Archives for April 2013

Doom And Gloom…Or Real Opportunity?

Get ready – it’s going to be a bumpy ride

A new article published this week in MSN Money on-line (“Welcome To The New Recession” by Anthony Mirhaydari, MSN Money, April 24, 2013) questions the underlying stability of the U.S. economy right now. Mr. Mirhaydari, a regular writer on stocks for MSN Money, makes a strong case for this instability. He cites that many indicators are pointing to very stormy weather for our economy in the near future. This will occur despite the stock market’s current robustness, as well as the Federal Reserve’s continuing to pump more money into the U.S. economy.

Mr. Mirhaydari makes his case clear and succinct: “But while the market suffers from Ben Bernanke’s reality distortion field, the situation on the ground is deteriorating quickly. Nearly 70% of the economic data points released over the past month have missed expectations, up from 53% two months ago and 35% three months ago. As a result, by some measures, the economy appears to have succumbed to a new recession, invalidating the theory that cheap money solves all problems and casting a pall over the market’s recent rise.”

Backing it all up…

He goes on to back up his conclusions with more recent information: “Just consider the economic data we’ve received so far this week. The Chicago Fed regional manufacturing index disappointed. Existing home sales disappointed. The Flash PMI manufacturing activity index disappointed. The Richmond Fed regional manufacturing index disappointed. New-home sales disappointed.”

The writer then goes on to reach some rather obvious deductions: “It wasn’t supposed to be this way. The fiscal cliff and sequestration battles are behind us. The Fed is pumping $85 billion a month into the bond market. The Bank of Japan just pledged to double its monetary base over the next two years. The Eurozone debt crisis is off the front pages. But as I’ve been saying for months, none of this addressed the deeper, structural problems such as tapped-out consumers pinched by a slowing job market, higher taxes and lower savings. Or a slowdown in Asia, especially China. Or a deepening recession in Europe, which is now infecting Germany, as illustrated by its abysmal Flash PMI manufacturing activity report Tuesday. Or the fact Congress hasn’t finished its budget battles, with $2.5 trillion more or so in additional budget austerity needed over the next 10 years to stabilize the national debt.”

How these conclusions will affect property investing

I had previously written here at the beginning of this year that “I don’t believe Congress, in all its machinations on the fiscal cliff, will allow the full sequestration cuts to go through. The country would be placed in a very real jeopardy for a new recession if this were to occur, especially if there are major cuts to the defense budget, as well as social programs. If sequestration were to occur, the overall unemployment rate would zoom up in 2013 and beyond.”

So I was wrong – sue me…

We did get sequestration. Though Congress is trying to amend certain provisions as I write this article. Nevertheless, the market data indicated above proves out that we are heading towards a new, secondary recession. 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.”

Time to repeat myself

Oh, how I hate it when I’m right…OK, I won’t gloat here. But again, my suggestions for residential property investing from earlier this year are still as much, if not more, valid now: “My best suggestion for property investors in the unlikely event of a Congressional meltdown and a descent into another recession, is to consider taking the properties you already own, and use the time to properly maintain and upgrade them in a downturned economy. Use the downturn to your advantage, and try to rebuild your weaker, or deferred maintenance properties. You’ll be able to address all necessary repairs, and/or increase their valuation by upgrading the properties. In so doing, you’ll also be able to increase the rents you charge on all your improved units.”

Obviously, this will put you in better shape to ride out any recession that is forthcoming – regardless of how deep it becomes. Your cash flows and profitability should increase as you beef up the attractiveness of your properties in a market that will see even more demand for rentals as people lose confidence in home buying.

One final note…

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. So in the event of a recession, look to revamp, refinance, increase your rent rolls and build cash flow on existing properties owned in 2013. And hold these properties in the short term until you see signs of a recovery.”

Can I get an amen, somebody?

photos courtesy of funagain.com, singaporepropertycycle.com.sg, worldpropertychannel.com, ehow.com, phlegmfatale.blogspot.com

Is It Time To Cash Out?

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

Rental Property Rates Should Remain Strong This Year

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

Appraisal Approaches of Investment Property Valuation

Three different appraisal methods

Any licensed state real estate appraiser will utilize three different approaches when analyzing investment property valuation. Since it’s a different animal than a standard home appraisal, the melding of the three approaches helps unify an appraiser’s valuation, giving it more weight. While appraising is more an art than science, and no two appraisers will value a property exactly the same way, they will (or in theory, should be) very close in analyzed market value for any given investment property.

Of course, the more specialized the property (a specific-use manufacturing plant, for example) the more rigorous and difficult the analysis will be. The three approaches most often used are the market value approach, the cost approach, and finally, the income approach. Naturally, each type of approach requires different methodology and information for the appraiser’s analysis. They then determine what weight to place on each individual approach, based on what data is available to them, and then they pull all three approaches together in one last analysis to come up with an investment property valuation amount.

Income approach

With residential rental property, the income approach tends to be weighted the greatest. When rents and expenses are completely known, this approach works best. Even when a rental property is vacant, or only partially rented, this approach works well, since there is usually plenty of data to show what market rents in the same area will throw off in terms of likely income for the building.

Cost approach

The cost approach would then be used to determine what a like building would actually cost to build to create the same amount of rent. Another part of both approaches takes into account the time necessary to build from scratch, as well as the time to expand to full capacity rentals.

Market approach

The market approach is used as another qualifying way of determining an investment property valuation, or the real market value. It helps the appraiser see just how in line the other two approach valuations truly are. Market approaches (also known as comparative market values) are commonly done for home appraisals. With residential multi-family properties, the market approach may still be weighted highly if there are enough good, recent sales data available of like properties for comparison’s sake. However, this approach is usually weighted less than the other two approaches when non-residential real estate is being appraised.

Reconciling the approaches

Once the three approaches are reconciled, one market value is arrived at by the appraiser for the income producing property. This is known as the appraiser’s “opinion of value.” The appraiser’s report not only contains all three approaches, but details how he has weighted them, as well as his analysis of how he related each to the other.

Commonly, lenders rely on the appraisal to help qualify the purchase price of a property they are considering offering a mortgage on. If the appraisal comes in below the purchase price, some lenders will allow a second appraisal to be done. But others will simply not make the loan – or will require the buyer and seller to “re-negotiate” the purchase price, based on what the lender will allow for a mortgage. In some cases, the buyer may make up the difference in appraised value and purchase price with their own cash, just to make the deal happen.

photos courtesy of thorequities.com, thealternativeinvestor.net, haleycustomhomes.com, rohdeappraisal.com, giulioruffini.ifunnyblog.com