Buying Real Estate in the Blue Ridge mountains

Buying Real Estate in this Market

USAA, Sept, 2007

There's never a particular bad market in the mind of Kendra Todd, a USAA member, real estate broker, and winner of "The Apprentice: Season 3." What she considers bad, however, is the number of people who want to invest in real estate without doing their homework.

"Somewhere in America, there's is always a boomtown," say Ms. Todd, author of "Risk and Grow Rich: How to Make Millions in Real Estate." "Finding good values in real estate is all about finding the right place at the right time, and it could be a particular state, city, or a particular block in a place you know well."

Falling Prices

Ms. Todd disagrees with those who say that there has been a bust for real estate. "What's dropped in some areas is market expectations more than market values," she argues. "Most people who are really complaining have already encountered significant appreciation in their property, and they are upset that they're going to make $50,000 on a $200,000 property and not $75,000. Most who have owned their homes for at least a few years still have significant gains in their property."

Ms. Todd, who bought her first property at 23, preaches that no one can become a successful investor without taking on risk. The trick is managing it successfully.

Risk doesn't mean taking out a huge loan and throwing the dice, she explains. It means not over borrowing and having cash in reserve to cover contingencies such as deadbeat tenants, over budget renovation projects, and yes downward markets.

It also means having an ear constantly to the ground to pick up on opportunities others might miss. Do that by getting to know people who live or do business in an area where you want to invest, learning about who's moving in and out, and most important, gauging how honest potential sellers are. Then you'll develop a sense of timing and a sense of whom you will and will not do business with.

Although Ms. Todd advises people to take a chance on properties they've thoroughly researched, she doesn't encourage chancy financing. "Don't over leverage yourself with some of the high risk mortgages that are out there,." she says.

In fact, in early summer, Ms. Todd admitted she was holding back her investment dollars as the slowing real estate market neared bottom. But she wasn't planning to wait long. "I actually love buyers markets, because I don't feel pressured. Sellers do," she says.

Ready to Jump In?

Before you make your first buy, define the difference between ownership and investment. Michael Kitces, a certified Financial Planner practitioner and director of financial planning for an investment advisory firm, puts it this way: "If you're not ready to sell your house tomorrow because it's appreciated and go rent a place, then maybe you really don't consider your home and investment."

Sure, he concedes a home can be sold years later and it's proceeds used to cover the full cost of a smaller place, but that's not truly an investment. " A home represents personal security, an enjoyable living space," he explains. "Ideally, an investment is an asset that you buy and sell unemotionally, and it's a very different way to think."

If you can operate with that mind set, you might be ready for real estate investing. But first consult a tax advisor or financial planner who can assess your situation objectively. For instance, if you have a child near college age, you might not want to take a chunk of tuition cash to put on a condo you hope to sell in a year or two. Or pending retirement might be a factor. Make real estate holdings part of a comprehensive financial plan.

Next comes a tough question - what type of property to target? For many, the first step is a second home , usually a vacation home , or rental property they may occupy as landlord. Others eye commercial property.

"Commercial spaces behave differently than residential space,." Mr. Kitces ask if they're really ready to operate the property as a business. When told about finance, construction, and tenant issues they might face, many rethink the matter or take more time to learn.

Entering the Marketplace

If you proceed, you'll find that sales of vacation homes have been up, while investment home sales have been down.

That means people are still willing to take a risk on a property they'll actually use or rent during vacation seasons, but there's much less speculation on general investment property than at the market peak in 2005. "People may think they have a high personal tolerance for risk," Mr. Kitces says, "but when they look at their financial capacity to handle it, their overall view of risk tolerance changes."

The Proud Owner

Despite the uncertainty, you still might feel the market allure. If you buy, Ms. Todd Believes an exit strategy is a must. "With every investment, you need to establish a price at which you'll sell, hopefully at a market high," she says, noting that smart investors hold cash from property sales in reserve for opportunities when the market goes down a bit - the essence of "buy low - sell high." While that cash is in the bank, investors need to be looking, always looking.

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