When Real Estate’s in Trouble, Spruce up Your Home and Finances

As the subprime lending mess sorts itself out, there will be plenty of conflicting signals in weeks ahead on what you should do with real estate and your investment picture as a whole. Most of the advice will come from the financial media, who are notorious for their extreme short-term view.

However, if you’ve been working with a fee-only financial advisor you trust, you should already have a financial plan in place as your guide. With real estate, those with great credit scores, available cash and well kept properties are in the best position to ride out the storm.

If that doesn’t describe you, you should consider doing some spruce-up work around the house, strengthening your credit report, and taking a hard look at your long-term plans. Some ideas:

Should you sell? Your primary residence is a home, not an investment. Sure, it should appreciate over time, but tough markets like this have little importance for those who plan to stay in their home for a long time.

However, what if you have a job opportunity in another city or country you can’t refuse? It’s probably unavoidable that you need to sell. Of course, that job opportunity should pay you well enough or give you a moving allowance to offset your selling expenses.

But, if it’s just a matter of wanting to take advantage of a relatively good price on another piece of property and you need to put your current home on the market, think twice. In many markets, homes prices have begun to fall.

Should you buy? Although many think this downturn will only last a short time, it could last for a while. The enormous price increases of the last few years went unmatched by increases in personal income and were fueled by rampant speculation, historically low interest rates and lenient lending standards. If you plan to live in the new house for at least 4-5 years and have established a solid financial foundation then you’re probably in the best position to buy.

Is your property in good shape? If you know you want to move in the within the next five years, consider making improvements. When the market does recover, it will probably not revert back to 2004, when people would buy a property in any condition at any price. Buyers will want a property in clean, move-in condition when you decide to put it on the market. It will pay to make sensible investments in landscaping and cosmetic repairs inside and outside the house.

Should you renovate? People always expect renovations to increase the value of their home substantially, but rarely does that happen – it may take years to recoup your money, much less show a profit. For a reality check, go to Remodeling magazine’s annual Cost vs. Value report online and check 2006 project cost averages for your region of the country. In any event, never believe that in a good or bad market a renovation is going to buy you immediate profits on a home.

Know how you’re going to handle capital gains: When you sell, remember that married couples can exclude from their taxable income up to $500,000 of gain and individuals filing separately can exclude up to $250,000. Of course, you must have owned and used your home as your principal residence for two out of five years before the sale. The exclusion is applicable once every two years. However, if you are unable to meet the two-year ownership and use requirements because of a change in employment, health reasons or unforeseen circumstances, then your exclusion may be prorated.

Clean up your credit report: If you’re not planning to borrow now, make sure you’re in good shape to borrow later. Start with your credit report -- you have the right to get all three of your credit reports – from Experian, TransUnion and Equifax – once a year for free. You can do so by ordering them at www.annualcreditreport.com, but do so at staggered times throughout the year so you can catch potential errors in your report as they happen. Also, if you need to clean up any bad behavior – late bills, heavy credit card debt, clean it up before you wander back into the real estate market. A bad credit score can raise the total cost of your mortgage.

Although it seemed like the good times would never end with real estate, they have. But, just as stocks recovered from the 2000-2002 bear market, real estate will too…we just don’t know when!

The System Is, There Is No System

Two years ago, as I was preparing for work in the morning, I tuned into one of those 24-hour financial “news” stations. I should have known better since I always end up frustrated with their extreme short-term focus. This time would be no different. The reporter mentioned that their next guest managed to turn $33,000 into $7 million in 15 months. Wow, I thought, I’ve got to see this!

Back from commercial they come and introduce the guest. They talk with him and he tells them all about how he was burned by a broker (at least I can believe that part!) and decided to invest his own money. And, in just 15 months, he turned his small sum into a fortune.

Of course, he offered no proof of his returns…we just have to take his word for it. And how did he do it? Well, by day trading of course! According to the guest, it is so easy anyone can do it! Should you follow his advice? I’ll let you decide but we will explore his claims further.

So this guy managed to turn $33,000 into $7 million in just 15 months. Now, $33,000 to $7 million in 15 months is a 7,252% annualized return. At that pace, he should be worth around almost $38 billion today. Funny, but I didn’t see his name listed on the Forbes top 100 wealthiest people in the world (although he should have been #4 based on his claims).

Of course, his story gets better! He wants to show you how you can do it too! How can you learn, you ask? Simple. Maybe buy his book that sells for around $24. Or, subscribe to any of his web site packages that run anywhere from around $15 to $400 per month. Also, he recommends a certain online trading firm to do your trading. Why would he do that? Because he has a stake in the trading firm he recommends which means he gets a cut of every trade.

I hope you can see where I am going with this. Think about it. If you had a system that could annualize 7,252% a year and would make you the wealthiest person in the world in just a few years, what would you do? Would you waste your time and energy writing books, giving seminars and running a web site to tell other people how to do it? I don’t know about you but I would be with my family on a tropical island somewhere.

It is so easy for people to believe in this man because we want to believe there is a quick and easy way to get rich. But please, take my advice. Someone is getting rich. It is the guy who is charging you money to learn a system that has no guarantees of working for you or anyone else. Please, save your money!