Friday, January 28, 2022

Why are you buying?



If you are considering buying real estate, you should ask this question: why? There are three reasons for a real estate purchase: First, you believe that it is the best place to invest to maximize a financial return; Second, you want a place for you and your family to dwell, whether as full-time residents or as a place to vacation; or third, you want a return on your investment, and you want your family to enjoy it while waiting for the best time to sell (a profit is intended).

Most buyers that acquire residential property in the Marco Island/Naples market choose the second or third; bad decision. Let me explain my view on the subject. (My view is not accepted by some, but I’ll let my track record speak for itself.)

If you are considering the purchase of residential property as a pure investment, as I have written before, don’t expect to “fall in love” with it. I once called a client and told them of a property that fit perfectly with their investment plans. I provided a financial analysis and they agreed that it was just what they were seeking. I then told them that I would send the paperwork to move forward. Their response: “I want to come see it first.” Since I had been looking on their behalf for some time and understood exactly their mission, I was set back. After gathering my thoughts, I asked the following: “You own stock in several firms listed on one of the exchanges. Have you ever seen the certificates?” Their response: “No.” They still wanted to see the property.

The point is that, assuming you have absolute trust in your agent, you should not need to visit the property. I’m sure that many of you are thinking “Now he’s lost it.” Maybe so, but I have helped many clients purchase, without seeing the property, real estate investments; and I have done so myself with good results.

The purpose of this discussion is not to tell you to never inspect a potential purchase, but to consider the circumstances. There are times to do so and times when it is not necessary and quick action will result in substantial gains. But again, if it’s for “investment,” don’t plan on “falling in love.”

To support the intent of purely financial return, one can buy for expected return either from “holding” or from annual income stream. If “holding” is the intent, one should have an “investment plan.” The plan should identify a timeframe and include an anticipated return. That is to say, if the anticipated return is reached, arrange a plan to sell and don’t get greedy.

On the other hand, there are some who seek the opportunity to acquire property based upon an annual return. Most commercial properties are acquired with an annual return



in mind. Whichever avenue is pursued, do your homework or employ a real estate professional who has a history in the local market and has a good track record with the type of investment you are considering. A more detailed article on real estate investment will be featured in a future publication.

The second reason to buy is the acquisition for you or your family’s enjoyment. While it’s nice to know that your financial statement will improve with the age of the home, the purchase of your (primary) home should include factors other than a future value. What does the family need and what would provide the lifestyle expected from living day-to-day in the home? Does the home have what the male of the household expects? Does it have what the Mrs.—or Miss—expects? (If it has what she expects and not what you want, you lose!)

What about your kids or the grandkids? I have a client who started with a condo on the beach, later bought a “vacation” home on the water, and now has a blast, fishing from the dock and swimming with the grandkids in their new “private” home. While the client would like to see some property appreciation, their experiences are priceless. By the way, their house is occupied exclusively by their family and friends; no rentals.

The third classification previously stated is that of a property (house or condo) that is intended for investment, but the family will use from time-to-time as a vacation home. An important consideration here is the rent-ability of the property. If you intend to have the property available for rental throughout the year, be aware there are many condos that restrict rentals to a thirty-day minimum; some have more restrictive covenants. Another factor may relate to a single family residence. Does it have a pool? When our firm was in the short term rental business, we would not accept into our program houses that didn’t have pools.  Homes with pools but no heaters were also not accepted as a pool without a heater was nearly impossible to rent in our market.

There is one additional class that one might place in the category of #2 or #3. That is a home or condo that one purchases for personal use, but needs to rent it to either satisfy the IRS or help defer some of the expenses related to the ownership. My wife and I purchased a vacation property, but we have to make it available and rent it, since we used the funds from 1031 deferred exchange (an IRS code definition) to purchase the property. Over the past years, I have sold numerous properties to clients who needed the income to help offset some of the expenses. If that’s what you have in mind, make sure that you can carry the load in the case that the rental market is weak.

Now it’s time to go out and support your local Realtor.

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