the principal residence per individual. For example, if you owned a home and a cottage, only one of those houses upon selling could take advantage of the principal residence exemption. No other asset class has such advantageous tax reduction characteristics. Unfortunately this is a onetime event; thus, those holding numerous pieces of real estate can only apply it to one property.

Allows for Control over the Asset

Real estate is typically an investment an individual has control over (assuming you’re the majority owner – which is typically the case) by the means of the owner has the ability to increase the value of the asset, which may not be the case in most other investment opportunities. When purchasing real estate, owners can make capital improvements to the home (ex. Finished basement, new porch, etc.), which will increase the value of the property (capital appreciation) as compared to purchasing stocks or mutual funds as assets where the owner can’t take action to increase the value of those assets (unless they’re a significant owner, greater than 20% – which is typically unlikely). The ability to control an asset adds value to the owner through what is known as a control premium, as a real estate asset may be more valuable in the hands of some individuals over others.

Why a House is a Bad Investment

Lack of Diversification

Average individual thinks the stock market is very risky while investing in real estate is more of a certainty. Purchasing equities allows the owner to conveniently hedge their risk amongst various companies in numerous industries, countries, etc. The purchase of real estate doesn’t provide the ability to diversify risk away as easily unless an investor plans on owning numerous pieces of different types of properties (ex. residential, commercial, resorts, etc) across various markets (North America, Europe, etc) – which is probably very unlikely for the average investor. Purchasing real estate prevents the diversification of risk because it’s dependent on the economic, migration, and regulation trends of the local area.

For example, assume you purchased a home in Oshawa, Ontario – which is a town extremely reliant on the large manufacturing facility of General Motors (GM). Should GM cut back on production or move their facility housing prices would fall sharply as it is the biggest employer in the area; thus, demand from individuals will decline as unemployment rises and real incomes fall. With a decline in demand and supply staying stagnate (as you typically can’t “un-build” a house once it’s constructed) the price will have to shift towards in order to align demand with supply.

Real estate doesn’t allow the investor to diversify away the specific risks in the local area as compared to purchasing equities, which allows the investor to spread risk amongst investments that perform differently during different points along the business cycle. Most individuals when purchasing real estate have all their eggs in one basket.

Maintenance Costs

Transaction and maintenance costs are significantly higher for real estate investments than stocks, mutual funds, etc. When purchasing stocks costs are typically broker commissions ($20 per transaction if using an online discount broker), while when purchasing a home it is typically 2% commission on the transaction value, significantly higher than purchasing equities.

Once you purchase shares, no further cash is required from the investor unlike real estate, which requires constant annual expenditures that continue to increase the investors cash committed towards the property, such as property taxes, insurance, utilities, maintenance and repairs of the asset, etc. These are costs that real estate investors or home purchasers don’t factor into their expected return, but play a significant role as the payment of property taxes (etc.) doesn’t contribute to the value of the property for eventual sale in the hopes of capital appreciation.

Historical Lower Returns Compared to Equities

During any 20 year period throughout history, no other asset class has outperformed equities, which includes real estate. This is from the perspective of asset vs. asset without consideration of leverage and how that may enhance returns (as discussed earlier). While it is true that over the long run real estate prices go up in value, this is typically due to inflation incurred. Recent spikes in housing prices seen in the past 10 to 15 years has been due to changing demographics, specifically the baby boomer generation (who makes up largest segment of the population in North America) go through life stages at the same time (same goes for starting a family and purchasing a home and real estate investment property). The result was a large influx in demand without a corresponding increase in supply as construction requires lead time; thus, leading to rising real estate prices.

Will this high demand continue? That’s where the argument lies. Likely there will be softness felt in overall real estate demand as baby boomers already have their homes and they’re likely to either stay put, move to retirement homes or downgrade into a smaller place in order to obtain some retirement income. Immigration will continue into North America that will prop up demand, but likely not the extent to fulfill the whole in demand left by the baby boomer generation; therefore, the future appreciation in real estate properties is likely to flatten out.

Can’t Take Advantage of Available Opportunities

The purchase of a home or real estate property requires the individual to tie up a significant portion of their net worth into the property (in a lot of cases, all of it). Having all your net worth in real estate is a risky strategy as you’ll be severely impacted by movements in real estate prices as compared to having your cash tied up into several asset classes; thus, less vulnerable to swings in any one asset class. Similar to the discussion had under the “diversification” section of this article.

With the majority of an investors net worth tied up in a real estate property, there isn’t available cash to take advantage of other opportunities that come along; thus, significant opportunity costs are involved in venturing into real estate. This should be considered before purchasing an expensive personal home or making a real estate investment.

Limited Scope

Real estate is a local good, unlike gold for example – which can be bought and sold throughout the year for the same market price. An individual looking to buy a personal home or make a real estate investment doesn’t have access to all available properties as there are physical limitations to contend with. It comes down to wanting to live where you grew up or currently work or not wanting to buy a rental property far from your home in order to reduce logistical issues. For example, if you live in Toronto, Ontario and are looking to make an investment in a rental property, you’re unlikely to consider properties in Paris, France though the opportunities may be better than those surrounding Toronto due to language and logistic issues. Equities (and etc.) are globally traded and available; thus, users can take advantage of opportunities around the world; thus, their scope is not limited to the local area of their current surroundings like real estate is.

Additional Points to consider if you’re purchasing a Home for Personal Use.

Doesn’t Provide Any Cash Flow

An asset typically provides you with cash flow, i.e. puts cash in your pocket. When purchasing a home, cash only flows out (property taxes, repairs, etc.); some would argue that if it appreciates in value then it is an asset. In this instance it is only an asset when converted into cash and if that is the case, where will you live? Likely end up buying a new house, which has also gone up in value similar to your house.  This makes it difficult to realize the value of your personal home appreciation, which acts more like a liability than an asset since it takes cash out of your pocket instead of putting some in there.

Tax Deductibility of Interest

Interest expense paid due to bank loans taken to finance investment properties is deductable against income because the investor is pursuing income and tax legislation allows deduction of any expenses incurred in the pursuit of income. This is not the case for a mortgage taken out to purchase a house for personal use as the individual is not in the pursuit of income; thus, interest expense is paid with after tax dollars, with no tax shelter provided. If those funds had been borrowed to invest in equities or mutual funds, the interest would be deductable because again that would count towards the theme of pursuing income.

Can Get Personal Joy Out of It

Unlike equities and other alternative investments, the investor can’t personally use or get joy out of it as compared to purchasing a home, which the individual can live in and enjoy during the investment process. An investor who purchases shares in General Motors (GM) can’t exactly borrow and test drive cars whenever they please simply because they’re a part owner. This is a qualitative benefit that is difficult to quantify, but should be considered.

Where to go from here?

The main reason to purchase a house is to have somewhere to live and enjoy their life, don’t think of it as an investment. Buying a home isn’t a bad decision; it is the investor’s perception that may be tainted because it is important to realize that there are many arguments against a home as an investment to be considered. Don’t buy real estate property with the mindset that an individual can’t lose and that there is no better investment opportunity than to purchase a home, etc. Beware of conventional wisdom that states there is no better investment than purchasing a house.

THANKS,

SIMON GIANNAKIS