How can this be a great time to purchase? After all, we are experiencing a huge real estate slump. Yet that is exactly what I am saying to you. The question is—why do I think that this is the right time to purchase. If you are in the right position, you can be an opportunist!
The time to purchase any investment is at or near the bottom. Even though there is the possibility that homes in certain parts of the country will continue to go down in value, if you can purchase a home below today’s value now, you will not be hurt by any subsequent decrease. With the oversupply of homes on the market including foreclosures, you can achieve incredible bargains if you have the resources. The key is to purchase real estate that is not “for sale,” but to purchase real estate that is “on sale.”
What is the key to achieving this goal? Having a system. A system that includes research, help of professionals including a mortgage consultant, real estate providers and even advice from accountants and financial advisers. Sound like a team? The answer is yes—businesses succeed because they have a team working on their behalf and you can implement the same concept. When you have purchasing power in this market and execute the right decisions, you have a competitive advantage over those who are less fortunate.
In addition to achieving bargains, if you currently own a home, you may be reticent to move up because you may not be able to sell your present home. This is a very real and important concern. You will find that the economics are in your favor despite this concern. Why is this so?
Higher priced homes typically fare worse in a down market than moderately priced homes. Let’s say your home has gone down in value by 10%. A higher priced home may have dropped in value by 20%.
Let’s take a look at these numbers:
- $500,000 home less 10% equals $450,000
- $700,000 home less 20% equals $560,000
There is another issue here. What if you can’t sell your present home? Even the positive trade off does not work if you have to carry the costs of a second home for the next two or three years. In this case, you may want to consider renting out your present home. There are several advantages to taking this action—
- From a tax standpoint, you can rent the home for up to three years without losing your exemption from capital gains. This is because the home needs to be a primary residence for only 2 out of the previous five years before you sell it.
- Also from a tax standpoint, any loss you take on renting your present home is tax deductible as long as you do not make more than $100,000, with deduction phasing out at $150,000. Not only is the loss on the mortgage deductible, but you can deduct depreciation and maintenance.
- If you wait two to three years to sell the home, chances are that you will be selling the home in a better market. That is what smart investors do—purchase in a buyer’s market and sell in a seller’s market.
- Finally, if you continue to rent the property, rents will rise faster than your mortgage payment—eventually causing a positive cash situation. Now you have positive cash-flow while someone else pays the mortgage. This is a great strategy to create retirement income and an asset that will be worth many thousands of dollars or more with no mortgage as you move into your retirement years.
Mike Ervin
Senior Mortgage Banker
California Retail Division
Office: 650-735-5261
Cell: 650-766-8500
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