May 1, 2016
You want to be a real estate investor, but you don’t even own your own home. How can you make it happen? Especially when you check out your assets and cash and can’t find a 20% down payment anywhere in the pile, it looks impossible.
You’ve toyed with the idea of buying a personal home, but you’re still renting. You can manage to scrape up a low FHA down payment for your own home, but you can’t get that low down for an investment rental property. Wrong! Not only can you make that happen, you can live close to rent-free and later you can move to positive cash flow.
You can get a mortgage through the FHA with a super low down payment if you live in the home. So, how do you live in it and rent it out too? No, not a roommate. You can purchase a duplex home and rent out one side while you live in the other. Because it is your principle residence, you can get FHA lending. You not only now own your home, you’re an investor too! The FHA will even let you count the future rental income to help you to qualify for the loan!
I’m not blowing smoke, and I’ll use a real life example duplex for sale in Houston, Texas, as well as rental rates, all as currently listed at Zillow.com. Here are the home particulars:
• Listed selling price is $ 255,000.
• Each side of the duplex is approximately 1996 square feet in size.
• Built in 2007.
• Rents of apartments and one side of duplexes in the local area justify a conservative rent income of $ 1,100 to 1,200/month.
• Zillow’s mortgage estimator shows the payment will be approx. $ 1,497/month.
Let’s become the world’s worst negotiator and pay full price for this home. However, we’re going to take advantage of the FHA and our credit score is good, so we’re going to be able to get a 3.5% down payment. With closing costs, we’ll bring about $ 9,350 to the closing table. Let’s run the numbers:
• You’ll be paying approximately $ 1,687/month with taxes and insurance included.
• You can reasonably expect to rent out the home for $ 1,150/month.
• Your gross out-of-pocket to live there is now $ 537/month.
So, you own a home and you only fork out around $ 537 per month to live there. But, I’m not through yet. You get some tax breaks that reduce your monthly net cash out-of-pocket. These are estimates, but pretty close based on the example mortgage. First, you get to depreciate the rented portion of the home (not the land value). Let’s say that the lot here is worth $ 40,000, so the structure for depreciation is worth $ 215,000. You can depreciate the rented portion (one-half) right now over 27.5 years, so:
• $ 215,000 / 2 = $ 107,500 Divide that by 27.5 for $ 3,909/year.
• $ 3,909 / 12 = $ 326/month deduction off your income.
• In a 25% overall tax bracket, $ 326 X .25 = 80/month cash not going out.
• Our previous out-of-pocket of $ 537 – $ 80 = $ 457/month net out-of-pocket.
I’m not through yet though. You also get to deduct the mortgage interest on the half of the property that’s rented (you’re still getting to deduct your own mortgage interest on your personal residence side). The amortization schedule for this loan showed approximately $ 760 on average per month in mortgage interest the first year.
• $ 760 / 2 (half is rented) = $ 380/month X 25% (tax bracket) = $ 95/month
• Current $ 457/month out-of-pocket – $ 95 = $ 362/month new out-of-pocket.
Next we can look at our tax bracket and deducting one-half of the property taxes and insurance, but you’re getting the drift. You’ll not get this down to zero or positive cash flow, but are you living in a nice home for around $ 300/month now?
Consult an accountant, as this is an on-the-fly example, but it’s all realistic and on a real home in a real market. Then think about enjoying this for two years and then renting something else for you and renting out the other side of this property and moving to a positive cash flow position. The two-year requirement is how the FHA makes sure that you’re building on a solid rental history that will allow you to use all of the income to qualify for another loan.
Also, if you have the discipline, taking the difference in what you were paying for rent that is now staying in your pocket and investing it somewhere is the way to go. If you were paying $ 1,100/month, you should see a cash infusion of the $ 800 +/- difference now. Use it to build a savings account balance to fund your next property purchase down payment.
NOW you’ll see some positive cash flow and you’re a rental property owner/investor ready to grow your business!
April 8, 2016
The Case-Shiller Home Price Index reported that home prices rose on average 5.7 percent in January from January the year before. That was pretty much as expected, but there was also a statement in the report that could raise alarms in some circles: “Home prices are rising very rapidly — twice the rate of inflation. There is very, very little supply.”
Could we be seeing a housing price bubble building similar to the one that burst in 2006 and took down the market? In one word, the answer is “No.” There is very little similarity in today’s housing market and the pre-bust market in 2006. Other than rising prices, other factors are very different.
Most analysts agree that a major factor in the crash that began in 2006 was lax lending standards and numerous programs spurring careless home buying and speculative flipping. People were in a frenzy to buy houses back then, and prices showed it. When the bubble burst, it was a nasty situation that lasted for years.
Today’s market is very different. The rising prices today are caused by a fundamental economic supply and demand imbalance. There are simply far more buyers than sellers in the current market, and this is creating competitive buying and higher prices.
Another major difference is the financial market and home loan requirements. It’s much more difficult these days to get a loan, with the old “stated income” and “no income verification” loans nowhere to be found. This keeps the careless buyers out of the market and isn’t contributing to price increases.
So, what can we expect if it’s not going to be a big bubble burst? With fewer artificial influences on home price action, the market will take care of itself. There are still a great many would-be sellers who are waiting to list to get back equity they lost in the crash, or just to maximize their equity and sell when they meet their cash goals.
A large group holding onto their homes is the baby boomer generation. Some housing analysts are blaming some of the supply problems on boomers sitting on their homes and not selling at anywhere near the rate they sold in the past. Part of this is because they’re not wanting to buy a replacement home in this market, or they don’t want to pay high rents. Rents have been rising faster than home prices, and it’s not the best time to be checking out retirement rental properties.
The market will take care of itself, and when prices hit points that spur sellers to list their homes, the supply will increase quickly. I don’t think demand will rise nearly as quickly when this happens, and there will be a slowing of price increases, and possibly even reversals in some areas. Will some recent buyers get hurt? It’s possible, especially if they paid up for a home in a bidding war. However, the overall market will be healthier.
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March 27, 2016
RealtyTrac.com has just released their annual house flipping report for 2015. The report showed that 179,778 single family houses and condos were flipped in 2015. This accounted for 5.5% all home sale transactions that year. This was up from a 5.3% share of sales in 2014.
For this report RealtyTrac counted a flip as “defined as a property that is sold in an arms-length sale for the second time within a 12-month period based on publicly recorded sales deed data collected by RealtyTrac.” The data was collected from 950 counties accounting for more than 80% of the population.
The trend indicates that there is a larger number of smaller investors doing fewer flips each. The total number of investors who completed at least one flip was the highest since 2007. However, the average number of flips per investor was at the lowest level since 2008. This is interesting and in a way gratifying. I would hope that my work in educating new investors has helped more of them to get started and successfully flip houses.
This is also interesting because opportunities for flipping aren’t as plentiful or easy to locate as they have been in the recent past after the market crash. These newer and less active investors are obviously doing their homework and due diligence. Some performance numbers from the RealtyTrac report show it:
• Homes on average were purchased at prices 26 percent below estimated market value.
• The homes were sold at an average 5% premium over estimated market value.
• The average gross profit per flip was $ 55,000, a 10-year high.
• The average was down to 1.63 flips per investor.
These are conservative numbers, and that’s not a bad thing. When new investors are jumping into the market and prices are rising, there will be fears of over-speculation. However, these conservative margins tell us that they’re being careful and profitable.
I think that we’ll see even more new investors in 2016, and that there will be a low number of transactions each on average. There are a number of reasons. Of course there has been plenty of promotion of flipping, with TV shows all over. The gyrations of the stock market, ho-hum job markets, and a generally slow economy have definitely been contributors to more interest in real estate.
It’s not unreasonable for us to believe that all of the promotion and exposure on real estate investment and house flipping has been a part of these numbers. However, we should also be happy that there has been enough good solid education in how to do it right that we’re seeing this success data. I hope we’ll build on the new investor interest and keep them successfully growing their businesses.
March 19, 2016
I don’t think anyone who has ever thought about buying or selling real estate will not understand the “location, location, location” thing. Real estate doesn’t move, and there is a finite supply. Where a home is located has a lot to do with value and what buyers will pay to live there. Sometimes the location factor can have a greater impact due to the neighbors. I don’t mean other residences either.
There has for years been something called the “Starbucks factor.” Data shows that homes near a Starbucks carry higher values than those farther away, even when other amenities and features are the same. Sometimes a new Starbucks is an indicator of neighborhood change or gentrification. Their market research is amazing, and often local real estate trends are uncovered early.
Now there is more information surfacing in reference to organic and specialty grocery stores. Trader Joe’s and Whole Foods are examples. Data is accumulating that reinforces the trend for home values to increase faster in close proximity to these businesses.
One reason could be that the higher cost of organic food means that regular customers must be in higher income brackets. Of course, they will also be willing and able to pay higher prices to live where they want and enjoy their favorite amenities. When a home buyer isn’t struggling to reach a price level for a particular neighborhood, prices tend to rise faster than in other areas. When home buyers want the best produce and niche foods, we find that they want to be near the places where they can get them.
Okay, what does this mean for home buyers? Of course, if you’re trying to make a decision about neighborhood and can afford it, you may want to place more emphasis on the home closer to one of these upscale or niche businesses. Over time, your investment should increase in value faster, or at least that’s what data is telling us.
Even more exciting, especially for investors, can you find a Starbucks, Whole Foods or Trader Joe’s breaking ground? This is especially true if it’s the first of this group in the neighborhood. They’re paying high dollar market analysts to gather demographics to support the significant investment they must make to build their new business. Why not take advantage of their due diligence if you can buy in the area?
For a double whammy, if you can find a neighborhood about to go through change, and these businesses are moving in, you may be able to pick up a bargain that will have an almost immediate value bump as the word gets around. This could be a great wholesaling or flip opportunity if you get there early enough.
As the glut of foreclosures continues to decline, you can create some opportunity of your own. A retail flip may be worth some rehab work. You may even find a rental home investment to be a great strategy. There is always opportunity if you keep up with developing trends, and this is one that seems to have legs.
March 1, 2016
Don’t get me wrong based on the title of this article. I’m not suggesting sitting and watching trying to catch the week you should sell your home to get the most out of it. First and most important, homes don’t usually sell that quickly, and you can’t just call a broker and execute a sell order.
However, there are a great many homeowners out there who have considered selling, or even want to sell, but they’re waiting and watching rising prices to get a bit more at the closing table. Some are retired and would like to move to a retirement or tourist community and enjoy life. Others will be downsizing or upsizing. There are many reasons that a homeowner can be ready to list for sale if they decide it’s the right time market-wise.
It’s tempting to keep waiting when the news is telling you that home prices are rising in your area. In many areas this can be the case when inventories are low. Some analysts are even blaming baby boomers for keeping inventories low as they are holding on instead of selling. Supply and demand will always rule the markets, so holding on and watching rising prices makes you a part of helping your cause by holding off the market.
However, when news stories with titles like More Markets Favoring Sellers popping up in the media, it can make you wait too long. The same supply-demand dynamic that you’re using in your favor right now can come back to bite you. And, it can happen very quickly. You have real estate professionals out there soliciting listings, and often they’re doing so using these news stories to convince owners it’s time to sell. At some point, the tide can turn.
The “real estate is local” meme is also important in this decision. Suppose for example that your home is in a popular subdivision with perhaps 200 or so homes. Right now you’re holding and watching prices rise because only around a half dozen or a dozen or so homes are for sale in your subdivision. There may even be some bidding wars on the best homes.
The question is just how many listed homes it will take in your subdivision to tip the supply-demand scales. If it’s a smaller subdivision, it can take just a few. In our example subdivision, past sold property data may show that a “normal” market would have 15 homes listed in your subdivision.
Suppose the eight currently listed became 15 or 20 within a week or two. The bidding wars would probably disappear, and prices would very likely soften significantly. It happens. Remember, there are others in your area doing just what you’re doing, so keep that in mind and don’t wait too long.
Of course, selling a home is a major lifestyle decision and shouldn’t be made based solely on current prices. But, if you’re in selling mode but holding, don’t hold too long.
February 19, 2016
OK, maybe a tug of war image is overdoing it a little, but they say all life is a negotiation. When it comes to selling or buying a home, you can negotiate with the real estate professional. At least you can if they can. Huh? Most real estate agents are licensed under the supervision and responsibility of a broker. They get their instructions and business practices from that broker.
That doesn’t mean that you can’t negotiate with an agent who must get approval. But, get ready for some of that “used car” thing with “I’ll have to check with my broker” thing. If the agent has certain latitude, it does make the process faster and easier. Let’s look at both sides, first a home seller and then a home buyer.
Negotiating with a Listing Agent
Ten years ago, it was difficult to get a home listed at anything but an industry-wide 6% fee. Prices can’t be fixed, but that was the generally accepted commission, and most brokerages just quoted it and stuck to it. However, the average commission has slipped, coming down to around 5% average nationally. So, just ask for a better rate and see what happens. If they tell you that they have to spend a lot of money to advertise your home in magazines and print, you could tell them to forego that, as it’s most likely to be sold because it’s listed in the MLS.
Another thing few sellers know about is the “dual variable” commission. You see, the total commission paid by the seller is split between the listing brokerage and another brokerage who brings the buyer (the most likely scenario). However, if the listing brokerage also brings the buyer, they double their commission, getting both sides. You can negotiate that dual representation commission down, usually by around one-percent.
Last, you could look for a “real estate consultant” or flat rate listing real estate company in the area. They may offer some reduced level of service or the consultant may charge a base and get paid for their time, but it’s almost always significantly less expensive.
Negotiating with a Buyer’s Representative Agent
OK, you’re a buyer. Like many these days, you’ve spent days, weeks or months searching the Internet and locating a few homes for your short list. The agent isn’t going to be showing you twenty or thirty, as you’ve done a lot of the prep work yourself. First, ask if they can rebate a portion of their commission. It’s not legal in all states, but it’s becoming more so these days.
If it isn’t legal, don’t ask them to do something that could cost them their license. It gets more difficult if legality is an issue. The seller is paying the entire commission, so you would have to get both sides involved in getting some relief. You could ask for a concession in the selling price if your agent will take less in commission, but the seller would have to be involved and their agent as well. Another option would be a credit from the seller for closing costs, but again, your agent would need to offer to give up that much in commission.
Just know that everything is negotiable in a deal. It’s a little more direct when you’re the seller, but still doable as the buyer. Just asking can get some suggestions. They make no money unless you go through with a deal.
January 30, 2016
There are now more renters in the U.S. than ever before in history, and the situation is still developing. Not only are more people wanting to rent instead of buy homes, there is a shortage of inventory. When demand is high and supply isn’t keeping up, rents rise, and they’re doing that aggressively right now.
There is plenty of media attention being paid to this situation, as well as many articles about the cost of renting versus buying a home. It seems that the ratio is not good, but people aren’t clamoring to buy. This is in spite of continued low mortgage interest rates. It’s partly a legacy of disappointment with housing as a wealth component after the market crash. Also there are far fewer first time buyers in the market. High student debt and an anemic job market isn’t helping.
It would seem that this is still a great market for rental property investors, but maybe not for everyone. The higher prices for single family homes is making it more challenging to get them into the rental market at prices people can afford. The percentage of income on average going to rent is rising and at levels that are causing economic hardship for renters.
I believe there is still a great opportunity, if you respond to the market with affordable rents on homes people want. That “homes people want” part is crucial. Due diligence into your market’s demographics is absolutely necessary. Baby Boomers are generally downsizing, so you’ll be seeking to purchase smaller homes in markets where they are locating. In college towns, larger homes that will work for roommate rentals would be your target.
Once you’ve figured out the style and size of homes you want, then it’s time to see how you can provide a rental that meets their desires, but at a more affordable rent than the competition. Your vacancy and credit loss numbers will be sweet if you can provide rental properties that are affordable and meet your tenants’ criteria.
It’s a more challenging situation, especially if you’re buying ready-to-rent homes. If you are doing fix & flip, you have some leverage in the rehab project. Going cheap isn’t necessarily the best approach. Using vinyl countertops may help you to set the rents where you want them, but they may not attract the best tenants. But, maybe something in between that and top grade marble is best. Maybe some tile that isn’t too labor intensive can do the trick.
The point is to really nail down your costs before buying decisions, get the best deal on the property possible, then bring it to market with the fit and finishes that renters rate as important to them. But, do it at a value price to comparable sized units in your market area.
January 24, 2016
What comes to mind when you see this image? No, not a glass of wine. When I see this image, I notice what isn’t there. There isn’t a bright white blown-out set of windows. Instead, there is a pleasing outdoor view exposed properly. There are not a lot of dark areas inside, much darker that the mellow shadows on the floor and walls. Instead, the shadows and highlights are more as my eyes would see them. There just isn’t a stark contrast because of the bright outdoors merging with the interior.
The fact is that real estate photography requires a lot of interior shooting. Surveys every year conducted by real estate associations and others tell us that people are using the Internet to shop for homes to buy or rent. They, at least 90%+ of them, tell surveyors that photos are the first thing they check out and they’re very important to them. If they like the pictures, they’ll check out the descriptive text and property information. If they don’t, they move on to another property.
Many real estate agents unfortunately would rather close the curtains and turn on interior lighting than have those blown-out bright windows like big white boxes. Others have embraced HDR, High Dynamic Range, photography. Real estate investment is about numbers, and the number here is 3. HDR photography uses three to five, usually three, photos at different exposure settings to merge and create a single image with all of the bright and dark areas adjusted for a result like the one in the photo above.
I can’t show you what this photo would look like if it was done as a single shot, but it definitely would have had the bright outdoors mostly very whitish to get the interior right. To get the outdoors right, the interior would be very dark, with harsh contrast between light and dark areas.
Most of today’s digital cameras have a feature called “exposure bracketing.” You set the camera to take your three photos with one underexposed, one properly exposed, and one overexposed. You should use a tripod, as you’re going to push the shutter button once and all three exposures will be created in rapid order. There will be:
• The underexposed photo with the outdoors looking OK, but the indoors dark.
• The properly exposed photo will be something in between, too bright out and too dark in most likely.
• The overexposed photo with the interior looking good but the windows blown out.
Now you just need software to do the HDR process for you. There is free software out there, such as Picturenaut. There are many good software packages under $ 50 too. The software merges the three photos to create the perfect blend of exposures that are more like what your eyes do for you. Some of the newer digital cameras even have in-camera HDR, and the processing is done for you automatically.
If you are going to market homes for sale or rental, you should look into HDR to get the attention of your Internet property viewers.
January 16, 2016
MyMovingReviews.com has released their annual moving trends 2015 Annual Relocation Data Survey. I wanted to share a few of their data points with you and comment on how some of them influence the plans of real estate investors. These survey responses have some comparisons to the previous year to help us to see trends that may be developing.
• Interstate moves down vs. local: 2015 shows a decline to 60.6 percent from 2014′s 63.5 percent figure for people moving out of state versus locally. It’s difficult to draw conclusions here, but more local moves may bode well for rental home investors if more renters are simply changing their rental addresses but remaining tenants rather than buying.
• Moving into smaller homes: Continuing a trend from 2014, people are mostly moving into one and two bedroom homes. Rental home investors should pay attention here. If their prospective tenants do not need a larger home, they’ll definitely stay away from the higher rents for larger spaces.
• Destinations changing somewhat: In 2014 the top 5 moving destination states were in the East and South. This changed in 2015 to states in the West and South. Of the five busiest 2015 routes, three of them lead to California. That is noteworthy because of the higher home prices in much of that state. This could be an opportunity for rental investors, if they can find the right type of homes that will cash flow well.
• Top 5 states for local moves:
2015: 1. California, 2. Florida, 3. Texas, 4. New Jersey, 5. New York
2014: 1. California, 2. Texas, 3. Florida, 4. New York, 5. New Jersey
Not a lot of changes here from year-to-year, but Texas has been growing its housing and economy overall, and it took second place from Florida.
• Changes in migration flow: Outbound and inbound states have seen some minor changes, but one more major change was California dropping out of the top 10 inbound states, replaced by Nevada. New York, Illinois and New Jersey continued a trend of losing population in 2015.
• Desire to move: The Census Bureau says that nearly 1 in 10 American households reported that they are not satisfied with their current place to an extent that they want to move out. On the other hand, the majority of respondents did not actually move in the next year. For rental property owners, working to improve tenant satisfaction levels could keep occupancy up.
When it came to reasons for moving, employment was in third place behind wanting a better or cheaper home and family reasons in second place. Investors can get some good data for decisions from this report. Knowledge is profitable.