5 real estate myths
Oct. 22, 2010 at 10:22 a.m.
Updated Oct. 24, 2010 at 10:24 a.m.
The appeal of real estate, at one time or another, likely wedged itself into your dreams.
Maybe you fantasized about the perfect home, considered becoming an agent or envisioned developing Victoria's next best neighborhood.
Many of America's wealthiest people have, in part, real estate to thank for their riches.
Before you dive into a real estate selling, developing or investing career, however, consider the following advice, which aims to dispel common myths.
MYTH NO. 1: RENTAL PROPERTY ALWAYS YIELDS GREAT RETURNS
Nancy Garner, a Victoria real estate broker and investor, said clients often have inflated expectations about initial returns on rental property investments.
"Most people expect 10-14 percent monthly returns on investment," Garner said. "Your monthly return is not usually that high right away."
Return on investment increases when the property is rented to a tenant, and the mortgage is paid down or off. Returns decrease because of taxes, vacancy, upkeep and maintenance costs.
Return percentages vary based on market conditions, investment quality, appreciation and equity buildup, Garner said. Tax depreciation often shields rental income, another benefit.
Garner said 6 to 7 percent is a likely initial return on investment - if the property is mortgaged and occupied by a renter.
MYTH NO. 2: ECONOMIC DOWNTURNS MEAN NEW HOMES COST LESS TO BUILD
"With the downtrend in the economy since late 2007, people are under the misconception that labor and material prices have also gone down," said Gary Davis, vice president of a Victoria homebuilding company.
"The prices for labor and materials have not gone down," Davis said.
MYTH NO. 3: ADJUSTABLE RATE LOANS ARE ALWAYS BAD
Many personal finance experts - such as Dave Ramsey, the syndicated radio and TV show host - advise homebuyers to always avoid adjustable rate loans.
The interest rate - and sometimes the payment - increase on these loans, Ramsey notes.
Gabe Lopez, director of real estate lending for Texas Dow Employees Credit Union, suggests adjustable rate loans can benefit specific people.
"Say you know you will only live in a house for five to seven years," Lopez said. "You can possibly get a better interest rate with an adjustable rate loan than you could get with a fixed rate."
Adjustable rate loans often boast lower interest rates on the front end. When they "adjust," the rate often increases.
Lopez suggests if you know you won't be in a home - and thus the adjustable rate mortgage - when the rate increases, you can benefit by saving on early-year rates.
Consult an independent expert before agreeing to an adjustable rate loan.
MYTH NO. 4: REAL ESTATE AGENTS ALWAYS MAKE A KILLING AT CLOSING
Sometimes, real estate agents garner large sums. The bigger the home's price tag, the more money agents make.
But Sarah Korczynski, a Victoria-based Realtor-owner, said most people misunderstand the commission agents typically earn.
Commissions, which are negotiable, often are 6 percent. If an agent sells a $100,000 home, many people think the agent receives $6,000 - or 6 percent - of the sale.
"Half of that commission goes to the selling office and half goes to the buying office," Korczynski said.
Because separate agents most often represent the buyer and the seller, the commission per agent then dips to 3 percent.
Then, the agent must split that 3 percent commission with his or her broker. The agent-broker split varies based on several factors.
"It's different in every office, but a broker can take out 30 to 50 percent of your 3 percent commission," said Melvin Chaloupka, a Victoria agent.
To sell a property, agents also incur expenses. They spend money on fuel, advertising, real estate licensing fees and more. Agents, of course, also pay taxes on commissions.
"A lot of other fingers are in the till that the general public does not know about," Chaloupka said.
In cases where one agent represents both the buyer and the seller - a less common but plausible scenario - the agent often lowers the commission to 5 percent.
MYTH NO. 5: IF YOU LOVE TOURING HOMES, REAL ESTATE IS THE BUSINESS FOR YOU
Real estate is a tough business - whether you buy, sell, develop or invest in properties.
Successful agents work considerably long hours, spend sizeable amounts on advertising and fuel - and start anew each month. Developers face red tape, changing markets and steep risk levels.
Even the casual real estate investor faces challenges.
Dave Sather, a Victoria Certified Financial Planner, owns a handful of rental properties and counsels clients who invest in real estate, too.
"If you do real estate investment on a small scale, you had better do all the work yourself," Sather said. "If it can break, it will. Everything that breaks is expensive to fix."
Common pitfalls of real estate investing include renters who move out unexpectedly or trash properties, as well as increases in taxes and utility costs, he said.
"Whatever your projections are about value, cash flow, etc., cut it in half," Sather said. "If you can cut all of your projections in half and still make money, then it might be worth doing. I personally hate real estate and would love to get rid of every last bit I own."