Top Ten Real Estate Investment Strategies - Part I

1. Use Positive Leverage to Maximize Your Return 

The great secret of real estate¡ªthe secret that will make you rich¡ªis positive leverage. We've already introduced this principle, but let's look at it a little more closely. The median price of an existing home in 2005 was approximately $219,000 (see http//www.buyincomeproperty.com). A 10 percent down payment on that property would be $21,900. Now let's assume that the property appreciates by 14.7 percent¡ªthe same rate at which property values nationwide grew between 2004 and 2005.

Here's the key point to remember: that appreciation applies to the total value of the home. In our example, the annual appreciation for one year would be $32,193. Compare that return to your cash investment of $21,900 (the down payment) rather than to the total value of the home, and you have an annual rate of return of 147 percent on your invested down payment. Obviously, very few investments yield that large a return. While your appreciation isn't likely to continue at that rate year after year, even half of that 147 percent rate would yield you a 70 percent return on your invested dollar. Of course, this simple illustration doesn't take into account your monthly payments, taxes, and insurance, but these costs are somewhat offset by the fact that you aren't paying rent somewhere else. In addition to the high rate of return, you also get to deduct the interest you pay from your federal taxable income, and when the time comes to cash out of your real estate holdings, you will pay no tax on your first $500,000 of capital gain. And then, of course, there are the intangibles. 
You and your family have a home of your own¡ªthe American dream. You have a safe base of operation for all of you.

In addition to all of these advantages, common sense tells you that you have to live somewhere. If you rent, you will pay and pay, and wind up with nothing. If you buy, you will ultimately have a nest egg of your own, free and clear after you've paid off your mortgage. For that reason alone, you should take the plunge and buy a home as soon as you can. Some home-buying processes change over the years, but most do not. In this chapter, we share home-buying strategies that have stood the test of time and can be adapted to a great variety of situations.

2. Remember That Location Is Paramount

There is an old axiom in the real estate business that the three most important considerations are location, location, and location. It's true. Always buy in the best neighborhood you can afford. Your first step in the buying process is to establish how much home you can afford to carry, in terms of monthly payments. Obviously, this is a combination of price, mortgage rate, and the size of your down payment. Once you have established that number, you are far better off buying the smallest house in an expensive neighborhood than buying the biggest house in a lower-priced neighborhood.

The logic behind this is that the higher prices in the expensive neighborhood will tend to pull the price of your home up as they appreciate. If homes in the lower-priced neighborhood lose value, by contrast, the value of your home will drop along with them, even if it remains the best in the area. In a poor neighborhood, at some point, your home may become difficult to sell because of the decline in values. We have heard some real estate horror stories over the years, and plummeting prices were almost always the result of a particular neighborhood's declining in value. This is why location is most important.

3. Buy the Least Expensive House on the Street

Another great home-buying strategy is to buy the least expensive house on the street. As a rule, this allows you to realize more gain from any home improvement or remodeling, since you will be less likely to overbuild for your neighborhood. Neighborhood amenities are another important consideration. One of the most important is the reputation of the school district. Avoid buying into a neighborhood in a weak school district, if you can. While you cannot do anything if the quality of the schools in your neighborhood slips over time, knowingly buying into a neighborhood with weak schools is a mistake.

4. Confirm Your Neighborhood School with the Central Administration

As a result of overcrowding and other considerations, school systems are sometimes compelled to redistrict. When you're buying a home, therefore, don't assume that the school right down the street is the one that your child will attend. Call the school system's central office, give it the address of the property you propose to buy, and find out which school district that house is in. Access to specific schools can be very important to future buyers, so being in the right district can dramatically affect your future resale value. Everyone has his or her own tastes and preferences when it comes to homes, so we won't presume to tell you what sort of house to buy. But to maximize the return on your investment, here are some guidelines to consider.

5. Consider Resale Value When You Buy

It is important that you buy the kind of home that will appeal to the largest number of buyers. An unusual home with a unique design may look good to you, but, when it comes time to sell, that offbeat look may turn off potential buyers. Selling a home invokes the law of averages. So keep in mind when you buy that unusual designs will limit your market and potentially hurt the resale value of your home. You should also consider other factors that affect potential resale value. For example, there is a bigger market for four-bedroom homes than for three-bedroom, and a bigger market for three-bedroom homes than for two-bedroom. Also, the greater the number of bathrooms, the better the resale value. Having two bathrooms is now considered almost a necessity, and an extra half bath (a powder room) helps both while you live in the house and upon resale.

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