Monday, July 12, 2021

Think You Can Make Some Money in Real Estate?

Have you been watching the skyrocketing prices and see potential in the real estate for making some good money, but you aren't sure you want to have a go at it by yourself? Well that is a very real concern. Along with big profits there some comes the possibility of suffering some big losses during times like these if you aren't careful. If you want to begin investing, just remember, you don't know what you don't know. I should add right now, this is not a pitch for some high priced training. Some is good, but you won't find it here.

If you have the idea of buying a property cheap and selling it at today's inflated prices, remember that “cheap” is a relative term. Even people who own terrible places see the prices going up, and, naturally, they want their share of the prosperity. I was at an auction several years ago where the house needed quite a bit of work, including a complete heating system as someone removed the old one – including the duct work. The pros shut down when the price reached about $75K. However two women, looking for a ”bargain” ran the price up to around $130K. That is pretty close to what they place would have been worth after fixing. You have to watch what you are doing.

What the Pros Do

Even experienced real estate wizards don't operate as one man bands. Some may seem to be that way, but everyone needs connections to a title company that understand investors, possibly an attorney, real estate agents – even though most rarely buy through the MLS, contractors, a source of financing (unless you are independently wealthy) and, often, a good property manager along with other supporting characters you will meet along the way. Where do you round up a team that will help you build your business? This is a subject for another day but a good place to start is the local REIA group. Many people there can help you make the contacts you need. Just keep your eyes open as there are occasionally some sharks who will be only too happy to help you shed your invesment capital. I once sat across a table from a guy who was offering hard money at 15% with 5 points. I wasn't interested in building his retirement account.

You Don't Have To Go It Alone

For those who aren't quite ready to jump in with both feet there are several alternatives to consider. You can look at investor groups and REITs. Each one appeals to a different type if investor depending on their financial capability, time availability, and risk aversion – to name a few factors.

With investor groups, members pool their capital and, as a group, buy, rehab and manage investment properties. There are various structures and goals. Some buy and hold properties. Some rehab and flip them. Some concentrate on commerical deals. In any case, the newcomer can get an idea of how things are done. The down side is it would take a chunk of money to join the group and memberships are not particularly liquid – but then neither is actual real estate ownership. However you may get a taste of what is involved and make contacts useful in the future.

REITs or Real Estate Investment Trusts are corporate entities that allow you to participate in major projects like shopping centers, large appartment complexes and other developments. These are exchange traded securities like stocks. This means that, while investment capital is needed, it's not necessarily as much as actually purchasing rental property but you don't have the leverage usually associated with real estate. It also means the investment is fairly liquid. The down side is that you watch it from a distance and have little if any educational participation.

Check It Out First

Before you decide on either of these it is important to do your due diligence. For investor groups ask around the investor community, which is usually means local REIAs. You may get a variety of answers – some people don't like competing against groups. However you may still get some valuable information to guide your choice. Check public records for multiple property owners, lawsuits and that sort of thing. Ask a lot of questions and don't just go by their answers, but pay close attention to the way they answer the questions. For REITs – they are publicly traded and there is plenty of information available there as well... it's required by law.

Of course neither of these is that helpful without some funds to invest. If you have little or none, try looking into some of the “buy real estate with no money down” gurus as a possible place to start. Be forewarned that it's never quite as easy as it is taught, but it can be done – you just have to look and work a little harder for the deals.

We will look at some of these concepts some time in the future. For the time being. if either of the two opportunities interests you there is plenty of information available. But be sure you look into them thoroughly before you write the check. As Ron LeGrand says: you can't lose a big check if you don't write a big check.

Monday, June 28, 2021

Hammering the American Dream

Owning a home has long been part of the financial stability plan of American families. Once that becomes a reality, many continue follow the advice of Will Rogers, “Don’t wait to buy real estate. Buy real estate and wait.” Some invest in raw land, but many more understand that the economy may go up and down but people always will need a place to live. Rental properties have long been the path to wealth – what a deal, your tenants make the payments and after a while you gain a substantial asset.

This value of this strategy has not been lost on major financial players. Chief among them is Blackrock, Inc. The giant has over $8 trillion in properties under their management with offices 30 countries. Additionally, they have been buying up entry level homes, and because they could, they bumped the rents up around 30%.

They are not alone. Other institutional investors, including giant KKR, private equity funds and hedge funds are reported to have spent more than $25 billion – with a “b” - to buy up over 150,000 single family houses since prices dipped in 2012.*

Five of these corporate single family landlords sold shares in public offerings and there were eleven debt offerings totaling $6 billion in the past year alone. This covers the price they paid for homes and remodeling – and more importantly, allows the real estate gobbling juggernaut to continue. Whole neighborhoods have been turned from owner-occupied into rental properties. When there weren't enough to satisfy the institutional appetite, they even bought new homes.

In spite of this, there are some not following this pattern because, they say, single family homes are generally not constructed as rentals. The maintenance costs are proportionally too high. This would indicate the institutional buyers are working under different economic thinking and expectations than traditional investors.

What Does This Do To The Market?

In some areas this took many starter homes off the market making it more difficult for families to find, let alone, buy, their own home. Anyone with an understanding of the Austrian school of economics will tell you that this puts upward pressure on home prices. It is as simple as reduced supply in a time of increasing demand, Even Keynesians will grasp this.

This was going on long before the covid fear closed down businesses and sent many people home to work remotely. The shutdown showed them two things, among others. First that they needed more room if they were to work from home and secondly, they didn't need to live so close to their employers.

Carried to its logical conclusion, those who could, began migrating from the over taxed and over regulated environs to more friendly regions, even to the point of buying properties sight unseen because of the highly competitive market. Put this together with the reduced number of homes available in some areas and you find the outrageous increase in real estate values that are only moderated by outrageously miniscule interest rates.

I might add at this point that low interest rates are not necessarily a bad thing – particularly to an industry so dependent on the availability of affordable financing. However, it is a double edged sword. For people just starting out and looking to put together a down payment for a home, a business or any other large purchase, the banksters are pretty much useless with the with their almost non-existant interest rates on savings – but then most investors already know about this.

Is This a Good Idea?

Blackrock found itself on the Forbes list of 50 Most Admired Companies in 2013. This is understandable – as an investment, the company leveraged it's commanding position to expand in the relatively safe market of single family home rentals. People need a place to live and this dominant position enabled them to rent to them for top dollar.

It is doubtful that those who would have liked to buy and could not, either because of the twin curses of limited availability and inflated prices probably didn't take part in the survey. They could not experience the increase in equity over the years as they paid down a major asset and watched their home's value grow. They did not have the privacy or security that comes with owning their own home. They did, however, have the opportunity to pay rent and live with the landlords terms.

This is not to say that rental properties are bad things. I have rental properties and people are quite happy to live in them. The point is that renting should be a choice. So should the ability buy investment property without dealing with out of town competition with almost unlimited funds. Here is where personal relationships become even more important.

We can't roll over and play dead like many mom and pop hardware stores did when the blue store and orange store came to town. I get emails every day hawking plans for different ways of working. Some of the ideas may work, but one thing is sure, we need to be aware of the environment we are working in instead of wondering where the deals went. It isn't just the dreams of home ownership that is getting hammered in some areas, but, for some, the dream of successful investing.

    *source Keefe, Bruyette & Woods


 

Sunday, June 13, 2021

Listening to Sellers

Many investors and home buyers have a hard time hearing anything the sellers have to say beyond the price. They dismiss talk about the property as mere puffery. Unfortunately, many of us have gotten to the point where we don't believe much of anything we hear anywhere. Then again, a lot of us don't even believe the price.

It's true and sellers try to present their property in the best possible light, but then, that is why we hire inspectors – or do a thorough job ourselves. This is fine as we tend to discount much of the things we are told, but there is a time we need to listen to the property owners. It is the answer to a simple question, and, possibly a couple of follow up questions to be sure we understand.

The Question

A friend of mine who has been in the business forever looks around a property, looks at the people and asks, “why are you selling a nice house like this”. Never mind the imperfections you've just seen, and now is the time close your mouth and wait for the answer. Unless it is someone trying hustle you, you will usually get a pretty straight answer. It could be they are facing foreclosure, or perhaps they just can't afford to stay in the property. It may be that they found employment in another city and they have to move. Perhaps they want to retire to a warmer, less expensive and safer location. There are a variety of reasons – and, to the seller, they are all valid.

 

You may have to poke and prod a little to understand completely, but you will learn what will move them to accept your offer – and it may not be the highest number. Summarize what they tell you to be sure you understand... and they know you understand and you can make an offer that meets their needs – this does not mean offering two hundred thousand on a one hundred thousand dollar property!

For example, I was looking at the proverbial ugliest house in the neighborhood. When the woman bought it said she didn't realize it was beyond the scope of her budget and ability to make it livable. I sat down with her and she told me about the various investors who came by with their formula driven deals and those with their creative financing plans. Some were newcomers and some old timers in the business.

Meet Their Needs

All this woman wanted to do was get enough money in hand to move up to Tennesee to be with her grown children. Creative deals didn't fly with her... even ones that gave her considerably more than I offered. I've done creative deals as well, but listening to the seller allowed me to meet her needs for less money than others had been offering.

On the other hand, if they don't need the money to buy another home and plan on putting the money away with the banksters, asking them to hold the paper on the property at many times the interest rate the institutions offer, may just be the ticket to giving them a better alternative while getting yourself a much better rate than the hard money guys are willing to offer.

How Do You Look?

Perhaps even before you get to the big question, thinking about how you approach the sellers can go a long way toward getting the deal. For instance, many of us do his business to get nice cars, But showing up with a new Corvette or Cadillac to talk to someone who can't afford the payments on a simple two bedroom house may not be the best way to open lines of communication.

Also consider there feelings. They may have contacted you because they saw it as the only way avoid foreclosure. On another property I sat down with the owner, As we were talking about her situation she explained how this big shot showed up in his fancy car along with his son. As they walked through her home, this guy made his disdain for the place quite evident as told the young man that they would tear this out and replace that. I don't know what they offered, but the lady was almost in tears thinking about the way they bullied their way around her home and she had no intention of working with them. Egos can be expensive.

A little humility can go a long way sometimes – and that is not a lack of confidence. It's understanding that sellers need to feel good about dealing with you. If you are looking to beat sellers into a win-lose deals.... good luck, I wouldn't even deal with you.

Looking at the property and making notes is fine, and, unless the owner has unrealistic expectations, you probably don't have to point out the flaws in the property – they already know. There are times when the sellers have an unrealistic idea of the value of their property, you may have to lay a little truth on them. Try not to make them angry or the deal is gone anyway. Many people would rather give their house away than sell it to someone who doesn't respect them.

So listening will get you the information you need and, most of us, myself included, tend to talk too much. They don't care how wonderful we are, who we know, or any of that stuff. All they care about is what you can do for them. They need to know enough that they believe you can follow through and solve their problem,

So as we talk to sellers, we need to listen more and talk less.


 

Sunday, May 30, 2021

Is This Really A Good Time For You To Sell?

 

Real estate appears to be in the middle of a crazy sellers market. Inventory is low and most anything that is placed on the market is snapped up almost immediately by desperate buyers – sometimes sight unseen.

Much of this comes as many buyers migrate from colder, more expensive and restrictive northern and western states to warmer, less costly locations in the south. However, this is not the whole story as the pandemic induced practice of working from home reduces the need for proximity to urban environs. Then there are the usual reasons for moving like new job, downsizing and retirement. Whatever the individual reasons, buyers significantly outnumber sellers with the predictable upward pressure on the prices.

Home for sale

For instance, a simple cape cod – nice, but nothing for HGTV – that was located across the street from my son's home, was listed at a substantial increase in price over comparable sales. He says the street was lined with cars when the house hit the market. The eventual buyer, after just a few days paid twenty thousand over the asking price. Then, when the inspection revealed mold in the basement, they just took the house as-is and paid for the remediation without going back to renegotiate with the seller.

An associate of mine had a nice two bedroom condo they wanted to sell, but were not in a hurry. They priced it high to give them time to get ready to move, etc. It was gone in three days.

Is it time for YOU to sell?

Given that it would probably not be difficult for you to sell your property, unless something is dreadfully wrong with it like being adjacent to a landfill or politicians office, is selling now the best decision for you? It depends on your circumstances and what you plan to do with the windfall.

If you've been in the place for a while and have some equity AND are heading to a less costly location, this choice could be a winner for you. That is moving from the city to the suburbs or from the high tax north to a more southern location, could go well for you. If you are looking at going the other way, from the suburbs to the city – unless it is somewhere like New York City where some prices have taken a beating as many people have fled the area – it may not go as well.

If you've had your eye on the five bedroom center hall colonial or the nearby waterfront home a few miles down the road and you see your house has increased significantly in value, don't get too excited since, although your house is now worth what those homes were selling for – they have gone up as well. So, when you sell your house for a pile of money, that pile of money will buy you pretty much what you had if it is in the same market.

On the other hand, if you are not needing the money to buy another home or it is an investment property, that is an entirely different situation. It may be time to take the money while prices are high and run – just consider carefully what you would do with the cash.

If you are looking a selling investment properties, there are a few factors to consider. Will the cash from selling a property that is producing a steady income replace that income? This may not be a factor if you are cashing out and retiring to a tropical island, or even a nice Florida beach.

If you have significant equity, the cash from one property may provide the down payment for several more properties and increase your cash flow... or it may provide the capital to take advantage of the outrageous retail prices and allow you to rehab and flip some currently undesirable homes.

There is a lot to consider beyond just the inflated selling prices. If you don't think prices will remain this high, just like many stock market investors do, moving into a good cash position may well permit to buy more with your money as a potential bubble bursts and prices fall. This whole process would be so much simpler if only we had a crystal ball to see the future.

The Taxman Cometh

No discussion of the potential for greater profits would be complete without recognizing that your greedy uncle in Washington is looking at more and better ways of increasing his share of your income. Books have been written on the subject so what we have here is, at best, a brief overview of some of the things to keep in mind. Whatever is written here could change tomorrow, so it would be well to pay attention to events in DC and keep in touch with your accountant and tax advisor.

If this is your personal residence, you get somewhat of a break. As a single tax payer, $250,000 of the profit is sheltered from the taxman. That is profit, not selling price. As a married taxpayer, each of you is eligible for that amount, or $500,000 profit is yours before they look for tax payments. Unless you are in the realm of point houses (as in 2.4 million), you should have little problem here.

Investment properties are another story entirely. Currently long term capital gains are taxed at a lower rate than regular income. Word out of Washington is that some are salivating over the potential windfall they would get from more than doubling their share of your profit. All this in view of the fact that a considerable portion of the price increase is because of inflation and not increase in intrinsic value.

Is There A Defense?

There are some things you can do to soften the bite of the taxman. Here is where a good tax advisor or account can be a valuable addition to your team. Just be sure that he or she is on the up and up and stays on the straight and narrow as the IRS can do nasty things to you if they think you are chiselling rather than filing.

While books have been written on tax strategies, we will look at a few. First thing that comes to mind is that you receive payments over several years as this will show a lower profit each year than if you recognized the whole amount in one year. This generally lowers your tax bill as it can keep you in a lower bracket.

If you hang around real estate investors for long, you will become aware of a number of creative ways to purchase property... and they are legal as I don't know any of these people that would look good in an orange jump suit. We don't have room to go into detail here, but options can be useful in spreading income over a few years. Partial ownership and lease options are other paths to explore. You can work with 1031 exchanges. Although both properties would be valued at the inflated prices you would still get the tax saving benefits of the arrangement.

As the saying goes: It's not what you make, it's what you get to keep that matters. If it is right for you, sell and take your profit, but be careful so you get to keep as much as possible.