Here's how investment, risk can be defined in real estate
By Michelle Singletary
By Michelle Singletary
I often receive many real estate-related questions during my regular online chat at washingtonpost.com. Here are some from recent chats I didn't have time to answer:
Q. We will be selling our house soon and will have $200,000-plus to "invest" for a short time, until our new house is completed. How should we invest the money for one to two months?
A. Here's what it means to invest, from investorwords .com: "To engage in any activity in which money is put at risk for the purpose of making a profit." And here's how this excellent online financial glossary defines risk: "The quantifiable likelihood of loss or less-than-expected returns."
If you need that $200,000-plus in one to two months, don't "invest" it. Park it in a savings account or a money market account. In fact, go to www.bankrate.com and look for the best savings rate deals for your money.
Q. As I search for a home loan, my FICO scores are 781, 786 and 793 respectively. Does it help to get them higher or does the benefit of doing so stop paying off once you reach a certain point?
A. With credit scores that high, you are in solidly safe territory for getting the best rates for your home loan. So now that you know this, play the lenders against each other to negotiate the best terms.
Q: I would like to refinance, get cash out, pay myself each month so I can pay the monthly bills and go into real estate full time. Hopefully, by the time the money runs out I'll be established enough in the real estate business to sustain my living from real estate. Good idea? Bad idea?
A: So let me get this straight. You want to use the equity in your home for income for some undetermined amount of time to start a new career in which you have no experience?
"You might as well roll dice," said Walter Molony, spokesman for National Association of Realtors. "This strategy is ill-advised."
Without more details, let's assume that by getting into the real estate business, you mean you want to sell real estate. Well, join the crowd. Molony said that from 2002 to 2004, there was a 26.6 percent jump in the membership of NAR, which includes most serious full-time real estate professionals.
Unless you're extraordinarily talented at selling real estate, your income won't be extraordinary at first. The median income of people in the real estate business for two years or less is $12,850, according to a recent NAR survey. People who have been in the business six to 10 years had an income of $58,700. Professionals with 26 years or more of experience had an income of $92,600.
So let's say you are talking about real estate investing. It's still a monumentally bad idea to use your home equity as your sole source of funds for your income and to buy real estate.
"You need to understand cash flow," Molony said. "What's going to be your income and expenses on your property? You need good entrepreneurial skills. You need to have six months of reserves in case things don't work out the way you think it will."
And you might be joining the real estate craze at its peak, which means you'll be buying high. "We think for all of 2006 we will see a slowing of price growth in housing prices," Molony said.
Real estate investing isn't for everyone. Can you make a living at it? Sure, you can. But you can also lose everything.