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The Republican Sweep And Rental Property Investment Strategies

The mid-term elections recap: little change for real estate investing

The mid-term elections have come and gone on Tuesday this week, only just two days ago. And because both houses will be controlled by Republicans starting in January, it doesn’t necessarily mean that the party of big business will take existing banking laws and revamp them en masse, along with their protections to the American people. Current banking loan standards will most assuredly stay in place, and the concomitant tight credit atmosphere that comprises today’s investment property mortgage market shall unfortunately remain unfettered.

On the downside for property investors

The investment property mortgage marketplace will remain as is, with very tight credit available. There’s simply too much downside for Republicans if an easing of current banking reforms (created since the banking crisis of 2008) were to be repealed, and a new banking crisis were to develop anew. Of course, President Obama would never allow any stripping of current banking mortgage protections, would the Republican majority try to proffer any revisions to current law. Obama would simply use his veto power to stop any changes in their tracks.

Minimum wage laws – some good news for property investors

Even with the Republican’s sweeping into a Senate majority, thereby controlling both houses of Congress in two months, don’t expect any major change in effects for property investment opportunities. Republicans will be quite averse to legislating anything that could hurt big business (and, to a major extent, small business as well). Before the election, there was at least a hint of a Democratic push for a major hike in the federal minimum wage. That will be tossed to the junk heap now. In addition, the wave of Republicans winning major state governorships on Tuesday, will mean that, even on a state by state level, minimum wage hikes will most probably remain at or near inflationary levels only. Even with the mass of protests by fast food workers this past year, expect the prospect of a $15 per hour minimum wage to be a pipe dream for at least several more years.

Keeping costs down

How does this affect the average property investor investing in real estate? Simple. If you don’t already do the menial maintenance work around each of your rental properties yourself, then you probably hire others to clear the walkways of snow, rake the leaves, empty the gutters, etc. As you keep adding on investment properties to your empire, these seemingly small costs become quite large when taken together. Whether you hired the labor yourself – or had your property manager do so – you still end up paying for this maintenance on each rental property you own. The prospect of a hike in the minimum wage would have definitely put a dent in your rental property cash flow. So with the Republicans being victorious on a national scale, expect to keep your maintenance costs at or near current levels. And that’s some good news that property investors can cheer about as a result of Tuesday’s elections.

photos courtesy of nola.com, socalfools.org, myweathertech.com, trashitman.com

Buying Investment Property With Your IRA

Are you a candidate?

A unique subset of property investors are those that comprise the niche utilizing their Individual Retirement Account (IRA) to fund new property acquisitions. This subset is made up of very savvy investors, who are unafraid of the risks of IRA investing in real estate, simply because they know all the inherent risks. They also check with their tax advisor (as should you) before attempting to use IRA funds to purchase investment property. They know that this is the best way to protect yourself before beginning any program of investing in real estate using your IRA funds.

Self-directed IRA’s

The actual vehicle used to purchase investment real estate with an IRA is called a self-directed IRA. It differs greatly from a traditional or Roth IRA in that it is set up specifically to fund outside investments (be they real estate or otherwise). The chief benefit? Naturally, deferring paying tax on your positive rental income, of course! And like all other forms of investment property, you can leverage them to increase your real estate portfolio. The double benefit of tax deferment along with the ability to leverage makes a self-directed IRA a very attractive financing tool for savvy property investors.

Passivity – the integral part of the plan

In order to retain the tax advantages afforded you by a self-directed IRA, you’ll need to make sure the investment is “passive” income. This means you can only use the investment to rent to others. It can’t be used for yourself, or other family members either. Each tenant has to rent from you in an “arms-length” way. In addition, and this is a real kicker, you must never comingle your own personal funds with the rental property you’re buying with your self-directed IRA. That also means, only funds from that IRA can be used to pay expenses on the building, over and above your rental income from that same building. The rent that building throws off should be used exclusively to pay for all your property manager fees, renovations, repairs and basic maintenance expenses on that building. You can’t mix the funds with any other building you own that was not bought with funds from your self-directed IRA!

Taking funds out at any time? Nope.

Using self-directed IRA funds to purchase investment property also means you must abide by the rules of the IRA at all times. This includes the provision that you cannot take funds from your investment property out at any time. While the money earned is yours, it must stay in the IRA, and there are set time frames for removing funds (IRA withdrawals) as well as distributions. In order to keep the tax advantage of the IRA, you must stick to these rules. Otherwise, you will lose your IRA status – and all of its tax advantages as well.

Some key elements to remember

There are several important things to remember when acquiring investment property using a self-directed IRA. Foremost among them is the fact that all costs incurred with the acquisition of the real estate investment must come exclusively from the IRA. Don’t even think of comingling funds with other assets. Any deposits or binders on a property need to be coming directly from the IRA. In addition, you’ll need to leave a large amount of reserve capital within the IRA. Any new (and especially unexpected) expenses that arise with your new property acquisition have to be borne exclusively from the proceeds of the IRA, and not any other personal funds. As mentioned above, always check with your tax advisor before undertaking any property investment using your IRA funds.

photos courtesy of theeffinglife.com, inside-real-estate.com, wellsrealtylaw.com, lifehealthpro.com, wealthcounsel.com, cincinnatireia.com

Student Rental Property Investing

Alternative rental options

A nice niche market in rental real estate is university housing for students. As an alternative to standard rentals, this form of property investment has its advantages and disadvantages. If you already live in a top university town, this type of investment could be perfect for you. Let’s take a closer look at whether this segment of rental investing is truly right for your situation.

Advantages of renting to students

One of the great advantages of student rentals is the ability to receive upfront payment for each semester period. So bad debt or collections can be reduced to very little in this segment. In addition, there is a constant flow of students in any given college town. So as most students become eligible to partake of “off-campus” housing (usually, universities allow this after a student’s sophomore year at school), it’s a good bet that you may have a student for at least one, if not two years. The less turnover, the easier it is to manage your property vacancies. Also, look for the ability to charge top dollar for student housing, as well as being able to collect several rentals into a single building, since students traditionally rent out rooms in the building, and share common costs.

Keep in mind that the “hotter” the university town, the greater the demand. Top student towns like Boston, for example, are major student hubs, and greater demand for student housing will invariably produce greater rent rolls and cash flow, in addition to increasing market valuation over time.

If you have children that are about to enter college soon, it may be a great time to consider investing in student housing. You can ultimately save on student room charges while they attend school, and then when they graduate, continue to rent the units out to new students. This assumes you’re going to buy in an economically viable hub college town, and not in a depressed area, with few if any, local colleges.

Disadvantages of student renting

Make sure you try to rent to upperclassmen and graduate students. Remember that maturity is a big asset in student renting markets. The more mature the better. In any event, even if you’re an absentee landlord, you (or a designated managing agent) will need to keep close tabs on your building with regular visits to ensure things do not get out of hand. I mean, students do party – and that will have a taxing effect on any building. Make sure you have adequate insurance on your building at all times in case of extreme emergencies.

Some negative factors to consider in renting to students is the down time between semesters. This is lessened if you buy in college towns that run on trimesters – basically year-round schooling. Rent rolls should cover any down time when students return to their homes. Many landlords of student housing tend to rent for full years, despite the fact that students may not actually be living in them year-round. This is yet another reason to check on the building at regular intervals.

photos courtesy of rentseeker.ca, multifamilybiz.com, mpmstudenthousing.com, theguardian.com, massrealestatelawblog.com

Reading The Rental Property Tea Leaves

Turn Back, O’ Man?

So the residential housing market is hot. Mortgage rates are on the rise (we’ve known this for a couple months now, haven’t we?). It’s now more affordable to buy than to rent. A lot of stories littering the national headlines both in and out of print of late give any property investor pause for concern. And what concern would that be? Well, check out some of the latest stories – here’s a brief sampling – and we’ll discuss the important ramifications for property investors later in this article. Consider these latest stories all part of a change in direction about to hit the residential property marketplace in the coming months…

The so-called “hot” housing market. Really?

A report from CNBC on August 26th, 2013 entitled “Home prices across the US defy gravity,” by John W. Schoen notes that “home prices are going up, up, up, but it’s not a bubble just yet. The surge in home prices over the past year may have some home buyers wondering if the market has gotten ahead of itself. Rising interest rates aside, housing prices in most parts of the country appear to have plenty of room to move higher if the wider economic recovery remains intact.” He goes on to say that “home prices have room to rise. A recent rise in mortgage rates is also spurring buyers to lock in rates before they climb further. “When start you see interest rates rise, people are going to want to jump in,” said Beth Ann Bovino, deputy chief economist at Standard & Poor’s. “All those people on the fence come back into the market. But that’s a good thing.”

Mr. Schoen also goes on to note that “higher borrowing costs could eventually price some buyers out of the market and slow the pace of home sales. Sales of new single-family homes dropped sharply in July to their lowest level in nine months, the Commerce Department reported Friday. Sales dropped 13.4 percent to an annual rate of 394,000 units, and the government also revised sharply lower its estimate for home sales in June.”

Summing up…

So what was the conclusion of this particular article? Mr. Schoen summed it up by saying “the continued pickup in the pace of home sales and prices will depend heavily on whether the job market continues its slow recovery and incomes continue to rise. That disposable income represents the buying power required to fuel the housing market’s continued recovery. And despite the recent jump in prices, homes in most local markets remain affordable by historical standards.” He goes on to note that “the cost of buying a house is still cheap in relation to the cost of renting, suggesting prices haven’t yet reached a point where they will cool demand, according to housing Capital Economics housing economist Paul Diggle. “The most reliable measure still suggests that housing is undervalued,” he said. Even if rising prices and rates don’t scare away potential home buyers, the continued housing recovery will depend on the availability of credit, which tightened considerably following the wave of rogue lending that fueled the mid-2000s housing bubble. Lenders are much choosier than they were six years ago, but there are signs they’ve begun to ease up a bit on credit standards as they compete for new borrowers. And after paring down a large pile of debt accumulated during the credit boom, those potential buyers are better able to take on a new mortgage payment.”

A hedge fund hedges its bets

Another headline in the Bloomberg News from August 23^rd, 2013, blares out the following headline: “American Homes 4 Rent Said to Fire Workers After Reporting Loss.” This tale of future woes for the residential property market goes on to report about the recent misfortune to befall the property investing company American Homes 4 Rent. The article notes that “American Homes 4 Rent fired a group of workers, with a focus on acquisition and construction staff, after the housing landlord reported a fiscal second-quarter loss, according to a person with knowledge of the terminations. The company, owner of almost 20,000 single-family homes, has cut about 15 percent of its workforce this year, including an earlier round of terminations before its initial public offering last month, said the person, who asked not to be identified because the information is private…Single-family landlords have struggled to turn a profit while acquiring homes faster than they can fill them with tenants. Hedge funds, private-equity firms and real estate investment trusts have raised more than $18 billion to purchase more than 100,000 rental houses in the past two years.” The article goes on to report that “single-family landlords are seeking to take advantage of prices that fell as much as 35 percent from their 2006 peak and increased demand for rentals. The U.S. homeownership rate is at its lowest level in 18 years, and more than 7 million homes have been sold for a loss or lost to foreclosure since 2007, according to RealtyTrac.”

Slowing things down…

The upshot from this report is made very clear in the last part of the article, where it is noted that American Homes 4 Rent “ is slowing its property purchases, with plans to spend as much as $100 million a month on 800 to 1,000 additional homes…the company’s chief operating officer, said on an Aug. 21 earnings conference call. “As far as being able to put money to work, I mean we could easily ramp back up to $300 million-a-month pace if we have clarity that we would have that capital available,” he said. “But we don’t want to get too far out over our skis.” I think that euphemism for being cautious should be used by all property investors…I mean, you’d hate to fall face first down a steep, snowy cliff of rental property negative cash flow, would you?

The writing’s on the proverbial wall

And yet another sobering story comes from the article “Signs This Real Estate Class is Set to Roll … Over” by Steve Mauzy’s blog of June 14, 2013. In it he notes “Axiometrics – an apartment data and research firm – reports rent growth slowed to a 3.1% rate in April, the slowest pace of the past 32 months. Falling rent growth is nothing new, though. Axiometrics reports rent growth has been moderating since July 2011. Rising property prices coupled with falling rent growth is hardly a recipe for real-estate investing success. Unfortunately, any fallout in the investment market won’t be contained to investors. Innocents are at risk as well. In many markets, investors are involved in up to 30% of residential real estate transactions, thus helping to elevate home prices – rental and owner-occupied alike. If the latter buys into an unsustainable trend, he could find himself underwater a few years later should investors start exiting en masse if the numbers no longer work.” This is quite the splash in the face of the average property investor in the U.S. But a cautionary tale nevertheless. It is time to take heed of all of these warning signs.

Hold ’em or fold ’em?

And lastly, a recent article entitled “Why I Sold My Rental Property” by Wyatt Investment Research, in their blog of August 23, 2013 notes that the current “hot market can offer both opportunity for profit and opportunity to get burned. The opportunity to profit arises when there are lots of buyers who think prices will continue soaring. And the opportunity to get burned happens by following the crowd, and assuming that the bubble will never burst. Once again, residential rental real estate is a hot market. Vacancies are low and rents are high. What’s more, vacancies have been falling and rents have been rising for some time. According to data from Reis Inc., a property-research firm, unrelenting rental-price increases have pushed national apartment rents to their highest level since 2007. Concurrently, national vacancy rates are now at a 12-year low of 4.3%.” They go on to say that “the residential rental market includes both apartments and single-family homes. Investors – landlords and property flippers – have been a driving force behind the housing rebound. Today they account for up to 25% of purchases. And their buying spree has helped lift the national median existing-home price 13.7% in the last year. Single-family homes have also been swamped with institutional money.” Get the picture? The tell-tale signs of impending problems for the residential rental market are becoming clearer by the day now. In this particular article, the author also tells how “property developers are following the money, and new construction has surged. Apartment building completions in the top 30 metropolitan areas of the country more than doubled. And more apartments are on the way, with new permits to build multi-family homes reaching a new high.”

A smart choice – or stupidity?

He also then goes on to describe his recent investment decision: “Of course, all real estate markets are local markets. Until recently, I owned a single-family rental property just north of metropolitan Denver, where vacancies are at a 13-year low. Rents are also at a multi-year high. I bought the property since 2003, and it’s been a solid income investment. It’s consistently provided monthly rental income of 15% to 20% above my costs. When my last tenants moved out, I could have negotiated a 12-month lease with new tenants willing to pay 20% more than what the previous tenants paid. But instead of finding new tenants, I decided to sell the property. The reason was simple: I don’t expect real estate to stay hot much longer.” He then goes on to explain his rationale why he would sell out now, when his cash flow was so excellent – “there are a few obvious reasons. Multi-year trends in both vacancies and rents are unsustainable. I expect more multi-family units will mean lower rents. That aside, the market simply looks and feels like it’s approaching a melting point. For evidence, look no further than bidding wars for homes that hit the market.” So he cashed out, rather than riding his cash cow.

A wise choice, or a huge mistake? Well, let’s take a look at the meaning all these articles in the news of late have been saying. Clearly, the upshot of so much national attention on the apparent rise in residential house values while rents have also been zooming upwards – until very recently that is, points to an indication that the residential rental boom is about to go bust. With homes being more affordable than rental rates nationally now, coupled with the slow rise in mortgage rates this Summer, it would appear that property investors should be wary about their calculations for the short term in increased cash flows due to yearly rental bumps. And if institutional investors, like hedge funds that specialize in residential single family homes, find their bottom lines dropping due to this rental rate bust starting to happen, then look out for these large funds to unload their worst-performing homes – en masse. This, of course, will create a glut of single family homes on the market, which will naturally depress home values in the short-to-mid-term range of the next few months through the end of next year at least.

Be wary, but remain calm and in control

What’s a small property investor to do? Well, for one, revise your cash flow projections, to make sure your property will remain comfortably cash-positive in the short run. In addition, since unlike a large hedge fund, you only have to appease yourself and not thousands of investors, determine at what level you are willing to ride out the coming storm that’s about to adversely hit the rental marketplace, as well as home values in general. If you’re OK with your current projections, then by all means, stick. Selling your property only produces more costs as you convert it to another asset class. You may stick with real estate – commercial is hot and steady right now –making for an excellent choice in real estate conversion possibilities. Again, be wary of the costs to do so. It just may be simpler to revise your market value and cash flow projections downward, ride out the short term, and continue to milk your investment property cash cow – but just not at its current level. ‘Cause it certainly ain’t sustainable…

photos courtesy of vitafair.de, labho.com, usnews.com, columbus.uli.org, brokersfirstrealty.com, digonline.org, trexglobal.com, sallyradi.wordpress.com, mortgage.lovetoknow.com, naplesguru.com, whatsthepointofaventura.com

Property Investment Death By Drowning

Water – a property investor’s greatest natural foe

Any investment in real estate – be it residential or commercial, will always have water as the main, natural element’s source of agita for property owners. Can you mitigate water problems? Absolutely. However, whether you can retain a positive cash flow in your property or not may hinge upon several key factors when dealing with water-related issues. Here are several important points to remember before you proverbially die from water torture.

Before you buy

You must have your potential investment property inspected by a licensed house inspector, or commercial building inspector. They can suss out any potential water problems associated with high water tables in the area, poorly graded building siting, underground streams and the ever-popular cracked foundations. Sometimes existing water or mold issues can be easily fixed. For example, an unmaintained building may have damaged or non-existent gutters and leaders. Hence, rainwater is dropped right next to foundations, and in heavy rains, there will usually be some form of basement seepage. This can then translate into standing basement water problems and/or mold growth – which of course, can spread. The solution – repair or replace existing gutters and leaders where needed, thereby stopping the problem from re-occurring.

In addition, make sure the area around the building is properly graded to allow for rainwater to escape away from the foundation walls. Simply sealing foundation cracks is usually not enough. The perimeter grading is what is all-important. Your inspector will also be able to tell if any underground streams and/or a high water table will require you to install an interior French drain system in the basement, complete with sump pump and outflow pipe considerably far enough away from the building.

Mitigating water problem costs known before you buy can easily be figured into your offer price on any potential acquisition. This type of water issue, while a bummer when you first buy the property, does not cause the kind of heartburn that the following problems most certainly will…

Emergency water problems

Here’s where things get icky. Any burst pipe will cause your tenant to call you – at any hour of the day or night, naturally. So you better have your emergency plumber (or two) lined up to call after you hang up with your frantic tenant. A plumber you can trust to get right out to your building and handle the bleeding, as it were, immediately. Sure, you’ll be paying double-rate for an emergency call – but think of the damage a burst pipe can do to your building. The worst-case scenario with a burst pipe, is when you don’t have a tenant in place to call you. (If a tree falls in the woods, did it make a sound?) Walking in on a flood as a property investor is one of the worst feelings you can have…So to hopefully avoid this, conduct regular inspections of your building(s), looking for potential water and or/pipe problems. Especially if you know you have any older, or rusting pipes. Maybe it would be best to replace them with pex (plastic) piping now to avoid any major problems later.

Train your tenants

Next to a burst pipe that produces an immediate emergency, the greatest water problem that can ruin your profitable investment property and turn it into a financial disaster, is the slow leak. The leak that’s never reported by your tenant. The tenant with the long-term lease. The one who will “just live with” the minor annoyance of a small drip emanating from the base of the toilet, or under the kitchen sink, or behind the refrigerator. The leak you won’t notice until they move out, and you discover a warped floor, damaged carpet, or ceiling stains from above. Or worse – if you discover mold that’s been growing for quite a long time – requiring you to remove entire walls or ceilings, and completely replace them with new sheetrock, as well as painting them.

Don’t put yourself in this position. Always do regular maintenance “visits” into your tenants’ units. Train them to call you immediately – if not sooner – when they discover the first drip out of anything in the unit! Then call your trusty plumber to make the necessary repairs. You’ve budgeted for repairs and maintenance as part of your cash flow analysis – make sure you follow through and get your tenants to alert you to the smallest of problems as quickly as possible. In this way, you can avoid the much greater hassles in dealing with any growing water issues, and the overall monetary damage they can truly represent.

photos courtesy of the-purest-of-treats.blogspot.com, mosbybuildingarts.com, homesinspectors.com, brookfieldangler.com, flooddamagetoronto.com, buzzle.com, .home-dzine.co.za

The Luck Of The Irish?

Overseas property investing with REITs

If you’re considering alternatives to personal ownership of your investment properties, you’ll certainly be considering the use of Real Estate Investment Trusts (REITs). These investment property vehicles are a good alternative if you don’t have the temperament for dealing with hands-on management of rental properties, be they residential or commercial, or if you find direct ownership of properties to be too risky for your situation and/or personality. For anyone that eschews hands-on property investing, but wants to diversify with some form of investment property, REITs are a wonderful tool for achieving steady returns.

Further diversification

By investing in REITs, as I’ve mentioned in a number of previous articles here, you can diversify your portfolio, keeping a hand in real estate investment opportunities – but letting someone else do all the management. Investment in REITs is just like purchasing shares of stocks in companies – except these companies are funds that invest in some form of property type. Some REITs are publicly traded, some are privately held. Either way, most REITs tend to specialize in some niche area of real estate investment.

The largest REITs tend to be the most diversified – and their investments tend to be allocated amongst both residential as well as commercial properties. In addition, many larger REITs will invest in foreign properties as well. Some REITs only invest in foreign buildings. And a newer trend is for larger publicly-traded REITs to invest some amount as a stake in the creation of other, foreign-based REITs, many of which are privately held.

Pimco’s latest buy-in

One such example, and worth exploring, is the unique buy-in by the huge REIT Pimco, with over two trillion dollars invested worldwide in numerous types of properties, of a 10% stake in the newly formed Ireland-based REIT, Green Property. It is the first Irish-based REIT of its kind, and it specializes in the investment in mostly commercial, retail properties in the Dublin area.

Its latest public offering raised over $200 million dollars for the express purpose of investing in Irish retail buildings. Not only does this show a resurgence in European business trends and a stronger retail market, it also shows a comeback in one of the formerly-troubled European Union countries, and displays great faith in the rebound of the Irish economy proper.

Having faith in the EU

The fact that Pimco would take such a large stake in the Green Property REIT shows the inherent faith one of the largest worldwide REITs is placing in the success of the Irish economic recovery. And that’s something even a small U.S. property investor should consider in our world-wide economy today.

Green Property REIT is expected to go public very soon, and when it does, it offers yet another option for the small investor to get in on the ground floor of foreign investment – without the headache of having to manage foreign property from these shores. It’s certainly worthy of a good hard look to any investor considering overseas property investing, especially in foreign REIT investments.

photos courtesy of donegalimporters.com, moneycrashers.com, aaii.com, online.wsj.com, marlesshouse.com

Property Investor Alert– Beware The Latest Mortgage Rate Trend

Rates are on their way up…

Cash flows for property investors are about to take a hit in the coming months – and into the foreseeable future. As The Fed has recently indicated, their stimulus package has an expiration date, and it’s coming soon – possibly as early as this September. So kiss goodbye to the approximately $85 billion a month of stimulus The Fed has been effectuating of late, by purchasing Treasury bills and mortgage-backed securities in order to help keep interest rates low. And that’s just some of the sobering news property investors need to stay alert to in order to plan your investment strategies intelligently. Add to this the fact that 30 year mortgage interest rates have been slowing ticking upwards over the last several weeks, and you’ll soon realize the bottom was reached on the interest rate front – and it doesn’t look like it’s going to return any time soon. Many national economists are predicting overall mortgage rates to increase on a steady trajectory through the end of this year.

Rates are going up for several reasons

I have reported here in recent articles that the current housing rebound is due mainly to property investors, especially a few incredibly large hedge funds that specialize in property investment. And I have noted that consumer confidence remains not altogether strong, as the jobless rate limps along, barely creating the necessary rebound to seriously improve job confidence. This yields a static situation where people are still fearful about their employment – at least the ones that have jobs. It still remains quite difficult placing job hunters in available positions nationwide. And this ultimately continues to erode consumer confidence, and keeps many potential homebuyers on the sidelines. Thus, it’s still a great position to be a landlord to provide housing for all the fence-sitters who continue to rent, thus pushing rental prices up.

Banks are flexing their muscles

So it is property investors who continue to prop up the housing market and mortgage industry – investors comprise more than 20% of all home sales in the past year. With all this activity, and with unemployment remaining at least steady, lenders are now flexing their muscles, figuring it’s finally time to start ratcheting interest rates up. After all, they see the numbers: the average time homes are on the market nationally have dropped considerably this year – from 100 days down to 60 days on average. And nationally, home inventories have been dropping from about a six month supply down to about four and a half months. So it would be wise for any property investor who was considering making their new-buys later in the year, to heed this news – interest rates will only be considerably higher by winter. Best to lock your deals up sooner rather than later if you’re going to be financing with an investment property mortgage loan. Your cash flows will thank you.

photos courtesy of realtypin.com, kstp.com, realtybiznews.com, forbes.com

Walking Through The House Of Mirrors

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 eyes 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 Rana 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 estate 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 predicted back in my article of January 1^st 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.’

And 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 government 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.

My 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

A Tenant’s Nightmare

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

Commercial Real Estate Investing In Rebound Mode

Europe helps shape current investing patterns

Just as the U.S. residential property investment picture has been transforming itself over the last year, with valuation gains occurring in most areas of the country, so too commercial real estate investing has been on the rebound as well. While not growing at the same pace, it is still seen as extremely attractive, especially to foreign investors. This is mainly due to its relative stability over the past year, as returns on commercial properties such as offices, retail space and warehouses continue to increase steadily.

Poised for a rebound

While not producing stellar returns, the commercial U.S. market is poised to rebound strongly this year. The reduced vacancy rates overall, as well as the perception that the commercial real estate investing arena is less risky and is not considered overpriced at this time, have led foreign investment firms to plow billions into the commercial property sector in this country. It is expected that commercial values will rise throughout the remainder of this year, making it an attractive time for investors before prices rise due to this increased demand.

Increased competition from abroad

Naturally, individual investors, as well as U.S. investment companies, have to contend with increased competition for the most desirable commercial properties because of the increase in overseas investing here. Compared with other countries, commercial real estate investing has increased at a much faster rate in the U.S. over the last six months. While investment increased by six percent in Europe and 15 percent in Asia in the second half of last year, it grew by almost twenty percent here in this country, according to DTZ, a London-based commercial real estate brokerage.

Safety in the U.S. commercial property market

They also report that investment in a single country is a safer way to place investor funds rather than spreading their capital pool over many different nations. Of course, Europe’s current financial woes have played a big part in the overall increase in shifting investment funds to the U.S. Despite all our political stalemate woes over controlling the U.S. budget, foreign investors are still quite concerned over all the volatility in their home countries in Europe, and still see the U.S. as much more stable and stronger economically. With their shift in investment patterns, individual investors should be aware of the way this increased demand will place upward pressure on price valuations for the entire commercial real estate investing segment in the U.S. over the next six months.

photos courtesy of miamire.com, collaperty.com, bloomberg.com, foreclosure-support.com, retaillawadvisor.com