Attaining Your American Dream

Opportunity in Growth Markets

With every property unique and located in one spot on the planet, real estate markets are highly localized—even down to specific ZIP codes and neighborhoods. “Even within particular municipalities, there are local dynamics that make each market entirely different,” says Chris Kyler, general counsel and CEO for the Utah Association of Realtors and a frequent real estate industry advocate on Capitol Hill. Regardless of what happens on average, whether it’s across the nation, a state, a region or even one city, Kyler emphasizes there will undoubtedly be neighborhoods where real estate is still a good deal.

Opportunity in Declining Markets

If prices were constantly rising, newcomers might find themselves locked out forever. Declining markets bring prices down to earth and make real estate more affordable to more people. And declining markets also help filter out the hype. Remember that a rising tide lifts all boats, and almost anyone can look like an investing genius when price appreciation graciously masks even total ineptitude. But just as tides periodically fall, so do markets, although not as predictably! Price pullbacks expose investment strategies to the light of day, allowing individuals and investors to more clearly evaluate them and learn from the mistakes of others.

Without a doubt, declining prices can present tremendous opportunities. A number of multimillionaires made their fortunes during the downturn of the 1980s. “Where there are challenges and economic turmoil, at the same time for people who have positioned themselves properly and wisely, this could be an excellent opportunity for them to build wealth,” says Landon Taylor, president of strategic markets with First American Title Corp. “For either the first-time homebuyer who is now able to enter the market—where just a year ago it was unreachable—or for the savvy investor who has some cash, this could be a perfect time.”

Position Yourself For Opportunity

Whatever the opportunities, Taylor emphasizes the importance of carefully evaluating your financial position, taking the time to create your personal income statement and balance sheet. Know how much money you can put down and your maximum monthly payment. Establish your investment objectives and criteria, determine your time horizon and then wait patiently. By setting yourself up properly, you will be able to move swiftly and decisively when an appropriate match comes along. Taylor also suggests the following:

• Research your investments carefully—Not only must you ferret out the scams that abound, but you must also determine if the deal aligns with your investment objectives and criteria. If not, let it pass.

• Be prepared to lose—To build in staying power, Taylor suggests you be able to sustain a short-term loss in your investment’s value of at least 10 percent. Otherwise, you may have to cash out too soon, locking in the loss for real before the investment’s value has time to circle back around again.

• Be prepared to walk away—Nothing compromises your position or clouds your judgment like becoming emotionally attached to a deal. Be particularly cautious if you fall in love with a new house before you’ve sold the current one. Love for the new can quickly turn to regret when the old one languishes on the market unsold while you’re stuck with two mortgage payments.

Be Ready to Strike—The Checkbook

Americans historically have been voracious consumers but not big savers. With comparatively little in other investments for many people, their homes are their largest chunk of wealth. Misspending on smaller items over the course of a lifetime can greatly diminish one’s potential net worth, but poor decisions in home financing can be particularly damaging.

“The real key to real estate is how you finance it—that dictates your financial success,” says Dave Savage, co-founder of The Mortgage Coach, an advisory business helping consumers make informed mortgage decisions. As a 20-year veteran in real estate, he says the most important considerations when arranging financing are:

1. Interest rate—While an important factor, too many people focus exclusively on the rate without considering their total financial picture.

2. Loan program—With the wide array of programs available, from 50-year to interest-only to adjustable-rate mortgages, from VA loans guaranteed by the Department of Veterans Affairs to FHA loans insured by the Federal Housing Administration, it’s imperative you choose an appropriate program.

3. Loan amount—Some people borrow as much as the lender qualifi es them for, which may be too big a strain on their budget. Others borrow too little, using up all their extra capital for the down payment when they should have saved a portion for their emergency fund or for other investments.

Crunch the Numbers

With so many considerations, how do you go about making a good choice? Savage suggests “dollarizing” the viable scenarios—plug in the actual numbers and compare the after-tax dollar costs of one mortgage decision against the other over both short- and long-term periods, such as three years, five years, 10 years, 30 years. You may find the total cost actually less for a loan with a higher interest rate but lower upfront fees if you sell your home at the end of three years, while if you plan to keep the home for at least 20 years your best choice could be a loan with a lower interest rate but higher upfront fees.

After you have quantified the various scenarios, Savage stresses the importance of examining them in the context of your personal financial goals, particularly to see which will help you achieve financial freedom the quickest and with the most certainty. When you look at the big picture, you may find the overall cost of a 10-year interest-only loan is lowered even more by your income tax situation while allowing you enough time to put your teenager through college without incurring student loan debt. On the other hand, if you wish to retire debt-free in 10 years, an interest-only loan might not be your best choice. And you could end up upside-down if the property value declines.

Hire a Professional

Whatever your interest in real estate, whether as a business owner, an investor, an entrepreneur or an individual homeowner, experts stress the importance of consulting with professionals. Among the many services they offer, professionals can help you explore angles you might not even know exist or tap into information not available to you. For instance, Taylor points out that many small-business owners leave wealth on the table by not understanding the advantages of owning their own building, which might be possible through a Small Business Administration loan or some other financing arrangement. He suggests having a professional perform a rent-versus-own analysis to help determine more accurately the feasibility on an after-tax basis. For entrepreneurs who typically experience fluctuations in their cash flows, Savage suggests arranging for a line of credit on their home loan to meet possible future liquidity needs—before a cash crunch makes it more difficult and more costly to obtain credit.

Why Real Estate Now?

While many real estate markets across the country may suffer during 2008, Kyler says the depression in home prices could be creating a window of opportunity for those in a position to buy and be patient. With interest rates remaining at historical lows, now could be a great time for those who have identified opportunities and done their research.

But, Kyler warns, “That window may close abruptly.” The many potential buyers waiting on the sidelines who could afford to be in the market now are creating a pent-up demand. With the government’s economic stimulus plan set to send billions out to Americans, much of which will be pumped right back into the economy, and with Congress modifying the mortgage lending limits in the more expensive markets, many people could jump into the real estate markets all at once, causing another escalation in appreciation.

As long as humans continue to need a place to live, work and play, real estate is likely to remain a much desired asset. Providing a store of wealth as well as a measure of economic stability for owners, real estate offers advantages that other investments cannot. Examine your personal financial situation and the investment options available, because for you, now might just be a great time!