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.
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. Dean Graziosi
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. Dean Graziosi
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 • Marketing/advertising
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. Dean Graziosi
Surveys of potential home buyers, particularly first time buyers, are telling us that many could use a little more knowledge about two of the largest costs of ownership. Everyone needs a mortgage and insurance is necessary as well. Your lender will require that insurance premiums be escrowed in advance to be certain that the money is there when they are due. Mortgage interest with a long term fixed rate is at least predictable and stable, but too many new buyers aren’t aware of how their credit rating influences their mortgage rate.
The Mortgage and Credit Scores
Transunion, the credit rating agency, recently announced the results of a survey of potential buyers. The survey of those planning on or considering buying a home in the next 12 to 18 months, found that while nearly 74% believe it’s important to check the accuracy of their credit report, only 45% or fewer correctly understand that their credit score measures:
• The amount of debt that they hold. • The risk of them not paying back the loan. • Their financial resources available to pay the mortgage payments.
Many believe that their payment history and on-time payments would be the only or the major factor in whether they get a mortgage or not. Also, too many fail to understand that the risk measurements influence the mortgage interest rate they’ll be offered. Small increases in the rate result in mortgage payment increases that can result in being denied a loan on a home they believe is affordable for them. In fact, only around half could identify the aspects of the home buying process affected by credit scores: interest rate (52%), the amount they can borrow (53%) and their mortgage lending terms (50%).
When it comes to improving credit scores before applying for a mortgage, around a third of consumers surveyed thought that simply increasing their income would have a significant effect on their scores. And, 28% thought that closing old accounts would help a lot. Both of those things do have some influence on scores, but not nearly as much as many consumers believe.
Only around half of survey respondents understood that their credit score directly influenced the amount they can borrow, the interest rate they would be offered, and the terms of the mortgage. Only around a fifth of consumers correctly identified three months as the correct time before applying for a mortgage to check their credit score. Almost a third of respondents believed that one month before was sufficient time.
Insurance Premiums and Deductibles
The majority of consumers understand that raising the deductible on a homeowner insurance policy will reduce their monthly premium. However, far fewer of them understand that deductibles offered vary by state and even in how they’re offered (flat dollar or percentage). Insurance is a must-have, and lenders will require advance payments into escrow to fund premium payments in the future. They will not allow a policy to lapse in order to protect their investment.
Why do deductibles vary by state? The first and most obvious reason is that the terms of insurance are controlled at the state level. They typically average somewhere between $ 250 and $ 5,000 per claim. One study found that raising the deductible from $ 500 to $ 2,000 could reduce policy premiums by as much as 16%. So, many home buyers understandably want to run their deductible up to reduce their monthly outlay.
However, that monthly savings varies a lot by state, with the 16% number being a national average estimate. In some states like Texas, it can result in a savings of only as much as 6%. In North Carolina that increase from $ 500 to $ 2,000 could drop premiums as much as 41%. When lenders are approving mortgages, the cost of insurance factors into the amount they’ll loan on a home based on income and expenses of the borrower.
If you’re about to gear up to buy a home, start planning early for credit evaluation and insurance cost estimates. You want to get prepared and have a firm understanding of what your lender is checking to determine what they will approve for your loan. Dean Graziosi
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. Dean Graziosi
Consumers these days are bombarded with information through the Internet. They can read reviews of any product they may be considering to buy. There are consumer reporting and review sites with the stated objective of advising consumers about what is a good deal and what is not. There are consumer product safety sites with loads of product safety information.
It’s “information overload” for many, but there is interest in reports by market area as to whether it’s more cost effective to rent or buy a home. Over at Trulia.com, an article about rent vs buy economics in October 2014 states: “Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas. In fact, buying is 38% cheaper than renting now, compared with 35% cheaper than renting one year ago.”
There are obvious factors creating this disparity. Low mortgage interest rates for purchase and rising rents are the primary factors creating this situation. And, if all you look at are the direct costs of ownership as a snapshot in a market, it is clearly less expensive to own than to rent. Even considering that property taxes and insurance costs can rise outside the control of the owner, buying still looks pretty good.
I am a real estate investor, so I do tend to prosper more when there is a healthy rental market, whether investing directly in rental properties or fix & flip and wholesaling to other investors. Of course, there is a great profit potential in fix & flip to retail consumer buyers, and that market is really healthy right now. All of this considered however, there really are other considerations consumers need to think about when making the rent vs buy decision.
Non-cost Considerations of Rent vs Buy
Will you need to move in under 8 years?
Especially with today’s higher down payments, it is anywhere from around 6 to 8 years before a home buyer can expect to get their money out of a home sale after the costs of sale. Those can be significant, with title insurance and real estate commissions being the largest costs of sale. If you’re not sure about having to move being out of your control, buying may not be wise.
Are you just starting a new family?
This isn’t a problem really unless you do like many first time buyers and get into a starter home that’s fine for two of you. However, when children enter the picture within a few years, will you be pushed into upsizing and selling before you can recoup your costs, much less get any appreciation in equity?
Is being forced to move a rental issue?
Tenants have little control over when their landlord may decide to sell the home. Generally, leases are for a year or less, so you can possibly be forced into a moving decision far sooner than you like. One buyer surveyed said that they were forced to move three times in three years, so they bought as a self-defense move. Their costs of moving that frequently were high, even disregarding the inconvenience.
Are you trading travel costs in this choice?
Many of today’s best jobs are in technology, financial and medical sectors, and these companies tend to locate in large urban areas. Buying is usually much more costly close to the workplace. Moving farther out to buy affordably can result in hundreds of dollars in travel costs every month.
The smart move is to consider every factor impacting your lifestyle, instead of just looking at a direct cost breakdown. Sometimes renting may be a good “now” decision that you can far more easily change later than taking the buy first approach. Dean Graziosi
Don’t you wish you could lock in a mortgage rate for the next year while you decide when and where you want to buy, or until you get that down payment together? Unfortunately, we can only lock from around 30 to 60 days or so before a closing, so mortgage rate movement does motivate or demotivate buyers.
REITs, Real Estate Investment Trusts, have been doing really well over the past two or three years. A REIT is a trust that invests either in property or in the mortgages that finance it. They are like a mutual fund, with professional management, but tax considerations are different, as they pass through profits to the shareholders. REITs are a way for the very passive investor to get into real estate with modest funds and not have any involvement in ownership or management considerations.
However, the market forces that have helped REITs over the past few years also helped individuals, partnerships and other smaller entities to invest in residential and commercial properties. While inventories haven’t been great over the past three years, there are still bargains out there for rental investors buying in the foreclosure market. They’re different from the mass foreclosures at the beginning of the crash. Those were often homes with owners still living in them, and they were in ready-to-live-in condition. Today’s foreclosures are more often very damaged and in need of significant rehab work to make them livable.
Fix and Flip investors and their buyers are quite dependent on funding for the purchase and rehab, so interest rates overall are of concern. Of course we know that rising mortgage rates definitely impact retail home buying in a negative way. The Federal Reserve has held the line for a long while now at near zero interest rates in order to spur home buying and the economy. Inflation hasn’t been a problem, so this policy has remained in effect.
However, the Fed has begun to make comments and issue guidance that seems to be preparing markets for rising interest rates. Economists are predicting rate increases between June and September of 2015. Some REITs and indexes have already begun to show signs of lower expectations due to the belief that interest rate increases are definitely coming soon.
Whether you’re investing in REITs or buying single family rental homes, interest rate increases will definitely impact your ROI going into next year. This shouldn’t spur you to liquidate your holdings, as there are other factors at work besides interest rates.
• Inventories are still low, and homes aren’t coming out of underwater status quickly. • Rental vacancy rates are still at historic lows with rents still rising. • Higher mortgage rates will keep more buyers out of the market, which means they’ll continue to rent. • Your investing uncertainty is shared by the general consumer, so they aren’t really eager to rush in and buy.
Considering all of the balls in the air, juggling investments right now is tricky. Hold the line on what you have, and be very selective and use a sharp pencil in calculations for new deals.
The Case-Shiller Home Price Index is reporting steady price increases across the nation. The Case-Shiller 20-City Composite Index rose 5% year over year in February. This was compared to a 4.5% rise in January. The February gain was the largest monthly gain since July 2014. Of course, real estate is local, and some markets like San Francisco and Denver are doing so well they’re skewing results to the upside.
Supply and Demand Factors
Markets, whether real estate or groceries, all respond to supply and demand pressures. And there are a three supply factors and one demand item that are putting upward pressure on prices.
Homeowners aren’t Selling – Supply
Though the number of existing home sales has been rising consistently, the increase hasn’t been enough to spur homeowner to enter the market as sellers. Many are still underwater, owing more on their homes than they’re worth. Many others do not have enough equity to pay sales costs and pocket any money, so they’re in a holding pattern.
Many are concerned that even if they can sell with some equity that they will not be able to find another suitable home. They see prices rising, but because a lot of the reason is low supply with rising demand, they are not sure that there is another home out there right for them at this time.
Builders aren’t Building – Supply
Last year only about 700,000 new single family homes were built. This is far below what is considered a normal market, so the supply is low for new homes. Builders are reluctant to build on spec, adding inventory when they don’t see adequate demand. Their financing is still more restrictive than before the bust, so extra scrutiny goes into starting new projects.
Fewer Foreclosures Suitable for Retail Buyers – Supply
When foreclosures were pouring into the market right after the bust, many were occupied by the owners and were in livable condition. They didn’t need extensive rehab work. These homes qualified for mortgage loans, so retail buyers were able to grab them up. Now the situation is different. Most of the foreclosures are abandoned home in poor to terrible condition.
Investors are loving these as fix & flip opportunities, and the competition for them is causing prices to go up on the front end, resulting in increases at the sale end of the flip. There is less fix & flip to rental investors, with an increase of flipping in the retail market.
Mortgage Rates are Still Low – Demand
Freddie Mac reports that the 30-year fixed mortgage rate is around 3.56% compared to 4.33% at this time last year. This helps to grow demand with more people able to qualify for higher priced homes with the lower mortgage payments available.
There are a couple of opposing forces holding back more demand and even higher prices.
Tight Lending Rules
Lenders are still being stingy with mortgages. Tighter lending qualification requirements are keeping many buyers out of the market. There is some loosening, but it’s a far stretch from the liberal lending practices prior to the crash.
General Economic Concerns
The outlook for jobs isn’t looking particularly rosy, and wages are pretty much stagnant. There is a general concern for job security and economic prosperity among consumers. High student debt and poor job prospects are keeping graduates out of the first time buyer mode.
So, with a 4-to-2 score, four positive factors and two negative, prices are still rising. It’s not a bubble … yet. As prices continue to rise, more homeowners will see enough equity to consider selling, so this could increase supply and offset some of the price pressure. However, there is also some evidence that first time buyers are returning to the market. It’s going to be an interest year for housing.