Real Estate Q & A
Should I Buy For Investment
By
Jan 16, 2006, 10:42

Nobody would deny that your purchase of housing should be a prudent investment. However, this may or may not end up being the case.

For instance, the purchase of a manufactured home might likely be a very sensible purchase for you if you purchase the type of community you want, the type of housing you want, and the location you want. But, it may not be an investment at all, but a depreciating purchase, similar to the purchase of an automobile. Like an automobile it is depreciating, but you are buying what you want and need for a certain number of years?

If your purchase of out-of-state real estate turns out to be a good investment, then more power to you. Your main goal is to make sure you purchase within fair market value. When I meet people who are seeking to purchase out-of-state real estate because they think it is going to be a good investment, I usually figure that making a wise investment in real estate requires a lot of research and a lot of effort. Generally speaking, you would be a lot better off if you stayed right in the location in which you are familiar and studied the market and went to work on making offers in order to find the best buy you could possibly find in your own neighborhood. Why go thousands of miles away into a market where you have little or no knowledge and play Russian roulette with making a good purchase because you are looking for an investment?

People purchase homes in resort destinations for the purpose of investment because they figure the location lends itself to being a successful income producer. One of the greatest miscommunications put forth by developers is the amount of rental income you can expect. Something else to be wary of is their estimation of what the expense of maintaining the property will be. Be advised that the income will be one-third to one-half of whatever is promised, and the cost for maintaining the property will be fifty to one hundred percent more. If the property still makes good sense from an investment standpoint after making these adjustments to the information given to you by the developer, then maybe you should go for it.

However, again my emphasis is that I would not suggest to the average buyer that he go out-of-state to make a purchase of real estate for investment purposes. Basically, my line of defense, for you, is well behind the aggressive line of expecting financial return. If you are going to purchase out-of-state real estate at least make sure you are not going to get hurt.

One of the attractions to the developer of out of state property is that not only does he develop in a location he thinks is drawing a market of buyers, but he also knows he is creating a product in which he can establish a price that is often out of the context of the value of the real estate market in the area. This means he can get a hell of a lot more for the land that he has purchased and improved than if he were just building homes for the local folks to buy.

Areas where people will be seeking real estate purchases for the purpose of resort, vacation or retirement, should prove to be overall good investments over the course of the next ten to twenty years. The immediate factors behind this sense of optimism in out of state real estate investment is of course that we are coming out of a recession and that mortgage money and prices are down (always the classic signs of good times to buy).

But, more importantly, you have significant and fast-paced changes happening in the behavior patterns and lifestyles of the people that will cause even greater growth and demand in areas up to now mainly populated for resort or retirement purposes.

One example is with the fast growing use of the home office facilitated by the electronic information highway. More and more individuals are not commuting to work but are communicating through computers and telecommunication. They are able to work from their residence, no matter where that residence is. Another significant change is the explosion of small business, which is un-encumbering many an individual from having to live near a particular major metropolitan area where his large corporate employer is located. These are significant changes which will affect the population movement, and whenever the population is free to move, they are going to tend to move to those areas presently popular for resort and retirement.

In terms of resort and retirement, you have the most influential generation (in terms of market impact and just about everything else) approaching their advanced years in which they will be seeking resort and retirement real estate purchases. In other words, the World War II Baby Boom Generation is about to turn sixty. They have their life savings and are going to start

buying soon.

In addition to the above, which mostly speaks to the issues of demand, on the other side of the equation of potential appreciation in real estate, is the subject of supply. In most areas where there has been development for resort and retirement, within the last ten years there has been significant increase in regulation at the local, state, and federal level on development. Local building codes, federal wetland regulations, and state environmental issues all have made developing a much more difficult and a much more expensive enterprise than it has ever been in the past.

The point here is not to argue whether these regulations are good or bad, but to just acknowledge the pragmatic reality that they have slowed the flow of product, and probably, more important, have restricted the flow of product so that supply will never be able to meet the oncoming growing demand as efficiently as it has in the past.

All of the above in my opinion adds up to increasing prices, and, therefore, appreciation on your out of state purchase. The main point I want to make on this subject is that you should not be buying out-of-state real estate for investment purposes only. But, if you want to buy out-of-state real estate for other reasons, then do your best to make this purchase intelligently so that it will turn out to be a good investment.



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