July 23, 2015
Builder sentiment is at its highest level in a decade, with that index at 60. The midline between positive and negative sentiment is 50, and the index has been sitting in the 50s for a while. This rise is not unexpected, as housing starts are up significantly as well.
In June, housing start building permits surged to an eight-year high. Groundbreaking rose by almost 10 percent to over one million units. This is good news for a whole lot of people, as home construction is one of the most powerful stimulants in the economy. When people are buying, and homes are being started, there is a general uptick in many economic areas.
Builders are happier than in the past 10 years, and housing starts are jumping. But this is a double-edged sword when it comes to coming back from our severe downturn. During the crash, home building almost stopped completely. For a while, even apartment and commercial construction suffered dramatically.
When the work goes away, the workers go away as well. If you’re a carpenter, electrician or plumber, you can’t sit around and wait a few years for a new home to build. Where they go is not data we’re aware of, but they definitely go do other things. Some start their own business, maybe repairs or remodel, while others take jobs totally unrelated to their previous construction experience.
Nine trades (9-trades index) are tracked in relation to home construction. According to National Association of Home Builders economist Paul Emrath, the 9-trade shortage is now at a level around where it was during the boom of 2004 through 2005. However, that’s when starts were at around 2 million each year, while right now they’re at just over half that number. It’s clear that this shortage indicates the flight of many workers from the trades over the past seven or so years. Unemployment in the construction industry is at its lowest level since 2001.
This is a less-discussed influence on home prices as well. We have growing building permits and home starts combined with fewer workers in the trades that are necessary to build those homes. Contractors are competing in hiring, with way too few workers from which to choose. If I were a skilled electrician, concrete worker, plumber or other construction worker, I would be negotiating for some nice rewards for making it through the lean years.
When the trade workers demand more, the contractors factor it into their bids and new home prices rise. Supply and demand rules, and this increases the cost of existing homes as well. If it costs more to build new, then the value of an existing home usually rises as well. Of course, how close it tracks with new home price increases depends a lot on location, age and amenities.
It’s a half-empty and half-full situation, but in general we should have a positive economic outlook if home building begins to increase again. New trades workers will come into the workforce for the high wages, and some of the old ones will return. It’s a good thing for the most part.
July 21, 2015
I’ve been a real estate investor and trainer my entire adult life, and I still find it to be fun and exciting, as well as very profitable. In speaking around the country and in email conversations with active investors and students around the world, I’ve noticed a growing trend over the past few years. More women are creating and growing successful real estate investing businesses than ever before.
As our society evolves, we’re seeing more single parent households and a trend toward delaying marriage until later in life. Unfortunately, we also have a rather high divorce rate in the U.S. Whatever our attitude about this evolution, there’s one thing that is clear; there are more unmarried women out there who are the main income source for their households.
It’s not just about being unmarried either. It’s not news to most of us that many families are financially dependent on more than one income. We have fewer stay-at-home spouses these days as well. Stretching one income doesn’t get the job done in many cases. An employed spouse often makes the difference between barely making it and enjoying nicer things.
What I’m seeing is a strong interest from women in doing more than just holding a job. They want to invest in their financial futures, and they’re finding real estate is a viable path to a comfortable life, or even a wealthy lifestyle. It’s not just casual observation that fuels my enthusiasm for this trend. There are more examples every day of women actively investing in real estate in all of the strategies available.
Gena H. — If you’re struggling with decisions about finances and how to improve your future, you may have experienced what Gena H. from Washington State did a few years ago. Watching late night T.V., Gena was exposed to real estate investing, perhaps one of those infomercial broadcasts. At 1:15 AM she woke up her husband to tell him that she was going to become a real estate investor. She adores her husband, so she really didn’t get upset when he groggily patted her on the shoulder and said “that’s nice dear” before falling back asleep.
She also didn’t let his next morning concerns and warnings about how difficult and risky it could be discourage her. His doubts about the real estate market or how they didn’t have much money to get started also faded into the background noise of breakfast preparation. Gena moved forward, and today she is an extremely successful real estate investor with a secure financial future and a doting husband.
Jen G. — Working in an accounting office, Jen wasn’t gazing out of her window dreaming of a better life only because she didn’t have an office window. She was a single mother with a young son and a desire for a better life for both of them. Once she committed to real estate investing, she didn’t waste any time in getting her feet wet.
Jen experienced what many new real estate investors do when she announced her intentions to family and friends. From well-meaning concern to outright negativity, she was warned that it takes a lot of money and experience to invest in real estate, and that it was very risky. Financial ruin was predicted by some, but she jumped in, learned the strategies and changed her life. In just six months she was able to fire her boss at the accounting office and has never looked back. It wasn’t long before she had almost 200 deals closed, and she’s still charging hard.
Tammy R. — Living in a fast-moving real estate market in CA, Tammy was home schooling her four children when she decided to start a real estate investment business. Her husband told her “it won’t work for you,” but she didn’t let fear slow her down. She didn’t have much money to start, as is the case with many new investors. Because of this, she adopted wholesaling as her primary strategy.
A real estate wholesaler uses a couple of different strategies to control a good investment property and match it up with an investor with money searching for a deal. This requires very little of her money, as she is the person in the middle between the seller and investor buyer. She locates the right investments and makes a nice chunk of change when she turns the deal to her investor buyer.
Tammy leveraged her profits, and began to see her deals and wholesale profits get larger every year. After dozens of deals, she had a firm footing in the market and the knowledge and experience to grow her business even more. If you ask Tammy today for advice, the first thing you would hear is that you “can’t let naysayers spoil your dreams.” There’s no magic potion for success in real estate investment. If you simply don’t let others discourage you, the tools and knowledge are out there to create a successful business with or without a lot of cash.
I’m still a very active investor, and there are some truths that never seem to change. Real estate investment works in any area, in up, down or sideways markets, and for anyone who invests their time, energy and enthusiasm in getting started. It’s not about how much money you have, whether you’re male or female, married or unmarried or even how old you are. Anyone can do it if they just ignore the naysayers and take the leap.
The fact that the ratio of women to men taking that leap is growing is a great thing for the marketplace. America doesn’t play favorites by gender when it comes to energy, enthusiasm and the desire for success.
July 15, 2015
Every day more homeowners exit “underwater” status, owing more on their mortgage than their home is worth. Others have owned long enough to have kept some equity through the crash and partial recovery. However, many are sitting on the sidelines waiting for more market price improvement, or they simply do not want to buy another home, so they stay put.
It’s not hard to understand the “waiting” decision, but perhaps it’s time to at least take a look at some reasons that could change your mind. This isn’t advice to sell now, just the presentation of some factors that may not have entered into your decision process when considering listing your home. If they change your mind or motivate you to list, it should be because you’ve run the numbers and considered all of the options.
1. Inventory is low: Supply and demand is always in control in a marketplace unless there is undue interference by government. Inventories of both new and existing homes for sale are historically low right now. Low supply usually creates upward pressure on prices. Many studies and surveys are also showing that buyers are returning to the market, though more of a stream than a river of demand. However, combine low inventory and increasing demand, and you may get more for your home than you think.
2. Mortgage rates are low: Whether you believe that mortgage rates are going up soon or not, many would-be buyers are concerned that they will lose buying power if they wait too long. It helps sellers when buyers can afford more home due to low mortgage rates. There’s the other side of this coin as well. If you sell now with the plan to buy right away, you’re getting the same low interest rate advantage. The money you take away from your sale, though possibly somewhat lower than if you wait a while, will go farther in financing another home.
3. Some markets scream sell: If you own in an established area with a history of stability and high demand, it makes a difference. Real estate is local, and while national influences bear on prices, the right location can make a major difference in your cash out on a sale. Check the number of sales in your neighborhood versus others in the market area to see if the demand is higher.
4. Real estate brokers are hungry: The downturn in number of sales and homes in the inventory is not just a problem for buyers. Real estate agents are selling fewer homes, and that means they’re taking home less money. They don’t make money in any other way than getting to the closing table. You can probably negotiate a lower commission rate for your listing in the current market climate.
5. Don’t forget holding costs: Every day you keep your home you have costs to stay there. Waiting a year to get a 1 percent or 2 percent bump in selling price can be a mistake if your costs exceed that amount. If there is a real estate property tax increase, that’s extra holding cost. Air conditioning, heating, plumbing and electrical problems can jump up unexpectedly. Consider your normal repair and maintenance costs in relation to an unknown bump in price if you wait a year or more.
Whether it’s the right time for you to sell your home or not is entirely based on your desires and situation. However, if you haven’t considered all of these five factors, do so and you may change your plans.
July 9, 2015
There is no shortage of coverage in the media and on the Internet about the decision to either rent a home or buy one. Most of this coverage is centered on the relative costs of owning versus renting.
With rental demand rising, supply-demand factors take over and rents rise as well. As it becomes more expensive to rent, number-crunchers find plenty of validation for a decision to buy instead. With interest rates still historically low, a mortgage can often be a smaller monthly payment than rent, even with taxes and insurance included.
Zillow.com gathers a lot of home purchase and rent data, and there are some good articles there for research into the rent or buy decision. Recently, a rent-vs-buy article appeared there with these four steps under a sub-title “By the Numbers.”
1. Calculate the monthly cost of homeownership.
2. Calculate the tax benefits of homeownership.
3. Subtract the tax benefits from the cost of ownership to get the “after tax cost.”
4. Compare the after tax cost to market rent for a comparable property.
The article goes on to explain the break-even horizon for buying versus renting. This calculation determines how far in the future it becomes more affordable to own than rent when all costs of ownership are included. You know, maintenance, repairs, utilities owners may pay that renters do not, etc. In the first quarter of 2015, the national number for the break-even horizon was 1.9 years. This means that 1.9 years after buying, it becomes more affordable to own than to rent.
All of this is great information and of value to anyone trying to decide between owning or renting. However, our lives have become more complicated and the American economy and workplaces have evolved over the past couple of decades. There are valid considerations other than money in this decision matrix.
Do you want to be responsible for maintenance and repairs?
You need to take care of your investment in a home, and this requires everything from yardwork to minor and major repairs. Of course you can defer maintenance, but then you’re negating some of the value of owning, as the home will likely sell at a lower price after the home inspection turns up problems.
Are you concerned about being forced to move?
This points to the fact that your rights are only guaranteed through your lease expiration. If the landlord decides to sell the home, you’re inconvenienced with potential buyers walking around, and you may be forced to move when your lease is over. Maybe you won’t have to move, but you may see a substantial increase in rent with the new owner.
How secure are you in your job, or do you want better?
What about your employment? Are you pretty secure in keeping your job or getting another one locally that will support a mortgage for a five year or longer ownership period? If you’re actively seeking a better career opportunity, it may present itself far away, even across the country. Can you sell a home and get most or all of your money out of it if you have to do so sooner than planned?
Is family growth possible in the shorter term?
If there may be children coming, you either must overbuy to plan ahead, or you could be stuck with too small of a home until you can sell and get your money out. It isn’t just children however. There is a growing trend of older generations moving in with their children for late life care.
The decision of buying versus renting a home is not too complicated. But, you want to take every facet into consideration, not just money.
July 1, 2015
As Seen On LinkedIn
In real estate investing, there are two strategies that are geared toward short term profits and fast turns. Wholesaling and fix & flip are those strategies; and particularly wholesaling can create the need to keep a lot of deals in progress to fill the profit funnel. One strategy used to fill this funnel, to purchase as many properties as possible, involves making low offers on a great many properties.
How does it work? Just as it says, the investor is working purchase offers on perhaps dozens of properties at any given time. There are real estate investment courses and seminars with suggested numbers, such as a 30-to-1 offers to a deal strategy. The number really doesn’t matter, and it should be based on the local market and the universe of potential good deals available.
Finding Homes for Offers
Unless you have a market with many distressed homes for sale on a regular basis, this type of strategy can be a waste of time and effort. The research involved can be minimized if you just take the “offer 60% of asking price” blanket strategy approach. However, unless enough due diligence is done to at least verify the asking price is within reason, you’re spinning your wheels. Or worse, you may get an offer accepted that will not work for you.
A drawback of working with a “rule of thumb” approach is that you’re having to work with real estate agents a lot, either making your offers, presenting them to their sellers, or both. Offering through the listing agent can be a good strategy, as there will not be a commission split with an agent bringing the buyer (you) to the deal. This potentially doubles the commission to the listing agent, and gives the seller and agent some room to perhaps accept a lower offer by cutting the commission a bit.
What you don’t want is to become the “crazy” person who they don’t want to see coming through the door because your ratio of offers to closings is very low. They’re working here, and they aren’t getting paid if there is no closing. As there are agents who work primarily with lenders and asset managers, a great many of the foreclosure properties on the market will be concentrated among fewer listing agents. They want to sell the property, but they don’t like wasting their time on a regular basis, especially since they’re likely working at a reduced commission rate with the lender.
Research and Realistic Offers Can Work
I’m not saying that 60% of list price isn’t realistic, as you never know where the seller/lender is in their process when they see your offer. More likely, you’ll get a counter offer rather than an acceptance. Depending on the amount of that counter, you may have a deal in the making if you do some negotiating.
The key in bringing these deals to closing with a profit when you flip the property will be the thoroughness of your research. It is crucial that you know the market, know what homes are selling for, and that you know the current supply/demand situation. Don’t worry about the ratio of offers to closings, whether it’s 10-to-1 or 50-to-1, as long as it’s working for you. To stay busy and stay profitable is the goal.
Read Previous Articles:
What a Difference a Decade Makes
Real Estate Research and the Internet
June 25, 2015
Coldwell Banker is a major player in the real estate market, and they’ve just published results from a study of changes in buyer and seller attitudes and activities over the past ten years. They looked at their client and customer behaviors, as well as how marketing of real estate has changed. It’s no surprise that there have been some significant changes in people’s methods and desires when it comes to finding, buying or selling a home.
Their study results present five top areas of change in real estate. I’ll give you a single statement of their summary and then add my comments. My point of view may differ from theirs due to my real estate investing focus.
1. Homeowners are getting choosier: Home sellers willing to take the first offer on their home have dropped from 59% to 46% of sellers. - Really there wasn’t a lot of comment on this, other than sellers are getting pickier when evaluating offers. I see this as a logical development from the Internet and a lot more information at their disposal. They aren’t just hearing what the real estate listing agent is saying.
2. Walkable communities are in demand: Both millennials and baby boomers are seeking homes or rentals in areas that are walkable to culture and entertainment. – Interesting here is the generational cross-over. For rental property investors, whether homes or apartments, it’s clear that there is opportunity in urban areas for investment. Density of population requires density in construction, so there should be economy of scale in costs that can result in better rental cash flow. In many areas, renters are willing to pay a premium for these walkable areas.
3. Online and mobile have changed the role of brokers and agents: Online has become the first stop for almost every home shopper, with agents not first on the list for information anymore. – We’re all very aware of this, with the Internet a tidal wave of real estate information. People now approach an agent with a great deal of information about homes of interest, and they simply want access in most cases. I would add that real estate agents who want to prosper in this new world of information glut will make an effort to educate their customers and help them to sift through a lot of information that isn’t accurate or is out of date.
4. Homes are selling faster: Technology is the reason, with almost every home listed showing up on multiple websites within hours to days. - I’ll refer back to item #3, and say that not all websites in the top ten for traffic are equal. They don’t all get their listing information from the same sources. When agents syndicate a listing to the Web, it’s in the best interest of their clients and the agent to get the listing out there quickly. However, if action is required to remove it after the sale, it often is far less likely to happen in a hurry if at all.
5. People are more willing to rent: There’s a lot more interest in renting over buying these days due to job instability, lingering fear after the market crash and tougher lender requirements with higher down payments - I agree that all of these are creating greater demand for rental properties. People just do not see owning a home as necessary to living the American Dream; at least not for now.
Change is part of life, and real estate is no exception. We’ll see more change in the next few years, and the Internet will still be a major factor. Add in the growth of crowd funding in real estate and we’ll probably see some exciting new trends for investors.
June 19, 2015
I write a lot for investors, but this information is of value to consumers as well. Where can you find the best real estate information for your specific needs? Sure, we’re all familiar with the big sites like Zillow.com, Trulia.com, Realtor.com and others. The one thing we have no shortage of is online real estate listings. In this article I want to throw out the sources that I’ve found of value, which are best for what information, and how I use them.
Residential Home Listings, Not Foreclosures
Some of these sites may list foreclosures, but for this section I’m talking about homes for sale by owners, not necessarily in major distress, just up for sale and mostly in demand in the retail buyer market only. In other words, sites that consumers can use to find homes, but investors can also use to compare neighborhoods and calculate home values.
Realtor.com is no longer owned by the National Association of Realtors, but it does maintain a special relationship that gets data feeds from most of the local MLS, Multiple Listing Services around the country. It’s that relationship that makes the listing information at this site more up-to-date than some of the other sites.
Zillow.com is a really popular site that recently acquired Trulia.com as well. This site offers a lot of bells and whistles, and some of them are very helpful. Satellite views of neighborhoods with home sale price overlays can help consumers and investors to get a quick view of the price characteristics of a neighborhood. The only problem with this site is that the listing data comes from a variety of sources, not from MLS data feeds. Real estate agents use various syndication processes to get their new listings onto the site. They’re very diligent about it to show their sellers what they’re doing to get their home sold. They’re less diligent about removing the listing once it is sold. In some cases homes are still showing as for sale when they’ve been off the market for months.
A real estate website with IDX is a very accurate and up-to-date local home listing resource. IDX, or Internet Data Exchange, is a system set up among local MLS real estate brokerages to allow their company and agent listings to be displayed and searched on other broker member websites. Instead of having to go to multiple sites to see what is listed, all of the member broker listings are searchable on all of the member sites. Most of these data feeds are updated at least daily or more often. In recent years some local MLS systems have discontinued their feeds to Realtor.com, which is why searching for a local IDX site is in my opinion a better approach. Just do a Google search using the market area, real estate, and IDX and you’ll find them.
Foreclosure Specialty Sites
While Zillow.com and other sites will have some foreclosures, the best approach to getting timely foreclosure listing and pre-foreclosure activity will be a specialty site. RealtyTrac.com is one of the most widely used. Many market analysts use this site’s reports and surveys in their market research and commentary.
Other sites specialize in foreclosures, and you should use more than one anyway. You want to use multiple resources to make sure you don’t miss a great foreclosure purchase opportunity, and each site has its own features that rise above the pack:
• ForeclosureListings.com – at the time I’m writing this, the site shows more than 375,000 foreclosure listings, as well as auctions, short sales and broker listings.
• Homepath.com – this site lists all of the foreclosed homes owned by Fannie Mae. It’s a great site for locating deals that even allows you to make online offers in some cases. At the time I wrote this, the site was advertising a special offer of up to 3% closing cost assistance.
Whether you’re just doing research, searching for the perfect family home, or trying to locate a bargain as a rental investment, these online resources all provide value and you should check them out.
June 11, 2015
Rental property investing has been a wonderful path to wealth and a comfortable retirement for many. Thousands of websites, tens of thousands of books, seminars and courses are focused on how real estate investment can be the path to wealth for the average American. I’m a real estate investor, and it’s been very good to me. However, in many cases there is not enough information to help the investor investigating rental property investment to balance the risks versus rewards.
No, I’m not writing a scam article, nor am I criticizing the general enthusiasm for rental property investment. I do want to help the aspiring rental investor to understand that there are two components of return on investment, and they are not fixed in time. The ROI goal of rental property investment involves:
• Positive monthly cash flow for the entire period of ownership.
• Appreciation in value for a significant profit when the property is sold.
There are some benefits enjoyed by rental investors not available in stock market and bond investing. There are tax breaks, including deduction of expenses, depreciation, and the ability to postpone or even avoid capital gains taxes completely. There has been a lot of news coverage about growing rental demand and increasing rents, so it is easy to get excited about buying a rental home and enjoying that monthly bankable cash during the years ahead.
In many cases we’re also buying at a discount to current market value, locking in some equity at the closing table. We expect decent value growth, even at low single digit price appreciation expected in the future. An online calculator tells us that buying a home today for $ 150,000 and enjoying only 3.5% per year in value appreciation, we would have a home worth more than $ 197,000 in eight years.
Once we start throwing out numbers like this with a positive monthly cash flow of let’s say $ 400, a quick simple calculation shows that we would enjoy somewhere around $ 82,000 over an eight year ownership period. This is great if we could just stop time in relation to our costs and economic conditions. We can’t do that, so taking a realistic look at possibilities before signing the purchase contract is wise.
While we can say that inflation actually could help our property’s appreciation, we could see offsetting damage to our cash flow that wipes out that benefit. The key is to understand the costs involved in rental property ownership and management. The only one that we can count on remaining constant is the principal and interest portion of our mortgage. However, other costs that are escrowed in the payment and influence cash flow are taxes and insurance. Costs of rental property ownership include:
• Real estate taxes
• Insurance (casualty and liability)
• Professional management
• Vacancy and credit loss
• Repairs and maintenance
You can count on inflation and these costs rising over time. You cannot count on being able to raise rents enough to overcome cost increases. While you may raise the rents to do that, you could lose your gains due to increased vacancy losses to competitor properties.
What about that appreciation component? The 3.5% example is considered realistic by many market analysts, but they don’t have a crystal ball. Real estate is local, and every market carries some local economic risk. Major employers move, and people move to where they can get work. OK, I’ve just popped the balloon for some who are considering rental property investment, but that’s not the goal
Just understanding the risks is the first step in getting your desired return on investment. Don’t use the “best-case” numbers to make your decision. Discount that expected monthly cash flow for possible erosion in the future. How much of a discount? I can’t tell you that, but some adjustment for unexpected but inevitable cost increases is a good thing. It will be far better if you’re pleasantly surprised by a greater than expected return in a few years.
You’re making a decision during a moment in time, but your deal evaluation calculations should take a long term approach adjusted for an uncertain future. Rental property investment is still a reliable path to wealth creation. It’s just a path with some twists and turns you should anticipate.
May 27, 2015
I don’t want to make this an article about becoming a super fix & flip guru or even managing your own rental properties. What I want to help investors to do is to look at how they can exit REITs but stay in real estate as an investment asset class.
Why Investors Like REITs
REITs have some really attractive attributes:
• They trade like stocks: Investors can buy into a REIT and enjoy the benefits without a big chunk of capital. They can get out just about as easily and move their money elsewhere.
• REITs pay great dividends: This is true if things are going well. In almost all cases, REIT dividends are higher than bonds, and retired investors want and need the steady income.
Why Care in REIT Investment is Required
REITs can lose big too: When mortgage rates are low and investors see paltry returns from their bond investments, many move their money to REITs for those higher dividends. Unfortunately, if rates rise, those same investors easily and quickly move their money back into other investments. Depending on when an investor bought in, they could lose their gains quickly.
REITs trade like stocks: Yes, I’m repeating what I said in the benefits section. It is easy for investors to buy in and sell out of a REIT, so they can be pretty volatile.
What if You Don’t want to be Really Active?
OK, you want to leave REITs but stay in real estate. However, you really don’t want to manage rentals, and you definitely do not want to get involved in fix & flip. You want to get a nice double-digit ROI from an almost passive role.
Try seeking out successful rental property investors or people who are doing fix & flip at a profit. They often are seeking investors to fund deals. Be careful, check references and track record, and be sure you cover your assets.
You can team up in a partnership with an active fix & flip investor to fund their short term deals of a few months, and you can bank some nice profits. You want to get help in structuring the deal, and you want a note against the property to cover your investment.
From a longer term perspective, you can enter into partnerships to buy and own rental homes or multi-family properties. You want to team up with someone who does want to take on the management tasks and has the expertise to do so. Or, you structure the financial side to afford hiring long term professional management.
The Great Long Term Outlook for Rentals
This is a great time to get involved in rental property investment. Rents are rising with increased demand. The younger generations are not buying homes at anything like the rates they have historically. They are renting.
Baby boomers are hitting 65 at a rate of 10,000 every day. Many will want to rent and get rid of the tasks of maintaining a home. Locating homes in areas where they will have convenient access to shopping, cultural activities and entertainment will help you to keep your units occupied with stable tenants.
The key for those who want a real estate alternative to REITs is to assess their risk tolerance and either jump in completely or partner with expertise and experience.