A Few Consideration On Investment Properties

There aren’t any easy answers to that question of whether this is a good time to buy investment properties, but there are several factors which need to be examined and considered before you arrive at the final decision. The current economical environment has made a mockery of many of the tried and true axioms on which investors relied to signal buy points in real estate.

Even so, there is one cliche by which I stand and which I have no trouble recommending “location, location, location”, now lets take a look at the rest of them.

Interest rates and the economy - In general the interest rates are determined by the liquidity levels in the system.A few years ago, prior to the market collapse interest rates alone were a very useful barometer to determine at what point to jump in the real estate market as an investor. Evidently things have changed. In current conditions the “Affordability Index” is probably a more useful tool.

Currently the housing market overall is at record affordability levels but there is no guarantee that they will not get more “affordable” or stay at this level for some time or maybe go up and thus get less affordable.

When clients ask me if this is the bottom, I don’t use the standard wise-crack reply ” My crystal ball ain’t working,” that so many so called professionals throw around. If a client does insist on a “sound bite” answer, I reply that “I don’t know if we are at the bottom or not, but I know that we are not at the top of the market”

In case the liquidity levels are high and interest rates are likely to remain low, the demand for property should be on the rise and therefore so should be the real estate prices. However determining the general direction of the, movement of interest rates is a complex issue and best left to the judgment of an economist. As a starting point its probably a good idea to decide to buy a property once your research suggests that the interest rates are likely to remain low.

Equity markets – In the past one steadfast argument was that if you you felt that the equity markets have bottomed out and are set to rise in the medium term, it would make sense to invest in real estate since the two markets are very correlated.
In this environment that hasn’t been the case. The equity markets have been en fuego for a total move of over 30% int he past few months where as if you had invested in real estate property during that same time, depending on price paid and which region, you would probably, be in the red.

Should you be discouraged? Probably not, if anything this illustrates two very important points:

First, in this environment only the most shrewd players will make a profit in the “flipping” world.

Second for real estate “time” is probably more important than “timing”.

The accepted matrix is that the equity markets lead the rest of the economy by about six months. If that holds true than the real estate markets will soon catch up with the equity markets and as investors are looking to protect equity profits they might take a look at the real estate market. Of course there are those who are forecasting a “W” shaped or double bottom economic slowdown. I have no way to know all that but again if you can give yourself enough time you might ba able whether all that.

Employment levels in the economy – Higher unemployment rates are a deterrent to the overall economy and adversely affect the growth of the housing industry. If you feel that the unemployment levels are on the decline, it could well be the beginning of a long term bull run in the housing industry. Watch out for employment numbers published at periodic intervals and you spot a trend then you might have a good starting point. Unfortunately employment figures are a very lagging indicator – meaning that employment turns up long after the economy has recovered- and you might have to pay more for having missed the first leg of the move up.

Tax Questions - The taxation advantages of investment properties have been largely curtailed and vary widely form state to state. Many municipalities, especially here in New Jersey’s Gold Cost have increased real estate taxes considerably, ranging form 47% in Hoboken to about 15% in Weehawken, etc. As expected both of those cities are currently in the middle of tax battles with residents appealing the increase. It does however illustrate the paramount importance of finding out not just the town’s current tax rate but what if any tax increases are on the horizon. A significant increase will certainly impact your carry costs for the property.

Location – If you are convinced that the location is about to experience a great degree of popularity, for whatever reason, then you can bid accordingly. Understand however that as Joe Public you are probably not the first person to know about whatever catalyst is about to hit the area in order to make it more desirable. Carefully compare the current prices to those prior to the announcement of what ever it is that will occur to spur demand.

Lets take for instance a commuter hub here on the Gold Coast If a new train station or light rail station is planned for a particular neighborhood or town you would think that it would be beneficial and that prices will increase accordingly.

Before jumping in there are a few factors that will help you ensure that you aren’t jumping from the proverbial frying Pan into the Fire. For starters find out if the project is privately financed, or publicly financed or a combination of the two.

If its a private project or has a significant private dimension to it find out as much as you can about the company’s finances, past endeavors and how those endeavors affected real estate prices in the area where it has competed similar project.

If the project is funded with public funds find out first of all if the funds have been allocated form whatever budget there is. If the funds are not allocated from the current budget and most large projects are not find out how the municipality plans on paying for the construction. Will they and can they issue debt obligations to finance the project? To gauge how likely that will be to succeed you may only need to take a quick look in the local newspapers and check the stories about the town’s financial condition. You may also try to talk to some of the syndicate members of previous debt issued by the municipality and see if any of them will give any indication of how the investment community feels about purchasing additional paper from that town.

It is also very important that you find out how crucial a particular administration’s backing is to the project. If for instance the current administration is all for it but their political opponents say that it will be completed only over their collective dead bodies then that’s something you might want to consider especially if the funds have yet to be allocated and construction has yet to start.

Again, also take a look at the tax ramification’s of the project as it is very possible that is is you who will be footing the bill for it in the form of upcoming tax assessments.
Financing- Evidently a high credit score will help to get a better financing rate, but unlike mortgages for a primary residence for an investment property that might not be enough to even get you in the front door. On the other hand you might find programs that will allow you to purchase multiple properties with very convenient rates. I’ll try to write on this subject in the future but for now I just urge you to consult you mortgage experts prior to spending any money

In case you have good financial credibility, which is reflected in a a higher credit score, you are still likely to get a mortgage loan assuming that the “numbers make sense”. How banks calculate what does and does not make sense in this current market is the stuff of the kind of alchemy of which I have no knowledge-few do. I suppose that its trial and error at this point and if one or two banks turn you down you might have to go to a third fourth or fifth lending institution.

Expert Advise – Its very important that you get expert advise on this and it is very important that you find someone who understands the various issues involved. For example, for properties over four families rent control considerations might need to be addressed.

Ask your agent if he or she has had any dealings with these type of issues I for one would look for an agent who also owns similar properties as the one in which I am interested and pick their brains. There is nothing like experience.

I wish you all the luck and success and if you are considering doing any of this in NYC or New Jersey’s gold coast please add me to the list of agents that you plan on calling for assistance. Chris 201 562 6850