What do Realtors actually earn?

As all of you are undoubtedly aware, real estate agents make tons of money.  After all, they drive nice cars, dress well, and show up at all of the best events.  They make tens of thousands of dollars off of each sale.  How hard can it be to open the front door, show someone through a house, and write up an agreement?

That’s a common perception, but how accurate is it, really? Especially given today’s economic situation?

I decided to take a look at the number of Realtors who are playing in the Newport County “pond” and see how they are doing in this economic downturn.  You might think that everyone is crying in their beer (or rather, their Chablis) at the monthly Newport County Board of Realtors’ “Wine and Whine” event, where we meet at a local restaurant to socialize and swap stories.

But at the most recent event, there was a lot less “whining” than had become customary these past few years.  In fact, the realtors seemed downright cheerful!

We decided to take a quick look at all of the companies who have offices located in Newport County, and add up their agents to see what they might have earned in the last twelve months.

There are 570 realtors who have their offices located in Newport County.  In the last year, 826 transactions were recorded in the Multiple Listing Service for this location.  This might seem like a thin pie for agents trying to make a living selling property, but each transaction usually includes two Realtors: one to represent the Seller, and one for the Buyer.

If we divide each transaction into two sides, we end up with 1652 transaction sides in the last twelve months, which translates into just under three transaction sides per agent.  The total sales price of all the sold properties is $362,955,336.  These properties were listed at total of $396,644,439, so with some quick math, they ended up selling for 92% of what the owners were originally asking, on average.

And now, back to our agents! Each agent’s compensation is determined by a separate agreement with his or her company and can vary by that agent's production and other criteria, but to make the math simple, let’s take as a  for instance that they split the commission evenly with their office.  Commissions are set by the individual offices with their clients, therefore I can only project figures based on our office standards .  Using our office's rate as an example, the total sales for the last year would have created $19,832,222 worth of gross income to the agencies.  Our agent’s share of that would be $9,916,111 worth of net income, which, divided by 570 agents, amounts to $17,397 each on average.

The reality is that 500 agents participated in the Newport County Sales, so at least 70 agents didn’t have any sales in the County at all.  Of those agents that participated, the lowest earner (using the above hypothetical agent earnings formula) might have received around $461 from their sales in Newport County.  Only 130 agents or a little over a quarter of the 500 hypothetically broke the $17,397 average number stated above and only 36 or just over 6% of Newport County agents hypothetically made over $50,000 in the last 12 months.  The top earner might have made somewhere over $321,000 for the year, but the majority of agents who participated in a sale could have made less than $7,700 for their year’s worth of effort.

Is real estate brokerage the right profession for you?  I would say that it can be if you want to work long and hard to excel, but not if you want to be average.  It’s tough to get by if your job probably earns you under $8,000 a year, as it does for most local agents.  Be kind to your local Realtor; he or she works hard for what they earn.

How are Sellers Doing in Today’s Market? or Nicholas Cage, you’re not alone!

“Gray Craig,” the estate that actor Nicholas Cage had purchased in Middletown, just sold for $6.2 million.  That may sound like a lot, but it is actually $9.7 million -- or 61% off --  the original asking price of $15.9 million.

This “bargain sale” caused me to wonder how sellers in general are faring in this market, and how actual selling prices are comparing to Sellers’ expectations when they first put their properties on the market.?” 

In order to try to answer this question, I created several charts based on the last six months of sales data in Newport County.  The first chart compares actual selling pricess to  original asking prices. The second chart compares original asking prices to the time it took to sell the property, or what we agents and brokers call “days on market.”  The third chart shows the selling price plotted against the property’s assessed value (according to the tax assessor) and how that relates to price.

Here are the charts:

Selling Price (SP) over the Original Asking Price (OAP) against Selling Price (SP):

Properties above the red line are the only ones that sold for more than their OAP.  Clearly, Seller expectations have been highly overblown for the most part, but we do have a number of instances where properties have sold over the asking price – some up to 20% more.  Once you get over a million dollars, those properties have been selling for significantly less than asking price.  On the whole, you can see that most buyers are picking up bargains – some at 60% off their OAP!

A number of Sellers reject the first offer that comes in with the notion that if they wait, higher offers will come in as more people see the property.  They believe “good things come to those that wait.”  Here’s a graph that shows how these types of Sellers do:

 

Again, properties above the line sold for more than their OAP.  As you can see, most of the properties that sold near or above their OAPs sold within the first few months of being listed!  On the whole, the longer the Seller held out and waited to drop their price, the greater the SP dropped as a percentage of their OAP. 

The lesson here?  Price it to sell right away and take an early offer; you’ll be glad you did.  The adage of “good things come to those who wait” applies to the buyers in this case.

Lastly, I wanted to see how our local assessors fared in this market.  Did they assess higher or lower than the market?  Typically in a declining market, the assessed values are higher than the actual selling prices: 

In this chart, SPs are plotted against assessed value (AV). Properties above the red line are thse that sold for above their AV’s.  These properties also reflect where there is the most market demand.

As we expected, the majority of properties are selling below their AV’s.  That said, there are still a good number of properties selling at or above their AV’s – a couple have gone for over two times their assessed values!  For the most part, these are also the higher priced properties. 

Note: the scale for the property price is a logarithmic scale, which allows us to see all the properties that sold in our price-diverse county, from $10k to $10M.  According to the scale, it looks as if the properties that did the best against their assessed values are those selling for around $500k and above.  These properties might be more improved, have more buyer appeal, or are in better condition than their brethren or, perhaps, the buyers are more well-heeled and able to pay what they want instead of being limited by what the banks will loan them.

I take a number of lessons from these charts.  If you are selling your property, price it right to begin with so you can get the best return and perhaps even receive offers for more than your asking price.  If you’re waiting for that special buyer who will give you your ideal price, stop.  Drop your price until it sells.

If you’re a buyer in this market, take heart. It is most definitely a strong buyer’s market, with some properties selling for up to 60% off if they have been on the market for a long time. 

But be warned that this scenario won’t last!  At some point, the charts will reverse, and sellers will be back in the driver’s seat.

What is the most important room in your home?

Okay everyone, it’s time for a pop quiz. Don’t worry, it’s only one question (although it might be tougher than you think!):

What is the most important room in a house?

The kitchen? The bathrooms? The living and dining rooms? When I take clients on a showing, those are the rooms they always ask to see. They’re also interested in the view, the landscaping and the age of the roof. But they rarely show interest in the space that is without a doubt the most important part of any home: the basement.

Surprised? You won’t be after reading this blog. I can tell you more about any home by looking at its basement than by touring all the rest of the rooms combined. Inspecting the basement is a lot like a doctor’s physical: it addresses all sorts of things that are not obvious on the surface.

If you have some knowledge of old buildings, looking at the basement can tell you when the home was built and when new additions were added. You can check out the size and spacing of the joists to see if the building was constructed well or whether the builder built to the minimum standard required. You can get a good sense of the age of the electrical system and amperage available. Is the boiler heated by electricity, gas, oil, coal or wood pellets? A glance can tell a knowledgeable basement spelunker whether the system is a hot air furnace or a boiler, which delivers hot water or steam to radiators. Hot water boiler systems can feed baseboard, radiant heat loops, or hydro-air hot water transfer coils as well as radiators. Once you’ve seen a number of old Newport basements, you can identify the telltale signs of flooding, and whether there are critters munching on your beams. It also becomes quickly clear whether the home uses city water and sewer or is dependant on a well and/ or septic system (this last can be a little trickier and can involve checking the yard as well).

And then there is the issue of MOLD (everyone’s favorite, I’m sure)! Mold is everywhere, but if there is lingering dampness in the walls and in the basement, it can create a problem that permeates an entire structure, emitting a distinctive odor and affecting sensitive inhabitants.

Most people have neither the expertise nor the interest to learn all they should know about the most important space in their home. Repairs here can be some of the most expensive you’ll come up against, in your time as a homeowner: they also tend to be much more time-critical. You can’t put off a failed heat system in the winter or a burst pipe any time.

Before you buy, take the time to really inspect the most important space in the house, and keep an eye on it after you’ve signed the purchase agreement. If you aren’t too familiar with basements and their workings – or even if you are – I always recommend taking a reputable home inspector with you.

Some illustrations follow:


 

1. Gas and water meters in an older basement (note the field stone and cement walls).

2. Updated PVC soil pipe leading out to either a city sewer system or septic system replaces what would have originally been lead or cast iron.  Notice the brick dividing wall coming out from the fieldstone foundation; also notice where the soil pipe has been cut off and sealed from what must have been a bath that was directly above or a floor above that.

3. Oversized, closely spaced joists with cross-member bracing speak of a floor designed for a heavy load or large span.

  

4. Long leaf yellow pine (hard pine) flooring over soft pine sub-flooring.  This is typical in many of Newport’s 19th and early 20th century homes, but very rare in newer homes.



5.  125-amp electrical panel with circuit breakers and a sub-panel labeled to indicate that it is running air conditioning.
6. And lastly, what keeps you and your pipes from freezing in the winter: a newer gas fired-hot air furnace, which probably replaced an older coal fired hot air furnace!

Renting Versus Owning Your Home: Which is Smarter Right Now?

In this uncertain real estate market, where so many people are feeling trapped by their ‘underwater’ homes, I’ve had a lot of folks telling me that they’ve made the switch from buyers to renters, and they’re never going back.  The reasoning behind this is that they are then free to move as the job market dictates, without being trapped by a collapsing market.  They can also look around and choose where they want to live if circumstances change – without the burden of having to sell the home and potentially losing equity and time, along with the stress of having strangers traipse through the house while it is listed!

Sounds reasonable, but let’s take a look at the other side.  Sure, we’re going through a severe market correction, but market corrections don’t last forever.  When the market is heading up, it’s nice to see the equity building in your largest asset: your home.  It’s only if you have to sell that you really feel the pain in a down or collapsing market.  The home that you live in doesn’t change its location or amenities just because its value has decreased, and you can put money and sweat equity into your home to make it a nicer and a more comfortable place to live.  You’re hardly likely to feel motivated to do that to your landlord’s property – plus, you can choose the colors you like and the changes you want without their approval!  Shelter is one of the three basic human needs (besides food and water), and I don’t see it going out of style anytime soon – one proof being that even our children are willing to move back and live with us under our rules because they have to have a place in which to live.

There are also tax advantages to owning your home.  While you cannot deduct the rent you pay for your living space, you can deduct interest charged against your mortgage and real estate property taxes that you pay.  Additionally, you have the security of knowing that the landlord cannot kick you out or raise the rent to outrageous levels if the rental market takes off.  There is some talk in congress about removing or modifying the interest deduction; with a down market and high unemployment, the last thing we need is an additional tax burden.  It might be a good idea to let your local representatives know how you feel.

Contrarians I talk to say that now is the time to buy, when everyone else is selling, but I would say you should only do it if you won’t get in over your head.  If you have the time, money, and inclination to purchase real estate, then now is the moment; otherwise, you might have to hunker down and ride this one out. 

I don’t think inflation and population increases -- which will eventually raise all our real estate values -- are going away.  The sci-fi image of desolated cities with squatters who are not paying rent, living wherever they can get in, is just that: a fiction and not a reality.  The reality is -- and I heard this on the evening news -- that they are offering homes in some cities to firefighters and police officers for $1,000 to encourage them to move into certain down sections of town.  The deals are out there and I can see inflation hitting us in the not too distant future.  This will be when the depressed and short sale housing you bought today will be worth a lot more money than you paid for it! 

Someone I know bought a nice co-op for $50,000 in Manhattan during the garbage strikes in 1974, when everyone thought that that was the end of the city.  That same co-op today, combined with the unit next door, was recently published as one of the top closed sales of 2010 for selling at $25 million.  Of course, my friend had sold in the 80’s when the apartment went for $1.5 million and thought he had cleaned up then.  Timing is everything!

Cold Weather

And here I almost fell for Punxsutawny Phil’s prediction of an early Spring this year!  I guess it just goes to show you that weather people and weather creatures of all species are never 100% accurate.

Knowing this to be the case, my motto is: Always be prepared.  And although my intention is not to terrify anyone, I’m going to share a couple of experiences I’ve had with winter property issues, and to some of you they may come across sounding more like horror stories than anything else…

Back in the 1980’s, I had a listing on an unique cottage on the Ocean Drive.  It was a lovely site, an historic property overlooking the marshes near Cherry Creek. 

Shortly after the holidays, which is when real estate typically slows way down and sellers sneak away to St. Barth’s, I received an unexpected request to see the house.  I say unexpected, because this was right after a major blizzard!  But I drove out to the house, parked on the road (didn’t even bother with the driveway due to the 2+ feet of snow that had yet to be plowed),  and trudged up,  key in hand, to get inside and turn the heat up for the showing.

As I got closer to the door, however, I noticed something a little out of the ordinary; there was water running under the door and over the sill! “Oh, &*%$!” I thought.  I opened the door, only to discover that the radiator next to the door had cracked open, and a huge chunk of cast iron was sitting on the floor, with water spraying everywhere! The front foyer had become its own winter water park, with a lake spanning the hardwood entry and streams of water cascading downward to the sunken living room and onto the owner’s favorite Persian rug.

I headed to the basement, only to discover that it was full of water too!  Feeling like an intrepid explorer on a spelunking expedition, I waded and groped my way through the murky darkness until I found the shutoff valve and turned it hard to the right.

Back upstairs, when the potential buyers and their agent arrived, I politely informed them of the situation and suggested that they might want to come back another time.  I then got back in my car, my feet frigid as my pant legs froze over, drove back to my office on Bellevue, and made the calls to notify the owner and the oil company to check the furnace.  (Just to clarify for some of my younger readers who may be confused as to why I had to drive two miles to get to a phone: don’t be afraid, but yes, there was once a time before cell phones even existed… Terrifying, I know. And yet somehow, we survived!)  It turned out that the oil company hadn’t been able to deliver because the driveway was unplowed (!) and the owner had simply assumed everything would be fine because they had an “auto fill” contract!

Ah, memories…

Here’s another one! An investor who bought the parish house from a local church was from out of town, and he was unfamiliar with our New England winters.  According to the gossip at the time, he figured that he could close the property up and let it sit until it was ready for development.  He remained blissfully oblivious that his property had a problem until he received a water bill for tens of thousands of dollars!  The heat had been off and the household pipes had frozen, thawed, and then filled the basement with water, and it was running out the windows and in a babbling brook down the hill towards Thames Street!

Needless to say, New England weather poses challenges for real estate owners.  Early in the cold season, you should have your heating system cleaned and checked, arrange for automatic fuel delivery, and leave the thermostat no lower than 55 degrees – especially if you are going to leave town for any period of time.  Make sure that you also make arrangements to have your drive plowed, walk cleared and have someone check the property regularly while you’re gone.  This is especially important in case there is a power outage that lasts more than a few hours in very cold weather; your property manager will need to shut off the water and drain the pipes.

There are a number of reputable property management firms in the area that, for a small fee, will be more than happy to look after your home while you are away.  Hire a firm or have a friend who knows your plumber, electrician, and handyman check your house regularly, so that you can bask in the sun without worrying about coming home to Loch Ness.

Setting the Stage!

One of my daughters is really into reality TV shows about fixing things up, whether it’s wardrobes, antiques, hoarded homes – sometimes even relationships! There appears to be a strong demand in the U.S. for more and more of these types of shows (given how much they’ve been proliferating), and I suspect it’s because people really enjoy watching a “diamond in the rough” being transformed into its full, shining potential in an hour or less.

Following this trend, there have been a few TV shows geared specifically towards staging one’s home in order to make it as desirable as possible for potential buyers. On Encarta’s World Dictionary online, “staging” is defined as: beautifying a home for sale: cleaning, repairing, and updating the decor and furnishings of an older home to make it more attractive when shown to potential buyers. The TV show will bring in a professional stager who will gently show the befuddled homeowners the errors of their previous ways and make suggestions for the aforementioned beautification.

The conclusion of the half-hour or hour-long show will always make it seem as if it was the staging alone that really “sealed the deal” and brought the house to close. You might wonder, is that for real? Can a little feng shui, Febreeze, and soft lighting really make that much of a difference?

This answer is yes, it can. It can make a much bigger difference than you think, in terms of both the salability of the house and in its perceived value – which then translates to bigger bucks for you, the seller!

 As a follow-up to my December 3^rd blog post about pricing your house correctly for the market, I am going to give you some specific tips on how to stage your home to make it more appealing to buyers. For help with this, I turned to Karen Heagle in my office, a certified (and highly knowledgeable) home stager.

Here are Karen’s “tricks of the trade” for staging:

The way you live in a home and the way you stage a home are two different things. Once your house goes on the market, it becomes a product.  You wouldn’t think of selling your car without getting it showroom ready, so here’s what you should do with your house:

• Clear any clutter and additional furniture, and if you are moving, start packing.  "If you can't see it, you can’t sell it" should be the rule of thumb here.
• To increase curb appeal, a clutter-free exterior is important as well.
• Put away your collections - they become distractions for buyers and are not for sale anyway.
• Reduce the number of family photos.  The buyers need to be able to picture themselves living there. That’s tougher for them to do when they’re surrounded by pictures of Junior splashing in the bathtub or getting rides from Fido on the living room floor.
• Be sensitive to odors: "If you can smell it, you can't sell it." This is especially true for pet odors! I can guarantee that your buyers will not feel the same emotional connection to Mister Fuzzysnout that you do, nor will they appreciate his shedding habits.
• Watch out for wall colors. I’m all in favor of letting your kids express themselves creatively, but while your Goth teenager might have insisted that black walls were essential to his happiness, your buyers probably won’t feel the same way. When in doubt, paint it out – neutral tones are best for creating that “blank canvas” feel, which allows the buyer to project their own personal future hopes onto the property. The same goes for overwhelming wallpapers.
• Pay attention to unfinished projects such as the rail around your deck, missing hardware, loose doorknobs, broken windows, etc. These give buyers the sense that they are buying an unending list of things that need to be fixed. Who wants that? Take the time and get it done. You’ll thank yourself later.
• In general, look at the house with a buyer’s eyes... and remember, you only get one chance to make a first impression!

If all of this sounds a bit daunting, you might want to consider hiring an accredited staging professional with a trained eye – this will take a lot of the guesswork out of it!

You want to be able to sell your property as quickly and for as much money as possible.  For this reason, it is important to spend the time getting your property ready for showings.  An experienced Realtor can give you a good idea about which items need your attention and what you can skip in staging your home as appealingly as possible.

Is Now a Good Time to Invest in Real Estate?

A condominium sold just the other day in Newport for $185,000. It had originally been listed for $350,000 and is assessed for $305,700. 

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Did I catch your attention? Is this exactly the type of investment you’ve been scanning the real estate ads for?

There are plenty of enticing opportunities available in the wake of the 2008 market crash. But how do you know if real estate investing is right for you, and what types of concerns and criteria should you be familiar with before you take the proverbial plunge into rental property ownership?  In this blog, I will seek to provide information to help you decide your level of readiness for such a venture, and also address some concerns you should be aware of before you buy.

First, although I’m sure most of you are already familiar with how stock investing works, I’m going to quickly go over some basic “Investment 101” points in order to illustrate a few differences between investing in stocks and investing in real estate.

The Basics: Stocks vs. Real Estate

When you purchase stock as an investment, you purchase a share in a company that pays dividends or income on a quarterly basis.  The returns may not be high, but hopefully you chose a stock that will appreciate in value so you can see two types of return on your investment: dividends and appreciation.  Investment real estate works similarly in some ways.  You take some money and purchase a property that will bring you an income stream (rental income).  But unlike stocks, which ask nothing of you after your initial investment, real estate demands that you keep an eye on it – or pay someone else to do so.  Stocks don’t break down.  They don’t leak, rust, chip, or stain.  They don’t need mowing and plowing and routine maintenance.  They don’t complain about rental increases and the other stock’s yappy dog or high heels clacking overhead… et cetera, et cetera.

On the other hand, you can improve your property and thereby increase its value, which is something you can’t do with a stock.  A stock is a stock is a stock, and you probably have little direct influence over its worth, the way you do with your property.

Some Things to be Aware of Before You Buy

When buying investment property, I urge people to exercise caution.  You should definitely have structural/mechanical and radon/ hazardous materials inspections included as part of your purchase agreement. 

Make sure that:

• You are buying in a neighborhood that is attractive to renters
• The apartments are not in violation of the housing code
• The apartments are legal and registered with the city
• That apartments built prior to 1978 have current lead-safe certificates

Additionally, you may want to consider those things that need attention right off the bat – usually maintenance items that were deferred by the previous owner:

• Roof condition
• Foundation/ masonry condition
• Heating and plumbing maintenance and repairs.
• Kitchen appliances, counters, cabinets, floor coverings
• Bathrooms
• Paint and wallpaper condition

These expenses should be mentally added to your purchase price. 

If everything seems to be a go at that point, then you need to think about the care and feeding of your new investment ‘pet.’  I usually sit down and create a maintenance and repair plan and schedule. There is a lot to think about when you choose to take on an investment property, and you’ll be better able to anticipate future costs if you adopt a forward-thinking approach.  

Financials

Critical to the whole process is whether this purchase makes financial sense for you.  Meet with your accountant and do a cash flow analysis for the next few years.  Make sure that you factor in vacancies, repairs and maintenance, inflation, as well as the commissions you will pay for finding tenants.

There can be significant tax advantages to owning investment property.  Under President Reagan, when Congress decided to rein in some tax code abuses, it categorized rental property income as “passive.”  At the time, this characterization struck me as a wild misnomer.  Owning investment property is probably one of the most hands-on endeavors you’ll ever take on!

If you choose a good property in a good rental neighborhood and are able to do some repairs and improvements on your own, then owning residential real estate investment property can be very rewarding.  I know plenty of people who have been able to retire on the income that their properties throw off once they’ve finally paid down their mortgages.

There’s also another pretty clear benefit to owning real estate instead of stock: real estate is something tangible.  Even if the market goes down the tubes and your house is declared “worthless,” at least you can still live in it!  The floors and walls and roof are still standing to provide you with shelter.  The same cannot be said of a devalued stock certificate.

Commercial Investments: Good Idea / Bad Idea?

Investing in commercial real estate, by which I mean office buildings, retail stores, strip malls, destination malls, and industrial space, has its own set of advantages and drawbacks.  When you buy larger commercial properties (shopping centers, office building, etc.), part of the process includes a period of due diligence.  This is a time period, usually 30 - 60 days, where you can explore all the ins and outs of the property and have a number of thorough (and often costly) inspections. 

Commercial leases tend to be long term – sometimes decades – and the leases have built in escalators to allow for increased expenses in taxes, insurance, inflation, and annual building maintenance.  These are called “triple net” leases.  While the leases can be long term, the waiting period to find a replacement tenant can be painfully long as well.  For this reason, a commercial investor needs to have deep pockets.  If you want to get into commercial real estate investment, you need to be familiar with the culture and leasing specifics around each kind of commercial investment, or hire a property manager who has this expertise.

Because of the length of time that it takes to pay off a mortgage, a friend of mine once jokingly referred to real estate investing as a “dead man’s game.” But if you work hard to find the right investment property and invest within your means, I can assure you that this will not be the case!

What did the 2010 Real Estate Market look like?

At the end of each year, around the same time I’m working on those tedious tax preparations, I compile all the real estate sales data from Newport County and the bordering towns so that I can see the last year’s effect on the local market.

I had a hunch that 2010 would be different from its predecessors, and it turned out I was right.  When I took a look at the pages of analyses coming off my printer, I noticed a number of significant changes on Aquidneck Island in the last year.  According to the MLS records for all types of property being sold, both average and median sale prices are up slightly over last year.  The number of properties sold has inched up as well.  When I look at number of properties sold each year, it’s clear that the low point occurred in 2008, but the low price point seems to have occurred in 2009, which makes sense.  Sellers lower their prices after their property hasn’t received significant activity in a while.

There was also a change in the type of property that sold.  Single-family homes, which have always been our best seller, dropped a bit from 365 sales in 2009 to 360 sales in 2010.  At the same time, the number of condominium sales, which has slipped severely since its high in 2003, has risen almost 25% over last year’s number and is almost back to 2007 levels.  Multifamily homes, a very popular commodity in 2009, dropped 13 properties this last year

While any analysis or chart is just a snapshot of past reality up to a certain date, it is fun to imagine that it can give us insights into the future of the market.  What it can do is show us where we have been and what current market looks like.

I have additional graphs, which divide the market into price ranges: properties sold below $400k, in the $400k to $1 million range, and above $1 million.  These are the multicolor area charts below.  From the chart, “Aquidneck Island Number of Sales Distributed by Price”, it is clear that the number sold under $400k has dropped, while the middle range has taken up the slack.  An interesting view of the market is the comparison of this chart with the chart that follows showing the total dollars spent on the purchases in each category of home: the “Aquidneck Island Sales Dollar Distribution by Price.” In this chart, you can see that buyers in the middle and high categories spent almost the same amount of total dollars on their purchases and were only exceeded a little by the total dollars spent on properties sold for under $400,000.

To sum things up, we reached a marked sales bottom in 2008 and have moved up since then and we may have reached our low price point in 2009.  The middle part of the market that really took a hit in 2008 has reentered the game in the last year.  Condominiums are being recognized as a great value due to the pricing pressure they have felt in last couple of years, and sales reflect that. 

All in all, I suspect that 2010 will continue this trend.  In light of these indicated price increases (however slight), I would say that if you are thinking of buying a new home or investment property don’t wait!

Investment Real Estate vs. Home Ownership

“Owning your home is a smart investment.”

I hear people say those words all the time, and whenever I do, I think that whoever came up with that phrase didn’t really know what they were talking about.  A distinction needs to be drawn between investing in real property and home ownership. They are not the same thing!

A young acquaintance who analyses bonds for a living mentioned a discussion he’d had with his father recently.  Being a father myself, my ears perked up.  He said that his father was investing in gold.  I said, “What’s the problem with that?  Plenty of people invest in gold.”  He said that gold is not an investment because it doesn’t throw off an income stream; rather, it’s a hedge against inflation.  It occurs to me that owning your home might fall into the same category, with one major exception.  If you want to exchange gold for currency or another investment, it is a fairly easy matter.  If you want to exchange your home’s equity, it’s a much more cumbersome process.  You either need to sell it and find somewhere else to live, or refinance it and take on additional debt.

Investment is defined as: the investing of money or capital in order to gain profitable returns as interest, income, or appreciation in value.   The important part here is “in order to gain profitable returns.”  The only way to see a return on your home as an investment is when your home is liquidated, i.e. sold.  (If you mortgage or remortgage your home you can get cash out, but at a premium that must be paid back with interest.)

Case in point: a few years ago, some people were convinced that it was okay to purchase more home than they could afford because they viewed their home not only as shelter, but as an investment.  It seemed as if all property was constantly increasing in value, and that they would have a home that was always worth more than what they paid for it.  I think we’re all well aware of the consequences of that type of thinking! 

Most homes fall into the expense category; they usually are not income generators.  When you take out a home mortgage, you are paying both the interest to the bank plus some of the “principal” or cost of your house.  Over 20-30 years you will pay this amount fully, and by that point, your home will have a lot of equity.  So in a sense, your house is your “live-in” piggy bank, your mortgage as the savings mechanism that causes you to build equity.  During the time you’re paying it down, you have to earn money to pay taxes, insurance, utilities, repairs, and interest. Buying a home only really pays when you are able to retire your mortgage.  Then your cost of living goes down – but you still have to pay to live.

There is one situation that fits the “home as an investment” criteria.  Some people – often young people – will buy and live in a multi-family homes.  This makes the property more affordable, because the rental income is counted as additional income for their loan qualification.  Instead of buying a $150,000 single family home, they might be able to purchase a $250,000 two-family home.  Ideally, in a rising market, the rents rise and pay more of the home’s expenses, and the property appreciates in value.  Additionally, since the loan they are paying is larger, their equity grows at a faster rate.  Of course the downside to this is that in a declining market, rents can go down and ownership costs can increase.  This is why it is important to make sure that you plan and save so that you can handle the “rainy day” cash flow if things go wrong such as your mortgage rate or taxes increase, your water heater dies or your rents go down.

Over the long run, values and rents typically increase in good areas.  The first home my wife and I bought was a two-family home.  The rent we received on our first floor, one-bedroom apartment ended up paying most of our costs after a few years of ownership, which made our living expenses more affordable.  We also put a lot of ‘sweat equity’ into that home and increased its rental value.

This is an example of how your home can also be an investment.  Multifamily homes  bring with them the burdens of being a landlord, but they can really pay off in the long run.

HAPPY NEW YEAR TO OUR “AT HOME IN NEWPORT” READERS!!