| Professionals’ Forum
 Renting v. Buying: Is the Property a Good Investment?
by Lennard Schwartz-Charles, Owner/Broker
Smart Realty
986 River Road, Edgewater
886-0800
Here’s the scenario:
• You have saved some money and are thinking of making a real estate investment.
• You either want an income-producing property, or you want to give up your present residence and purchase a primary residence.
• The time seems right, interest rates are low, the economy is good, prices are stable and rising.
Remember the simple real estate expression “caveat emptor”: let the buyer beware. It is not as easy as 1-2-3. Your financial calculator is no substitute for experience.
Do you want some professional advice? Ask yourself the following three questions:
1. Do I have a plan, long term? ... short term?
2. How much cash can I really afford to tie up?
3. How many years can I tie this money up for?
A word to the wise: real estate can not be liquidated quickly and sometimes not easily; markets fluctuate up and down. You do not want to be caught in a position where you need cash, but it is tied up.
The 1-2-3 “Caveats” of Investing
1. Don’t count your chickens.
What seems to look like a slam dunk deal can have some surprises. Take out your magnifying glass and do your research, then estimate your potential upside and downside.
If you are purchasing a primary residence ask yourself: will the fair market rental value cover your monthly carrying costs in the event circumstances dictate that you have to relocate or move?
2. Don’t look in the other person’s pocket.
Making a million is not as easy as some make it sound.
Estimates and other valuations do not put money in your pocket - a buyer does.
If you are purchasing investment property, ask yourself if you will still get a return on your investment if there is a vacancy or small decrease in the fair market rental price?
3. Don’t count on a flip.
Flip or flop, on the way down you can lose more than 100% of your investment.
Flips are great, but getting in and out of a real estate deal is expensive - about ten percent of the price. Also, don’t forget the tax consequences.
Ask yourself if you can afford to keep this property if it is not quickly sold.
Remember the late eighties - nobody is smarter than the market.
Many leveraged sophisticated investors were humbled.
Three Safe Havens for Investing
1. The monthly cost of a primary residence should not exceed an affordable rental after you consider your tax savings. If you are in a jam make sure that you can rent the property to not only to cover your costs, but provide a return on your investment (down payment plus closing costs).
2. Try to buy where your total purchase price is either equal to the land value or less than the replacement cost considering depreciation.
3. The net rental income covers the mortgage payments if the property is 100 percent financed.
The return you receive on a rental property generally is less than your projections. Do not count on your projections without having taken into consideration repairs, replacements and vacancies.
3/31/00
Have a question for Mr. Schwartz-Charles? Call him at 886-0800.
Visit the Smart Realty web site at www.smart-realty.com.
Do you have a question that you’d like Mr. Schwartz-Charles to answer in a future column? Send it to editors@edgewaterbeacon.com.
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