ADVICE FROM EXPERIENCE
If you have an extra billion or so lying around, you can pick up some really good deals from Uncle Sam.
Even if you do not have that much to invest you may want to get in the game since home prices have not been this low since 2002/2003.
Landlords are beginning to figure it out and may of them are sitting pretty!
As a landlord I have to like it when Yahoo reports that renting is better than owning 100% of the time!
It is also fun to watch the spin for a housing market recovery.
Home Sales Jump! The housing market is recovering!
Well, maybe we spoke too soon.
The housing market is really comatose. No, it’s more zombie like.
Meanwhile there are plans to downsize Freddie and Fannie. And there are plans for more bailouts, this time by the USDA.
The bottom line is properties are cheap, money is cheap and renting is good. Now is the time to buy.
Here is a round up of real estate related news stories I found interesting this week.
“The new loan program would likely be only available for deals of $100 million or more.”
The world’s tallest building is now a distressed property. The folks here called it way back in 2007.
Anything else catch your eye this week? Send me a message and let me know.
Rents are starting to go up. According to the Federal Reserve Bank of Cleveland:
Rents are starting to accelerate. Rent of primary residence rose 3.1 percent in December, and has risen 3.5 percent over the past six months. Owners’ equivalent rent (OER) rose 2.2 percent in December and is up 2.3 percent over the past six months. Interestingly, all but one of the regional OER components we use to compute the median CPI posted an increase near 3.0 percent in December (the median component was OER: Midwest, which rose 2.9 percent).
Rents are simply responding to the laws of supply and demand. Demand for rental properties is up as the number of renters has increased significantly due to the foreclosure crisis and a reduction in the amount of available credit for home loans. The market is responding to this increased demand for rental units. According to the US Census Bureau, the number of permits for the construction of multi-family units are up over 50% since December of 2010.
Single family home construction continues to be in the dumps. New single family home construction permits are down over 75% from the boom time highs, as this chart shows:
What does all this mean for the average investor? First, if you own rental property, keep it. Rental inflation and thus rental profits should increase over the coming year. Second, continue to buy and hold rental properties if you can. Third, if you’re a flipper, buy and hold investors are going to be your buyers. Fourth, continue to be very careful with retail flips. Very few areas are viable retail markets right now so choose wisely.
It is more and more obvious to me that real estate investors are going to be the ones that get us out of this mess. I just hope the banks and our government begin to realize it as well.
I have often been asked by people wanting to get into real estate investing for advice about the types of properties they should invest in. There are so many different kinds of real estate investment types, from single family homes, to farms to industrial parks and there is nothing wholly right or wrong with investing in these various types of real estate. Each has advantages and disadvantages. But in my experience, residential real estate is the easiest to get into and the learning curve is the shortest. So for the new investor, I recommend residential real estate investment properties and that is what I am going to discuss in this post.
There are three types of residential investment properties. All three can be great investments. Just be aware of the advantages and disadvantages of each type before investing. Let’s go through each one.
Single Family Homes – Single family homes are properties with just one dwelling unit in them. They can be detached homes on acre lots, town homes, even condos fall into this category. Single family homes can be great investments. One of the best features of single family homes is that they generally are the only properties you can sell on the retail market. You often therefore can get a higher sales price when you sell than you would with other type of residential properties.
In today’s market there are many, many homes out there that are priced right and will generate positive cash flow. In fact, right now they are the cheapest I think they are going to be for a long time. Even thought prices have declined, rents have not. Properties in desirable neighborhoods can bring good rents and very stable tenants.
New investors can also get some very favorable financing for single family investment properties right now. Rates are currently amazingly low. Investors with W-2 (regular job) income and a good credit score can get up to 10 investor loans with low fixed rates financed over 30 years, just like you can with an owner occupied house. So both pricing and loan rates make this type of investment property very attractive. (Here is a tip. If you are married be sure to put these loans in only one spouse’s name. That way you can get 20 loans, 10 in each spouse’s name.)
In many areas however, the prices of single family homes are far higher than the rental income they will produce can cover. In other words, unless you are paying in cash for an expensive home or have a large down payment, the amount you will have to finance will not create positive cash flow. Be careful buying in pricier neighborhoods.
A downside to single family homes is the fact that when your tenant moves out, your house is vacant and producing no income. You need to move quickly to get your property re-rented. Vacancy is a cash flow killer! For example, if your monthly cash flow is $150 per month on a home that rents for $900 per month and it remains vacant for a full month, you have just lost 6 months of cash flow profit. Plus, when they are empty, they are more prone to theft and vandalism.
Duplexes, Triplexes and Four-plexes – These are the two, three and four unit properties or smaller multi-unit properties. These also make great first time real estate investments. The main advantage here with these multi-unit properties is that they will still produce income when one unit becomes vacant.
Another advantage for the newer investor, you can often get the same types of loans mentioned above with single family homes. This is because Freddie Mac and Fannie Mae, the buyers of these loans, treat these multi-unit properties the same way they treat single family homes.
These smaller multi-unit buildings can still possibly be sold to owner occupants. So the market for these properties is a little stronger than it is for others. They can often be sold to someone like me perhaps. When I was beginning my investing career, I wanted to generate some extra income so I bought a duplex and lived in one side while I rented out the other.
Apartment Buildings – Apartment buildings are properties that contain five units or more. These types of properties can really be income producers. However, they can also be real drains if they are mismanaged.
Management of these types of properties has to be strong or they can quickly get out of hand. Tenant issues and faulty maintenance can quickly add up to a negative cash flow situation. You might think you can hand this type of property over to a property management company. But if you do not know how to manage your property or manage the property management company, you will end up on the short end of the stick every time.
Financing these properties is also much harder. Say goodbye to 30 year loans that you can get with the above properties. To purchase these types of investments, you will most likely need to go to a local bank and get an officer’s line of credit or commercial loan. These loans have significantly higher rates and much shorter terms. Often terms of 5 years or less. In this way they are very much like commercial or industrial properties.
Selling these properties is also much harder than with other types of residential investment properties. Think about it. Who is going to buy these types of properties? Certainly not a retail buyer, but another investor who is going to be looking at the same cash flow numbers you were when you bought the property. In other words that investor will be looking for a deal just like you were.
What should you buy if you are just starting out?
I would suggest starting with a duplex, triplex or four-plex. You can generally get decent, long term financing. They will produce income with multiple units as opposed to sitting vacant. The resale market is fairly good for these types of properties. These three factors help reduce the risk for you first time investors. If these types of properties are not available where you live, then go for single-family homes in stable neighborhoods for many of the same reasons. Whatever you decide to do, do get into real estate investing today. Make it a goal to buy one or two investment properties this year. The combination of low prices and low rate may not be seen again for a long, long time.
Since the Great Recession began in 2007, the United States has witnessed a drop in the number of new households being created. Moody’s Analytics estimates that there are about one million less households in the United States than there should be based on current demographics
What’s a household you ask? A household is simply persons who occupy a housing unit, such as a single family dwelling, an apartment or mobile home. Households are normally created when children grow up and leave the nest. Children go out on their own and get their own place. But in today’s economy people are strapped for cash, so they are doubling up with friends and family. People are living with roommates, other families or even going back home to live with mom and dad because cash is so tight.
So what? Well as landlords and real estate investors, household creation affects us greatly. If people are doubling up with other people and not going out on their own, that translates into less renters or buyers for our properties.
I know many have said that rents should be increasing because fewer people can afford to buy a home these days and should thus be becoming renters. However, while the pool of applicants has been steady in my market, I have generally not been able to increase rents due to increased demand (and I
have tried!). I suspect this drop in household creation over the past few years has something to do with that.
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