SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Real Estate Prices

Ordinary Americans Priced Out Of Housing

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I wonder where all of this “Institutional Buying” of single family properties is eventually going to end up?

“If there was any doubt that the US housing “recovery” is anything but the latest speculative play by deep-pocketed (namely those who already have access to cheap funding) investors, who are now engaged in rotating cash gains out of capital markets and into real estate, on their way hoping to flip newly-acquired properties to other wealthy investors, then the most recent, September, RealtyTrac report will put that to rest.”

Are we creating a nation of renters?  Is that a good thing?

Read the rest here.

What to Watch to Know Your Market

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Last time I wrote about the importance of knowing your market.  You never want to go out and just buy an investment property for the sake of buying a property.  Rather, you want to make a calculated investment decision.  And in order to do that, you need to know your market. 

But what exactly does that mean “know your market?”  What should you be watching?

Here are four items that I watch almost every day.

  1. What is the Rent? – What are properties in your market renting for?  You simply have to know what type of income you can expect before you can make any purchase decision.  How do you watch them?  You scan Craig’s List, read the classified ads, call for rent signs pretending to be a potential tenant and talk to other landlords at your local REIA club.
  2. Where is the Rent Going? – Are rents in your market steady, going up or going down?  This factor obviously can drive many an investment decision.  If you see rents going up, perhaps it is time to ratchet up your buying, if they are going down, perhaps you should consider another market.
  3. What are Properties Selling For? – As buy and hold investors, we are generally concerned with one thing, positive cash flow, hence our focus on numbers one and two above.  Price is also a very important factor in that cash flow calculation.  You need to be keenly aware of property values and prices in your market, because when a deal comes on the market you have to spot it and act quickly sometimes to beat others to it.  You can’t do that unless you know your market.  My Sunday paper prints listings of sales every week.  Working with a realtor from your local REIA group can also be very handy here.
  4. Know Who is Buying In Your Market – No I do not mean by name, but what the buyers’ goals are.  Are they owner occupants or are they investors or both.  Knowing this information may help you determine your next move.  If there are many owner occupants they may be driving prices too high for a reasonable cash flow return and it may be time to find a new market.  If there are a lot of investor types, you may have found a good rental market, but the competition may be stiff to get properties.  I like to watch the daily property transfers here.  Your location may have a similar publication or website.

If you watch this information continuously, you will soon develop a very good feel for your market.   You will become a much smarter real estate investor.

Know Your Market

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As a Smarter Landlord, you should be very in tune with the market where you invest.  Remember, you are a real estate investor buying investment properties and the value of an investment property is based solely upon the income it can generate.

To a landlord that means you really only need to know one thing when looking to buy a property, what will the property generate in rent.  Once you are reasonably certain about the rental income, everything else will fall into place.

I have seen way too many “investors” go at buying properties from the wrong direction.  They start, not by looking at the income, but by looking at the expenses.  They note that their mortgage, tax, insurance and expenses payments will be X dollars.  Therefore they reason, they will need Y dollars to cover those costs and make a little profit.

Sounds great, but here is the problem.   You do not get to set the rental amount at Y dollars.   The market, hundreds if not thousands of other landlords and tenants, will determine what the rent will be for you property.  It may not be Y, it may very well be Z.  The market does not care that you need Y dollars and were not in tune with what it was trying to tell you, it will simply ignore you

This is why knowing your market is so important.  Knowing what your market can generate in rents will set the price for the properties you are looking to invest in.  Knowing your potential rent first and then subtracting expenses will lead you down the path towards becoming a successful investor.  You will also be able to see when a deal is truly a deal.

Remember, the numbers do not lie.  If the numbers do not make sense, then do not buy.   And never, ever bet on appreciation.  Betting on appreciation is speculation, not investing. Look where that got folks in the last few years.

So learn your rental market and what it closely, by doing so you may just spot your next deal.  I’ll write more about that in future posts.

The Key to the Deal is Motivation

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There are generally two types of investment properties out there on the market to buyers like me.  These are:

  1. Investment properties that are owned by other investors.
  2. Investment properties that are owned by banks.

I have bought from both of these owners over the course of my investing career.  Both present their own unique circumstances.  But no matter who the owner is, they have to be motivated.  Without motivation, there is generally no deal to be made.

Investor owned properties that are on the market are generally going to be listed with a real estate broker.  Many times the broker will list the property with an “exceptional” price.  In these circumstances, you have no idea why the owner is selling the property.  The owner may be retiring, he may be sick of dealing with tenants, he may have an illness or he may be trying to gauge the market.  He may just be trying to see if there is someone out there who will “pay his price” so to speak.

In other words you have no idea if the seller is truly motivated or not.  You can ask the broker why the owner is selling, but most likely you will just receive a vague answer.  If you want the property, all you can do is view it, run your numbers and make your offer based on those numbers.  If the seller comes back with a counter offer, you can begin to gauge the motivation.   If not, move on, he is not motivated.

The second type of seller is generally always motivated.  Banks do not want to be landlords.  They may have unrealistic prices in their heads, but they are generally motivated.  Again these properties will also be listed with a broker and what I have found is that banks often need to be educated on the true value of the asset they are holding.  Sure, the asset may be worth the price they are asking if it was fully rented, generating top of the market rents and lacking repairs of any sort.  But that is rarely the case with bank owned properties.  It can take a little time to educate the sellers and work these deals.

I like working with either type of seller, but for the deal to work for me, they always have to be motivated to sell.  If the motivation is not there, the gap between ask and bid is just too wide to bridge.  So determine the level of motivation as best you can early on.  If you find it lacking, move on to the next deal.

Update – Property Reappraisal Challenges

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This is an update to my previous post, I Thought Real Estate Was In the Dumps.  It is a property reappraisal year where I live and despite the down real estate market the county property assessor seems to think we are in the boom times.  Follow along with me as I go through the process of challenging these appraisals.

I have received more property reappraisal notices over the past week.  So far I am looking at an even greater supposed substantial increase in property value for 2013.

The first step in challenging these appraisals is to find out what basis the property assessor used to determine these values.  The basis is generally comparable sales or “comps.”  I went to the property assessors office and asked to see the comps for my various properties.  This information is generally public record and all you need to do is ask for it.

So now I am armed with the info that the assessor used to value my properties.  I will be analyzing it over the coming weeks and will let you know what I find.

I will also note here that the staff in the assessor’s office were very helpful and I could not have been treated better.  I was in and out of the office in about 15 minutes.  It is always refreshing to get good service.

 

I Thought Real Estate Was In the Dumps?

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I thought real estate was in the dumps.  After all, all we have heard for the last few years is about foreclosures, underwater mortgages, short sales, falling prices, declining values and so on.  I guess my local property assessor has been listening to some other news source.

Let me start at the beginning.  Every four years in Tennessee each county property assessor is required to reappraise all properties within their jurisdiction and adjust them to the “fair market value.”  2013 is a reappraisal year here in (Memphis) Shelby County, TN.  That means that all properties have to be reappraised since their last reappraisal four years ago in 2009.  What do you think has happened to values since 2009?

So far I have received reappraisal notices for about half of my properties and amazingly my values have gone up almost a quarter of a million dollars!

Now, I do consider myself pretty savvy when it comes to determining a property’s value, and I always look for the good deal, but damn I did not know I was that good! (Insert sarcasm here).

So it looks like I will be challenging several of my appraised values again this year.  It is not really difficult to do and I have done it several times before.  I will be blogging about my experience here.  So join the fun and follow along.  It should be interesting to learn how they developed their “fair market values.”

The Time Is Now To Get Into Real Estate!

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Right now there is almost a perfect storm for real estate investors.  If you are thinking of getting into real estate investing and becoming a landlord there is no better time than now.  Real estate is currently on sale and mortgage rates are at the lowest points anyone has ever seen!  Even better, rents are on the rise because more and more people can’t purchase a home and are there fore forced to rent.

If you are thinking about becoming a real estate investor, I can’t emphasize enough how good the conditions are right now.

If you have been thinking about it and you want to jump off the fence and get into real estate investing here is what I would do.

  1. Do your homework.  Learn about real estate investing.  What are the major expenses and how will you handle them.  Join a local REIA for expert local advice.  Get this book for some real expert advice.
  2. Pick a place to farm as I explain here.  You need to start out in someplace you know and someplace you can get to rather easily.  Find a place and get to know it like the back of your hand.  Learn what properties rent for and what they are selling for so when a deal comes along you can run your numbers quickly and grab it.
  3. Get your money lined up.  If you have your own funds, great!  If not, you should go and talk to a mortgage broker about setting up some investor loans.  If you have good credit and income, it can be done.
  4. Look at buying foreclosures.  Foreclosures are everywhere right now and can really be priced right because banks can’t get rid of them fast enough.  There were over 4,000 in my area just this year alone!   Plus, with a foreclosure there are many other advantages that Richard, Jo and I talked about here.
  5. Once you find a deal, jump on it!  You have done your homework, plowed your farm and have some money lined up.   These conditions will not last forever.

Trust me, in a few years you will be wishing you had bought more real estate.  Like my friend Richard says “Don’t wait to buy real estate, buy real estate and wait.”  That’s great advice!

Landlords Are Sitting Pretty and Other News Items

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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!

Renting is Better 100% of the Time & Other News Stories

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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.

 

 

 

5 Forecasts For 2012

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So I am going out on a limb here with some forecasts for the New Year.  I say forecasts rather than predictions because it is impossible to predict the future, but I can speculate a little based upon current conditions and a little base knowledge.  Forecasting 2012 is much like forecasting the weather.  I know for example that here in Memphis in the spring cold and warm air masses will begin to interact with each other on a more frequent basis.  Sometimes this interaction will produce tornadoes.  I cannot say however where those tornadoes will touch down or how strong they will be.  There are just too many variables.

The same goes for 2012.  I know based upon what is happening now, such as Federal Reserve money printing or government market manipulations that certain things are very likely to happen.  I just can’t say exactly when or how significant the impact will be.  For that we will just have to wait and see.

OK here goes:

1.  Commodities such as oil, copper, gold, building materials, etc will continue to increase in price.  These increases are the result of money printing by the Federal Reserve and soon also to be by the European Central Bank and Bank of China.  Newly printed money always hits the capital sectors of the economy first before it makes its way down to consumer goods.  This is why commodities like copper have gotten so expensive that people will now take grave risks to steal it.  I do not see any sign of the money printing slowing so expect commodities to continue to increase in price.

Why should you care?  Higher oil prices are like a hidden tax, especially on lower income folks.  They will either have to buy gasoline to get to work or pay you rent, but will not be able to do both.  Higher prices also make new home construction much more expensive, slowing it down in all but the priciest parts of town.  Eventually the new money will make it to the consumer sector and food prices will begin to rise.  That’s when things will get fun.

2.  Interest rates will begin to creep up.  The United States borrows $20,000 every second!  Well guess what, with loose spending like that no one wants to buy our debt anymore.  In fact some like the Chinese have been selling it off.  So as demand drops we have to offer higher and higher interest rates to unload our debt.  Unless of course the Federal Reserve steps in to buy the debt no one else wants by printing money.  Then rates may stay low but see Number 1 above.

Why should you care?  Interest rates affect real estate prices.  Higher interest rates will put more downward pressure on prices.

3.  The Chinese economy is in trouble.  I expect to see some real turmoil in the Chinese economy in the coming year.  China has made remarkable strides in the past few decades, but it is still a communist, centrally planned economy in many ways.  Thus the number of malinvestments in China is staggering.  This malinvestment of capital and resources is going to have to be corrected and that correction is going to be painful.

Why should you care?  China makes all our stuff now, where will we get it all?  If China takes a dive, who will buy all that debt?  See number 2 above.

4.  Real estate prices will not recover much.  There are still a lot of malinvestments (bad loans, useless condos) on the books and in the foreclosure pipeline in this country.  We have not even begun to reach the bottom of the foreclosure crisis yet as there are thousands of people underwater and not even paying their notes.

Why should you care?  These foreclosures and low prices translate into numerous deals for us investors.  It looks like the deals will keep on coming.  I hope you can get some sooner rather than later though (see number 2 above).  And be sure not to bet on price appreciation, unless you are a farmer.  Bet on positive cash flow to stay strong.

5.  Lending to real estate investors will remain flat.  Banks made a lot of bad decisions (malinvestments) in the past decade and a lot of that junk is still on their books.  They are either so backed up with foreclosures, or do not want to take the write downs, or simply no one wants to buy their bad loans and inventory.  In fact, I bet we will see bank closures and forced fire sales to other banks in the coming months.  Bottom line, the bankers are scared of real estate, especially investment real estate and will be for some time.

Why should you care?  One of the best things about real estate is leverage or using other people’s money (OPM).  Traditionally banks were the place to go to get OPM.  Those days are over for now.  Does that mean you quit as an investor?  No!  This is the best time to be buying real estate (you read number 4 above right?)  You must adjust.  Find private lenders and offer then a nice interest rate (especially now while rates are low!  See number 2 above).  Or find a wholesaler who has private financing in place.  They are out there.

So there you have it (wow that was a longer post than I thought it would be).  My five forecasts for 2012.  It is not all doom and gloom.  In fact it is a great time to be a real estate investor.  But one must watch the trends, study the data, make the forecasts and adjust accordingly.

Till next time, work smarter not harder and Happy New Year!