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.
January 6, 2016
Over at CoreLogic.com there is a lot of analysis of the housing and mortgage markets, including foreclosure information. Recently CoreLogic released their report 2016 Housing and Mortgage Rates Forecast.
They report that expectations for 2016 show that the Fed will probably raise short term interest rates by one percentage point gradually over the year. This is expected to cause mortgage interest rates to rise by around a half point, to around 4.5% for the 30-year fixed rate mortgage. Those of us who remember rates in the past averaging more in the 6% to 8% range probably aren’t too excited about these historically low rates.
However, particularly with first time home buyers, the mortgage interest rate influences the amount of the payments and the value of the home loan for which they can qualify. Even with discouraging mortgage rate increases, a modest increase in the number of home sales over those in 2015 is expected. Refinancing activity is expected to drop however.
An improving labor market is expected to spur household formations in 2016, with 1.25 million new households expected. More households will spur demand for both purchases and rentals, but rentals will get the most pressure. With rental vacancies already at the lowest levels in 20 years, rents should be rising more. This could move some buyers from renting back into the market.
Even with just a modest increase in the number of sales, it’s still going to be another consecutive year with more sales than in any year since 2007. Rising demand is going to help prices to continue to rise. The CoreLogic Home Price Index showed a year over year increase of 6% over the past 12 months.
It’s been a whole new housing analytical world since the housing and mortgage crash. We still have owners holding on and not listing, and that’s keeping inventories low. Depressed inventory is as responsible for rising prices as modestly increasing demand. First time home buyers are still avoiding the market in droves compared to pre-crash historical numbers.
At some point low inventories and rising demand could bring prices to a level that will bring sellers back into the market. Many are still making up for equity lost during the crash, and some are still underwater in their mortgages. When they do start listing in more normal numbers, then we could see some slowing of price increases and maybe more demand.
It’s tough predicting the new real estate markets. CoreLogic is one of many companies publishing reports and projections. I’m sure you can find others with different conclusions, and real estate investors have a constant stream of date through which to sift for trends. We are constantly evaluating our markets and seeking opportunities. I don’t see anything really negative about rental investing over the next few years, so have fun!
December 12, 2015
Are you an apartment investor, or do you want to be? Bank of America has released their 2015 Trends in Consumer Mobility Report. There is lots of fun stuff in this report, particularly as related to the younger generations and their reliance on technology. When it comes to their smart phones, the information is pretty amazing:
• 71% sleep with or next to their phones.
• 35% reach for their smart phone first thing in the morning, even before coffee.
• 23% have fallen asleep with their phone in their hand.
• 89% check their smart phones at least a few times a day.
• 36% say they check it constantly.
So, we know that the younger generation, a large pool of our apartment renters, can’t do without their mobile devices. Then there is Facebook. Here are some stats published over at Zephoria.com:
• Age 25 to 34 accounts for 29.7% of Facebook users, the largest group.
• One in five page views in the U.S. occurs on Facebook.
• As of May 2013, there were 16 million local business pages, doubling from the previous year.
With these kind of numbers, how can we use them to our benefit as apartment property owners and investors?
Going to Facebook and searching the word “apartments” shows that there are many local apartment projects with business pages on Facebook. What are they doing with them?
They’re getting followers, Likes and reviews. Of course, good reviews are the goal. How much advertising do you put out trying to attract good tenant applicants? What does it cost? A Facebook page costs nothing, and can create a community of happy tenant users who will promote your business and deliver tenants.
With an About page to tell the world how great your apartment community is, you can also post all of the photos you want to attract residents. But there is much more to post in the page Timeline to create a sense of community with your tenants:
• Articles about apartment living
• Maintenance news
• One project posts recipes for busy people who work late
There are tens of thousands of articles out there about how to create a website for real estate investment, and many for how to do the same for apartments. Then you have to create content, and so it goes.
With a Facebook business page, you get the ball rolling, and if your tenants are enjoying their stay, they grow it like a snowball going downhill. Quality content builds, and you can also run very targeted advertising at reasonable cost.
A warning here though: Any negative comments or reviews MUST be dealt with quickly and the tenant’s satisfaction is paramount. You want visitors to see you dealing with the issue and the tenant’s ultimate happy resolution. Do this and you’ll have your very best marketing resource out there.
December 10, 2015
If I were writing this back in 2008 it would be a different article. Back then the foreclosures were coming down the pike so fast you could almost do no wrong in grabbing one. Wholesalers, fix & flip and rental investors were rolling in opportunities. The biggest problem was in not being able to do deals fast enough to take advantage of the flood of foreclosure homes.
Fast-forward to today and things are very different. The Mortgage Bankers Association reports mortgages in distress at eight to ten year lows. At the lowest rate since 2007, only 4.99% of one-to-four unit residential loans have missed at least one payment. Only 1.88% were in some stage of foreclosure, counted as inventory. Also at the lowest level since 2007, only 3.57% of active mortgage loans are in 90 days past due status.
FHA loans in foreclosure are also down to an inventory of 2.65%. It would seem that nationally there aren’t a lot of foreclosure homes available. This is true overall, but there are two types of foreclosure based on the state in which the property is located. They are “judicial,” and “non-judicial.” Let’s look at the differences to see why some states have higher inventories and longer times to get a foreclosure off the books.
From nolo.com, we see this breakout of the states’ foreclosure process:
Predominately Judicial Predominately Non-judicial
Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, New Jersey, New Mexico*, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Vermont, and Wisconsin Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia, Georgia, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming
There are some variations and mixed processes in a few states, but this is pretty much how they break out. This is a big picture description of the process, but it will illustrate why some states have higher foreclosure inventories than others, despite economic influences.
In non-judicial states, a note and deed of trust is the general way a mortgage is held. The courts are not involved in a normal foreclosure process. When a borrower is roughly 90 days behind in payments they’ll get a letter and roughly 30 days to respond and bring all payments up to date, including any penalties and interest.
If they do not do that, then the process moves forward, with the trustee placing notices in the proper places and moving toward a sale of the property. Without any abnormal situations, the property will be sold and the home owner evicted if they are still in the home.
This entire process can take just a few months without any involvement by courts or government other than recording the activity and the new owner for taxes. In non-judicial states, there are generally lower foreclosure inventories now because they are able to move them through the process and clear them faster.
There is still a similar process in sending the lender letter at 90 days delinquent, and giving time for a response or to bring the loan current. However, then things take a different track.
An attorney is now in the process and filing documents with the court. The court must review the documents, details of the mortgage, and how the process has been handled to this point. Now everything pretty much stops until the foreclosure works its way onto the court docket and makes it through the ruling of court approval to move forward with a sale.
This is why it takes significantly longer to move a property completely through the foreclosure process in judicial states. While less than half of all loans in foreclosure are in judicial states, those states account for the majority in inventory. The top three judicial states, New Jersey, New York and Florida, have the highest percentage of loans in foreclosure.
Depending on the state in which you’re investing, you can find foreclosure opportunities varying quite a bit.
November 24, 2015
An early question many people have if they’re getting serious about actively investing in real estate is whether to get a real estate license or not. After all, if you’re out there buying and selling homes, it can be great to save the commissions and increase your income on every deal. Especially with fix and flip, there can be some decent savings if you can avoid using real estate agent commissions.
Many Deals Avoid Agents Anyway
If you’re marketing to attract distressed sellers, or if you’re using a lease-purchase strategy, you’re usually dealing directly with the seller anyway, so there is no real estate agent involved. If you’re flipping to another investor, the same thing applies. If you’re buying and fixing to hold for rental property, you may end up with commissions if it’s a listed foreclosure, but they’re generally lower because the lender selling the home negotiated it that way.
So, unless you’re doing a lot of deals with real estate agents involved on one or both ends, you’re generally not going to see a major savings or income boost if you get your license. An exception could be if you are using an investor or investor group and guaranteeing them a specific return on deals. If you are, and your commission as the agent is a valid cost in the deal, it could be extra income for you.
There’s Time and Money in Maintaining a License
Real estate laws vary by state. But, in almost every state, the licensing laws require upfront license fees and periodic renewals, often in the hundreds of dollars. You’ll have local MLS, Multiple Listing Service, dues to access the listings. Many of these associations require membership in the National Association of Realtors, another annual fee. One broker added up just the licensing and MLS fees and found that his costs were around $ 1,500 per year.
Many states also require bonding and or insurance to practice. The same broker had an annual premium of around $ 350 for required insurance, and it couldn’t be shopped much, as the state mandated that only companies were to be used. Now, if you aren’t doing any active real estate other than for yourself, that’s probably all you’ll have out of pocket. However, in most states you must work under the supervision of a broker, and they will not want to take on a part-timer without some compensation. This can be a percentage of each commission or monthly desk fees.
Now let’s talk about the annual Continuing Education requirements. These vary, but usually require around 30 mandatory renewal hours in classes mandated by the state. So, you have the costs for those as well. These may be annual or for a two or three-year license period. So, just to maintain an active real estate license, you will have significant out-of-pocket costs.
In most states you can do your own deals and not be forced to hire a real estate agent. You’re considered to be in charge of your affairs and the risk is yours. However, once you have that license, things change. Your dealings with that seller and buyer will be considered as giving you an advantage with your license training. You pick up some liability in the transaction if anything goes wrong. You are subject to complaints with the state and even lawsuits in extreme cases.
Well, I’m done selling you on getting a license! Actually, in some cases it can be an advantage, but in the majority of investor deals, even fix and flip, it’s usually not going to yield enough to be worth the added cost, invested time and risk.
November 14, 2015
The image is of the Craigslist search results for a search in the Real Estate Wanted category on the phrase “want lease to own.” Some of these are likely investors, but others are individuals who want to ultimately own a home, but for various reasons they need to lease it right now.
There are other ways you can locate opportunities for lease to-own-homes, from the classifieds to Web searches and even on the social sites. Are you in a situation that keeps you from buying right now, but you are stable in the area and wanting to own at some point?
- Saving up for a down payment.
- Repairing credit history.
- Expecting higher income in the future, want a larger home than you can buy now.
There could be other reasons unique to you, but the point is that you want to own a home in your local area, but you’re not ready to pull the trigger on a mortgage right now. For many people, they are fine with paying a little over market rent for the right home if they can get the option to buy it after a specified period of time. The idea is to get a feeling of permanence, not feel like a renter.
Another advantage is that you can begin to do minor modifications and renovations if you want in order to make this your home. Of course, you aren’t going to take these improvements with you if you leave, so don’t get carried away unless you’re really sure you are going to exercise your purchase option.
Sometimes you can make an agreement with the current owner for certain improvements the property needs and that will improve its value as well. There can be a rent tradeoff, so you aren’t footing the entire cost. The owner’s motivation to agree is that the home will be worth more if you’re taking good care of it and making value-enhancing improvements. So, if you leave without exercising your purchase option, they have a property worth more in the market.
So, how does lease-purchase (rent-to-own) work?
A homeowner wants to sell, but for some reason can’t at the time. Perhaps they just need to move in a hurry for a job, and they can’t afford to keep the home and rent in their new area both. Renting it out is a temporary solution, but they still have to sell it when they can. And, they worry about the condition of the home with tenants in it and them living far away and unable to check the home from time to time.
Whatever the reason, there are owners out there who would be willing to rent you their home with an option to buy. Let’s be clear that it is an “option,” not a requirement. You do not have to buy it. The lease could for example be structured for three years at a set amount for rent that will cover the mortgage and escrows for taxes and insurance. It will state a price at which you can buy the home on or before the expiration of the lease.
The agreed upon price can be a hard number, or it can be the value from an appraisal company that is independent and acceptable to both of you. If you expect home values to rise, setting the price at the current value is best for you, the tenant-buyer. The amount of the rent is negotiable, and it can be more than the mortgage and escrow, and can even include a monthly amount to go toward the down payment.
This is a simplified example, so you’ll want to do your research and get an attorney to review the lease-purchase agreement. You can move into your new home today and buy it later.
November 8, 2015
This article is for the investor who wants to move into real estate, but they want a higher level of involvement than just buying shares in a REIT, Real Estate Investment Trust. You still do not want to buy and sell properties or work with contractors, but you would like to get a nice return on investment in a real estate investment environment. You also want short term turnover of your money to limit market risk.
Let’s say that you’re currently invested in stocks or bonds and your pre-tax return in in the low single digits. This isn’t that bad considering the current interest rate environment, but after even nominal inflation, it really isn’t exciting at all. You’d love to up that return by a few percent, and you would do a dance for double digits with acceptable risk.
The problem is that there aren’t really any formal mechanisms in place to connect someone like you with a fix & flip investor or wholesaler who is knowledgeable in real estate and in need of funding. This lack of an established communication connection makes it tougher for those deserving of your funding from connecting with you and happily giving you the returns you want.
The best place in most local communities where an individual passive investor can connect directly with active wholesalers and fix & flip investors is in a real estate investment club. The thing to remember in the club situation is that there will be investors with varying levels of experience and success; or lack of it. This just means that you’ll need to know your business and do your due diligence.
What is Level 2 Passive Investing?
So, you don’t want to just buy REIT shares. You want to invest directly into properties in your area by partnering with active investors. You still want to be passive, just providing funding for their projects. We’re not talking about long term rental investing in this case. We are interested in providing short term funding for fix & flip and wholesale investors.
The wholesale investor usually does no rehab on a home. They specialize in locating deep discount properties and flipping them to other investors. Those could be rental investors if the property is ready to rent, but more often they go to rehab or fix & flip investors.
The fix & flip investor is going to do repairs or major renovation to bring a home to livable condition. They then sell it to a rental property investor or sell it on the open market to a retail buyer.
Our passive role is to provide the money they need, which could be a time requirement of just days to months. A wholesale deal can even close both ends on the same day. So, as the money person, you can put funds to work for hours, days or weeks and get returns well above other traditional investments.
How Does it Work?
When you connect with one of these active investors, you really need to check their track record. If you want to take a gamble on a newer wholesaler or fix and flip investor, definitely do your research on the property, their buyer, and the time your money will be at risk. They should have a buyer or potential buyers lined up before you put up money to buy a property unless they’re selling in the retail market. It is easier to work with investors selling to other investors, as they often have a standing relationship and offers to buy properties that meet their requirements.
Before you dish out money, you take out a note or lien against the property to cover your investment, and generally keep your involvement to 60% or less of the current value of the home. This gives you some room to sell it and get your money back if something goes wrong.
You charge whatever fees and interest charges you want within reason. They have to make a profit too you know. Professional transaction funding companies charge loan initiation fees, double digit interest rates on loans that are out for more than a day or so, and they also charge other fees. You should be able to achieve double digit returns on your invested money. Check transaction funding websites to see how they set their charges.
Do your homework to limit your risk, and you can turn your money over multiple times each year for some amazing ROI numbers.
October 29, 2015
You don’t have to be the investor in the photo. Sure, doing anything for the first time can be a little stressful. And, it’s definitely a major investment to buy your first rental home. But, you really can make it happen without going into stress overload. Here are my top 5 tips to enjoy a successful and low stress first rental property investment.
Tip #1: Advice is OK, but Do Your Own Research
Take courses, read investment books, go to a seminar, or any other learning process that helps you to gain confidence to make decisions. I suggest that any books, courses or seminars be about how to select locations, value properties and evaluate the rental market. Your success will be based on your due diligence and most of all buying right in the right area.
Your first rental property investment is best done in your area of residence, where you know what’s going on economically. You want to know that the economy will support today’s decision into the future, as this isn’t a short term strategy. Understand who the major employers are, what drives people to move in or move away, and if things look good into the near future.
Tip #2: Don’t Just Rely on Real Estate Agents
Sure, now and then you can work with a real estate agent who handles foreclosures and get a good deal. Remember though that these will be “listed” foreclosures on the MLS, Multiple Listing Service. You and all of your competitor investors have access to the same information, so competition will likely drive up your cost of acquisition.
If you do your own marketing and locate motivated sellers, you have a greater chance of negotiation a good deal. Another approach is to work with an experienced real estate wholesaler. They are investors too, but they are experts and finding great deals that they can flip to rental property buyers at a below-market value price. Just check their references out and be sure they do know what they’re doing.
Tip #3: Know What Will Rent and for How Much
Check with property managers who handle single family homes. Go to the classifieds and check out what homes similar to the one you’re considering are renting for. Are the owners offering incentives like free months? This is usually a sign of a soft rental market or heavy competition, so you may want to try another neighborhood or property type.
Call on ads, drive around, talk to landlords as if you’re a tenant. The most important thing for you to know before the next tip is what you can reasonably and conservatively expect for rental income and low vacancy.
Tip #4: Get the Right Financing & Cash Flow
You need to know all of your costs, including estimating repairs and other maintenance costs. But, the mortgage is going to be your largest cash outlay, so it is your most important cost consideration. You’ll need to put 20% down or more in most cases. For a rental unit you may also pay a slightly higher mortgage interest rate. A great credit history helps in this regard.
Get a firm handle on all of your costs, then see what your mortgage payment with taxes and insurance escrowed will be. Let’s use an example of a $ 150,000 home with a $ 32,500 down payment and closing costs. If you can manage to clear even $ 250/month over cash out of pocket, your return on the actual cash invested is going to be around 9%.
Tip #5: Lock in Equity at the Closing Table
NEVER buy at retail market value. If you can’t get the home at a 10-20% discount to its current market value, don’t do the deal. You want to leave the closing table with that equity as either future profit or a cushion should you have to sell before your initially planned liquidation date.
If you’re going to work with a wholesaler who you may meet at a local investment club, be clear that you’ll want to see their valuation calcs and you’ll check them with your own. You give them your requirement. If it’s 15% below market value, then they will know what they have to deliver.
You’re in control here, and you don’t have to make a deal until you know it’s going to be a great investment.