Walking Through The House Of Mirrors

May 23, 2013 By Leave a Comment

Be very wary…

Just like a fanciful walk through the twisting, colorful and dizzying amusement park attraction, the House of Mirrors, that bend your shape and leave you rubbing your property investment adviceeyes for better perception, so too is the effect on real estate investors trying to read the current state of the U.S. housing market.  My singular property investment advice:  be wary of what you see in the current housing recovery.

All factors and new data suggest a rapidly improving housing arena.  But, like the House of Mirrors, everything’s bent totally out of proportion and  recognition.  And, we’re left with the main issue I’ve preached in two previous articles here this year:  all investor’s eyes need to remain squarely fixed on the unemployment rate – not how the housing market is doing.  For it is that unemployment rate that should dictate how you invest in these current economic times. 

Here’s what others are saying…

In an article from this week’s Time magazine (“The Housing Mirage,” by Ranaproperty investment advice Foroohar, Time, May 20, 2013), she notes that in regards to the present housing market conditions,  “prices are up, but the market is far from healthy.  We’re missing key elements of a true recovery.”  She goes on to ask, “if housing is back, why is the percentage of people who own homes lower now than it was over a decade ago.”  Of course, it’s because property investors have been gobbling up most of the foreclosure market over the last few years.  And this is especially true with institutional investing firms. 

She goes on to note “that a relatively small group or rich investors…is driving the real property investment adviceestate market.  That includes private-equity titans like Blackstone (which owns a portfolio of 20,000 rental properties) as well as high-wealth individuals who can pay cash  up front for property for themselves or to rent out. “Investors remain the dominant force behind the house-price bounce back,” says Capital Economics property economist Paul Diggle.  That’s reflected not only in the lower rate of homeownership but also in the swelling ranks of renters.  Not since 2002 have fewer rental properties been empty in the U.S., and rents are rising sharply in many cities.”   And that’s a scenario that makes property investments in residential real estate all the more valuable in the coming months, if not years.

Let the unemployment rate be your guide

Ms. Foroohar makes the case that tight credit policies by banks are still placing a stranglehold on mortgage lending nationwide.  She then makes a point I had property investment advicepredicted  back in my article of January 1st  here, entitled “Predictions For 2013.”   I had written then:  “watch the unemployment rate.”  I then went on to offer up these pearly bits of property investment advice:

“The unemployment rate will be one of the most important figures to keep a watchful eye on in the coming year. If it starts ticking upwards because of the effects of no deal being reached by Congress on the proverbial fiscal cliff, then look for overall U.S. rents to continue to increase as homebuyer malaise begins to sink in.  So individual rental property owner’s should be able to see increases in their cash flow as the new year progresses.  Clearly, residential rental properties will become even more valuable than they were in 2012.  So it would behoove the individual property investor to continue to search for and acquire additional rental property in 2013.’

property investment adviceAnd now, five months into 2013, Ms. Foroohar backs me up. She quotes  Jonathan Miller, CEO of a New York based real estate appraisal firm,  who said “to have a sustainable and healthy market, all that really matters is employment….You need higher employment and wages to support housing consumption and looser credit.  If we see some real economic growth over the next two to three years, then we’ll know the housing recovery is real.  Until then, we’re in what I call a precovery.”

The bottom line

She then goes on to bring it all home:  “ this precovery has been underwritten by the property investment advicegovernment at historically unprecedented levels.  Every month, the Federal Reserve is purchasing $40 billion worth of mortgage-backed securities.  And Freddie Mac and Fannie Mae stand behind the bulk of new mortgages.”  Finally, she notes that “it has long been said that you can’t have a sustainable economic recovery in the U.S. until the housing market is back.  In truth, it may be the other way around.  Until you have more jobs, rising wages and a middle class that can afford to take out a mortgage….you can’t have a real housing recovery.” 

Sounding like a broken record

And, as I’ve been saying for months, the housing arena does not indicate nor showcase the deeper, structural problems such as tapped-out consumers pinched by a slowing job market, higher taxes and lower savings.  I had also previously written that “if the unemployment rate were to go up next year, look to continue acquiring residential rental property, since rent prices will then continue to escalate.  And cash flows on rental properties would commensurately increase as well.”  I would have to amend that statement slightly, and say, if the unemployment rate remains stagnant, as it has been, or goes up, then look for increased cash flows on your rental properties.

property investment adviceMy best property investment advice continues to be taking your existing properties and make sure you continually maintain, if not upgrade, them in a down economy.  Especially in this House of Mirrors economy, where rent prices continue to escalate.  Continue to make your product more attractive relative to your competition.  In this way you’ll be able to maximize cash flow and profits. Also remember the advice I gave in that earlier article on the coming shape of our economy, and how it will affect what you do in your property investing strategy for the coming year. “Consider the next year as a good time to try refinancing your investment properties to help increase your overall cash flow on all your collective properties.  With rates at all-time historical lows, and with an economic downturn occurring, you’d be able to lock in excellent rates for the long-term on your portfolio of real estate holdings. 

 

photos courtesy of selmainthecity.wordpress.com, ptoday.blogspot.com,  travelwebdir.com,, multiplex.coolhouseplans.com, hereandnow.wbur_.org, 3-424tales.blogspot.com, laurieflower.com, auroragov.org

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Property Investing Advice – The Best And The Worst

May 14, 2013 By Leave a Comment

Two extremes

Sometimes I am asked by novice property investors what types of advice I’ve received in my investing career.  And what was the best advice I ever received – as well as the worst.

The absolute best advice I ever got about property investing:

Roll, baby, roll. Leverage is EVERYTHING in real estate.  It is unlike any other investment asset class, in that you can increase your leverage with each new property you acquire.  Forget about the bank “owning” the property.  They’re simply your “partner.”  Lenders are what allow you to grow your business steadily over time…even without the need to put more of your own capital into each new acquisition.  If you manage your acquisitions properly, maintain them, improve them, then refinance them, all on a planned, strategic acquisition schedule, you’ll be able to roll your property investments up – that is, increase your leverage with each new property acquired.  Ultimately, you can build your own version of a “real estate empire.”  Keep things realistic, and you will succeed in property investing.  Keep growing your property portfolio with high leverage  – always putting down as little of your own funds as possible.  That’s the absolute best property investing advice I ever received.

On the south side…

The worst advice I ever got about property investing:

Anyone can do it.

WRONG!

It takes a certain temperament, a certain je ne sais quoi, to be a good property investor.  Basic personality qualities include being entrepreneurial, being decisive, and having a proper aptitude (though not genius-level)  with math, as well as being meticulous, grounded, and having stick-to-itiveness.  These are some of the basic qualities a good property investor will display.  Notice I did not include:  being good with people, or being a  “wheeler-dealer” type.  These two traits are not something you need…and they can be learned, as well as delegated to others.  That’s what property managers , as well as real estate agents come in and can do for you.

What are the traits that make a good real estate investor?

So be cognizant of what makes you tick – and what your passions are….Active investors in real estate (those that prefer to control their own properties, as opposed to investing in Real Estate Investment Trusts, REITS, for example) don’t get in strictly for monetary rewards alone.  There are too many pitfalls to running a successful property investment business to take on the added risks.  Rather, hands-on property investors enjoy wearing many different hats:  being the site locator, searching for properties, then being good numbers crunchers to see which are the most attractive properties available at any given time.

They then switch hats to become buyers, making offers, negotiating, then finding financing for the properties.  Finally, there’s the investor who needs to wear the hat of property manager – acquiring tenants, refurbishing units, and keeping them continually maintained properly.  This requires great diligence and attention to detail.  You are running an active business, not simply parking your investment dollars in a fund that will (hopefully) offer you positive returns.  So heed the worst property investing advice I ever got – that anyone can do it.  And make sure you have the right temperament and personality for the job.

 

photos courtesy of newmusicworld.org, dionisteam.ca, carterrealtyagency.com, sanpedrosquareproperties.com

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A Tenant’s Nightmare

May 1, 2013 By Leave a Comment

Being a  bad landlord – from the tenant’s perspective

I was recently pitching in with a local United Way “Day of Caring” campaign.  I was helping out by doing some yard work for a disabled woman in my area.  While there I was told that she was a tenant of the house she called home.  And while I was raking leaves and branches in her yard, I couldn’t help notice all the building code violations and generally unsafe conditions that existed around just the exterior of the house alone.   Items like rotting window sills, rotting foundation beams, missing gutters and leaders and unsafe walkways to name just a few.

Without going inside, I knew from experience that there had to be general water leakage problems present.  I asked her why her landlord had not made the necessary repairs.  She said that he just doesn’t do anything.  Basically, she painted a picture of a classic slum lord – except this house was not in an inner city, but rather more in a rural setting.

Reporting the violations – the basic problem

I then asked why she doesn’t call the town building inspector and report these violations.  That way, the landlord would be forced to make the necessary repairs and create a safe environment for his tenant.  But then her answer was chilling:  “because he’d kick me out.”   Folks, we’re talking about a blind woman with diabetes, who had recently suffered a heart attack.  And she’s scared her landlord’s going to throw her out for reporting safety violations.  So, for paying her rent in a timely manner, she gets the right to live in sub-standard, unsafe conditions.  This truly gives all property investors a bad reputation by inference.  For my part, I reported the problems to the United Way in hopes they can investigate and intervene.

Doing the right thing

I note this little story in the hopes that all property investors will be cognizant that running a cash-producing investment into the ground is unacceptable when other people’s lives, and safety, are at stake.  Basic, minimal and constant maintenance is required of all hands-on property investors.  God forbid there is a fire, or your tenant gets hurt in some way due to your negligence, it’s not enough to say, “I’ve got property as well as liability insurance.  And that will cover it.”

All property investors belong to the same club.  No one says you have to be a “people person” to be part of this club…Or want to earn as much profit as possible on your investments. That’s the goal, after all.   But if you’re not going to treat your tenants – your customers – like human beings…well, please stay out of our business.  You hurt the good name of all of us decent property investors.

 

photos courtesy of investors.housez.ca, neastphilly.com, 24dash.com, keypersonofinfluence.com

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Is It Time To Cash Out?

April 18, 2013 By Leave a Comment

Never cash out your money-maker unless it’s an emergency

With residential rental property, always stick to your long-range goals of steady yearly cash flow growth, combined with the tax advantages of depreciation and holding your investment property asset, as well as capital market appreciation in the long term.  The only time you should be cashing out should be reserved for emergencies.

Recent data from the National Association of Realtors (NAR) suggests property investors are intending to hold onto their rental property for at least eight years now (up from five years the prior year).   However, some are finding the strong demand for properties coupled with a decreasing inventory of foreclosures and investment properties in general, as well as continued low mortgage interest rates to be too irresistible.  And so they are placing their cash cows on the market now.  Again – big mistake if you’re not in an emergency situation, and must have the cash on hand quickly.

Investment drop-off

Since real estate investments peaked in 2011, there was a dropping off of property investing last year as inventories declined, and foreclosures available to the marketplace lessened.  With decreased inventory and market valuations rebounding, many investors decided to begin cashing out.  As noted in my prior articles, only negative-cash flow rental property (or, the “dogs of war”) should be jettisoned when consistently non-performing, or when you are unable to make positive cash flows when still renting out at full capacity and at top market rents.  Positive cash flow properties should remain within your stable of properties for increased leverage to acquire additional property, as well as future cash growth and appreciation.

Institutional investors

As foreclosures have dwindled in the past year or two, so too are property investors that originally came into the marketplace by swooping in and purchasing large numbers of foreclosures, fixed them up, then rented them out for positive cash flows.  As prices have been on the increase of late, and with fewer foreclosures readily available in the marketplace, investors (especially institutional hedge fund type investors) have cut back on their rental property investment.

Higher entry costs into the market

In addition, with the rebound in the entire housing market over the last year, prices to get into the rental property acquisition market concurrently have risen.  For example, according to the NAR, the median investment property price rose 15% from 2011 to 2012 – from a median price of $100,000 up to $115,000.  Significant to note is that while the median down payment on all investment properties remained the same, at 27% of property price, the percentage of buyers who paid all cash for their investments rose to almost 50%.

The combination of increasing prices and tight credit have also produced a scenario where investors are lessening their current buying schemes for investment rental property.  However, the NAR data also shows that 47 % of real estate investors intend to purchase another property at some point within the next two years.  Though with current tight credit standards in the mortgage industry, roughly half of all investors will continue to make all-cash buys.

 

photos courtesy of  clearlyderby.blogspot.com, mathforgrownups.com, flickr.com, infrawindow.com

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Rental Property Rates Should Remain Strong This Year

April 11, 2013 By Leave a Comment

The latest jobs report’s effect on rental property

With the latest news out of Washington showing that U.S. employers added only about 88,000 jobs last month, compared with 268,000 in February,, residential investment rental property is poised to remain quite strong through the remainder of this year.  The latest Labor Department statistics reveal that this is the third Spring season in a row where employers cut back on hiring after starting the year more robustly.  And while the unemployment rate went down ever so slightly, from 7.7 to 7.6 percent nationally, the major cause appears to be that more workers were dropping out of the work force.   Clearly, not that many people were hired over the last month.

A dwindling work force

The work force of the U.S. has been dwindling for some time now – and stands at about 63 percent of the total U.S. population – a figure which has not been that low since 1979.  Retirement from baby boomers would certainly account for part of this figure.  But a large helping of psychological pessimism seems to be wreaking havoc with both employers and potential employees in such a lack-luster economy as we currently are in.

Probably the greatest drop in the worker participation rate can be attributable to young, new workers just entering the economy.  Many of those fresh out of college are rapidly giving up hope of finding entry level positions in their fields.  And in turn, they are choosing to continue their education on the graduate level, thereby deferring their entrée into the job market until a (hopefully) better jobs picture develops in the not-so-distant future.  Of course, in so doing, they take on more debt to finance their education, thereby showing a higher overall increase in outstanding consumer debt loads nationally.

Keep watching the unemployment rate

As I had mentioned in an earlier article, the unemployment rate will be one of the most important figures to keep a watchful eye on for the remainder of this year.  With the stagnant nature of today’s economy, and more workers feeling driven out of the work force, continue to look for overall U.S. rents to  increase as homebuyer malaise sinks in.  Housing valuation increases and continued drops in housing inventories and days on market are more a reflection of institutional property investors swooping in and purchasing massive amounts of foreclosures over the past year.  While displaying quite a positive sign for the housing market numbers overall, keep in mind that the general malaise in the workplace lurks right behind the cheery reports

Beware a false housing market rebound

Any rental property investor should be fearful that the housing market rebound will continue in its robust way.  Once the foreclosures are worked through, the overall psychological component of an unsettled workforce will play havoc on the housing arena.  And this means that the rental market should remain quite strong for the rest of this year, with landlords able to squeeze out higher rents as vacancy rates continue to edge downward.  So individual rental property owners should be able to see increases in their cash flow as the year progresses. Clearly, residential rental properties will become even more valuable than they were in 2012.  So it would behoove the individual property investor to continue to search for and acquire additional rental property for the remainder of 2013.

 

photos courtesy of flickr.com, sultharproperties.com, davegi.com, diegoviera.girlshopes.com, ericksonsdrying.com

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The Bargain Basement Days Appear To Be Over

March 7, 2013 By Leave a Comment

Resetting your property investment strategy

After several years of horrendous declines in the valuation of house prices in the U.S., the latest reports show a definite pattern of a slow but continued rise out of the housing slump.  So much so, that it appears the days of the great “bargain” prices for those looking to buy investment property are beginning to come to an end.

Statistics don’t lie

Even before the traditional Spring selling season is about to begin, statistics show that house prices are rising at their greatest pace in almost seven years.  Home prices rose 8.3 percent in December, and are now reported to have jumped 9.7 percent in January, compared to the prior year’s data, according to CoreLogic, which tracks house prices in the U.S.  While price valuations are still down a huge 26 percent from their lowest point in 2006, this recent trend upwards is good news for all those looking to buy investment property.

Continued price rises

Except for Delaware and Illinois, prices rose in all other states in January.   Western states garnered the lion’s share of price improvements, with Arizona, Nevada, Idaho and California leading the nation, with double-digit percent increases.  The nation-wide inventory of homes for sale has been slowly shrinking, and that coupled with increased pent-up demand has been fueling the price increases.  Property investors with existing holdings finally have some cheery news to celebrate.  Now, for the first time in years, price appreciation can be added to your expectation of returns on rental housing properties, besides the positive cash flows from operations.

Moving off the fence

Another fortuitous sign of the housing recovery is the fact that the number of signed contracts for sale of existing properties jumped in January from December to their highest level in over two years.  Again, this activity is occurring prior to the Spring real estate sales market – a very good sign indeed.  It would appear that all the fence-sitting buyers are now starting to realize that this is the time to move ahead and purchase before house prices rise even further.  Especially with interest rates for 30 year mortgages continuing to stay at extremely low rates – for the time being.  So if you’re looking for a great “deal” now as you look to buy investment property, your mindset should be changing.  Instead of a good bargain, be more concerned with obtaining a proper cash flow return on your investment.  The increase in property valuation will begin to come to fruition naturally after that.

 

photos courtesy of  news.com.au, domain.com.au, robertsinvestmentproperties.blogspot.com, dailymail.co.uk, usprefrealty.com

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Lessons From The Buss Ride

February 21, 2013 By Leave a Comment

Learning from the best 

In the wake of Dr. Jerry Buss passing away this week, property investors should look back and see his example as the crowning achievement in how to grow real estate investments. While known mainly for his tremendous success as the owner of the Los Angeles Lakers, and his visionary ways in the sport of basketball, Dr. Buss started from very humble beginnings.  While teaching chemistry at USC in the early 1960’s, he took to real estate investment as a way to simply supplement his income while teaching.  Stop me if this sounds familiar – like the reason many investors first venture forth into property investment themselves. 

Humble beginnings… 

His very first property acquisition was a small apartment building in West Los Angeles – a then up-and-coming community.  He invested $1,000 of his own money in the property.  From there, he, like many first time investors, caught the “bug.”  He found he was not only good at leveraging property to buy other pieces of real estate, but it soon became his passion.  He later took on a business partner, Frank Mariani, and they began their own real estate investment company named Mariani-Buss Associates.  Together they helped grow a real estate empire machine. 

It’s important to note the power of combining resources when trying to grow real estate investment. Many times two heads are better than one. And this was certainly the case with Buss and his partner Mariani. As their empire grew, they were able to continually leverage their different pieces of real estate. Eventually they started investing in very high-end pieces of real estate.  By 1979, Buss himself purchased the former Mary Pickford estate in Los Angeles… 

It seems like Los Angeles in the ‘60s and ‘70s was a great place for wheeler-dealer types and real estate investment. There was plenty of money to be made back then, and many empires were formed in that area. In Dr. Buss’ case it was clear that the power of this partnership helped to greatly propel his real estate empire…much farther than he could have had he tried to do it alone. 

The partnership lesson 

This is a crucial lesson if you are operating in real estate investment today.  You can go it alone and retain control of all your properties. But you pay for that in the long run in many ways. There’s only so much growing you can do on your own.  You won’t have the advantage of two heads to use for business acumen, connections, creditworthiness, searching and negotiating skills. And you won’t have the leverage opportunities available to you if it’s only yourself.  It’s also important to learn from this example that even more than two people may be a good move for some investors when creating a real estate investment partnership.  If all the partner’s skills are complementary, you could really develop your empire that much faster. 

One great thing about a real estate investment partnership is that it helps to even out the lows in the business cycle – and there are always low periods. Losses are more easily absorbed with a partnership than by yourself. So the partnership can more easily take on bigger projects – and riskier projects as well because of this cushion. These could be acquisitions a single individual proprietor may not be able to finance by themselves, nor want to take the risk themself. 

Simplicity and passion = good property investing 

So learn from Dr. Buss’ example of initial investing simplicity. Consider starting early in your real estate investing career. You don’t have to invest your entire life savings, but start small, and look for as many units as you can purchase for your first project. Use the cash flow from this to leverage your next project.  See if you have the temperament – but most importantly – the passion for the business as Dr. Buss did. In addition, look for partners to help you in purchasing new projects. This will increase your leverage greatly. And it will grow your empire much faster. With all the tremendous successes Dr. Buss had in his life, and his great basketball legacy in Los Angeles and the entire NBA, we can learn from his humble beginnings in property investing. And you should try to utilize these simple principles to develop your own little real estate investment empire.

 

photos courtesy of  flickr.com, marinij.com, cbicommercial.com, you-are-here.com, corporatedispute.com, blog.aarp.org

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Ride The New Wave Of Tenant Screening

February 14, 2013 By Leave a Comment

New methods for finding the best tenants 

The old tried-and-true methods for screening the best tenants for rental property are quickly becoming outdated these days. And since finding quality tenants is the lifeblood of your rental business, you have to be very precise and feel very confident that the methods that you’re using to screen prospective tenants are the best ones available today. 

The home visit 

With this in mind, the methods of running a credit and background check and calling past references (most notably, prior landlords), are all staples by today’s standards. But you’ll want to augment this with new methods.  One new method that’s gaining popularity with landlords is to go and visit a prospective tenants’ current home.  That’s right – you should be checking up on them, and at least from the exterior, get an idea of the current condition of the property they’re living in.

There’s also nothing wrong with knocking on their door, and asking if you can come in to see what their existing home conditions look like.  A surprise visit can tell you a great deal about them. And if they choose to not allow you in, that will tell you a lot about them as well.  After all, they’re the ones asking you for the right to rent out your unit.  So if there are any problems in their existing home, you’ll want to scope that out prior to signing any lease with them. 

Online searches 

In addition, another new approach for tenant screening nowadays is to do online searches of your prospects. This includes checking social media for information on them. Is it spying on them?  Well, yes.  But just like an employer checking on a prospective new hire, you do have the right to do a little checking up yourself when economics are involved.  It’s perfectly legal.  But more importantly, it can ultimately save you a tremendous amount of money in fix-up repairs to your rental property in case you choose a tenant unwisely.  So check their Facebook page, see what photos they’re posting, and if there are any photos of their existing homes, and what condition they’re in. See if they’re party people – you’ll get a good idea of that by looking at their posted photos.  More parties equals more wear and tear on your unit, which will end up costing you more in repairs and maintenance. 

Beware disinformation 

Don’t forget that the internet can be a place with much false information too. Prospective tenants can post false information designed to deceive unwary landlords.  So credit and background checks may not be so foolproof as they used to be anymore, because false information (disinformation) can be widely disseminated very easily nowadays.

 In addition, prior landlords can be “set up” by the prospective tenant to await your call, and give that tenant a glowing review.  In fact, these people may not be prior landlords, but in fact could be friends or family.

A few pointed questions about the landlord business and their current holdings will help you uncover their veracity, and give you a good idea just how real the reference is turning out to be.  Then you’ll have a much better idea of whether to trust the prospective tenant.

Give foreclosure applicants a second look 

So always be wary when choosing your tenants. But don’t cut off prospects for bad credit alone. Many new tenants have just gone through foreclosures of their own homes and need the help to get proper housing these days. With vacancies so tight overall in the U.S., as average rental property rents continue to tick upwards nationally, anyone with a bad credit history due to a foreclosure is going to have a tough time with any new landlord. 

So it is important not to just write them off as being poor credit risks by the virtue of their having gone through a foreclosure process. Dig deeper. Go the extra mile. Find out what kind of people they are. Check with their current employers. See how long they’ve been at the same employment.  If you do all this homework, you’ll certainly find that a large number of people with poor credit these days were placed into bad economic positions by the overall state of the economy – and not necessarily due to their own negligence or actions.  Looks can be deceiving, so always scratch more than the surface when investigating your prospective tenants. 

Going the extra mile 

You’ll find that a little extra research may garner you a really fine, long-standing tenant for your rental property. This will provide you with steady rental cash flow and little repair costs for your unit in the long run.  After all, it’s your goal to keep all your units occupied with the best tenants – at all times.  This will help ensure your cash flow remains high, while helping to increase the overall valuation on your property.

 

photos courtesy of  99problems.org, brookdale-pms.co.uk, clickpropertymanagement.co.nz, ushousingconsultants.com, best-realestate.com.au, readharding.com.au, homesathomes.co.uk

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The Latest Outlook For Property Investing

February 7, 2013 By Leave a Comment

The new normal

As the overall real estate market continues to recover across the U.S., there is now becoming a new normal for property investors. Compared with the last several years, investors need to be aware of several important changes in the marketplace.  Understanding  these changes is crucial to properly allocating your real estate investment dollars in the foreseeable future.

Inventories are stabilizing

As the foreclosure crisis slowly becomes a foreclosure way of doing business, and the overall volume of foreclosed properties continues to drop, the real estate market will respond by pricing rebounds.  The less inventory, the more demand.  This is simple, basic economic theory.  Banks have been selling off their inventories of distressed properties to investors in record numbers over the last few years.  And that huge glut of foreclosures has now been worked down to a manageable amount.  Investors who bought them are now reaping the rewards of either flipping or holding them for rentals.  This slow lessening of housing inventory nationwide will invariably tighten the overall marketplace.

Investment loans are getting costlier

Interest rates have remained at record lows for quite some time – almost three full years.  That’s about to end.  The Federal Reserve has indicated they may tick rates up slightly later this year, based on the continued slow but steady economic growth pattern exhibited in the U.S.  last year.  Rates should remain relatively low through the end of the year, on average between 3.5 to 4 percent.  But the lowest rates have already come and gone.  In addition, expect the credit markets to remain tight for property investors, making qualifying for a mortgage much more difficult.

 

The Ability To Repay Rule makes borrowing more difficult

As mentioned in one of my recent articles posted here, the Consumer Financial Protection Bureau instituted a new rule to make sure lenders prove that borrowers can actually repay the mortgage they’re applying for.  Obviously, this was created to help protect the entire U.S. banking system, and avoid the collapse we came through over the last few years, as no-income mortgage lending was the norm – and got so many homeowners into hot water as they could not repay their loans. So now all lenders must verify all assets, income and debts of every borrower.  In order to now qualify for a loan, the new norm here is that investors are obtaining mortgages from hard money lenders, with higher interest rates and much shorter terms, in record numbers. 

As inventories level off, expect a construction boom

Records indicate that building permits for single family homes nationally are up about 25%  from the past year alone.  With the near-record low interest rates currently available, builders have been gambling on pent-up demand in the housing market.  And it’s a demand that has been held back since 2007.  New home prices have been rising faster than existing single family homes of  late, and builders also want to take advantage of this trend.  However, this expected larger supply of homes could keep prices down over the next year.

Valuations continue to level off

While a majority of local real estate markets saw increases in house prices over the last year of about 9 to 10 percent, due to shrinking inventories and low interest rates, this year should produce more modest gains.  Economists feel these price increases will probably be in the 2 to 3 percent range.  Naturally, everything is an average, so there will still be some areas of the country, like in the Northwest, which will continue to remain hot regarding price increases.  But others will lag, and some major cities will continue to show little or no growth.  These include cities like Denver, Atlanta and Chicago.

Investors continue to feed on distressed properties

As mentioned above, it’s getting harder to find great foreclosure deals these days, as the sheer supply of distressed properties plummets rapidly.  Most large investors have gobbled up the best foreclosure deals.  Real Estate Investment Trusts (REITs) enlarged their portfolios over the last two years, buying huge numbers of distressed properties, then fixing them up and renting them out en masse.  Still too, many banks decided to hold a number of their foreclosures, add value to them by making minimal repairs, and have placed them back on the market with higher prices.  But overall, as the inventory has declined, house prices have rebounded.

 

photos courtesy of reiwa.com.au, blogs.va.gov, legalrefinance.com, builderonline.com, vamortgageveterans.com, guardian.co_.uk, biz.thestar.com.my

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Creating Your Investment Property Exit Strategy

January 29, 2013 By Leave a Comment

A crucial strategy 

When buying any piece of investment property, you need to have your exit strategy in place before you spend your first dollar on that investment.  By exit strategy, I mean a marketing plan for unloading your investment – especially when times are bad in any given real estate marketplace, and you need to sell fast.  As with all good property investing advice, it’s best to be prepared for the worst.

Flipping out

When flipping a property, the exit strategy is set well before you buy:  you’re already thinking of the end user, the speculative purchaser you’ll be selling your property to…In this scenario, you’ll be creating a psychographic picture of your potential buyer, after you’ve made all renovations to the house.  This not only helps you define your marketing plan ahead of time, but you’ll be able to figure out your target sales price, and work backwards into your renovations required to please this prospective buyer, as well as determine exactly what renovations are crucial to help you move the house once it’s ready to place on the market.

Psychographic profile of your buyer

Psychographic data includes demographic information – basics such as age, income level, gender, size of family, and even ethnicities.  But it also includes psychological quirks and leanings of your prospective buyers.  For example, the location you are considering purchasing in will determine a great deal about your potential buyer.  Is the school system of paramount importance to them? Are they Democrats, Republicans or Independents?  Are they liberal, moderate or conservative thinking?  How religious are they?  Do local religious institutions need to be extremely close to the investment property you’re acquiring?

Likewise, do they value privacy, and are looking for a more remote property to make them feel at peace.  What types of psychological stimuli will appeal to your prospective buyer?  Once you’ve begun answering these questions, create a page write-up of what your potential buyer will be like – both demographically and psychologically.  Proper property investing advice  will show that with this “road map” in place, you’ll be in a much better position to figure out what your target sales price should be.  And you’ll then be able to work backwards to come up with your renovation budget.

Rental properties

If you’re looking to acquire a rental property to hold for the long term, cash flow and purchase price are the two most important features that will determine your overall profitability on the property.  However, you must also consider your exit strategy in case things go wrong.  (And invariably, with some properties, they will go wrong.  After all, it only takes one truly horrendous tenant to blow your cash flow to bits…)

Devising the exit strategy

So what exit strategy can you put together before you acquire a long term investment property?    When things go wrong, they usually go wrong fast.  So, plan ahead for this eventuality.  Always make sure you have the best tenants.  And always keep checking what current market rents are by constantly researching the rents of your competition.  And then make sure you align the rents on each of your units accordingly, as leases come due.  Also, never neglect the upkeep and regular maintenance on your property.  Ever.  In this way, if you need to sell fast, you’ll at least have maximized your rent roll, and kept your property up.

This will help maximize the amount you can obtain for your property when it comes time to sell – whenever that may occur… Even if that time is years before you’d like it to be.  In addition, always have a regular Realtor lined up – one you work with exclusively.  In this way, if you need to market your property quickly, a brief call to your very own Realtor will produce immediate results – thus shortening the time it takes to get your property on the market. 

Keeping the exit strategy current

Whichever exit strategy you create – whether it be for flipping a property, or for longer-held rental units, make sure you stay on top of it, and tweak it regularly.  This is especially true for your long-term holdings.  Simple property investing advice states that you’ve got to stay on top of market rents, maximizing them at all your units, and keeping up with regular maintenance on all your properties.  In this way you’ll always be prepared to place the best product on the market quickly, should the need arise.

 

Photos courtesy of  starchilde7.deviantart.com, consulting-business.com, debugdesign.com, rockiesventureclub.org, crownglobalinc.com, greencpa.blogspot.com,  betting.betfair.com

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