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Perkins on Real Estate

Real estate market changes require careful adjustments

By Broderick Perkins

Like calling a nuclear-tipped missile the "Peacemaker," real estate market buzz words "stabilizing market," "returning to normal" and "market softening" may send the wrong signal.

The housing market isn't likely to implode in a mushroom cloud, but words like "normal," "stable" and "soft" are more likely to produce complacent acquiescence at a time better suited for a more active approach.

Experts who have lived and worked through past market shifts take a decidedly more robust "cover your assets" approach to today's changing real estate market rather than trying to pigeonhole it as typical.

One of those experts is Lisa A. Vander, real estate investment adviser and founder of Pacific Blue Investments in Solana Beach.

Also author of The Real Guide to Making Millions Through Real Estate (Entrepreneur Press, $24.95), Vander is doing for real estate what Suze Orman did for the stock market and personal investments--leveling the playing field for the first-time and small investor.

It's not easy.

Real estate investors, including homebuyers, are just as unrealistic about and unfamiliar with the real estate market as novice stock market investors were about the technology sector during the dotcom era of sudden wealth and sudden losses.

"They are unfamiliar with the real estate market, especially when it decreases in value and does not appreciate at the tremendous rates that have been seen recently in some parts of the country. It cannot be emphasized enough how this is not standard and is not how long-term investors should be calculating their numbers," Vander says.

The fundamentals apply--realistic, conservative and well-diversified investments over the long haul virtually always yield greater returns than jumping on the wagons just as they are about to circle.

"Real estate gains will be experienced for a period of time and then immediately followed by times of losses up to 20 to 30 percent. These gains have historically outperformed the losses, but investors who keep and sustain their properties during these cycles are those who win in the long run," she says.

Vander offers additional pieces of advice designed to help investors hold on when the ride gets bumpy.

"There are several key action steps investors can make to help sustain their investment real estate during all real estate market adjustments and conditions," she says.

* Squirrel away equity. An equity line on your primary residence helps augment mortgage payments should you have to decrease rental income in declining markets. Get the equity line when the market is healthy and lenders can verify your employment and good credit. Don't wait until you lose your job or interest rates skyrocket.

* Don't squirrel away too much. Retain, unencumbered, at least 20 percent to 25 percent of your property equity should you have to sell to get access to cash. Over-leverage property in a declining market and you could be holding the bag with an upside-down mortgage--where the balance is larger than the property's value. That could make a needed home sale difficult, if not impossible.

* Know your mortgage. Examine the terms of your mortgage. Know how high the loan's interest rate can adjust during each adjustment period and over the life of the loan and how those adjustments can affect your payment.

* Build loan bridges. Refinance with loans designed to get you through market tightening--loans tied to stable indexes that don't adjust too frequently. Cheaper interest-only loans that don't pay down the principal are best suited for property in high-value markets where prices appreciate. For investors, such loans keep payments reasonable while rents and values flatten or decrease during down times.

* Reduce rents slowly. Right now, rents in many regions are rising favorably for investors in response to the demand for housing from a growing number of consumers who can't afford to buy. Nevertheless, check with your property manager or others in the area to learn historical rent trends for the past 10 years. Follow suit if local rents drop. Be prepared to sustain ownership even if rents drop by as much as 10 percent to 15 percent. If rent reductions are necessary, drop them slowly so you don't squeeze your investment too much. Work hard to please and keep your current tenants so you don't have to lower rates to attract new tenants. Offer improvements, amenities and other incentives to keep your current renter renting from you at levels to sustain your ownership.

Real estate writer Broderick Perkins, executive editor of San Jose-based DeadlineNews.Com, writes regularly for this newspaper.