The Investment Scientist

Archive for the ‘Real Estate’ Category

Less than a week after we were done with settlement on a rental home purchase, we bought a house for our primary residence. The decision process for our primary residence purchase was vastly different from that of the rental property. For one, I didn’t use cap rate to evaluate the primary residence. Instead, we followed these five decision steps.

1. School district

My two sons will grow up in this house, so the right school district was of the utmost importance. My wife did thorough research, and she declared Whitman to be the best school district in the whole state of Maryland, followed closely by Churchill. The first is in Bethesda, the second is in Potomac. These two areas happen to be the most expensive areas in Maryland.

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Owning a rental property as investment may sound attractive to a lot of people who are sick and tired of the volatile stock market.  However, owning a rental property is like owning a business. Do you know what it takes to be a landlord? Listen to Paula Pant talks about it.

Podcast: Becoming a landlord

Table of contents

Consumerism Commentary Podcast[00:00] Introduction from Tom Dziubek
[00:36] Interview with Paula Pant
– [00:54] Owning rental properties
– [01:51] Analyzing a property’s profitability
– [03:04] Expenses involved
– [04:08] Things to look for in a property
– [05:19] Renting to professionals
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For folks who think we got a great deal on our investment property, they have to balance that with the hassles we were put through. All in life is fair; there is a reason why these houses are sold cheap.

A short sale is like a tripartite dance between the buyer, the short seller, and the bank that holds the title, and that’s not counting the buyer’s mortgage lender. Any one of these can trip up the others, and the deal will fall through.

Here is the list of 10 troubles we went through:

1. The seller was willing to sell at $170,000, and he said the bank had pre-approved the price. Once we accepted the price, the bank (Bank of America) reneged. It would not release the title unless the price was $180,000. After a few weeks of negotiation, we split the difference – $175,000.

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Invest in a house

In December of last year, a real estate agent who is a close friend brought our attention to a townhouse in short sale. The townhouse is in the fastest growing neighborhood inMaryland. It is within walking distance of the town center and a short drive away from an interstate highway.

The seller bought the townhouse for $350k five years ago, and he was now asking only $170k.

I did a quick search on Zillow and found out that similar townhouses in that area are renting for about $1,700 per month. I did another search on the county planning board and found that a new hospital is being planned nearby. Then, I went with my wife to check out the place, and it was in relatively good condition. We decided to buy it on the spot.

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price chart downOn a recent air trip to China, I found myself sitting next to a Japanese. As our conversation turned to real estate, I opined that the Japanese real estate market had finally turned the corner after 16 years of falling prices, and it might be a good time to buy. He immediately disagreed with and went on to give me a litany of reasons why the Japanese real estate prices would keep on falling. His reasons include that no Japanese nowadays would think that the real estate prices will ever go up again.

In 1991 when the Japanese market was at its peak, banks were lending to home buyers without any down payments, people were taking out interest only loans, and everybody was expecting the real estate prices, already the most pricey in the world, to keep on rising. Does that sound familiar? Was it like what we saw two years ago in some hot markets in the US?

The excess in their real estate market took the Japanese 16 years to unwind. During this time, their real estate prices fell by an average of 60%. Counting inflation, real values have fallen by more than 80%.

Could the US real estate market experience a long recession like what had happened in Japan? I can’t give a definite answer. However, judging by how relatively optimistic people are with real estate, I believe there is still a long way to go before the market turns around. I think when I don’t see real estate investors around me, when I don’t see people talking about real estates as the best investment, better yet, when I see people in the US speak like the Japanese I met on the trip, I can then reasonably conclude the bottom has been reached.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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