How to avoid buying real estate that does not suit your budget or needs

You might think that people don´t rush into buying real estate any more.

Surely we have learned from all the crazy and ill considered purchases made during the boom?

People consider all factors carefully before signing on the dotted line right?

Nope, I´m afraid not. 

• - Peer pressure still exists.
• - People still dream of owning a home they can´t afford.
• - Buyers still worry that they might miss out if they don´t take action now.
• - We still seek reassurance from the seller (of all people!) that this will be a good idea. 

1. Budget is a hugely important issue. I´m not just talking about setting some funds aside forunforeseen expenses (like buying a new a/c unit or an unexpected vacancy period). Buyers really need to analyse their finances very carefully before deciding that they can afford to purchase. 

For example: $75,000 might be a great price for a 2 bed condo in a nice part of Jacksonville, and it might rent out for years with little or no trouble. However, if your life savings total $100,000, then you should absolutely not be buying this property. Depending on your age and the safety of your job, I would not invest more than 60% of my cash on an investment property.

2. Timing. Any real estate purchase should be considered a medium to long term investment. More often than not, this means you can earn a nice income for the first few years and sell at a profit in the future when prices have increased to a level you´re happy with. With prices at 30% of their 2006 peak in many areas, I can see lots of buyers doubling their money if they resell in 7-10 years time. 

The flip side is that you should not purchase real estate today if you need to get the cash out within a year or two. If this is the case, you could very well end up selling at a loss. Even if prices increase by 5% in the interim, you would end up with a net loss due to the purchase and selling costs involved.

3. Investment vs Vacation. Some places, like Florida, are great places to live, retire and go on holidays. It has a warm climate, a great infrastructure, nice beaches, hundreds of golf courses and more restaurants, shops and attractions than you´ll ever need. 

However, there is a big difference between buying investment property and buying vacation property.

An investment property is just that, an asset you bought to maximise rental and resale income. If you are lucky, you´ll have the same tenant for several years and monthly income will be very regular. These properties are not for personal use (although some buyers will choose to rent full time for 10 years and then use it themselves during retirement, which I think is a great idea). 

Income can be earned from a vacation property, but it should not be considered a regular or a reliable income stream. Some months you earn lots of money, and others you earn nothing (but still incur running costs). 

Also, tourists are fickle and management expenses for short term lets are very high (a lot more work is involved getting 6 families in and out of your apartment during the summer than looking after a single tenant on a one year contract). 

More importantly, the exit strategy for an investment property usually involves finding a local buyer who wants to live full time in that area. If you bought in a desirable location, you should have no trouble selling at market rates. On the other hand, the exit strategy for a vacation property usually involves finding a non local person who will buy it as a holiday home. This is a shorter list of potential buyers. 

Mixing Investment & Vacation Properties

In my view, there is a profitable way and an expensive way to mix vacation homes with investment homes. 

The expensive way is to rent out your holiday home when you are not using it. Aside from irregular income, this can be very time consuming, stressful and the wear and tear on your fixtures and fittings can be substantial. While you might love the idea of having a vacation home near Disney now; you (and your kids) might not be so enthusiastic in 5 years time.  

There is another, much simpler, more flexible and more profitable option. 

It goes like this: purchase an investment property, rent it out to a local on a long term lease and use the money earned to go on vacation wherever you want.

In Florida for example, the net income earned from a well located 2 bed condo should be more than enough to rent a 4 bed pool home for a couple of weeks every year.

Regards

Colin Murphy