Economics 101

What happens to a market when you take away or threaten to take away the artificial sweetener of free money?

Answer: You get less Buyers

What happens to a market when supply increases more than demand?

Answer: Prices go down

How many owner occupant homes can a first time buyer acquire (and get the stimulus money)?

Answer: Only one obviously

If you were a rational buyer and wanted to buy a home and you had the means would you take advantage of the $8,000?

Answer: Yes of course

These simple Economics concepts can tell us what is happening in most real estate markets. Prices are going to go down as artificial stimulus is withdrawn, first time buyers demand is pulled forward and supply increases.

Invest wisely as opportunities in 2010 could make 2009 look like an appetizer

Good Investing

10 Predictions for 2010

With the closing of one year and the start of the next I thought I would take some time and jot down some predictions for 2010. I want to do this for a couple of reasons. First it allows me to shares my thoughts on the next 12 months with a lot of people who can point out my errors. Second it allows me to look back in 6 or 12 months and evaluate how I did reading all the tea leaves of real estate investing

1) We will see the peak in residential foreclosure in 2010

2) The Case-Shiller Index will turn negative and continue negative until July or August which will prove to be the bottom people have been looking for

3) Duplexes – Quads will prove to be great buys in 2010 assuming you can get financing as banks will want to dump these as rents continue to get soft and loan quality continues to get worse

4) Great Long Term Holds can be purchase in 2010

5) Rents stay soft for all of 2010 (But 2011 will see this turn around)

6) Small Commercial apartments 5-40 units start to foreclose in greater numbers providing excellent buys late in the year

7) Government extends the first time buyer program at least 1 more time as real estate stays soft through Q1

8) The Fed stays on hold all year and does not raise rates in 2010

9) Stock market (Dow) will retest 7,500 before June 2010

10) Home building industry consolidates to remove capacity from the system as new housing starts stays weak throughout 2010 as we burn through the foreclosures

As always let me know what you think.

Good Investing in 2010

One Data Point is not a Trend but …

So I just heard from one of my REO agents. She indicated that this past week she was given 20 REO properties where she rarely saw more than 2 or 3 a week the past 6 months. She also expects more next week in a short week.

I don’t know if this is a trend yet but the backlog might finally be hitting the market.

Curious if you are seeing an increase of REO’s in the MLS in your market.

Good Investing

Real Estate Investing will TEST you ...

To the new investors looking to get started make sure you and your significant other is totally committed because investing in real estate will test you. When you get started everything is great. Deals seem plentiful and you are making all the correct moves. You may even buy a property, get it rented and bring in the repairs under budget.

But then boom the roof leaks, the water heater goes out and the tenant doesn’t pay rent and skips town. Stuff happens with real estate investing. So be prepared and make sure you have the support of the family at home because there will be months that will surprise you.
Remember if Real Estate Investing was easy - EVERYONE would do it

Good Investing

Looks like inventory on the low end is building again

I might be wrong but over the last 10 days I am starting to see a growing number of low end houses for sale. Which could mean the buyers have gone away for the winter OR the banks are finally releasing some inventory. Either way this will certainly have a negative impact on December sales.

My prediction is that December is reported as a negative month when all the metrics are released in January.

If this is true we just had what stock investors would call our "Dead Cat Bounce". As a pet lover this is a terrible term but in this case the real estate market just had a bounce and we may see a dive deeper with more foreclosures and short sales and lack of new buyers ...

Is the media Negative or Positive on Housing as Investment

I only ask as I saw an article in Yahoo Finance that said Housing Flipping is back and it documented a couple of very impressive examples of profit. I know it is not that easy especially when you’re buying on the court house steps as the article discusses. But telling someone they can make 100k simply by buying an REO and selling it is bound to bring in more new investors.

I don’t know about you but I get really nervous when the main line media starts highlighting Real Estate as an easy, quick and lucrative business. This type of attention seems to bring in the masses and start a nasty bubble. Could we really be starting another bubble in housing so soon?

I doubt it as financing is tight and unemployment is too high, but more articles like this are sure to make great investments harder to find.

I am curious if you are seeing the more negative or positive articles in the media. In March it was 100% Negative with Zero Positive. Today I would guess it is 70% negative and 30% Positive. What do you think?

Good Investing

Market seems to be changing again:

In my investment market I am starting to see signs that the market is changing again. In the early part of 2009 if you had cash you could close on some very nice deals. Then the world changed with supply constraints and artificial demand looking to scoop up cheap homes.

As an investor I am happy to report that I believe the market is changing as I am starting to see inexpensive homes come on the market in greater numbers. I am also seeing small multi families (2-4 units) come on the market in great numbers. The final bit of good news is that small commercial buildings are being listed (5-20 units) at reasonable prices.

I have looked at several apartments that appear to be ok deals but they require 25%. The market in this space will turn when the bank holding the property chooses to finance the building at 10%. If they simply changed the required down from 25% to 10% they could move some properties. Hey they could be like the FHA and only require 3.5% down…

Good Investing

So does 1.5% make a difference???

In my investment market the most popular loan programs are sponsored by FHA. Which only requires 3.5% down payment for first time buyers and given the $8k tax credit meant each buyer would have to come up with very little out of pocket cash when they netted out the tax savings.

As we are relearning if the home owner has next to no skin in the game they are less motivated to keep paying on a depreciating asset. Given the poor performance new FHA loans, FHA is looking at raising the requirement almost 30%. But on a nominal basis the change will only take it from 3.5% to 5%. So why does 1.5% make such a big difference?

People are suggesting that this small change is going to put a damper on the housing market. I say are you kidding me. The market is going to cool down because the supply of housing is going up and demand is going down.

If you don’t have 5% or even 10% for the down payment keep saving. Owning a home is a great thing but it can not be just given to everyone.

Don’t blame FHA changes for the coming slow down in real estate sales. If FHA doesn’t address their guidelines now they will just become the next sub prime lender and all of us tax payers will feel the burden of bailing them out.

We need to create loan programs that encourage investors to own real estate. We need to encourage capitalism to insure we turn this thing around.

Good Investing

Said it before and I’ll say it again:

If you are a new investor you have to get your hands dirty and touch your real estate. It is not about just buying properties or investments but about putting a long term business together.

I didn’t always get that. I thought I was setting the world on fire just buying multiple properties and that would set me free. Please learn from my mistake. I invest 3 hours away so it is not easy for me but I now spend several weekends a month in my investment market turning properties as they go vacant.

I strongly believe this makes me a better investor. It also gives me experience as I work my way towards investing full time some time in the future.

Good Investing

As an Investor what should we hope for????

So I am torn on the following question and would appreciate your feedback.

First off I think is more than obvious that the government has their finger prints all over the single family home market via tax credits, loan programs, etc. My question is as an investor do we want them involved???

If the government were to suddenly say no more help go figure it out on your own a couple of things would happen. Prices would collapse in many places, banks would be more inclined to reduce loan balances and the market would clear as economist say. But it would likely be very-very painful!!!! But probably last no more than18-24 months as the seeds of capitalism would start to bloom again in the bloody aftermath of the market turmoil.

The other option is the government stays involved. This likely means less of a dramatic price drop but it also means the market is not working optimally. I suspect this means that we will just bleed price drops and flat line at some point for years, perhaps as long as 5-8 years.

But again as an investor do I want the violent price drop that would produce plentiful deals or the slow train wreck that will produce deals for years to come.

I suspect the answer lines in how large a pile of cash you have today. If you had access to lots of cash today you want the violent price drop but if you are like most investors looking to add deals as you secure capital you want the longest runway possible.

So in the end I guess I am glad the government is involved …. As a capitalist this goes against my nature but as an investor that wants the best for my family I need the long runway to secure lots of deals.

Good Investing

Be Thankful for this Investment Opportunity

There are lots of reasons to be thankful but given this is a real estate investment blog I just want to say lets be Thankful for the opportunity to invest in this market. In a decade people are going to talk about all the money made during 2009-2010. I believe there are always deals in real estate but you may never see opportunities like we have today again.

Do some research and look for your good deal

Good Investing

Don’t believe the Hype!!!

So the latest real estate numbers have been fairly positive but unfortunately they are laced with artificial sweeteners and they can’t be believed.

Let’s see:

We have the $8,000 tax credit that was set to expire and wasn’t extended until late in the month. So demand had to be pulled forward.

We have foreclosures and short sales moving up the real estate curve so these new distressed sales actually raise the average price.

Various supply constraints of loan workouts, extended short sales, etc.

In the end this reporting period will likely look like a blip rather than a trend as the subsequent months show reduced demand and increased supply.

We are not out of the woods just yet

Good Investing

Rents are getting soft so be conservative

As you might expect with Single Family housing prices falling more and more investors are choosing to buy rental properties as investments. This means a couple of things are likely to happen in the short term.
First the floor of the market is either in or very nearly in as first time buyers and investors snap up properties that are either cheaper to own or produce oversized cash flow returns. As more properties are converted from owner occupant to rentals in the short term we are likely to see rental rates fall as supply out paces demand.

I have already seen rental rates in my investment area take a $50 hit on several of my properties. So when you are buying today run all of your estimates and calculations with very conservative numbers. For example if you think you can get $950 a month, run the same calculations at $900 or even $850. If the deal still looks good you really have a great deal on your hands.

Something else to keep in mind is has rents fall the value of multi family properties will fall which may cause additional distressed sales of small multi families as many of these suffer from the same type of over financing.

As a new investor understand that in the short term rental rates are falling so buy with this in mind. But also understand that this will turn around in a big way as inflation takes hold.

Good Investing

Being Patient but Persistent Pays off BIG TIME!!!

If you have been an active investor over the last year or so like I have you have probably noticed a very different market at the end of year verse the start of the year. In short deals were easy to find during the first 4 months of the year as long as you had cash or a solid hard money lender. But then the market changed. The government created all these programs to restrict supply and increase demand.

The solid cash flow house went from easy to find to almost impossible. Most weeks I would make 10-12 offers on houses that meant my criteria and in every case I was now being out bid and sometimes by a large margin. I remember several houses going for 40% more than list price. Many houses would get 10+ offers within the first 48 hours. It started to feel much like 2005 all over again (Except the prices were much lower).

I refused to play in bidding wars and went 4 months without locking up a property which is my longest stretch in 5+ years. It wasn’t always easy but I stayed patient and just kept tracking properties. It was about mid year where I identified a particular duplex that would be a solid addition to my portfolio. I made a few calls and offered prices that were about 60% of list price. To say my offer was laughed at is not an understatement as the agent already had 10+ offers.

Well the property was quickly put in escrow but the buyer couldn’t close. So it came back on the market. I made the calls again and offered my same 60% of list price and was laughed at again. I was told they had multiple buyers willing to go over asking price. Sure enough it was in escrow again in a couple of days. This happened 4 times over 6 months. Each time I would call and offer the same amount and guarantee a close.

Well after 6 months and a dozen or so phone calls I just put this property in escrow at the exact number I offered 6 months ago. After doing my detailed walk through today with my repair team I am even more excited about this property. It will be my BEST DEAL of 2010 by far.

Lessons I learned from this. Be very comfortable with your numbers and don’t over pay if the market gets crazy and starts over paying. Keep a list of the properties you like as they may come back especially in this market with tight financing.

Most important always stay patient but persistent

Good Investing

Let’s start 2010 Goals Early

Good news I just granted you 13 Months to accomplish your 2010 goals. Sit back over the next week or so and think about what you want to accomplish. The Thanksgiving week is a perfect time to do this as you are likely around family and friends having a good time, instead of New Years Eve where alcohol and parties rule the day (not to mention that New Years kiss from the special someone).

We chose real estate investing for the lifestyle it can provide and thus lets set some goals to accomplish over the next 13 months.

I’ll start.

I will add 10 REO rentals to my portfolio that each produces greater than 20% cash on cash return.

Good Investing

Things are getting bad again (I mean good again)

Before you say anything I know that I am a little of my rocker but hear me out. Over the last two weeks I have started to hear the first couple of cracks in the media around this suckers rally we have had in the market (Real Estate and Stock Market). For about 4 or 5 months now I have been hearing nothing but good news and not really understanding where it was all coming from.

But over the last 2 weeks I am starting to see more and more people realize we are not out of the woods yet and we will have a lot more pain. Don’t get me wrong I don’t see the Armageddon option on the table again. We survived that near miss but just because we survived it doesn’t make everything better.

So I suspect over the next 6 months we will finally put in a bottom and then it will take 2-3 years to get out of this mess as we have a lot of idle capacity we have to chew through.

Signs that a bottom is in place will be some of the following:

Another Stimulus is approved by Congress (After all TARP will be mostly paid back so they will sell the public on the idea that they are just reusing capital, (Our Capital)).

People will stop talking about the Fed raising rates in 2010. It is not going to happen people. In fact I think it is 50/50 that they raise rates in 2011 (If they do raise them it won’t be over 1%)

Government will pass a $5,000 stimulus for anyone to buy a foreclosure, that should chew up excess capacity quickly

FHA or other Government entity will increase investor loans from 10 properties to 30 or 50 properties

Bank of America will be majority owned by the government with the next bailout, they have to regret buying Countrywide

Public Builders will start to buy each other out for their cash positions and to reduce future building capacity

Taxes will go up (If we keep spending we will have to raise taxes)

Keep in mind I made my best deals of 2009 in Jan-March just as the financial panic was hitting TILT. So we should all have a chance to ring the register again.

Buy Cash Flow properties and hold for the long term

Good Investing

The scariest statistic I have heard in a long time!!!!

Make sure your sitting down when you read this…. I just read that we have over 4 Million homes at least 1 month delinquent on their mortgage. That is a large number but until you have this next piece of data you probably are thinking I am crazy for claiming it is the scariest number.

Guess how many homes we have listed for sale right now across America??? Well, we only have 3.9M homes for sale.

How does that feel? We have 4 Million delinquent homes and only 3.9M homes for sale.

Guess what happens when supply goes up and demand goes down ….

This is going to be interesting

Good investing

More Pain Ahead (But More Opportunity also)

I suspect over the next 30-60 days it will become ever clearer that we are still in the throws of painful real estate correction. Over the next several months I expect several things to happen:

1) Delinquencies to continue higher (Currently 9.6% this likely goes to over 12% and maybe as high as 15%).

2) Prime mortgages will continue to fall behind in increasing numbers

3) Building new homes should continue to stay low

In addition, the more I look at the additional tax credit available to move up buyers ($6,500) I am struck by who this will and won’t help. Because unless you sold years ago and been sitting as a renter (if so good for you) who would want to sell a home and buy another one? I am guessing most people feel the home they have is good enough given the loss they have felt or seen in the last several years. Maybe if you bought back in the 80’s you could have the equity to think about trading up but it has to be a small pool of people available for the new credit.

As for the 8k tax credit they did such a good job of being non committal on extending it that almost everyone and their brother who could qualify did purchase a house already. And as we know they can’t buy another primary residence so the additional pool of buyers is lower than say in the summer.

I don’t know how to get around my fear of a tidal wave of supply coming just as demand dries up causing prices to reverse coarse and fall again. Simple supply and demand means prices will have to fall to clear the market.

But as a buy and hold investor you should be ready to pounce because I suspect we are in or about to be in the best buyers market of our investment lifetime.

Good Investing

Why are people surprised when building starts come in lower than expected???

I have said it in a previous post or two but we need to sell the houses we built and stop building new ones. The way out of this mess is to chew through the inventory of homes we built over the last couple of years.

I don’t know the exact numbers but I can tell you we built several hundred thousand houses we didn’t need. The easy financing made them easy to sell so we built them. But now we have to pay the bill for those homes. We can either sell them slowly or knock them all down and start over.

It is a simple equation. The supply is greater than demand so don’t build more spec homes.

Good Investing

Section 8 Rentals – Good or Bad Investments:

As a real estate investor who aims to own cash flow properties one of the first choices you will have to answer for yourself is do you want to rent to Section 8 tenants? In my investment area the lower end of the rental market is dominated by Section 8 tenants.

First I should be honest I support this program and see a lot more good than bad from the program. The two main reasons I like the program are first and for most a portion of the rent shows up on time. In addition I come to appreciate the yearly inspections they perform on the rentals to insure the unit is in good condition. I want my tenants to have safe and sound homes and the inspections insure this to a greater degree.

The downside is these inspections frequently come up with miscellaneous items that were actually tenant damaged or never reported by the tenant. This can cause a large repair bill around inspection time but I see these repairs as small investments aimed at stopping bigger problems.

Another issue some landlords discuss is the limits on rental rates, rent increase and required notification periods. If you are buying cash flow properties with the intent to hold long term this will not be a problem but if you hope to flip the house inside a year you might want to look for a non Section 8 tenant to give yourself greater flexibility.

Another question I hear from new investors is don’t you have a bunch more problems with these tenants? The simple answer is No. Now I do have problems but I see these as more people problems and when I look back over the years most of my tenant issues and evictions have been with no Section 8 tenants. As a landlord you are in the people business and everyone deserves a safe and secure place to live.

My final thought on this subject is I get some personal satisfaction out of supplying safe, sound and secure housing for families. I grew up very poor so I see this as one simple way to give back.

Good Investing