The Home Buyer's Advisor: A Handbook for First-Time Buyers and Second-Home Investors - Softcover

McLean, Andrew James

Softcover

ISBN 10: 0471466417 ISBN 13: 9780471466413

Publisher: Wiley, 2004

Synopsis

The tax-smart guide for first-time buyers and second-home investors

Whether you're a first-time home buyer or a seasoned investor, this practical guide covers everything you need to know to invest safely, confidently, and profitably in today's real estate market-while getting the most out of the latest tax laws.

The Home Buyer's Advisor shows you precisely what to look for in a real estate investment, where to find the best buying opportunities, how to use proven holding strategies such as land-banking and lease options, and how to make your home a secure foundation for future real estate investments. Ideas for a secure retirement are also included. Packed with ideas, strategies, and real-world examples, Andrew McLean's Home Buyer's Advisor will show you how to:
* Take advantage of a wide range of financing methods, such as originating new VA, FHA, and conventional loans; loan assumption; wrap-around loans; and other alternative financing methods
* Hunt for bargain properties using the Internet
* Profit from HUD and VA repossessions and bank foreclosures, and bid for property at special auctions
* Use professional appraisal techniques to ensure you're getting the best value for your investment
* Utilize smart investment strategies and holding techniques
* Manage properties without all the hassles
* Minimize, defer, and transfer more of your tax liability
* And much more!

About this title

About the Author

ANDREW JAMES McLEAN is the coauthor of the Wiley bestseller Investing in Real Estate, which has sold more than 100,000 copies. He is currently an active investor in the Las Vegas and Mississippi Gulf Coast real estate markets. He holds a BA in business administration from Michigan State University.

From the Back Cover

The tax-smart guide for first-time buyers and second-home investors

Whether you re a first-time home buyer or a seasoned investor, this practical guide covers everything you need to know to invest safely, confidently, and profitably in today s real estate market while getting the most out of the latest tax laws.

The Home Buyer s Advisor shows you precisely what to look for in a real estate investment, where to find the best buying opportunities, how to use proven holding strategies such as land-banking and lease options, and how to make your home a secure foundation for future real estate investments. Ideas for a secure retirement are also included. Packed with ideas, strategies, and real-world examples, Andrew McLean s Home Buyer s Advisor will show you how to:

• Take advantage of a wide range of financing methods, such as originating new VA, FHA, and conventional loans; loan assumption; wrap-around loans; and other alternative financing methods
• Hunt for bargain properties using the Internet
• Profit from HUD and VA repossessions and bank foreclosures, and bid for property at special auctions
• Use professional appraisal techniques to ensure you re getting the best value for your investment
• Utilize smart investment strategies and holding techniques
• Manage properties without all the hassles
• Minimize, defer, and transfer more of your tax liability
• And much more!

Whether you’re a first-time home buyer or a seasoned investor, this practical guide covers everything you need to know to invest safely, confidently, and profitably in today’s real estate market–while getting the most out of the latest tax laws.

The Home Buyer’s Advisor shows you precisely what to look for in a real estate investment, where to find the best buying opportunities, how to use proven holding strategies such as land-banking and lease options, and how to make your home a secure foundation for future real estate investments. Ideas for a secure retirement are also included. Packed with ideas, strategies, and real-world examples, Andrew McLean’s Home Buyer’s Advisor will show you how to:

• Take advantage of a wide range of financing methods, such as originating new VA, FHA, and conventional loans; loan assumption; wrap-around loans; and other alternative financing methods
• Hunt for bargain properties using the Internet
• Profit from HUD and VA repossessions and bank foreclosures, and bid for property at special auctions
• Use professional appraisal techniques to ensure you’re getting the best value for your investment
• Utilize smart investment strategies and holding techniques
• Manage properties without all the hassles
• Minimize, defer, and transfer more of your tax liability
• And much more!

Excerpt. © Reprinted by permission. All rights reserved.

The Home Buyer's Advisor

A Handbook for First-Time Buyers and Second-Home InvestorsBy Andrew James McLean

John Wiley & Sons

Copyright © 2004 Andrew James McLean
All right reserved.
ISBN: 978-0-471-46641-3

Chapter One

Why Buying a Home Is a Great Investment

Home is where the heart is, said Charles Osgood, host of the popular CBS television show Sunday Morning. That particular show, which aired April 27, 2003, had a segment about how Americans have retreated to their homes for safety since the attacks of September 11, 2001, and have made them their sanctuary from the rest of the world.

But the home has much more virtue than just sentimental value, or its value as a great refuge. Not only is the home a great investment, it also is a natural wealth builder and a superior tax shelter. Your home can even be the foundation for a pyramid of other profitable realty investments, yielding a lifetime of worry-free income.

Reasons Why Real Estate Outperforms Other Forms of Investment

A monumental event involving America's stock market took place in the spring of 2003-on March 24, the bear market turned three years old. During that time, the Dow Jones average had lost over 30 percent of its value (measured not in billions, but in trillions of dollars), and unfortunately the bear's birthday coincided with the onset of a new age of uncertainty. Americans faced a steady media drumbeat of war, terror, fear, and recession. The United States initiated its first preemptive war, against Iraq. Fear of terrorism stymied economic growth. Scandals put distrust in financial statements and Wall Street research. Seasoned investors now no longer view the stock market as a direct route to a comfortable retirement. The sound investment strategies that earned great returns in the 1990s don't work any more.

Meanwhile, what do you think happened to America's median home price-half sold for more, half for less-during that same three-year period of declining stock prices? It jumped 8.8 percent year-over-year in the October to December quarter of 2002. The increase broke a six-month trend of moderating home price increases. As Figure 1.1 shows, home price increases ranged from a low of 3 percent to a peak of 8.8 percent during that three-year period.

The 8.8 percent jump was the biggest such increase reported by the National Association of Realtors (NAR) since 1981. And the upward push on prices is widespread: 39 metropolitan areas registered double-digit price increases for the quarter, triple the number of metro areas with such growth in 1999. NAR chief economist David Lereah is quoted as saying, "The big jump reflects the explosive mix of tight supplies of homes for sale and mortgage interest rates below 6 percent, the lowest in four decades."

Like many other housing economists, Lereah forecasts that the growth in home prices will decelerate to just 3 percent by the end of this year. His scenario: a strengthening U.S. economy leading the way to higher mortgage interest rates, and a modest cooling in what continues to be a red-hot housing market.

What's the end result after three years of declining stock prices in an economic recession? The average stock market investor took a beating in the portfolio. Conversely, over the same three-year span, the average home owner or real estate investor experienced steady appreciation with solid gains in value.

This comparison has served to emphasize the enduring benefits of owning a home. Most Americans prefer safe investments with historically good track records. Housing is one of those standards of enduring value, and adult Americans have most of their wealth invested in their homes. Two out of three adults living in the United States own their own home. Investment in a home gives the owner a hedge against inflation, an opportunity to shelter income from taxes, and, more important, a chance to accumulate wealth for the future.

"Okay," you may be saying, "you've convinced me that real estate has looked good in the past three years, but what does the future look like?"

Expect Increasing Rents and Appreciation

Although short-term economic recessions may temporarily cause a rise in vacancies and depress rents, rent levels and appreciation will go up over the long term, because future demand will increase faster than future supply. Here are four reasons why:

1. Growth in America's population. Moderate growth projections for the next 20 years reveal that the U.S. population will increase from its current figure of 284 million to a figure of 334 million-an increase of 50 million people. In just two decades, America will add more people than are currently living in the three states of Florida, Michigan, and Texas.

2. Growth in the number of households. Americans presently average 2.2 persons per household. But continuing with a declining trend, that figure is likely to fall to around 2.0, given the relative trend of families having fewer children, more singles living alone, and more baby boomers of the mid-1940s moving into retirement. Thus, America will need 25 million additional housing units just to adequately house a net gain of 50 million people.

3. Growth in personal income. People need money to rent apartments or to buy homes. Accordingly, people earn more money when the national economy is growing. But what does the future hold for growth in the U.S. economy-will it be productive, and can it adequately supply the employment needed to generate this income? It's gratifying to know that the outlook for growth in the national economy is very promising. Expansion of markets for U.S. products due to globalization, continued corporate cost cutting, higher levels of competition among businesses, and technical innovation will bring more gains to incomes and economic productivity. In addition, a growing number of two-earner households increases overall household buying power.

4. Growth in second-home ownership. Currently, approximately 8 million households own a second home. Taking into consideration the prevailing market conditions that tend to stimulate more real estate investment-low interest rates for mortgage loans and dispirited stock investors bailing out of the market to invest in real estate-forecasters expect this number to expand significantly over the next 20 years. They're predicting that by 2024, about 20 million households will own at least two homes.

As you can see, expanding population over the next two decades will generate record numbers of people needing adequate housing. This additional demand on the housing market will put a lot of upward pressure on the nation's overall housing supply, with corresponding increases in both rents and home prices. Yet, you might respond, "What about the law of supply and demand-that builders will expand their capacity to erect more new housing to satisfy the demand? Or, is it possible that they could go overboard and build too much, and glut the housing market?"

The answer is no to both questions. Here's why:

In the classic economic theory, supply increases to satisfy demand. Shortage of a product increases the demand for it, which inevitably makes its price rise. As the price continues to escalate, more suppliers see the profit potential and begin competing to produce the product, which eventually adds to the supply and curbs runaway prices. This theory is credible for long-distance telephone rates and airfares. However, throwing cold water on a red-hot housing market when home prices are going through the roof is not so easily done. Builders and developers are unable to construct enough homes and apartments to meet people's needs, because they're hampered by the following five factors:

1. Insufficient habitable land. All in all, the United States is blessed with an abundance of land-unfortunately, the majority of it is situated where people don't want to live. Most of the desired habitable land is already built on, and that which is still unimproved costs plenty to own.

2. High costs. Even with today's easy-qualifying low-interest mortgages, most people still can't afford to buy or rent new construction. The median price of a new home is now $178,000. The cost to construct new apartment developments approaches $85,000 per unit. And in contrast to giant corporations like General Motors or Chrysler, home builders can't easily cut costs through economies of scale (that is, lower the production cost of each individual unit by producing a large number of units of the same type) or across-the-board layoffs.

3. Inadequate infrastructure. New housing and apartment developments usually require new or expanded infrastructure, such as roads, schools, and sewer and water systems, to service the new community. In situations in which developments lack sufficient infrastructure, governments assess developers thousands of dollars per unit in impact fees or as an alternative, often block new construction.

4. Oppressive regulatory approval procedures. Before construction can begin on any major land development, governments require dozens of lengthy and costly permits. Large-scale projects necessitate an investment of millions of dollars and several years of preparation before the first apartment or home is ever completed.

5. Negative public interest. Even if developers are able to get through the maze of bureaucratic red tape, they must still contend with environmentalists, unhappy neighbors, and public interest groups who all want to restrict development.

Considering all five of these restrictive factors, it would be very difficult for housing developers to respond both expeditiously and economically to sudden demand. Granted, from time to time, some local markets have to endure an oversupply of housing, which produces excessive vacancies and depresses home values. Yet, in the best of times and in most markets, builders are invariably trying to keep up with housing demands. Over the next two decades, home owners and real estate investors will surely benefit from the restricted supply of new housing.

On the whole, given the market fundamentals-the growing numbers of home buyers and renters with money competing for a constrained housing supply-rents and property values should increase to all-time highs.

Other Benefits of Real Estate Investment

Besides a promising future outlook with regard to value appreciation and increased rents, there are many other benefits of real estate and reasons it will outperform other investments. These include:

* You have personal control.

* You don't need much to get started.

* You get forced savings via the wealth-building benefit.

* You get tax benefits.

* It's easy to learn the how-tos of profitable real estate investing.

You Have Personal Control

Owning real estate means having a home of your own to live in, and a second home you can rent out, invest in, and profit from without losing control to so-called professional investment advisors. And most important, you'll have personal control over your investments in historically stable markets.

In simple terms, there is virtually no better investment available, none which gives you such total control, nor which historically appreciates over the long term and offers big tax breaks (mortgage interest plus property taxes) and up to $500,000 in tax-free gains to boot. Second-home investors or investors with other types of income property not only share the great benefits home owners have, they have the added advantage of reducing rental income through depreciation and expense allocation. (See more about these topics in Chapter 22.)

I want to emphasize the phrase personal control, because there is an important lesson here. Unlike acquiring stocks or bonds, with real estate you don't have to depend on third-party agents to handle or manipulate your hard-earned investment money. That's because you make the critical decisions as to what to buy or invest in. Granted, you may take the advice of knowledgeable Realtors or friends, but it is you who will ultimately live in the investment and care for it, or decide who rents it, and it is you who will thereby have command of its usage.

You Don't Need Much to Get Started

Most often, all you need to get started with buying a home is a few thousand dollars, and at times you don't even need that. This book shows you no-money-down techniques of acquiring real estate. With FHA financing you only need as little as 3 percent down. And if you're a qualified veteran, you can use a lot of leverage to finance a $203,000 home with virtually nothing down.

In the financial world, leverage is the use of a small amount of cash to control a much greater amount of assets. Zero leverage would be a full-cash purchase; a purchase 90 percent leveraged would combine a 10 percent down payment with 90 percent financing. Due to the impact of inflation and appreciation on real estate values, you can achieve the greatest yield on your invested dollars by getting as much leverage as possible when purchasing real estate.

As a simple example of leverage, consider buying a home using 95 percent leverage (a 5 percent down payment), as opposed to purchasing the same property with zero leverage. In this example, suppose you bought a house for $100,000 with a $5,000 down payment (5 percent), and a year later you realize a $5,000 increase in the value of the home. Therefore, the house is now worth $105,000. Because you put only $5,000 down on the house and it appreciated $5,000, you realized a 100 percent return on your investment ($5,000 return on $5,000 invested).

Now suppose you bought a similar house with $100,000 cash (zero leverage), and a year later that property also increased in value to $105,000. In this case, your investment is $100,000, the appreciation is still $5,000, but the return (yield) is only 5 percent on investment ($5,000 divided by $100,000).

Unlike buying stock, you can own $100,000 of real estate with as little as a $3,000 down payment. To purchase $100,000 of stock, you'll have to come up with at least $50,000 in cash (50 percent). And if the stock you purchased declines in value, you'll get a margin call requiring that additional cash be added to the account. If you do not meet the broker 's margin requirements, the stock could be liquidated, and you'll be stuck with the loss. But there are no margin calls in real estate. Even if your home declines in value, your mortgage lender cannot require you to invest more cash into the home just to maintain a specified loan-to-value ratio.

Overall, not only can you invest in real estate with far less cash than would be needed to invest in an equivalent amount of stock, but financing real estate is not nearly as risky, and it is much less complicated than using leverage to buy stocks. Using leverage to invest in a volatile, unpredictable stock market is a risky game played mostly by brave speculators.

You Get Forced Savings via the Wealth-Building Benefit

Figure 1.2 shows what happens to a $10,000 down payment on a $110,000 home over 30 years based on three different rates of inflation. Based on a 4 percent rate of inflation, as the loan pays down over 30 years the home owner can expect an equity growth of $300,140. At 5 percent, he or she can expect a $10,000 down payment to increase to $491,350. And at 6 percent, a similar down payment would grow to $589,350 in equity.

Typically, when you own a home for many years, it becomes an important part of your financial net worth-that is, the difference between your assets (financial things of value such as stocks, bonds, mutual funds, CDs, savings accounts, retirement accounts, and so on) and your liabilities (debts). Over the decades a home will likely not only appreciate in value, you'll also be paying down the mortgage. The resulting home equity-the difference between the home's market value and the outstanding mortgage balance-can develop into a substantial amount of wealth that you can benefit from in several ways. If you're like most people who plan to retire someday, the home's equity can be a great source of retirement income. (See the section titled "How to Retire on the House" in Chapter 23.)

(Continues...)

Excerpted from The Home Buyer's Advisorby Andrew James McLean Copyright © 2004 by Andrew James McLean. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: Wiley
• Publication date: 2004
• Language: English
• ISBN 10: 0471466417
• ISBN 13: 9780471466413
• Binding: Paperback
• Edition number: 1
• Number of pages: 312