Personal finance author David Bach, a former senior vice president at the Wall Street investment firm Morgan Stanley, turned his sights on residential real estate as a wealth-builder in his latest best-selling book, “The Automatic Millionaire Homeowner: A Powerful Plan to Finish Rich in Real Estate.”

At a glance
Name: David Bach

Hometown: New York

Education: University of Southern California, B.A., communications

Career highlights:
  • Senior vice president, Morgan Stanley.
  • Partner of The Bach Group, which during his tenure (1993-2001) managed more than half a billion dollars for individual investors.
  • His breakout book, “The Automatic Millionaire,” spent 14 weeks on The New York Times Best Seller List.
  • His most recent book, “The Automatic Millionaire Homeowner,” has sold more than 1 million copies since its release in March 2006.

How do you feel about investing in real estate given the current state of housing markets?

Real estate is not national; it’s local. At the end of the day the only market that matters is the one you’re investing in, the one you’re buying in. If you’re thinking of buying a home, you have to ask: Where? Why? How long do you plan to live there? People are always doing better buying for the long term.

How long is “long term”?

To me that’s more than three years. If you think you’re going to be alive longer than a decade, you’re going to be better off buying. What separates rich and poor is real estate. I honestly think the market looks better now than it did two years ago. Now prices are flat, and in certain cities declining. Just as I said in my book, we have a buyer’s market again. It really depends on the market. If you’re thinking about buying a condo now in Florida, there are some great opportunities to buy from people who had bought with the intention to flip.

Is it better to buy sooner, with little down payment, or to wait until you’ve saved for a bigger down payment?

Half of the buyers a year ago bought with nothing down. I’d rather see someone put 10 percent or 20 percent down. We at least know they have a proven ability to save money. But, if the choice is either to buy with nothing down or to save for two years so you can buy with a down payment, I would rather see them buy now, provided they have at least three to six months of mortgage payments in savings. Keep that money in an emergency account rather than put it down on a home.

How do you like some of the newer mortgage innovations used in recent years, such as loans that allow interest-only payments or negative amortization?

Interest-only mortgages have been around a long time, but they were originally created for sophisticated investors, people who have assets somewhere else. In the last few years they have been given to people who are not sophisticated. People were buying more than they can afford, and in many cases without understanding what the loan is. With negative amortization, you can owe another $50,000 beyond what you borrowed. Your mortgage payment can go up 40 percent or 50 percent. Those are the people losing their homes to foreclosure. Unfortunately, we’ve become a society that focuses on monthly payments. It’s common with car sales and it has spread to homes. If prices are going up you can get away with it, it doesn’t hurt you. But when the market is going down and the payment is going up …

Is the 30-year fixed-rate mortgage boring? You seem to like them.

I love ’em. My preference is a 30-year fixed-rate mortgage and a biweekly payment plan. My own mortgage right now is a 30-year loan, fixed for 10 years and then it switches to a one-year adjustable-rate mortgage. And I pay an extra one-third of the principal due every month. With a hybrid like this (a loan that is fixed for five, seven or 10 years and then switches to an ARM), you really need to understand when it is due, or when the rate will reset and what it will reset to. You need to stay on top of your credit score so you have the ability to refinance if you need to.

What about diversification? If you prepay your mortgage, you’re getting about 6 percent or 7 percent return before taxes. Would you be better off putting some of your money into stocks and bonds for better growth?

The great thing about this country is that you can choose where you will invest. In my nine years with Morgan Stanley (you’d expect me to promote stocks) my clients all had their greatest gains in real estate. The reason people were able to retire in their early-to-mid 50s or early 60s is because they paid their homes off. Those who paid their homes off early were able to retire 10 to 15 years sooner than those who didn’t.

How do you shop for a mortgage?

First I go to a site like Bankrate.com.

Ah, yes, and?

I always start with my bank first. You should sit with the mortgage adviser and ask, “Do you have a preferred customer rate?” And if you get quoted a preferred customer rate, you go out and make sure it’s the lowest rate. I had two mortgage brokers compete against each other. Two of the top brokers in New York.

How did you find them?

They’re always running advertisements. One was a referral from a Realtor at Sotheby’s. I talked to their preferred lender. The other was a mortgage broker. I called the No. 1 mortgage broker in Manhattan. The bank couldn’t compete with the broker’s rate. I shopped my mortgage very hard. I got a jumbo fixed at 5 percent for 10 years. Then it converts to one-year ARM. I was able to get 5 percent instead of 6 percent for the 30-year-fixed. That’s a big difference because I had a jumbo, a big mortgage.

Do you have any advice on refinancing?

You have to factor in all the closing costs for a refinance. There is no such thing as a no-cost loan. The loan documents, the HUD-1 settlement statement details it all. You have to ask “What costs will there be?” There are some lenders now who offer flat pricing. No points. But there may be a $500 or $1,000 fee. Just ask your lender or broker, in writing, to provide a list of all the costs associated with the loan, including title and appraisal. Especially if you put your request in writing, an e-mail or a letter, you have a paper trail. There are more good mortgage loan people out there than bad. It’s a very regulated industry.

Do you like loans with 15- or 20-year terms, instead of 30 years?

If you can really pay a 15-year loan, it’s just a fabulous financial planning tool. What makes the 30-year nice is you have the flexibility to pay it over the longer term or to pay it off early.

Is it a good time to become a landlord? What about all those rentals coming on the market from investors who weren’t able to flip with a quick resale?

It depends on the market. Know the market. In some areas rents are going up. In New York, they’re going up 20 percent to 30 percent. Real estate is so simple, just open the newspaper. If you have a three-bedroom, two-bath, see what three-bedrooms and two-baths are renting for. You can tell with very little research how your market is doing currently.

What about investing in vacation homes?

The fantasy of vacation homes is that you’ll buy them and then rent them for enough in high season to cover your mortgage. But you should assume that only 50 percent of your mortgage costs are covered. The second-home market has been a fabulous market. Baby boomers continue to want second homes. It has slowed down a bit, but looking out 10 or 20 years, if it’s got a view and it’s on the water, it’s going to go up in value. Boomers want water, golf courses and a location that’s only one or two hours away from their existing home.

Has anything surprised you?

I’m surprised by how fast the media turned negative on real estate last March. It’s almost like a hyped, negative market. After seven consecutive years of double-digit increases, you had to expect the market to slow down. But, gosh, we didn’t see 20 percent or 30 percent drops. I do see that the people who were bragging at cocktail parties about the condos they were going to flip, they’re not bragging anymore. And that’s a good thing. It tells you the silliness about the speculative market is cooling.

Real estate is a simple business. It always comes down to cash flow.

What is the biggest risk now?

The single biggest risk for a renter is standing on the sidelines and not buying. The longer you wait, the harder it gets. If you’re looking in a place like New York City, San Francisco, Washington, D.C., or San Diego, places where people always want to live, prices will go up. You only have to miss one good year and you won’t be able to afford to get back in. If prices move from $500,000 to $600,000 in a year, appreciate 20 percent, and you’ve saved 10 grand over the year, you won’t keep up.

Is that kind of appreciation coming back?

think it will be a year to a year-and-a-half before it’s a seller’s market. It depends on your area. If rates stay low for the rest of this year, we will see a lot of buyers coming out and buying real estate.

For information on Bach’s real estate wealth seminars being offered with Donald Trump and Anthony Robbins through the Learning Annex, go to www.finishrich.com.

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