Five Real Estate Buying Lessons Learned
Updated: Jul 14, 2022
I have learned a few lessons about buying real estate over the past 25 years. Here are a few important ones. They apply not only to investment but also to those buying to occupy their property.
1) Don't buy a house on a steep slope, unless you are buying a million dollar view. I've done it, but for a modest view, and it was a mistake. Steep slopes cause all kinds of headaches: difficulty maintaining the land, shifting foundations, erosion, water runoff issues, falling trees, accessing the property with heavy equipment, yard enjoyment, landscaping, hill views and more. Skip them and find a level property.
2) Don't buy a condominium unit that is below ground level. Basement condos tend to be cheaper than average and thus the price looks attractive to buyers. Yet, when a good real estate market turns, these units tend to be the most difficult to sell (even in a good market they can be tough to sell). A higher-than-average number of these units tend to go to foreclosure. Also, when there is a water leak somewhere in the building (nearly inevitable), where do you think the water ends up? Other issues include: poor view, poor lighting, small windows, safety issues, smaller pool of renters and the impact to one's psyche of living in a basement. Don't be enticed by that low price, it's not worth it.
3) Don't over-leverage. I suggest setting a target of no more than 50% loan-to-value on a real estate portfolio, including the house you live in. Now, that's a high hurdle for most home buyers, especially first-time buyers, so that might be a longer-term goal since we all need a place to live. If you have 20% to get the best interest rate and have a comfortable monthly payment, then maybe set a five-year plan to get that 80% loan down to 50% (or paid off - what a thought, think of the freedom!). Believe me, when the market turns (and it will) and your property value drops, or you experience unexpected hardship, it will be a great feeling of security that you will be able to weather the storm.
4) Beware of real estate speculation in neighborhoods and areas that are considered "up-and-coming". This applies to investors and those seeking a house for themselves. Yes, you can build equity quickly by riding the wave, yet when that wave recedes these speculative areas tend to be the hardest hit in a downturn. Either interest rates rise or the liquidity for investment dries up for any number of reasons and the investors pull back. Then businesses pull back too, and you are left with the remaining creeping blight and sometimes a resurgence of crime as prices plummet. You'll want to know that the economic fundamentals are solid for this micro-economy and that progress will weather a downturn. Try to identify that "critical mass" of investment that makes it a safe bet for you. Otherwise, you might as well day-trade your retirement fund in the stock market as "safer" speculation.
5) Buy with an eye to selling. You should be thinking about selling your property when you are thinking about buying it. Buy property that always will appeal to a large pool of buyers. Yes, these properties are harder to buy in an up market, but the effort will be worth it. This applies not only to the lot and the style and layout of the house, but also to the area and neighborhood. Just because you are thrilled by the geodesic dome, the vintage appeal of the1970's wood paneling throughout, you don't mind the gas station across the street and the fact that you only need the one bedroom that was built doesn't mean you should buy it because that is what you like. If you have no concern for money, then go for it, otherwise always be thinking about whether the property you are buying will appeal to lots of buyers in the future. No property is perfect, so divide the issues into those you can fix down the road (e.g. wood paneling) and those you can't control or easily fix (e.g. everything else).