At the time the first edition of this chapter was written, in the troubled fall of 2011, residential #real estate was getting a lot of bad press. According to news accounts of the day, this troubled market was the root cause of one of the worst global economic meltdowns in modern history. It all began with speculation in residential #real estate markets in the United States, many European countries and even China. Bad loans to unqualified investors were made in the trillions of dollars (no exaggeration). When it became apparent that default rates
would be high on most of those loans, a rolling panic set in that impacted one major bank after another,
threatening many of the largest banks in the world with #bankruptcy. Some banks and brokerage houses with famous names, like Lehman Brothers, Bear Stearns, Merrill-Lynch, Washington Mutual, and many more, did fail, and the others were saved only when the Federal Reserve System purchased more than $1 trillion of bad mortgages from them.
One might think that after this experience a chapter about real estate directed at college students would simply warn these young investors to stay away from #real estate - don't make the same mistakes made by your parents!
But that isn't the case. In fact the theme of this chapter is to encourage young men and women just entering the labor market to get deeply involved in #real estate - to make it a significant part of your long-term investment
strategy. The case to be made here is that the damage has already been done, and although those who were in this market at the wrong time may have been financially ruined, the collapse had the very beneficial effect of rolling prices and interest rates back to levels seen decades ago. This current college generation has the good luck to be coming of age early in the recovery.
When investing the oldest motto around is "Buy low and sell high." Now and for the next few years will be the time to buy low. If you are a college student now and you look back on your life in 30 years, you may just end up saying to a friend, "Do you remember back around 2013 when you could buy a really nice family home on a big lot for $350,000 using a - this is hard to believe - 30-year fixed rate mortgage at a subsidized interest rate of only 4.125%!" The next sentence will likely either be, "What could I possibly have been thinking when I didn't move on that - what was I waiting for?" or "Walking in the real estate door when everyone was running out turns out to have been the smartest #investment decision that I have ever made in my life."
Real estate markets are cyclical and can be hazardous, if for no other reason that your investment is typically leveraged more than five to one. That reality simply requires that you employ smart screening and investing techniques, that you use your brain and that you are not caught up in fads and manias and the nonsense of greed - that you are an aloof and independent investor who does his or her research and strategically thinks through major investment decisions.
This chapter concerns itself with treating the home in which you live as a #real estate investment, or to look at it another way, to look at your home purchase momentarily from the perspective of an investment rather than simply the home where you live with your family or friends. That is what is nice about a home. It can have all of the wonderful benefits of being your special place where you raise your family without the interference of a landlord, where you can plant your own garden and chose whatever color you want for the wall in the den, while at the same time being a significant and productive high-yield component of your investment portfolio.
This chapter does not discuss buying and operating rental real estate or any form of commercial real estate,
because both of those are businesses in and of themselves and require dedicated treatment that is far beyond thescope of this chapter and this class. We do briefly discuss the benefits of buying a vacation home as a second home.
The next section justifies why the typical young employed college graduate should buy a home, looking at the issue from the perspective of regarding it as an investment, and that is followed by the essentials of shopping for and considering homes for sale in the #real estate market, including what steps one goes through when buying a home for the first time.
The view from outside the window from where this chapter was written a few years back after a night of snow.
The third section concerns itself with the all-important issue of financing the home with a mortgage, identifying the types of mortgages that are out there, their relative pros and cons, and includes warnings about what to avoid in these murky and occasionally dangerous markets.
Finally, in the lecture (alas, not this text) we conclude where we started, with a discussion of the terrible real
estate crash that began in 2007 and continues until the present. Certain lessons emerge from that catastrophe that might provide guidance in future years.
Real estate is a visceral category of investment if there ever was one. For that reason, images that are not identified as Figure X are scattered throughout this chapter to remind us of the emotional side of the real estate investment. After all, it is the hearth as much as the yield that gives a home a special place in our sense of what is right or wrong with this world.
Before we begin the discussion of the financial reasons for investing in real estate, it is worthwhile to remember
the non-financial reasons.
First and foremost, if you buy a single-family home with a yard, you will be living in your house on your land and you can generally do as you please, which is to say paint your rooms the color that you want, put in the floors that you like, fix it up or not fix it up, and grow your own garden. Sure there are covenants on what even homeowners are allowed to do in high-density residential areas, but even those are not all that restrictive, at least compared to the rules of apartment living. It's your house. You can raise your kids there. You build trains in the attic, hot rods in the garage, specialize in yellow irises or Palm Trees from Madagascar, and junior can practice the tuba in the living room.
If you own a condo there are more restrictions, but typically fewer than you would find in an apartment.
In a few words, you don't have a landlord.
So thats why you need insurance.
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