How Many Bedrooms Do They Need?

A while back we wrote about changes in the real estate market brought about by the Chinese flu and the government reaction to it. There are many negative impacts on individuals and businesses, but today we will look at the changes in single family housing that are taking place already.

We noted then that many people were working from home instead of commuting to an urban cube farm. Unless they were already doing a significant amount of work at home, most of these newly confined employees find themselves working from makeshift offices in the corner of a bedroom, dining room, garage or wherever they can find some space and an internet connection.

Another Curve Ball for Construction

As if home builders did not have enough to contend with on the building materials and labor fronts, they are now facing the demand for another bedroom or dedicated office. In some areas, the traditional three bedroom home is being pushed to the side in favor of this extra room.

Because they are still working with the middle class market, not looking for a McMansion and not being able to afford one anyway, they are trying not to bump the price up too much. One builder working in the new construction for rental market recently explained that they were trying to rework their current designs to carve out that extra room with the same footprint – thus minimizing the price impact.

This may mean pulling back from the open concept designs and smaller rooms to avoid adding square feet and pushing the price of the home further out of the reach of many of the people they are building for.

Why Build For Rentals?

Some new developments of single family homes are actually being created for the rental market. A significant segment of this market is occupied by the much maligned millennials. There are many who have not been damaged too severely by their education are working at pursuing the American dream – however they define it.

Many have saddled themselves with excessive college borrowing. Even though some make pretty good income, the education debt stands in the way of a reasonable home loan, or even an unreasonable one. This is one reason many would like to palm their debt off onto the unsuspecting tax payers who have plenty of their own debt to deal with. Because of this, some builders are working to build rentals that provide nice housing at a rental level the market can handle.

Impact on Investors

Many investors working in this same market may well find themselves looking at similar demands from their tenants. When you get into the family market many here are also looking for and extra bedroom or office. Most of the time, expanding the footprint of the home is neither practical or economical. Here is where some creativity will come into play in meeting this demands of the market.

Investors and rehabbers are usually flexible and creative people able to find ways to turn a property into something people will either want to buy or rent. Being aware of this trend will help meet the needs of the market and the profitability of the investor.

 

 

It's Still a Wonderful Life

We are officially in the Christmas and Hanukkah season. For those who chose not to celebrate or offended by this time of year, that is your choice and I respect that but please don't expect the rest of us to forego this inspiring time of year. Every economic slowdown brings with it opportunities, so that even though some are experiencing lack, others seize opportunities that did not exist before. For example, how many people ever used Zoom before they were locked in their homes? How many used carry out and home meal delivery as much as they are doing these days?

The same can be said for the real estate business. Some are prospering and some are barely hanging on. Whether it is real estate, hospitality, food service, or any other business that has been shut down or greatly diminished by the Chinese flu or government edict, there may be a sense of failure like George Bailey experienced in the Christmas classic, It's A Wonderful Life.

It's A Wonderful Life

George Bailey was so distraught over his current circumstances and even worse prospects in the future that he wanted to end his life. But he was stopped by an apprentice angel who showed George what the world would be like without him. Whether you are one who has prospered in these times or suffered financial loss there are lessons that we learn from Clarence, the angel.

We probably will never know all the people's lives we touch as we go about our lives and business. As Clarence said, “One man's life touches so many others, when he's not there it leaves an awfully big hole.” Yes, it is about much more than money – even though it may not feel like it when the unpaid bills are piling up and you can't give the kids the Christmas you want to.

Clarence also told George, “No man is a failure who has friends.” There is a corollary to this as well: no man (or woman) is a success – no matter how much money he has – without friends.

Watch The Movie

Frank Capra mellowed from the madcap comedies he made before the war. His experience filming the horrors of combat during World War II helped him better understand the stress and struggles people are capable of experiencing. Jimmy Stewart (George Bailey) was still working his way through what we would call PTSD today, from his time flying bombers and watching his friends blown out of the sky over Germany during the war. Together they created a masterpiece of inspiration for those who question their circumstances and value.

Today, isolation and financial stress have brought discouragement to many people. It's a Wonderful Life gives a break from self pity and reminds us that circumstances are temporary and can be overcome.

That is the story of Christmas as well... and we even hear that from the likes of Charlie Brown as Linus tells the Christmas story. Take the time to watch some of the Christmas movies – even those like Die Hard and LA Confidential. They also carry the message that good does overcome evil – something we all need to be reminded of these days. Turn off the news and watch Charlie Brown, you will feel a lot better.

What About Hanukkah?

Hanakkuh has it's own story of overcoming and the miraculous. Very, very briefly, in 168 BC, the Syrians, under Antiochus Epiphanes, attacked Jerusalem, killing many people and desecrating the temple with idols of Greek gods and the sacrifice of pigs on the altar. A rebellion ensued and the Jews, led by Judah Maccabee, facing overwhelming odds as they did in the Six Day War, defeated the Syrians and drove them from Jerusalem;

When the temple was being prepared for rededication, it was discovered that there was only enough oil to burn in the menorah lamp for about one day. However, day after day, miraculously, the lamp kept burning for eight days, until they could secure enough oil to keep it burning as tradition required. There is much more to this story than I can recount here. It is worth checking out to remind us that there is hope, no matter what things look like. Just remember we can live several weeks without food, a few days without water and minutes without air and seconds without hope.

The Lesson

Whether it is in personal circumstances or as a nation, when things look the worst, we need to keep moving forward, doing our best and watching for help from unexpected sources. As Winston Churchill once advised, “Never, never, never give up.”

For a boost in your spirits, whether you are experiencing boom or bust, help somebody else. One place I like to help is the Angel Tree program at Prison Fellowship. They see to it that the children of those incarcerated are not forgotten during the holiday season. It doesn't take much to let a child know someone cares about them and make their Christmas.

 

 

Active Income, Passive Income – What's the Difference?

Real estate can be a profitable undertaking. There are various ways to make money. Sometimes it comes in large chunks, and sometimes it comes in regular intervals. Every time though, there is a tax man (or woman) ready to take their portion – whether it is a fair amount or not is open to discussion. There is an old saying that we will consider today, “it's not how much you make, it's how much you keep”.

Since everyone's situation is different, the purpose of this is to help you ask intelligent questions of your tax advisor and plan your business to minimize the April 15 impact. There are carve outs and phaseouts inserted into the tax code at various times with only a tangential nod to uniformity and common sense, so it's as the say. “the devil is in the details”.

I don't make the rules, and the people who made up some of these rules are probably long gone. You will see the term “generally” used quite often in this discussion and that is because the tax code was never designed to be a unified, logical exercise. Each piece came in individually, generated by a committee that was subject to various influences and compromises.

Not All Income Is Equal

Most investors are aware of the fact that long term capital gain is taxed at a lower rate than regular income. But there is more to it than that. While old timers are probably well aware of this, many newcomers are not. In many cases, rental income is taxed differently than fix and flip income. Knowing how the tax code is structured is the first step toward minimizing your “contributions” to the Washington leviathan.

Two Types of Income

There is regular income – the kind you work for. It can be for an employer who gives you a W-2 at the end of the year. It can be from self-employment where you file a Schedule C. It can be from your interest in an LLC or S Corp where the tax liability passes through the business down to the individual owners tax return by way of a K1. These are all taxed at the individual rates, designed to extract the maximum number of dollars from the working taxpayer. There are some exceptions that we will discuss later.

Then there is passive income. Yes, you may have to do some work to get this, but generally your involvement is not as great, and, ironically, you don't pay as much tax on this “mailbox money” income.

Passive Income

We will take a look at passive income first. It is the dream of many to spend their afternoons lounging in a hammock while money rolls in the front door. When you have rental property, this is how the IRS sees you, even though you “materially participate” in the operation of your empire.

That is, they regard pretty much all rental activity as passive even though you take part in deciding rental terms, approving tenants, and making repairs, whether you hire someone or do some yourself.

The same is true if you are an investor in a rehab project and someone else takes care of the work – acting as the general contractor or doing much of the work themselves. Just do not become too involved in the day to day activities. You might say, “couldn't I just lend them the money?” The answer would be no, not if you want the income to be passive. Interest income is generally taxed as regular income.

Truth be told, passive income has the same tax rate as regular income – but – and it's a big one – unlike self employment or regular business income there is no self employment tax. That is a 15.3% savings. That's not 15.3% off your tax bill, that is 15.3% of your profit that you get to keep. Some will say by not paying that you are not putting money away for your retirement. If this bothers you, perhaps passive income isn't for you, but if you think you can do better than the social security people... go for it!

The Caveats

Passive losses generally can only offset passive income, although, under some circumstances, if you qualify, up to $25,000 can be applied to regular income. You can qualify by being actively involved in the business and have at least 10% ownership in the properties. Even that phases out at $150,000 if you are filing a joint return... less if you are single.

On the other hand, if you are considered to be a real estate professional, rental income is no different from any other.

What is a Professional

If you are seriously in the real estate business it is easy to fall into the professional classification. If you spend more than 750 hours in a year in the trades or materially participating in the business or more than half your personal service time in such activity you lose your amateur status.

Qualifying Business Income Deduction

Real estate professionals generally benefit from the Qualifying Business Income deduction, otherwise knows as QBI. With this, you can knock up to 20% of your business profit off your Adjusted Gross Income (AGI). There again, there are limitations you tax advisor can explain in greater detail. You may not benefit from this much in the future unless sanity remains in Washington.

And there is good news for rental owners here too. If they treat it as a serious business, keeping separate records for each property. This includes contemporaneous records of time spent and activities performed in the various aspects of the rental business.

Keep What You Can

Volumes have been written and people have spent years learning the ins and outs of the tax code. This article is just something to get you thinking about the impact of taxes on your financial well being. We have not touched on the benefits of operating through a self-directed IRA. It could be well worth the time of both the serious and casual real estate investors to get to know more about the tax environment. It won't make you more money, but it could save you a boat load if you do it right... but push yourself beyond the law... the IRS can do bad things to people who chisel when they file.

 

List It Or Sell It Yourself?

Many investors and some home owners with a do-it-yourself bent believe they can save a couple thousand dollars by selling their house or condo themselves. Some are quite happy with the outcome and others eventually turn to an agent to sell their property. So what does each choice re quire and yield?

For Sale By Owner

As you drive around, you are likely to see those red and white For Sale By Owner signs scattered among the standard signs featuring the face of a smiling realtor. They can be picked up at any blue or orange store. There are even companies that specialize in facilitating the process by supplying signs, flyers and other support materials.

Now that you have your sign and hopefully will start getting calls. Many of these calls are from neophyte realtors looking for listings as they begin their careers. In looking to save realtor commission, you can price the house to benefit from the saving or you can price it a little lower to make the sale easier. Then you can show the place and point the reasons it would be a wise purchase.

Of course, you will get the usual range of looky-loos and investors looking for bargains. If your negotiating technique is primarily lowering your price to accommodate objections, perhaps this is not a good choice for you. You can get some help in this area by getting a book like Never Split the Difference by former FBI hostage negotiator, Chris Voss.

When you find a buyer you can download the legal forms or get them at most office supply stores. Be sure you fill them out properly or they could be worth less than the paper they are printed on. Then take them to an attorney or title company to set up the closing. If you get a deposit (and you should) it is not yours yet. The people doing the closing are usually escrow agents that can hold it until the sale is completed.

I find it unusual to make this recommendation, but if this is your first effort at selling a piece of real estate, I would recommend a good real estate attorney. They will keep you from a multitude of costly missteps along the way That is a real estate attorney, not one who dabbles in real estate while spending most of their time handling wills and divorces.

What Can An Agent Do For You?

In many ways it depends on the agent. As with any profession, there are good ones, there are learners, and there are shysters. If you go this route, don't just pick an name from an advertisement, ask around and talk to the people who have worked with them.

The good ones will know the market and be able to set the price to be competitive so it attracts buyers. They will tell you how to arrange you house to be attractive to buyers. They will list it on the MLS and promote it to other agents. They will handle the paperwork in a legal and professional manner, and follow through with arranging inspections and all the other details that provide for a smooth closing.

For that, you pay them multiple thousands of dollars... and they will probably pay for themselves by getting you more for your property than you would get yourself. But, can you get it cheaper with a discount agent? Remember what I said about good and not-so-good agents. Like most things in life, you get what you pay for.

A good real estate agent can make a lot of money, but don't think they are making it just on you. There are a lot of expenses in doing a good job for their client including a share that goes to the brokerage that provides facilities and services to the agent. There are memberships in national, state and local realtors organizations. They pay for those beautiful signs, the digital lock boxes, advertising, driving people around showing houses. You may only see the buyer they bring you at closing, but you may not know about the one or two dozen prospects they brought through along the way.

Most are hard working people, concentrating on selling your property – they don't get paid unless you do.

How About Investors?

If you've been around a while, you know the paperwork. You know, or should know, the title companies and attorneys, depending on your area, that can do a clean closing and take care of your interests. The question becomes, is handling the sale the best use of your time? Would you be better off looking at and preparing other properties? Only you can answer that question.

If you are looking to sell the place with owner financing, you are working with an entirely different economic reality. Realtors tend to stay away from these things, partly because of comfort level, and partly because there may not be enough there to pay their commission – in which case you have no initial income for your trouble.

These are deals that are generally best handled yourself as they tend to be easy sales since there are many people unable to qualify for a mortgage. Just make sure you do a thorough background check. On these deals, a good title company is worth it's weight in gold. Along with this you would need a cooperative residential mortgage loan originator (RMLO) to put together the paperwork to be sure you don't give someone a free house – it's worth the money. Even though they are gone from congress, Messrs Dodd and Frank are still looking over your shoulder “protecting” the consumer. Mortgage brokers can point you in the right direction if you don't know of any.

There is a lot of money involved in either choice, so you may want to give it a lot of thought.

To Buy Or To Build... That Is The Question

Everybody needs a place to live. Some are happy renting and other people want a home that they own. If your preference leans toward ownership, and you have the financial resources, you have the choice of purchasing an existing property or having one built to your specifications.

Price Is Just The Beginning

Dave Ramsey tells us that last year the average cost of new construction was around $485,000 while the average price of an existing house was in the neighborhood of $309,000. Prices may be higher or lower in your area but there is still a sizeable gap between new and existing housing. New semi-custom tract houses save some money over full custom builds, but they are still around $50,000 higher than an existing residence.

What Do Your Dollars Buy You?

The big draw for many who chose to build is the ability to have a home just the way they want it with the newest materials and the fashionable colors with the perfect room layout. These things are important and they are what makes the place yours. However there is also some real value in things you don't see as well. Beneath the shiny new surfaces you will find some of the latest in home comfort systems. They are usually longer lasting with higher efficiency ratings. Beyond that, they are new with warranties and their full functioning life spans ahead of them.

While you usually won't be able to bargain about the price, there is often the possibility of asking for concessions from the builder like material upgrades or an extra feature or two.

Sounds Great! What's The Downside?

Other than the extra truck load of cash, what else do you have to think about? The most obvious is the time element. Building a new house takes months, not weeks. There are materials delays and weather delays. One summer when I was in college I worked on a masonry crew. I must say I was never in better physical shape in my life. However when we ran into a rainy spell, we only worked half the time. Brick layers sitting in their trucks watching the raindrops fall don't get the job done quickly. If you are in the northern part of the country and you don't get the job done before winter sets in, you could have several months delay. My dad worked for a masonry contractor and spent his winters doing odd jobs as a handy man since the regular outdoor work came to a halt.

If there are delays or interruptions in the materials supply, the builders costs, and your price, escalate, as we have seen with lumber prices through the Chinese flu fiasco. Sometimes this, or other financial reverses stretch the builder's finances beyond their capacity to survive. It is not unusual for some builders to have operated under several corporate entities as circumstances got out of hand for them. This is not to say don't build, but to strongly suggest you look at the financial stability of the builder.

If you are one of the first building in a new development be aware you may have to deal with the mud and the noise of construction equipment all around you. Here again, the buider's stability is important but so are the vagaries of economic fluctuations. During the 2008 debacle I was in the Richmond VA area and there were several new communities with roads laid out and a few homes, besides the sample ready for their home owners. When the financing dried up, construction stopped and the a those who moved in their almost million dollar homes were living in a ghost town with a few house started and abandoned. Where there is an opportunity, someone would come around and pick up the pieces eventually.

Then there is the punchlist. The very existence indicates that there will be bugs in the new home. Reputable builders handle this list of fixes in a timely manner. Here is where talking with their previous buyers is important to your peace of mind and happiness with your purchase.

What About An Existing House

With an existing house you can pretty much see what you are getting and you don't have to wait months to move in, unless there are issue with the seller. You will see the property and the price. If you don't like the price you can feel free make another offer. The seller doesn't have to accept, but often there is room for bargaining unless you are in a strong sellers market.

Whether you knock them down a few thousand dollars or not, you are still paying much less than a new property so there is some space to make the place to your liking. You can, and most assuredly should, have a thorough inspection to be sure you are not walking in to a money pit. If the appliances and HVAC systems work but appear to be on their last legs you can ask the seller to purchase a warranty so you don't get any expensive surprises in the first year or two.

Of course inspectors sometimes miss flaws, but they are few and far between as most have a fetish about pointing out everything that could possibly go wrong and then some. If you are happy with the place as it is presented, it could be a worthwhile purchase..

You will have saved plenty of money to update some of the technology and correct some of the updates from the previous owner to make the place yours.

Pay Your Money and Make Your Choice

Either new or previous construction can meet your needs nicely. Pay attention as you are shopping and either choice can be the right one. Just be aware of the pluses and minuses of each selection and factor them into your expectations and you won't be disappointed.

Is Wholesaling For You?

Many potential real estate investors aren't sure how to get started. They don't have the money to go out and buy houses and they don't have the knowledge and contacts to pull the deals together yet. Because of this, they start out as bird dogs or wholesalers.

Bird Dogging, Not As Easy As It Looks

The idea of bringing a rehabber or landlord a deal and picking up a couple thousand dollars for your trouble sounds pretty appealing. Picking up deals should be simple, just look for people who need to sell, right? Think about it – if the deals are that easy to find, it would appear that the pros would have already picked them up. They would be paying you for a service.

It takes some searching, some digging, some talking to potential sellers, learning their stories and gaining their confidence. Then negotiating an agreement that someone would be willing to pay you for. After that, there is building relationships with your market – rehabbers who can actually close on the place and will not cut you out of the deal. Credibility and trust are key elements on both sides of the deal along with understanding what price will get you the deal.

Wholesaling Is An Art In Itself

Wholesaling gives you some more security in that you actually have the property under an assignable contract that you sell to the investor. The subject of assignable contracts will be held for another day. The investors know what the deal is and can take it to closing if it meets their requirements. In this case you have to have a valid agreement and a deposit. It will cost you a little cash, but many owners of distressed properties will accept a hundred dollars.

Some may not take you seriously with that small a deposit. However, if that is a problem, perhaps it's not the deal for you – or you may need to polish your negotiating skills. As Ron LeGrand is fond of saying, “you can't lose a big check if you don't write a big check.”

What Makes A Deal?

Whether you are bird dogging or wholesaling, the elements of a good deal remain the same. Just becauses a property is advertised as a fixer or appears to be selling somewhat below market doesn't mean a rehabber will jump at the opportunity you are offering.

First of all, if a place is listed, even as a fixer, rehabbers are usally already aware of it. Second, those actively promoting a fixer upper, whether owner or agent, are usally thinking in terms of owner-occupants who will fix the place for themselves. For example, a house with an after repaired value (ARV) of $100,000 that needs about $20,000 in repairs will often be offered at between $70,000 and $75,000. This is not a bad deal for someone who wants to make the home their own... but for a rehabber, the numbers just don't work.

I get emails all the time offering properties with projected ARVs and estimated repair costs that show the place to be a wonderful opportunity. The reality is that some are and some are not. Here is where you can gain the confidence of your potential buyers by doing your homework and increasing the accuracy of your figures.

Starting with the ARV

We all tend to be optimistic about the deals we propose, but to get this right, you have to throw away your rose colored glasses. You will not get a good number from Zillow.

Take a tip from realtors and find 3 or 4 recent sales (not listings) of similar properties – in the same area. That means do not use properties on the other side of major boundaries, like municipalities or major highways. They may look similar but there are other factors that may not be obvious.

Look for homes with the same level of finish you are looking to accomplish. Here is where Zillow can be helpful as the pictures can tell you something about each property. You are not looking at the absolute price, but at the price per square foot. That is how you can compare 1400 sq ft homes with 1550 sq ft homes and make some sense of it. Then drop the ARV a few thousand as rehabbers may be looking for a quicker sale and not go for top dollar.

Add In Expenses

Next you have to estimate repairs. This will come easier with time and I've almost always found these estimates kind of a suggestion that didn't always come close to reality. Experienced rehabbers will do their own estimates, but the closer you are to reality, the more your numbers will be trusted in the future. Develop relationships with a couple of contractors and get a some real world estimates until you can come close yourself.

Now you know that the place could be worth and you know what it will take to fix it, you are set to start contacting investors through ads, the local REIA, or whatever method you use. Right? Wrong!

There are a few items to factor in to your proposal. First you will have to include the acquisition cost as well as the selling costs – if using an agent or not. Then there is the not insignificant carrying cost of the money borrowed for the project.

Then you can't forget the 10-15% for profit for your buyer. If this is not there, there is no reason for anyone to do the deal.

Once you have all these numbers, you can figure out what you can offer for the property – oh yes, there is one more thing: your profit! It may take a few times to get it right, but each time you will gain experience that will help you do better next time. As John Maxwell says, “sometimes you win, sometimes you learn”.

Beating The Pros

When you find a property that looks like a good deal, others may have found it as well so you have to act fast. In the heat of the moment you may want the deal so badly you push the numbers a little just to get the agreement. You will find it is not difficult to outbid the professional competition. The danger here is that you offer enough to get the deal, but you have just priced yourself into a position where there is not enough meat on the bone for your buyer – the place doesn't close and your credibility is damaged.

The second caveat is to sell directly to the rehabbers or landlords. You may find other wholesalers hungry for deals that will pick yours up only to try to assign them to other investors. Here again, this can lift the price to a point where the real buyers can't make money and the deal won't close.

In either case, instead of beating the pros, you will have beaten yourself.

Wholesaling Into The Future

Some people make a nice living wholesaling one property after another. However, if they don't figure out how to keep a house now and then, it just like a job where you have to keep working all the time coming up with deals rather than developing the ongoing residual income that means you don't have to keep turning the crank to keep the dollars flowing.

 

Shifting Real Estate Markets

It's interesting to read projections of various experts as they look toward the future of the real estate market. They seem to be seeing different factors or looking through different lenses, but that is to be expected. There are general trends, but in a county as large and geographically diverse as the US there are multiple markets and they don't always rise and fall in unison.

Escaping the Big City

In the past, we've discussed the exodus from the densely populated urban areas as many workers are now working from home and more than a few support business have shut down, either because there was no one to sell to or by dictatorial decree. The obvious result of this is the rapidly dropping cost of urban living. But there is more to this story – much more.

There is a trend among the affluent refugees to purchase vacation homes and live on vacation as the are no longer bound by commuting distances to downtown offices. Three cities in particular are experiencing this phenomenon: New York San Francisco and Miami. But to a lesser degree many other urban centers are seeing the same thing.

One such vacation spot is North Carolina's Outer Banks. It's a long stretch of barrier islands with nice beaches and elevated beach homes. Oh yes, and Kitty Hawk where the Wright Brothers made their first flight. According to the Outer Banks Association of Realtors sales this past September were up 120% over the same time last year. Even with the lock down stay-at-home orders and fear based mentality, residential sales on the islands are up over 30% for the year.

Beach Towns Aren't the Only Ones Booming

The National Association of Realtors tells us home sales overall were up 9.4% in September and median prices were up 15% year over year. People weary of urban living, the pandemic and various restrictions who have the dollars are taking advantage of the almost free financing and bugging out for more human friendly environs.

Of course this kind of increased demand pushes up the prices but it is in the process of depleting the available supply. The National Association of Realtors says there was only a 2.7 months supply of homes on the market. This is the lowest inventory level that they hae seen since they began this measurement in 1983, Elementary economics tells us that greater demand puts more upward pressure on pricing.

In middle America, Kansas has not been left behind. They are not on the extreme end of the scale, but they have just been chugging along despite the best efforts of the Chinese flu. They expect to see a 1% increase in home sales and 12% increase in new home permits with a 4.7 % increase in home prices this year and another 5.8% increase next year. There are always winners, even in uncertain times.

Of course, not every state can claim these numbers. Some have not been permitted to re-enter the American prosperity. Hopefully that will change soon.

How Long Will This Last

The folks at The Capitalist see the trend carrying into the new year as they see major cities hemorrhaging population. The folks at Fast Company are not so optimistic as they foresee a “dark winter”. Many economists have many opinions. What we see here is more evidence of the idea that if you would lay all the economists in the world end to end, they still would not reach a conclusion.

Not Everyone Is Participating

The retail and hospitality industries have taken a particular beating as people have holed up in their homes. Resort towns were turned into ghost towns. The Outer Banks, mentioned earlier, did not suffer the fate of more entertainment based destinations as the draw is more like relaxing at the beach.

There are people all over the country that aren't working that would love to return to their jobs. There are some jobs that are gone forever as many businesses could not survive the lockdown orders. Some who have never entered this part of the real world see all business owners as rolling in cash taking advantage of the poor defenseless consumer. Sure, some make a good living but they depend on the steady cash flow of customers coming through their doors. When that stops, many businesses close and people lose jobs.

On top of this, there are always those with economic difficulties that have their struggles, but this episode with the Chinese has multiplied their numbers dramatically. Then there are those who are working that just can't get approved for the low interest loans that are available to those with gold plated credit.

There will be cries for more low income housing as the eviction moratoria come to a close, Is this the best answer? I have to turn to the great American philosopher Groucho Marx when he told us, “Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” We have seen more evidence of his wisdom in recent months to ever doubt his words.

Can Investors Help?

Some investors I know love Section 8 housing for the guaranteed payments they provide. Others won't touch them. I tend to fall into the latter cagegory, but that is a matter of personal philosophy, but it may be an answer for some.

Once people are back at work and generating some income, it may still be difficult for some to come up with the downpayment or even a security deposit. One approach some have taken is using a surety bond in place of a security deposit, if the income was there. It may even cover your risk better than just one months rent.

What about providing homes with owner financing? Almost by definition, many people in the position just described will have little to put into a downpayment. Perhaps they have something to trade, like a car or boat they don't really need, Some sort of bond may protect your investment in these cases too, although it won't provide the immediate income of the non-refundable deposit. Some thought and a little creativity may take us to the solution people are looking for. Never underestimate the ability of the American entrepreneur to find solutions to problems.

Will Low Interest Rates Last?

Many people are buying a home or refinancing theirs at today's record (can anyone say ridiculously) low interest rates. These rates have been a nice boost to the real estate market at a time when other factors could have done significant damage.

The Law of Unexpected Consequences

Low interest rates have been a stimulus of their own to many industries where financing is the general rule. They have increased the number of buyers or, in the case of real estate, permitted buyers to purchase larger, more expensive, properties – for a while. However, this increased demand had the not unexpected effect of putting upward pressure on prices.

This increase in prices – also called inflation – is the very thing the Federal Reserve Board is in business to prevent, or so we are told. At this writing this rate is an “acceptable” 1.4%. However, if one knows much about economics and the calculation, we know the number is bogus since these figures do not include food or energy because, as we are told, they are far to volatile to be meaningful. Anyone who uses energy and buys food has seen where these prices are going.

While this bit of economic slight of hand would lead one to expect the Fed to begin bumping up the interest, even they understand that our economy weakened by the Chinese flu inspired shutdowns would not respond well.

Two Sides to the Low Interest Equation

While low interest makes large purchases more attractive, it is not without a negative impact as well. Many items require a down payment. Even the security deposit on a rental is a larger chunk of money than many people living paycheck to paycheck can easily lay their hands on.

The traditional way to get the down payment for a home is to save the money. The same low interest that makes the purchase attractive makes saving for it most difficult. The FHA has artificially solved this problem with low down payment options. Yet, with the sub one percent savings rate and sub two percent certificate rates even 3 per cent down payment is a reach for many.

A while back, when I was assuming control of inherited accounts, I was sitting across the desk from a bank branch manager. She was a nice lady who meant well as she recommended one of their “high yield” CDs. I looked at the numbers she showed me and told her, in a nice way that she should describe them as the best interest they have, but please, don't call them high yield.

Looking Ahead

Can the banksters function at 2 percent for long? It is not the way to their prosperity and their magnificent edifices. Many have compensated by chipping away at their customers with more and higher fees, while cutting operating expenses and services – encouraging automated banking rather than face to face interactions. In some ways this is a convenience for the customer, but it is a big cost savings for the financial institution.

In my younger days it was not unusual to make the weekly trip to the bank to deposit my paycheck and get to know the people who were handling my money. Not so today with ATMs and smart phone deposits. But is it enough to survive? Will the Fed be able to maintain the current interest?

We have to remember that the Federal Reserve, despite it's name, is not a government agency. It is a central bank, owned and operated by the banking community. The question is: when will the prime rate begin to rise and what impact will it have on real estate and on the economy as a whole?

Thin profits on loans, business loan failures, forbearances, foreclosures, will put more pressures on the beloved underwriters to make fewer and fewer errors in judgement – loans will be harder to get until interest rises and gives them more of a cushion. Even today, a majority of people cannot get a home loan while government types clammer for more “affordable” housing.

Is this all bad? Individually it may be, but loose lending practices are one of the factors that led to the 2008 debacle. The impact will be moderated as savings accounts once again pay reasonable amounts to savers.

Back to Dave Ramsey

While investors have to deal with lenders, the economic world we live in has been created to encourage us to mortgage our future by creating debt – for houses, for cars, for massive TVs and any other shiny trinket our heart desires. We are assigning future income to pay for today's enjoyment. Perhaps that enjoyment would be greater if it were accompanied by more equity and less debt that makes the prospect of an economic downturn to difficult to consider and more difficult to experience.

The rich rules over the poor, and the borrower is the slave of the lender. Proverbs 22:7

We seem to have forgotten this wisdom as we take the bait of low interest and and rush to enslave ourselves to the banksters.

Show Your House – Sell Your House

If you are trying to sell your house, whether it is your residence or one you rehabbed or inherited, sooner or later it comes time to show the property. After you have the place all polished and shined it's time to start advertising.

Getting the word out

The best advertising techniques is a topic for a whole other time, but we will hit the high points. There are various online options, including Craigslist and various For Sale By Owner sites.

Take some pictures and make up some flyers. You may want to have the pictures made into a short promotional video for your online ads. The flyers you can pass out around to the neighbors – perhaps they will supply your buyer as they help decide who moves in the neighborhood. You can purchase signs at most big box building supply stores. When you do, get the tube or box to hold more flyers and keep them stocked.

Invite them in

When people begin responding to your ads you will need to start showing your house. Here is where videos can be a real time and life saver as it could weed out the buyers not really interested in your property. Whether you are living in the property or not, it is usually best have an open house scheduled for them to come by. Some will not be able to make your time and it's OK to deal with that, however it's best to get them all together at once for them to see others interested in the property. Have a sign in sheet when they come in. Realtors do and so should you. Get their phone number and/or email so you can follow up with them, even if they are not interested in buying. You may learn something to do better next time.

Preparation

Now is the time to get the place super clean. Hire a cleaning person to make the place shine if you have neither the time nor inclination to scrub down everything – especially the kitchen and bathrooms. If you have a cat, you don't notice the litter odor, but visitors probably will. There are sprays available to eliminate that aroma. This is definitely the time to have that extremely honest friend come and walk through your house with you. They will notice things you live with every day. Speaking of aromas, baking cookies, even the ones with dough that comes in a tube make the home feel more homey and can be served to make the visitors feel more like guests. Yes, serve the cookies and let the visitors enjoy them. Try to keep an eye on the offspring that they don't grab them by the handful.

If you have a lot of family pictures, it is good to put them away while you are showing the place – especially if you have children. You want people to start thinking of the house as their place, not that they are buying your home. Beyond that, the less visiting stranger know about your family the better.

Make sure the lawn is cut and trimmed, and the leaves raked if it is that time of year. Pets caged or visiting relatives - and the back yard cleared of “land mines” if you have a dog.

Staying Safe

There are some safety tips if you are showing the place alone. I need to add at this point that many come straight from realtor training as supplied by our local police department. This is not to frighten you but to help make sure you enjoy the sale. It is best that you have your car parked in the street if it is possible so you cannot be blocked in. This is most important when you are alone on the property. When taking people on a tour of the house, direct them into bed and bath rooms along with any enclosed area rather than going in first, then stay by the door. Most people are great, but just be careful and stay safe 

Relax

People usually enjoy looking for a house. Occasionally you will find some that try to be intimidating. Ignore it and enjoy the process yourself. I've met some pretty good people showing houses. When it comes to negotiating the deal – that also is the subject for another day.

For now, know what you believe the place is worth and don't let someone low ball you. The whole process from start to finish is covered in our eBook Sell Your House Like a Pro!!!

Cash For Keys – A Better Option

Any time you own rental property you are dealing with people and the ups and downs in their lives as well as your own. Sometimes the evaluation process does not catch problem tenants and sometimes good people with good histories run into financial or health problems no one could foresee.

Many years ago we rented a house to a nice family with a special needs child. They were good tenants for well over a year and they took good care of the property. However, eventually their problems became our problems and rents started coming in later and later. We were fortunate that they were reasonable people. After we discussed the situation with them, we decided to tear up the lease and part company as friends... yes, we kept the deposit.

Other Options

We could have tried to hold them to the letter of the agreement. We could have gone to court to try to get money they didn't have. We could have had the Sheriff dump all their belongings on the front yard. We could have developed such a toxic relationship that they would have trashed the house and cost us thousand to repair it. Fortunately, none of this was not necessary or even considered.

An Expanding Problem

Missing rent checks are always a problem, even in the best of times. However, during this period of enforced economic shutdown, more people who have regularly been making timely rent payments are finding themselves in the awkward situation they did not plan on. Their problems are becoming the property owners problems.

Adding to the property owners problems is the moratorium on evictions. While this is not universal and doesn't cover every situation, it is a way of shifting some of the pain to the property owners. Tenants must qualify for this protection it does not cover every situation. Even for those covered, it will not go on forever, nor should it be necessary, unless we, as a society, makes some grave errors this November.

A Necessary Accounting

Sooner or later, there must come a day of reckoning. Either the bills for the property cannot be paid or a paying tenant must be put in place. No fancy economic theory from an ivory tower academic can come to any other conclusion.

This is not saying the landlord should not work with the delinquent tenant, nor that they should be treated as an enemy. But what do you do?

The Normal Procedure

I know of some property owners who begin initial procedures when the rent in a few days late. It may be necessary, depending on the nature of the property and renters, but for regular, hard working people who just had a big car repair bill it may be overkill and begin an adversarial relationship.

It could also be an expensive one. Depending on the state, it could cost you hundreds to thousands of dollars and take from a few weeks to many weeks. It may create such animosity that results in a lot of destruction in your empty house. I've seen holes in walls, appliances taken, cement dumped in toilets, and cabinets destroyed or stolen by angry people forced from their homes,

Another Approach

Many landlords have found a Cash for Keys approach works well in some cases where they give the tenant three to five hundred dollars when have vacated the home – if they place is not damaged and littered with trash. It gives them and incentive not to take their frustration out on your property.

Some will say “Wait a minute, these people have lived rent free for several months and now you want me to give them money when they leave?” It seems like you are rewarding bad behavior. But who is the real winner here? If you go through the eviction process, it will cost you money. If they trash your place, that could cost you lots of money. And you can bypass this for five hundred dollars? That makes you the winner. Forget that they come out OK. We are not in business to punish anyone. As a straight business decision it is the best outcome to a bad situation.

The practice is not really something new. Banksters have been doing it for years with short sales and foreclosures. If the house is left in good condition, the borrower is given something like three thousand dollars moving money to make the process go smoothly and not damage the property.

Some Cautions

Do not give them the money until everything is out and you have confirmed it. Unfortunately, not everyone is as honest and reputable as you are. Once this is confirmed, change the locks immediately! You don't know how many keys are floating around. Then take whatever other steps are necessary to secure the property. You may want to only leave one operating access point to the building. Neighborhood kids like to explore vacant houses if they can get in. The recently removed tenant may try to come back and do damage or take something. I've had an unsecured lawn mower taken. Lesson learned.

You never know how much hostility there is in the mind of the exiting tenant. You may not want to be alone when you confirm this exit. Or go through after they are gone and meet them at a public place to give them the money. Just keep your personal safety in mind as these days too many people see violence as a way to settle their issues. You are not the bad guy, but the person leaving their home may see things differently.

Listen to the tenant. Do what you can to help with a smooth transition. Be safe, some people can be very emotional, but this can often be diffused if you are a good listener.

 

Next Step in Home Automation

We have been adding items to our homes for many years that have made our lives easier. Garage door openers, motion sensing porch lights and programable thermostats were just beginning. For those of us rehabbing houses for resale adding such devices sweeten and help close deals. Why is this? The techies find the gadgets fascinating, but everyone likes the idea of an easier life.

Tying the Gadgets Together

In recent years, using WiFi or hardwiring, many of these useful devices have been connected, sometimes into really useful networks and other times, it seems, just for the novelty. I find internet enabled refrigerators interesting, but have not brought myself to feel the need to get one. Granted, the price tag alone puts them beyond the reach of many consumers and leaves them in the domain of the die hard gadgeteer or the practitioner of conspicuous consumption.

Other things have actual practical uses, like video door bells and internet capable dead bolts. Working mothers get a sense of security when they see their children arrive home after school. The more affluent can unlock the door when the cleaning people come to their home. This approach is much more secure than leaving the key under the door mat.

These networks can pretty much run the whole house. My neighbor can sit in his living room and turn on lights in different parts of his house. He can adjust the temperature. He can lock and unlock his front door. And he does this by just talking to the system. And there is so much more. You can connect security lights and cameras, security systems, robotic vacuums... and the list goes on and on.

For myself, I'm happy controlling some lights and talking to my Google Mini. When I am traveling, I can let the family know I am thinking about them by flipping some lights on and off from my cell phone app.

A word of caution accompanies this capability, just like with your computer and phone. It is fairly easy to tie all these gadgets together. So easy, that the recommended security protocols may just be skipped over in haste to see the new creation working. This is something that is often overlooked because who wants to mess with your lights and AC unit? Your network is visible to your neighbors or that van parked across the street. You have teenagers living nearby? It may be innocent fun – or it may not be.

Ready For Prime Time?

These things have been around for several years now. Time for most of the bugs to have been found and squashed. This is more than just nice to see. It is essential. I have never wanted to be the first to try any new technology – with good reason.

Many years ago, during the early years of personal computing, I was at the largest MicroAge computer store in the country. The place had such a large volume that it sold AT&T computers to AT&T offices cheaper than they could get them from internal channels. Yes, AT&T made computers at one time and they were pretty decent units. However, the pervasive utility company thinking kept them from being responsive to changes in the market and they are no longer in that business.

This was about the time IBM was promoting the PS2, and Lotus 123 was the dominant spreadsheet program – prior to Micro$oft gaining control of the office workspace. The first version of DOS was being replaced by DOS 2.0 and all the techies jumped on this new and improved operating system.

It was not long before it was discovered Lotus 123 would not work on the new operating system. Of course DOS 2.1 came out shortly thereafter, followed by other revisions that would run the required Lotus program.

Lesson learned, and confirmed many times since. I am happy to let others work in the bleeding edge of technology. I recommend this for any technology. New stuff is cool but it is not possible for everything to be tested completely in every situation before releasing to the eagerly awaiting public. Self driving Tesla's are a current example.

This is why I am perfectly content to let others be the final testers of the product. Beyond that, prices usually drop after the initial introduction. That way I save time, aggravation and money.

Mature Technology

While are always new additions to the automated home, many things have been around for a while – long enough to have discovered most of the holes in the systems. Nothing is completely secure or foolproof, but in the years these things have been on the market, vendors have learned much.

It's a never ending game. Security holes are discovered and patched. Intruders don't just quit an look for other activities. They find new holes, and when discovered, those holes are patched. Ad infinitum!

Will you be perfectly secure with your whole house system? Total security is not possible, but you can reduce the possibility of intrusion by taking recommended precautions. Just consider the small chance of issues as the price for the convenience of the automated and connected home. It's really no worse than your internet connection.

Too Big a Price Tag?

If you like the idea of the automated home but find the checkbook a little thin for the entire system. You can put up motion sensing lights economically. If you like the idea of video monitoring but find the cost a little steep. You can give intruders the sobering impression they are being watched with dummy cameras for about twenty dollars each. Often that is enough, along with some kind of security system sign to keep them moving down the block. Your neighbors may not be happy if their home gets robbed, but it won't be yours.

So the automated home may be the ideal, but if you don't want to deal with the connection or security issues or you don't want to spend the money, sometimes the appearance will just about as good.

Lessons From The Lockdown

There is an old English saying that goes: it's an ill wind that blows nobody any good. If we look for the good, even in a bad situation we can usually find some. We can look for some lessons we learned in our recent foray into house arrest and isolation – and there are some things we have learned and are learning as we move forward. Some of them are changing the face and needs of society and the places where we live.

Keeping In Touch

We have learned that there are ways to keep in touch with people all over the country and over the world without leaving the comfort of our home or office. We can see and hear each other without fighting crowds, traffic, paying tolls and parking.

While some of this technology has been with us for years, recent events have brought it to the forefront with some nice refinements. Many years ago I worked for a utility company in Richmond VA and we would periodically have visits from a facility in Connecticut... among other places. This would involve one or two people spending a day or two, accumulating travel expenses and being away from their regular duties.

When we began using teleconferencing, we could get whole teams from Virginia and Connecticut together to discuss common situations – and it only took an hour or two out of our day, with no travel time or expense. Zoom, and similar products, have given us this capability on steroids. The transportation and hospitalilty industry losses have become software and hardware suppliers gains.

This is not just a corporate gain, but many real estate investor groups have taken to meeting online when face to face gatherings were forbidden. What may have been intended to be a roadblock just became a minor annoyance.

Abandoning the Cube Farm

With the ability to communicate came the ability to actually work from home with no need to head on into the office to get much of the work done. For some this has been a blessing and for some, it has been a curse. For commercial real estate, it has shown a decrease in the need for high priced office space – and this is a lesson that will be carried into the future.

It has also reduced the need to live near the urban business centers and resulted in higher residential vacancy rates in these areas. I once knew several people who, because of real estate prices and quality of life issues lived in eastern Pennsylvania and car pooled on Rt 80 all the way across New Jersey to their jobs in New York City. To me, this was madness, but it was their choice. Today, that sort of thing is no longer necessary.

Becoming More Self Reliant

Since many of the places that made our lives more pleasant, or bearable, were deemed by our betters as being non-essential, we have found other ways to meet our needs. For instance, we used to eat out frequently, but for a time, dining in was forbidden. This provided the opportunity for meal delivery services that was not there before and will continue to some degree into the future.

Fortunately, for those of us who live in a free state, this activity has been restored months ago... and, in some ways is more pleasant as the restaurants are not as crowded, both by decree and because many people are still hiding out in fear of the plague.

I have read that many people have forsaken their gym memberships – in places where they are available. I see gym owners in many of the highly controlled states are fighting for the ability just to resume their business. We will see how many are left when the dust clears.

For myself, prior to the lockdown, I would be there three days a week. When they closed down, I, like many found ways to exercise at home. When, at last, they were given the green light to proceed, I went out there once and did the temperature check and wiped down the equipment before and after each use. But the second time when I pulled into the parking lot, all I saw were two ServPro trucks and workers unloading their equipment. Someone had snuck, or is it sneaked, the virus into the building and it had to be eradicated.

I went home and back to my own routine and haven't been back since. It looks like I am not alone and I have to wonder about the viability of so many similar businesses – and the implications for the use of some commercial space.

Pictures and Videos

Realtors and investors have been getting more creative in ways to buy and sell properties. Some still do door knocking, but many people are not happy about letting others into their homes. This also applies to showing the houses. I see some open houses, but not many, even though we are living in a free state. Reliance on photographs and videos has increased along with the sophistication of these items. However there is still no substitute for an in-person visit.

Lessons of Limitations

How many times has a house looked simply wonderful on the internet but turned out simply awful in reality? As an old photographer, I can say it is not difficult to make most anything look good by selecting your shots and post production editing. Pictures are great for initial screening, but not for final decisions. They don't show the twenty-five year old car up on blocks in the neighbors yard or the spongy floors in the bathroom.

While we can see and hear each other over our laptops, it does not give us as good a feel for the conversations we are having. If we know the person well on the other end, it is not so bad. However it is not a perfect substitute for meeting face to face and the impression of the grip on a handshake. For the time being it is what we have and we need to make the best of it, but accepting it as a “new normal” will only let is become used to the isolation it breeds.

The cloud meetings work relatively well in the corporate and organizational world, but in the real estate world we are working with individual home owners and buyers who may not have this communication capability. One solution is to adopt some kind of technology like my doctors office uses. He sends me a link on my cell phone and I give it permission to access my camera and microphone and we can see and hear each other. This works fairly well, but he can't take my temperature and check by blood pressure. Again, it is better than nothing but far from ideal.

Human Factor – Rejecting the New Normal

We as human beings are not meant to live in isolation, we are social beings. While some in the medical community are crowing about reduced infection rates, they ignore the increase in depression and, its ultimate expression, suicide. Some of this is simply from being alone with our negative thoughts, which are stoked by daily servings of television news, or by economic ruin brought about by the closure of “non-essential” businesses. Our GDP took a tremendous hit by closing down the economy, but the human toll goes on, unmeasured and generally unreported

Making the Kitchen Pop... on a Budget

Whether you are getting your home ready for sale or doing a complete gut job, kitchens (and bathrooms) sell the property – but you already knew that. On the other hand, you may just be looking to fix the place up for your own enjoyment, possibly with an eye to the future.

You can do a great job with $50,000, $75,000 or $100,000. What happens if your budget isn't up to those numbers. You can still make the kitchen a cut above the others in your price range. A hundred fifty thousand dollar rehab project doesn't work well with a kitchen taking up one third the budget. So how do you make your project stand out?

Appliances

Appliances are one of the first things potential buyers see when they walk in the room. If appliances aren't new, they need to be cleaned up to look new – as possible. If you are starting from scratch you can get some pretty inexpensive units at the blue and orange stores. If it is a low end rental, you can even find them at used appliances stores. They are working units that come from kitchen remodels.

But that's not the way to get the best price for your property. Cheap appliances are easy for your buyers to see. But you don't have to spend thousands of dollars for a range or refrigerator. Stainless steel has become pretty much expected in today's new units. Individually, they are only a hundred or two more than similar white or black models. Even with laminate counters, stainless steel makes a nice appearance. Although I have seen some pretty striking installations with white or black appliances. Don't let price scare you away.

Cabinets

If you can afford new cabinets, they make the place look great and are a nice selling point with features like soft close drawers and unique configurations. However, if the cabinets you have are solid, replacing the hardware can give it a fresh look. If the finish has seen better days, a good coat of paint can bring them up to todays look. It can also turn a dark kitchen into a bright and airy room. For a little more, you can replace the door and drawer fronts, This costs more than painting, but is a lot less than new units.

Counters and Backsplash

For entry level homes laminate counters can do nicely, but be careful of getting those nice custom made units... those prices are approaching low to moderate granite and quartz tops. You may want to go up a little for a big jump in the wow factor. However, if the project won't support that, the pre-formed units at the big box stores and look much better than than old worn and stained tops. If you have the skills and equipment to make your own custom tops, go for it, but you may still want to check out granite and quartz. Either makes a long lasting low maintance counter for nicer rentals as well.

I tend to use subway tiles for backsplashes. The are inexpensive and easy to work with. They are easy to clean and look a lot better than spaghetti stained walls. Don't let my preference be yours without checking out the range of materials, The subway tiles run a couple of dollars a square foot, and you can go from there up to fifteen or twenty dollars a foot on up and up, If your budget is on the lower end, the subway tiles, make a really nice look and they do it for a long time and are good even for mid range rentals on up.

Details

Here is where a few hundred dollars can make your place stand out from the competition. A high end faucet package, a unique range hood, or light fixture that is not usually found at your price point can seal the deal for people whose taste runs toward a nicer home than their budget will allow, You are giving them at least part of their dream home at a price they can afford.

Floors

Tile is always a good choice, but can be pricy. There is a temptation to put laminate down. It looks good and is relatively inexpensive. Don't do it! Most laminate does not deal well in areas where it can get wet. The layers separate and your buyers or renters will be most unhappy.

There is a new product I have not used but looks like it has potential. It is a thinner tile that is made to be laid on top of existing tile flooring that is solid, but looking like it has seen getter days. It is not cheap, but it saves the demo work of removing the old flooring.

A less expensive approach is luxury vinyl. It is just slightly more than laminate AND it is waterproof, It does fine on kitchen floors and looks great. There are even groutable versions that I have had realtors get down on their hands and knees to confirm it wasn't ceramic tile. It is a nice touch and works just as well in bathrooms.

Catch Their Eye

The point of all this is that replacing or fixing up an old kitchen works better if you aren't just removing the tired materials and replacing it with the same thing, only newer. It is an opportunity to make improvements that make the place sparkle – and easier to sell or rent, if that is your inclination,