Buying Real Estate for fun and profit

Buy what you can afford to start with. The first five years you are building an equity position. Own more than one. Make money when you buy. Be flaxible. Work the numbers, and be prepared for an opportunity.

Alright, let’s begin with the fact that everything you have ever heard or have seen in an infomercial is true. People, just like you, buy and sell Real Estate every day and make a profit. There is nothing fancy about it, nothing glamorous either.

It takes hard work, focus, and dedication. It’s like any other business. Buying and owning Real Estate is a business. If you want the white picket fence, that’s fine. Remember though that if you have that American Dream it usually involves other things than the family home. There is no reason why you can’t be smart in this process.

The first trick of the trade is timing. October, November, December, some times August and September are good times to buy. The best time to sell is January and February. March and April are the hanger on times, if your not sold by then you better be ready for competition. The May, June, July times of selling are sucker bets. Those are the times families want to move so the kids can change schools smoothly.

The fact is that the school has to be chosen by February 15th so the biggest buyer pool is shopping at that time so the kids can be sure to get into the perfect school. Some families rent in the school area they want to end up in just to hold the spot. Most, with money shop for the home, ask for delayed closing, then get the family home on the market in, you guessed it, March, April, and May. So to be clear the best buyer pool is selling in May.

If the best buyer pool can’t sell in May, June, or July they may panic in August, or September. There is another way to look at this; a smart family may sell in November and buy in January then have a place legitimately on the books for the February 15th school enrollment. So October, November and December some families want to make a deal.

Mom, Dad, and the kids are the biggest buyer pool. It’s just a fact that families have a greater need for housing. You can follow that with retirees. As we move down the food chain it’s young couples, single women, and last, but not least, guys. OK those are the players in the housing market.

Now let’s talk about product. Real Estate is a commodity. A lot of talk surrounds location which we’ll get to in a minute.The Cadillac of construction years for Seattle were the mid to late 1950s. Money was cheap, there were excellent builders, and the anticipation of the World’s Fair made everything seem golden. In 1960 to 1962 the building pace got more frenzied and things were just thrown together 1962 to 1964.

In the world of old the 1920s were great for Seattle. Remember this was a boot leg city built on Canadian Whiskey. War years brought Seattle big business and dollars. Every community has a story and construction trends to go along with it.

Once you have product in mind you can kind of figure location. Tudors, Craftsman, Bungalows, and Colonials, have places around the city. Depending on your life style, and what you want out of a property may determine your location.

Which brings me to flexibility. Many families are stuck in a school system where the children want to stay with thier freinds. Young couples want a house to grow in, and single women want to feel safe. Big generalities I know, but please play along for now. Oh yea, I forgot about the guys, for those few who actually buy a house, I’m sure it was an accident.

Along the lines of flexibility you never know what will happen in the market place. You may walk down your street in the next hour and find the perfect house. It happens all the time. Some one may want to sell today for cheap. Some people get relocated, some buy what they want then sell off what they don’t, you just never know. So the first thing to do is shop for money. Go to a Mortgage Banker, or Broker who can shop loans for you.

I say shop because there are hundreds of loan programs that require different things. Find out what you can do with a mortgage first, but don’t get discouraged when they tell you no, or that you have to find a house first. Check your credit score with a Mortgage person. Give your Mortgage person your personal information. Get a file going first, before they tell you no. Don’t be discouraged. Find the money first before you shop.

Here’s why. Let’s say you qualify for a twenty five thousand dollar owner occupied loan; Great, Congratulations, let’s go shopping. Let’s say you qualify for the loan but you don’t have money; Great, perfect! Maybe your credits bad, we can fix it, maybe you do need money in the bank and we can save it. Figuring the financing is crucial to the process.

Next, your not going to get what you want. Separate sentence fade to black.

 You will get what you need, and what you need is to step up. There are two ways to look at a property, cash flow, and equity. I buy equity. I buy what I can sell the same day for a profit. I may keep the property for a while, but I want to know those dollars are there. Other people buy what they can rent out the day of closing for a positive cash flow. In order to do either you have to negotiate a deal. You have to work your numbers and stick to them. You need a deal. Flexibility is the only way to negotiate, and you need to be prepared to move on if things aren’t going your way.

In the shopping process you have your numbers. By all means take a picture of the house you want to end up in and hang it on the wall, but you won’t get there by hoping, or dreaming. You have to make this happen. A strategy is to buy a house to live in first, then immediately buy another within about a year. Many people rent out both houses, or rent a room in one of the houses to live in while they work two jobs or operate a business.

You make money when you buy the house, and collect the money when you sell. After two years of owning two houses, you may want to sell one to buy down the principle balance on the second house. This helps to amortize the mortgage faster. You can still work two jobs, or operate a business then throw more money at the principle balance. As you begin to get the principle to decline it will be time to buy in earnest. Equity is the only way to leverage and you never leverage the equity. 

By now your into this process five years and only own one house. Hopefully you have an equity position from a diminishing principle balance. You’re headed to do the same thing of buying another house to live in. It’s important to jump start the first house. It will pay off later. Of course there are people who buy twenty houses in that first five year period and every two years they sell off a house to apply the equity to the principle balance of the one they want to keep.

The five house theory is just that. If you own five houses free and clear you should be able to retire. The trick is owning the homes and getting the principle to amortize. The owning one house in five years and getting it on it’s way to diminishing the principle balance is pretty easy. Owning twenty is more risk. Either way it’s important to stay active. Some people paint, clean and repair; most do nothing. Some argue that you can build a savings account, which is true. The thing is that in the five year period there are, appreciation, or not, amortization, and most important inflation.

You want to get five properties to thirty year fixed mortgages and in fifteen years your are diminishing the remaining balance with inflated dollars. That’s what makes the wealth value of property. Inflation is giving you more rent. It keeps pace with the Consumer Price Index.

These are the basic theories. In the next installment I’ll share strategy. If you want to comment I can address concerns. This is a business model, so please don’t confuse this with the family home. We are in business to make money.