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REAL ESTATE: THE LONG-TERM INVESTMENT
How brokers and consumers manage finances with property
By Eugene L. Meyer
RISMEDIA, March 21, 2007-It's a bad time for flippers looking to make a quick buck, and their departure from a demand-driven market has certainly contributed to a drop in home prices. But for investors who view real estate as the keystone of a long-range financial plan, there may be no time like the present to buy-and hold.
A New Approach to Sales
For brokers confronting large, lingering inventories of unsold properties a buyer's market could actually be good for business. Just ask Greg Rand, a Hudson River Valley, New York broker who has found a niche that transcends the cyclical ups and downs in housing.
Rand's 725 agents in 21 offices service owner-occupants, both buyers and sellers. But they also seek out buyers who aren't looking for a primary residence but rather for a long-term investment. He calls it the "get rich slow" program. "It's a different sales campaign," he says. "You're contacting somebody who may not want to move but may want to make an investment. You are realizing a transaction out of thin air.
"This is a great differentiator," says Rand, managing partner of Prudential Rand Realty, whose business is mostly in the suburban home owner market. But as Rand sees it, the firm's investor services set it apart from others. "We happen to occupy a niche where we have real substance behind the claim."
The substance, Rand says, is "My Property Portfolio," an online way to track the value of a real estate portfolio, with access to all comparable sales in a neighborhood and to detailed local market statistics "customized to your real estate portfolio."
Rand developed the program, which includes training for agents and clients in the fundamentals, based on his own experience with a financial planner. "I bought a $200,000 condo five years ago when my daughter was born," he says/ He put $20,000 down for the property. The condo isn't producing rental income above expenses but Rand says he is breaking even and counting on rising equity from long-term appreciation and from paying down his loan.
"I'm not doing this for income but for the objective of easily financing college in 12 years," he explains. "I'm extremely confident I'll have the dollars I'll need, $500,000 when she goes away, based on my initial investment. It will be very, very largely paid down. I'll either sell or refinance it."
Rand has taken this philosophy to the bank, and for inspiration he credits financial planner James Giangrande, who worked with him to create a long-range plan. "My thing was: here's a condo for college and a share of a multi-family building for retirement and a piece of commercial property, also for retirement," Rand says. "It helped me to design our program."
Rand's initial thought had been to invest $20,000 in a Section 529 college savings plan, but Giangrande had another idea. He noted that after 15 years, Rand could wind up with $146,000 from a 529, all of which must go to education, leaving nothing left over.
Or Rand could buy a $200,000 property with $20,000 down and a 15-year mortgage. At the end of the day, assuming rent covers only expenses and no profit, the mortgage is paid off and Rand has at least $200,000 in equity. If the property has appreciated 5% a year, its worth rises to $415,000. The property could then be sold, or refinanced to use some of the equity for college.
"You're using other people's money to build your wealth," Giangrande explains. "It's not for everybody. There'll be times when you have no tenants or damages and you have to put money into the property, but it could be viable in the right situation for the right person with the right temperament and the right stomach for it."
Those who get hurt, he adds, are people who use equity lines for down payments or finance 100% of the sales price or don't have cash reserves, in case the house sits empty or requires repairs. And, Giangrade adds, it's important for investors to make a "holistic" financial plan that takes into account all their goals, not merely one.
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