Investing in real estate — whether buying a home to live in or purchasing an income property — can be a path to wealth. Or, it can be a horrible boondoggle that saps your savings and cracks your nest egg.
Even if you get a great deal when you purchase a home, you can blow it later by making a poor sale. And sometimes, you're better off staying away from real estate altogether and simply continuing to rent instead.
How can you make sure your next real estate transaction is a smart one? It helps to know the tricks of the trade. The following are 12 secrets that real estate agents know, and that you must learn to make a great real estate purchase or sale.
Smart Preparation Can Help You Boost an Appraisal
Appraisers are meticulous and precise professionals. But they are people too, and certain things turn them off, including strong pet odors and stale cigarette smoke.
So, if you are going to sell a property, eliminate lingering scents and "get rid of all the clutter in your home," said Jonathan Miller, the New York-based president and CEO of Miller Samuel, a real estate appraisal and consulting firm. Tidying up "makes the home appear larger," he said.
A Home Tour Video Might Sell Your Home Faster
More than 80 percent of all buyers now find their homes online, said Ben Salem, who owns Ben Salem Properties in Beverly Hills, Calif. "So when you have a YouTube video that comes up on Realtor.com, that's huge," he said. "The best part is that you're one click away from showing it to the whole world."
Salem has a series of home-tour videos on his website. Catchy music and sharp camera work helps, too. It might cost a few hundred bucks, but it can be worth the investment.
Some Home Additions Add Value — Others Don’t
It's important to research home improvements that add value to your home — because some don't. A good rule of thumb is to avoid out-pricing the real estate market: Don't shell out thousands of dollars on fancy renovations that potential homebuyers won't be able to afford, especially if homes in your neighborhood don't boast the same types of upgrades.
If you pay too much for unnecessary additions, you'll end up wasting thousands of dollars. Instead, focus on modest improvements to your home. For example, stick with remodeling your kitchen or bathroom. Or, work on your home's exterior and replace the front door.
You Can Talk Your Way Into a Quicker Sale
Sometimes, your home's appeal comes down to talking up your community's stellar points, from excellent schools to ample green space and nearby entertainment. People looking at your home might not realize these advantages right away — and even your real estate agent might miss some of them.
So, be sure to highlight the neighborhood's best features in order sell your home for a bigger profit. To start, make a checklist of recent exciting developments you've seen, including the addition of upscale restaurants, museums, parks and other amenities.
Turning Your Home Into a Trust Can Cut Your Taxes
A qualified personal residence trust (QPRT) allows you to gift your home — in most cases, to your children — yet continue living in the residence, all with the benefit of paying a reduced transfer-tax cost. With a QPRT, you setup an irrevocable trust, yet retain the right to use the home for a predetermined period of time.
Once the term concludes, you can pay rent to your beneficiaries if you want to continue living in the home.
Auctioning Your Home Might Be a Smart Option
With real estate in high demand in some areas, smart homeowners can actually start a bidding war for their properties.
"The most compelling reason for an auction is that a seller can decide when their property will be sold, instead of leaving it to the vagaries of the market, and specifically what date," said Rick Levin, president of Rick Levin and Associates, a Chicago-based real estate auction firm.
"And right now, demand is greater than supply for many homes in many parts of the country," he said. "So you get many types of bidders fighting for the home and driving the price higher until it sells."
The Cap Rate Can Reveal a Property’s Overall Value
Two properties in different cities that generate the same income might not represent the same value. If you're investing in real estate, the capitalization rate — or cap rate — helps you determine how much your assets are really worth.
The cap rate is determined by dividing the net operating income by the current market value. A property making a given amount in New York City will yield a low cap rate — because market values are high — compared to a property making the same amount in Poughkeepsie, N.Y.
Turnkey Real Estate Can Be a Moneymaker
In essence, a turnkey property transaction is where the investor buys a fully vetted, rehabilitated property that usually has a tenant. Many investors don't understand or even know about this potentially profitable sector.
The idea here is to buy into a slice of the real estate market where a long-term buy-and-hold strategy is possible, meaning you can hold onto the purchase and expect rising property values. Be prepared also to handle property management, or hire someone to do it for you.
Renting Is Sometimes Better Than Owning
While your home's value might rise, it also could fall. Rich Arzaga, founder and CEO of Cornerstone Wealth Management in San Ramon, Calif., examined 250 properties around the U.S. and went through close to 40 client files to project the financial impact of owning real estate versus renting.
He found that "100 percent of the time, it was better to rent rather than own," he said. When you own a home, the carrying costs — or expenses needed to maintain the asset — range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs, leaving the occupant free to invest revenue in other areas.
The wisdom here is to buy a home to enhance your quality of life — not your portfolio.
Home Equity Lines of Credit Might Never Be Cheaper
It seems likely that the Federal Reserve will continue to hike interest rates over the coming year. So, if you're going for a home equity line of credit, now is probably a good time to do it.
"I'm a big fan of home equity loans when used responsibly," said Bijan Golkar, CEO and senior advisor of FPC Investment Advisory in Petaluma, Calif. "Many people have most of their wealth trapped in their main home. Having a HELOC allows you to have quick access to capital and you can normally write off the interest on your taxes."
Just make sure you understand how to leverage home equity before you do so.
A 15-Year Fixed Payment Isn’t Much More Than a 30-Year Loan
Interest rates are generally lower on 15-year fixed-rate loans than on 30-year fixed-rate loans. The fact that you get a lower interest rate — and that you have less interest to pay overall — means that when it comes to the monthly payment, there is often a smaller cost difference than you might think between a 15-year loan and 30-year loan.
Sure, you'll pay more each month with the 15-year loan — possibly even a couple hundred dollars more. But that's probably a small price to pay to shave 15 years off a mortgage.