One thing about real estate is that it is always shifting. That means that at any given time there is going to be one or more arenas where investing makes more sense than others. This is by no means an exhaustive list, and really only applies to today…but hopefully these thoughts will be of some worth.
With the incredible population growth that we are experiencing the question comes up all the time, where are we going to put everybody? Growth is a great problem to have and where there is a problem, there is the potential for making money if you can fix the problem. Here are my top 3 best investments…in no particular order.
Raw land/water rights
It is an age old strategy to buy land on the outskirts of a metro area and wait for growth to catch up to you. This has been proven successful time and time again, but there are a few things to know:
If you choose wisely you will look like a prophet/genius
The difference between valuable land and cheap land is huge!
You have to be prepared to play the ‘long game’
Taxes must be paid every year, so you usually invest a bit more every year
You will need water to finally develop the property
When you invest in raw land you have to be OK with the fact that it might be your grandchildren that finally get a benefit for your hard work. Predicting the growth of communities and the preferences of the public is a tough game to play. Even economists and ‘insiders’ commonly get growth patterns wrong. My observations have led me to believe that basically you just have to go with your gut and be prepared to be patient.
An advantage of buying land is that you can then begin to purchase water rights. In Utah if you do not use water you lose it, so you will need some land on which to deploy the water. You can lease the right to a city in the area as well, but htat is not nearly as much fun!
If you can assemble the capital necessary to purchase multi-unit apartments that cost more than $500,000 you can do quite well. Lower priced units are fiercely competitive so the investment returns get pushed down as the properties get bid up. If someone is going to live in one of the units themselves it makes sense to accept a very low investment return because you are basically just subsidizing your payment.
When you move into higher dollar properties you are no longer competing with the owner occupants so the return on investment is much better. This means that you can get real pre-tax returns of better than 6%. After tax returns are much higher depending on your tax bracket.
With small multi-units in the lower price ranges we discussed the element of a payment subsidy. This same principal applies to larger homes that are owner occupied and a small portion of the property is rented out. For example if you purchase a home for $500,000 that has a 2 bedroom basement apartment included and you rent that apartment out your effective house payment plummets!
Monthly Mortgage payment: $2800
Rental income from apartment: $1200
Effective payment: $1600
The amazing thing is that your effective payment is like owning a $300,000 home, but the $500,000 will be about 3-4 times the house than that smaller house you could have bought. Accessory apartments are a probably the very most lucrative investment for a home buyer to consider.
I just finished reading an interesting book by Leigh Gallagher titled The End Of The Suburbs. Being a real estate agent in Utah, where almost all we have is suburbs, I was intrigued by the title and had to read it. Though Ms. Gallagher makes several good points regarding demographic trends and individual preferences she was forced in the end to concede that there is in a fact a need for suburbs.
Points of Agreement
The author has a very East-coast-centric perspective and I think that her conclusions are more applicable in the East than they are in the mountain region. Despite her personal perspective there are sever points with which I agree:
- People are moving toward smaller homes. The “Bigger is better” mentality has faded. I even have clients that now set an upper limit on the size of home they will consider (Still only about 1 in 10)
- Buyers want to be closer to services and transportation hubs
- People are more willing to use public transportation
- Poverty is not concentrated in the cities. The suburban poor are a growing population
- Suburbs will evolve to accommodate increasing energy prices
Points of Disagreement
I think some of her conclusions are over wrought and will only apply to areas of significant population decline.
- Suburbs will become “Ghettos” filled with people who are too poor to live in the city
- Suburbs will be bulldozed and returned to native grass or used as farmland
- Builders will move operations to cities and avoid building in suburbs.
- Suburbs are, and will become even more, social and intellectual wastelands
The bottom line is that as a young single woman, the author’s perspective lends itself to a bias towards big city living and away from commuting but even she admits that the suburbs are in general an easier place to raise a family. Hopefully the cities will continue to improve and become home to more full-time residents. I believe that contrary to her conclusions the suburbs will continue to be an important housing option that will continue to evolve to meet the needs of future generations.
In my years of practice, I occasionally come across a home that will “never” sell, but that is simply wrong. The fact is EVERY home will sell as long as the value proposition is correct for a given buyer. To get the very best return on any home it is important to consider how the value proposition will be computed for the average buyer in any given price range. The elements of the value proposition are nearly constant, but the key to remember is that value proposition changes as the price range changes.
The elements of the value proposition are:
- Location – Where a home is located affects the other factors, but it is quantifiable alone.
- Utility – Does the property “Work”. This encompasses floor plans, room counts, and flow.
- Features – This includes things such as yard size, square footage, parking, room size, etc.
- Lifestyle – What does the community offer? How do people live in this home?
- Status – What will my friends think? Nothing more than that, but frequently masked by terms such as curb appeal, landscaping and decor.
- Asterisk – These are the weird ones.
I have tried to come up with other elements, but they eventually all fit into one of these elements. The Asterisk category is NOT a copout. It is just the cases in which a SINGLE factor overcomes all others, such as when someone buys a house next door to a family member because they want to be close, or the house is bought to be torn down for a parking lot. Usually this overwhelming factor is location or intensely sentimental reasons.
The point is that these factors adjust unpredictably in their importance to the individual buyer, but systematically depending on price range. For example consider the extremes; 2 families of 4, one who will spend $100,000 and one who will spend $1,000,000.
As represented above, all of the factors are considered by every buyer, but the ones that become paramount depend on constraints. For example, it is almost impossible to find a million dollar home with less than 3 bedrooms, and it is equally difficult to find a $100,000 home that has 3 bedrooms. So the lower priced shopper must consider a minimal set of utility and feature requirements that are automatic in a higher price range.
Most people do not even know what their own value proposition looks like. As a buyer’s agent, you need to decipher any given buyer’s criteria and understand the criteria better than they themselves do. As a listing agent, you must be aware of a given home’s value proposition to the average buyer in order to price a home correctly. I love this process and have been helped greatly by quantifying this concept in my business.
I am fortunate to live in an older home that presents lots of challenges and “repair opportunities” (Euphemism of the day). I am now attending to some badly neglected exterior painting. I have learned that there is no way to get new paint to stick if you try to paint over oxidized or peeling paint. After scraping for a while realized that I would be scraping off old paint on this house for the next year so I sought out a better way.
Oxidized and Peeling Paint on Wood before power washing
One option is power washing. I have never done much with power washers so I rented on from Timp rentals in American Fork. The rental costs $15 per hour or $60 per day. After three hours I was done so I spent about $50 with tax and gas and saved myself untold hours of work and pain. I had to play around with holding the wand the right distance from the surface, but it really is not rocket science. About 6 inches seemed to work right for me.
Clean Wood and well adhered paint after power washing
As you can see this method is not perfect. There are still a few spots where some cracked paint was not removed, but it is adhered well so once I prime and paint again I am thinking that it will look alright. In some areas almost all of the old paint came off, but in other areas that were not as bad most of the paint remained after power washing.
It also worked really well on concrete. If you have some old concrete it can look almost new again with a little power washing.
This concrete has been swept and washed, but still ugly
Overall, renting a power washer was money well spent! Give it a shot.
For years I have seen inspection reports come back with the complaint of “Slow Drains”. I assume this is a universal plague since I have the same trouble from time to time, If you have an extra 3 bucks lying around I have to encourage you to buy one of these:
Best Plumbing tool ever
It doesn’t look like much but this simple tool will save you a lot of headaches and a lot of money as well. Buy it once for less money than a bottle of Drano and you are set.
You insert the tool into the slow drain and the nasty looking hooks snag whatever is causing the clog, usually hair, and you gently pull it out. I have left out the photos of clogs because I do not want to gross you out, but with 4 daughters in my house one shower drain took 4 efforts and a total clog weight of about 2 pounds! Not pretty but the drain flows nicely once again!
The funny thing is that the package says to discard the tool after use. I assume this is for liability reasons because cleaning off the hooks is a risky proposition. Be careful and you can reuse yours for many years. I just saved the packaging and use it as a sheath to avoid snagging things.
Over the years I have helped many people sell their home and buy another for a pile of different reasons. Several times I have talked people out of moving because upon closer inspection it was not the best decision for them. Hopefully this list will help you think more clearly about whether moving is the right thing for you.
Important Factors to Consider Before Moving
- Income: What are your income prospects for the near and long term? Is your current business or employer turning a profit?
- Job Stability (Geographic) – What is the likelihood that your employer may want you to relocate? It may make sense to put out some feelers to determine if you will be moving out of the area.
- Family Size: Will you be growing or shrinking? I have seen families move to a big house to accommodate a bunch of teenagers and it seems like in the blink of an eye, they are all gone!
- Marriage Stability: Moving is not without stress. If your marriage is not at 100% why tax it? Spend the money on some good counseling and get happy first. Then make the move.
- Current Housing Situation: I have seen situations where with just a few tweaks the existing home may be the perfect home. Figure out if you can make a few changes to be happier where you are.
- Long-Term Goals: Where do you want to put your time and money? Do you want a big yardthat you take care of or would you rather look out at the HOA park and never mow again? Do you value travel more than your house? Do you want to move away from an area soon?
- Real Estate Values: If a move is right, are you moving into an area where values are moving up or is the area declining? Never forget, you will have to sell the new house someday, and hopefully someone else will want it!
- Family and Friends: Can you bear to leave your close family and friends? For some people 1 block is not close enough, and for others one state is not far enough away.
- Schools: What schools are available? Do they meet your idea of what you value?
- Commute Time: Nothing dings your lifestyle like sitting in your car for 2 or 3 hours a day. Even the best seat in a car is not as good as your favorite chair at home!
Of course no list is comprehensive, but hopefully this one will help you in your decision making process. If you need a third party to go through all of this with you, never hesitate to call me. I am happy to help!