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| St. George Island! Gorgeous views...right on beach! Anxious Seller! |
Banks. Just because they have money now, doesn't mean they are lending it to you.
Interest rates are historically low...if you can get approved for a loan. Yes, the bar for getting a second or third mortgage has been raised. Income? Assets? Banks are less likely than, say 2006, to just take your word for it. Cash flow is king, if you are only a paper tiger with non-liquid assets, it might be too risky. A loss of a job or income stream, for only a few months, could paint you into a desperate corner. And there you'll be- in those new white canvas beach shoes, in a corner, with red paint- yes, literally and figuratively- all around. What a mess!
Are you buying for an investment?
Really? Then you, sir, are an optimist! Much more likely, we'll see real estate prices slowly approach their mid-2000 price levels, over the next 30 years. Thirty years from now will, at least, put you into your retirement years. So, is this purchase for your kids? And in that period of time, there will sure to be some trials and tribulations in the marketplace. One thing I will never forget about the financial markets from this experience is that the smartest people in the world didn't see this whole mess coming. And if anyone did, they were not influential enough to matter or make a difference. Won't be that last time that happens...Will you really use it?
Most Americans get about 3 weeks of vacation per year and use even less than that. Even a long weekend is not without its challenges. In our situation in the Northeast, leaving work early on a Friday still requires catching 2 flights to finally make it to Panama City or Tallahassee. Then renting a car and a 1 to 2 hour drive to the beach. With luck, and remembering the house key, you are there by midnight.
A nameless financial planner says, "I would rather see you two rent the nicest house on the island for 2 weeks every year, than even own a sandy lot in Florida." He has a point.Can you handle someone else using your place when you're not?
Your answer to that question makes a lot of these others easier to answer. Why not use and treat your new place as income property?
Avg yearly % weeks rented
Property Value Mortgage/Tax/Ins/Utility Avg. Rent/Week 25% 50% 75%
$100,000 $11,100 $1,000 $12,000 $24,000 $36,000
$250,000 $16,400 $1,500 $18,000 $36,500 $54,000
$500,000 $27,600 $2,000 $24,000 $48,000 $72,000
These are rough numbers here, this is intended to get you thinking about some options. I'm figuring that you will use this place 4 weeks per year including family/friends. The remaining 48 weeks are to be filled with rentals.
If you can't manage the rentals yourself, then reduce rentals by 10%, a typical fee for a management company. Interesting development here, isn't it? In a couple of these scenarios, just renting the house only 12 weeks a year could offset most of the yearly costs, before taxes. 24 weeks will give you a nice cushion and 36 weeks some serious income! Pay down the remainder of the mortgage or use the income to finance similar deals down the beach. Beach House Bonanza...or Boondoggle, it's all in how you manage it.
Distressed properties and vacant sandy lots
As mentioned above, if you are faced with a situation where real estate values will be depressed for the longterm, you aren't buying for the appreciation. What can you do to improve your situation?
"Pay as little as you can, as late as you can"People who can't wait- pay more. People who don't negotiate (or want to)- pay more. In fact, these could very well be the people who will be selling you their beach place! We haven't had this kind of situation in housing before. Banks are sitting on multiple properties, owners are struggling with second mortgage payments or trying to get the greenlight from their banks for a "short sale". Add in the usual divorce and estate settlements, increased job layoffs...and you find yourself in a world of distressed property.
Every property will have it's own story and most likely a different bank to work with. The downside is that there will be some hoops to jump through, but the upside is that you can get an undervalued property compared to the going rates today. And in my mind, if I just paid 33% less than the already reduced property values, then I start ahead.
Undeveloped lots. I've been intrigued, I admit. An undeveloped lot is inspiring and usually inexpensive. Although I could sub-contract the work and build cheaper than a developer, I still will have too much of my cash involved too long in the deal. In fact, the banks require you to have your fingers deep in the pie for a construction loan. Say no.
Just like most things, there are a lot more details to cover before purchasing any large dollar item. There could be advantages in creating a corporation, available housing tax credits, even energy rebates for renovations. A tax professional, financial planner, real estate lawyer and realtor would all be great places to start your planning.
