At Think Realty, we believe in the life-changing impact of successful real estate investing and are dedicated to being the go-to partner for new investors and seasoned professionals. With a goal of helping individuals and businesses profit from real estate investment, the Personal Real Estate Investor Magazine blog provides readers with the information they need to be successful in real estate.
For 11 consecutive months, the annual rate of foreclosures has dropped, according to a recent report from ATTOM Data Solutions.
In May 2019, the real estate analytics provider found that foreclosure filings were reported on a total of 56,152 U.S. properties, which is a 1 percent increase from April, but down 22 percent from a year ago. Lenders completed foreclosures on 10,634 U.S. properties in May, which is down 4 percent from the previous month and down a whopping 50 percent from a year ago, according to ATTOM.
“We are continuing to see a downward trend with overall foreclosure activity, especially in completed foreclosures declining year after year,” said Todd Teta, chief product officer at ATTOM. “However, in May 2019 we did see an uptick in the number of states increasing in foreclosure starts going from 17 to 23 states rising annually, and again Florida is bucking the national trend with a continuous annual increase.”
Every state in the U.S. — except Vermont — reported an annual decline in completed foreclosures, ATTOM reported. A handful of state reported precipitous drops in completed foreclosures, including Michigan, which dropped 84 percent, Massachusetts (down 74 percent), Indiana (down 67 percent), Kentucky (down 66 percent), and New Jersey (down 64 percent).
Among metro areas that saw big drops were Birmingham, Alabama (down 67 percent), New York, New York (down 59 percent), Washington, DC (down 58 percent) and Philadelphia, Pennsylvania (down 57 percent).
The rate of foreclosure starts was largely flat from April to May 2019, but down 9 percent from May 2018, which is the fourth consecutive month with an annual decline, ATTOM found.
Foreclosure starts in May 2019 were up 99 percent in Wisconsin, up 64 percent in Kentucky and up 53 percent in Louisiana. While at a comparably low rate for foreclosure starts, Florida’s 23 percent increase in May is the 12th consecutive month that the Sunshine State has reported double-digit annual increases in foreclosure starts.
“To put the numbers in perspective, I would use a full year, perhaps 2006 as a “normal” benchmark number. That would be the last year before the real estate world crashed,” said Bruce Norris, president of The Norris Group. “The total foreclosure starts for Florida in 2006 was 102,875. In 2018, there were 33,031 foreclosure starts. Even at a 25 percent increase over 2018, 2019 will still be less than 50 percent of 2006. An increase of some 8,000 foreclosure starts is not a game changer at this point.”
Metro areas with populations greater than 1 million that saw an annual decrease in foreclosure starts included Indianapolis (down 82 percent), Houston (down 65 percent) and San Jose (down 58 percent).
When people think of vacation rentals, usually the serenity of the beach or mountains comes to mind, not the hustle and bustle of a city. There is a growing debate in the vacation rental/short-term rental industry if urban properties really are vacation rentals. Short term is considered anything less than 30 nights, which comprises most U.S. vacationer’s length of stay.
My vacation rental property company is in the Midwest, in a city that not many people would consider top-of-mind for vacations. While 75-80 percent of our guests are here for business, the remaining 25-20 percent are here visiting friends, family, and touring the city of Indianapolis. As a matter of fact, we recently had a guest from Saudi Arabia who came to Indianapolis for vacation. She’s a returning guest (she was here last year for work) and stayed with us for three weeks this time, strictly for vacation.
The urban market is a HUGE segment of the vacation-rental industry. Should we only be catering to vacation guests? Absolutely not. Don’t business travelers deserve the same wonderful benefits as our other guests? Now that more businesses are accepting vacation rentals as a choice for their employees (Airbnb has over 900,000 businesses signed up for Airbnb for work purposes), this is another avenue to grow our market share in the actual vacation space. When travelers stay with us for work, they see how great it is to have an entire house, with all the amenities of home — more space, privacy, and a fully functioning kitchen that they don’t have to clean!
An associate who has a 9-year-old daughter and travels often, just stayed in a hotel for the first time. She had to explain to her daughter why they didn’t have an entire house on that particular trip. This young child has grown up only on vacation rentals for work and vacation trips for the family. We have a whole generation coming up who are growing accustom to staying in vacation rentals, no matter the reason for the trip.
Airbnb has made vacation rentals mainstream for just about every location on earth, except where stringent regulations and laws prohibit it. In the end, the market always drives demand. The market is loud and clear on wants and needs, which is a strong demand to stay in well-stocked, well-designed and professionally managed vacation rentals whether that is in Honolulu, Hawaii for pleasure or good ole Indianapolis, Indiana for work. The urban market for vacation rentals is alive and well, so embrace it and capitalize from it.
Ah, the continued plight of the American mortgage system. While each year millions of homeowners finance and refinance real estate with few problems, the system is increasingly fraught with new complexities and potential pitfalls. Updates are constantly needed to keep up with a number of outside factors and trends. Without change, the system would increasingly be impacted by risk, fraud, and losses — factors which would result in fewer originations and higher rates. And so, the lending industry needs to be ready for anything.
It may seem difficult to believe that the mortgage system is stressed in any significant way. All of the traditional fundamentals appear to be positive. For instance, foreclosures — the most obvious measure of industry issues — were at a 13-year low in 2018 according to figures from ATTOM Data Solutions. ATTOM reports there were foreclosure filings — default notices, scheduled auctions, and bank repossessions — on 624,753 U.S. properties last year. And, despite all of the paperwork, many of these distressed properties were never actually foreclosed on.
The reason is that home values have been rising in most markets. The National Association of Realtors (NAR) says median existing home values reached $249,500 in February — the 84th straight month of year-over-year gains. With rising prices, some distressed owners can simply sell in the open market for enough to cover the debt — and many do! In 2018, says ATTOM, only 230,305 properties were actually foreclosed on.
Interest rates are also looking very positive for homebuyers right now, averaging 4.54 percent in 2018 according to Freddie Mac, well below the long-term average of 8.08 percent going back to 1971. By late March 2019, the big GSE said weekly rates for 30-year fixed-rate financing had fallen to 4.06 percent, down almost half a percent from the 2018 average.
In effect, it’s very difficult to see the growing stresses in the underwriting process because the system is now so successful. However, success masks the reality that low rates and rising prices are not guaranteed. They can come and go as the economy evolves.
And the economy, as we all know, always evolves.
“The U.S. economy has reached an inflection point, with the consensus forecasting real GDP growth to slow from 2.9% in 2018 to 2.4% in 2019, and to 2.0% in 2020,” said Kevin Swift in March. Swift is president of the National Association for Business Economics (NABE).
So, what are some of the factors and trends currently happening that are likely to impact the way lenders do business moving forward? Let’s take a look.
Ability to Repay
Federal rules as well as common sense tell us that lenders must verify the ability of borrowers to repay residential mortgages. While there are exceptions for such things as open-end credit plans, timeshare plans, reverse mortgages, and temporary loans (a loan for 12 months or less), the ability-to-repay rule is still the compliance gold standard.
Lenders take this stuff seriously, which may explain why the typical loan application vies with “Gone With The Wind” in terms of length and heft.
“With the size of an average mortgage loan at more than 500 pages — and hundreds of different document types — the labor-intensive and costly processing methods used in the past are no longer possible for banks that want to compete,” says ZIA Consulting.
What file size reflects is a serious effort to verify borrower claims. This added bulk, while necessary, is certainly an application problem. But bigger issues lurk beneath the surface.
What is Gross Income, Really?
All lenders generally treat income the same way. They check how much you earn each month before taxes. They can then see if it’s possible to “gross up” income for qualification purposes.
While the expression “gross up” may not sound especially alluring, it can be a huge benefit to mortgage applicants. It means that such things as child support, tax-exempt interest, and business depreciation can be added to taxable earnings to create a larger qualifying income.
For example, if you report $90,000 in yearly income before taxes and receive $1,000 in child support, the lender will review your mortgage application as if you earned $102,000 a year ($1,000 x 12 = $12,000 plus $90,000).
Grossing up can make a big difference for mortgage borrowers. The reason involves the debt-to-income ratio (DTI), a measure used to see if applicants qualify for financing. Lenders don’t want to provide mortgage financing to borrowers with big debts and excessive monthly payments. For example, lender Smith might be okay with borrowers who devote no more than 43 percent of their gross monthly income for recurring monthly debts such as housing costs, auto payments, student loans, and credit card bills.
Using the 43 percent standard, if you earn $90,000 a year, you therefore have an average household income of $7,500 a month before taxes. Allowable debt payments amount to $3,225 ($7,500 x 43%). However, if you earn $102,000, the picture changes. Now you have a gross monthly income of $8,500 and 43 percent of that is $3,655.
A bigger income allows you to have larger monthly debt payments and still satisfy lenders. This has become an increasingly important issue as consumer debt levels have soared. The Federal Reserve Bank of New York reports that total household debt reached $13.54 trillion in the fourth quarter.
“The total,” said the New York Fed, “is now $869 billion higher than the previous peak of $12.68 trillion in the third quarter of 2008 and 21.4 percent above the post-financial-crisis trough reached in the second quarter of 2013.”
One result of growing debt loads is that the HUD recently announced new and tougher FHA standards. Here’s why:
Almost 25 percent of all FHA-insured forward mortgage purchase transactions in fiscal year (FY) 2018 involved mortgages where the borrower had a DTI ratio above 50 percent, the highest percentage since 2000.
The average FHA borrower had a 670 credit score for FY 2018, the lowest average since 2008.
There have been a growing number of applications with credit scores of less than 640 combined with DTI ratios greater than 50 percent.
In FY 2018, 60 percent of all refinances were cash-out financing, meaning less equity is available to offset losses in a foreclosure situation.
To reduce risk, the Federal Housing Administration (FHA) is going back to a rule abandoned in 2013. For borrowers with credit scores below 620 and DTIs above 43 percent, the government will now require manual underwriting. The likely result will be fewer FHA originations and that will translate into reduced home sales.
In the wider market, we may also see an increasing use of dual-approach mortgage underwriting, the use of both automated systems as well as manual underwriting.
“One of the primary beneficiaries of non-agency, aka ‘non-QM’ lending, is borrowers whose income is not ‘typical or customary,’” Ray Brousseau, President at Carrington Mortgage Services, told Housing News Report. “These borrowers often have good credit and assets, but their income is considered non-traditional. They’re often self-employed, and although their bank statements support positive cash flow and the ability to repay, it’s hard to document using traditional approaches (1040s, W2s, etc.). Hence the advent of ‘bank statement’ non-agency programs that allow these borrowers access to financing through non-agency bank statement programs. These have proven to be extremely popular, and they’re manually underwritten.”
Is Gross Income the Right Measure?
Gross income has always been the main application standard but that’s likely to change as a result of tax reform.
Under tax reform, there were several major changes to the system.
The standard deduction for those married and filing jointly went from $12,700 in 2017 to $24,000 in 2018.
Mortgage interest remains deductible for as much as $750,000 in new first and second-home real estate debt, down from $1 million.
State and local taxes (SALT) remain deductible, but there is now a $10,000 limit on combined property taxes and state and local taxes.
How do these changes impact the lending process? Two results stand out:
First, most borrowers will elect not to write off mortgage interest and property tax costs. Only four percent of households will claim itemized deductions, down from 21 percent under old rules according to the Tax Policy Center. Effectively, the cost of homeownership will rise in most cases while the distinctions between owning and renting will narrow.
Second, the value of income will change, depending on where you live. This very much impacts the concept of qualifying borrowers on the basis of gross income.
Prior to tax reform, such things as mortgage interest, property taxes, and state income taxes were commonly deductable, but now — with a larger standard deduction — the value of itemizing for most borrowers has fallen to zero.
Imagine that two married couples each have a gross annual income of $120,000. They’re alike in every way except for where they live. Living in Los Angeles, the couple will pay $8,004 in California state income taxes whereas in Florida, Texas, Wyoming, Washington, South Dakota, Nevada, and Alaska, the tax bill is zero. There is no state income tax in these jurisdictions.
The couple in the no-tax states has an additional after-tax, income. Why is that money – which is both real and spendable – not used to gross up the income for borrowers in Florida, Texas, etc? How is it any different from child support or business depreciation?
There is, in fact, a way to capture the blessings of lower tax costs. The Department of Veterans Affairs (VA) requires lenders to look at residual income (the cash left over after expenses) when qualifying borrowers.
“The VA’s residual income guideline offers a powerful and realistic way to look at affordability and whether new homeowners have enough income to cover living expenses and stay current on their mortgage,” says Chris Birk with Veterans United. “Residual income is a major reason why VA loans have such a low foreclosure rate, despite the fact that about 9 in 10 people purchase without a down payment.”
“In the end,” says Carrington’s Ray Brousseau, “residual income is critical. It’s what’s left that the family is expected to be able to live on. Residual income is an important characteristic when measuring ability to repay.”
The VA approach works extremely well. In the fourth quarter, according to the Mortgage Bankers Association (MBA), the non-seasonally-adjusted foreclosure starts rate stood at .19 percent for conventional loans with either 20 percent down or backing with private mortgage insurance, .55 percent for FHA-backed financing with as little as 3.5 percent down, and .28 percent for VA loans which are readily available with zero percent down.
We’re going to see the wider use of residual income. But that does not mean the gross income standard will melt away. Instead, it will increasingly make sense to reduce origination risk and qualify applicants on the basis of both gross income and residual income.
What Defines Employment?
A key measure of borrower finances is very simply the fact that they have a job. Lenders generally like to see a two-year history of employment at the same job or in the same field. But, how can this standard apply in an era when more and more of us are becoming gig workers?
“Broadly defined,” said Gallup in a 2018 study, “the gig economy includes multiple types of alternative work arrangements such as independent contractors, online platform workers, contract firm workers, on-call workers and temporary workers. Using this broad definition, Gallup estimates that 29 percent of all workers in the U.S. have an alternative work arrangement as their primary job. This includes a quarter of all full-time workers (24 percent) and half of all part-time workers (49 percent). Including multiple job holders, 36 percent have a gig work arrangement in some capacity.”
The common understanding of employment — 40 hours a week plus benefits — is giving way to the gig economy. We are increasingly a nation of freelancers, where more and more of us work independently, share jobs, or have multiple occupations. Corporations, in turn, love the new economy. With gig workers, businesses do not have to underwrite payroll taxes, or offer health insurance, paid vacations, or retirement plans to non-employees.
Gig work allows companies to tailor work schedules to avoid idle time. This also means many part-time workers are “on call” even if they are not actually working. Without a defined schedule, it’s difficult if not impossible to have a second job even though the hours are available.
Gallup says we now have two gig economies and that “independent gig workers (freelancers and online platform workers) often enjoy the advantages of non-traditional arrangements, while contingent gig workers (on-call, contract, and temp workers) are treated more like employees without the benefits, pay, and stability that come with traditional employment.”
“Tech-mediated gig work,” according to the National Law Employment Project, “is the latest iteration of a 50-year-old pattern of workplace fissuring – the rise of ‘non-standard’ or ‘contingent’ work that is subcontracted, franchised, temporary, on-demand, or freelance. Gig companies are simply using newfangled methods of labor mediation to extract rents from workers, and shift risks and costs onto workers, consumers, and the general public.”
“By 2023,” says MBO Partners, “over half (52 percent) of the private workforce is forecast to have spent time as independent workers at some point in their work lives.”
We have long had independent contractors such as accountants and lawyers who are sole practitioners. What’s new and different is that the concept is spreading to fields where workers have traditionally been corporate employees.
The growing gig economy disrupts the old definition of employment. The problem is that, at this point, we can’t be sure that gig employment means steady and reliable future income. Case in point: a 2018 study by the JPMorgan Chase Institute found that between 2013 and 2017, earnings for freelance drivers fell 53 percent.
One can argue that much contingent freelance income — and thus the ability of such workers to borrow and repay — will face big challenges in future years. Here’s why:
First, there are few barriers to entry. Lots of people can become dog walkers or freelance drivers. You don’t need a license or a degree for many gig positions. The result is that increasing supply pushes down wages. Freelance drivers, according to the JPMorgan Chase Institute, saw monthly incomes fall from $1,469 to $763 between 2013 and 2017.
Second, in the longer term, new jobs will be added as a result of marketplace change while others will largely disappear. While the secretarial pool was killed off with the introduction of personal computers and milkmen were done in by supermarkets, a huge number of service jobs have been added to the economy.
Lyft, for example, may create more opportunities for programmers over time while reducing the need for drivers. As it explained in its recent IPO, “In the next five years, our goal is to deploy an autonomous vehicle network that is capable of delivering a portion of rides on the Lyft platform. Within 10 years, our goal is to have deployed a low-cost, scaled autonomous vehicle network that is capable of delivering a majority of the rides on the Lyft platform. And, within 15 years, we aim to deploy autonomous vehicles that are purpose-built for a broad range of ride-sharing and transportation scenarios, including short- and long-haul travel, shared commute, and other transportation services.”
Third, the practical reality is that in a slow down, the first workers to be released will be contingent employees. Full-time workers will be expected to pick up the slack.
So, what to do when a contingent gig worker applies for a mortgage? How should such income be counted? Should gig income be grossed down in the same way that non-taxable income can be grossed up?
There’s certainly work for lenders to do. Automated systems will need to be refined to incorporate new work patterns. Manual underwriting will become more common, not less. The need for job experience is likely to grow with gig workers, requiring at least a look back at three or four years of past earnings and not just one or two.
Is it Really a Prime Residence?
Across America, the nature of residential real estate is changing. For many homeowners, it’s not so residential anymore. Several million travelers stay with homeowners on any given night. Empty bedrooms as well as unused attics and basements are increasingly seen as income opportunities.
The hospitality industry is fighting back, demanding that local governments enforce ordinances which limit the competition faced by tax-paying hotels and motels. But the die have been cast: there are simply more homeowners than hotel magnates. Rather than fight short-term rentals, local governments are increasingly coming to terms with the big rental platforms. They’re taxing the revenue received by property owners. More and more, it’s okay to rent a room as long as you pay the local government.
According to Airbnb in 2015, “Home sharing is making it possible to take what is typically one of their greatest expenses — their home — to make additional income that helps them pay the bills. Policymakers are taking notice and acting to support home sharing and the middle class.”
While the connection between rental rates and tax collections is direct and obvious, there’s also evidence that, at least in some markets, short-term rentals are forcing up real estate prices and rental rates. This is good for owners, though not so good for buyers and tenants.
For lenders, the growth of home sharing raises two questions: what is being financed and should the borrower’s income be bumped up on the basis of potential short-term rental income?
Francois (Frank) K. Gregoire, an appraiser based in St. Petersburg and the four-time chairman of the Florida Real Estate Appraisal Board, told The Mortgage Reports in 2017 that, “a room rental situation, depending on the number of rooms, may shift the use of the property from single or multifamily to a business use, such as a hotel or rooming house.”
This new world of short-term rentals raises a number of questions for lenders:
Is the property a prime residence or a riskier investment property?
If the property is used for short-term rentals, has the income been declared for tax purposes?
If the home has not been used for short-term rentals, can an appraiser use short-term rental data from nearby and like properties to create a valuation?
Is the property insured for use as a short-term rental?
If local ordinances or HOA rules ban short-term rentals, can the owners repay the debt if rental income stops because of a complaining neighbor or code violation crack-downs?
There are already efforts to create financing options for short-term rental properties. “Hosts in the U.S.,” says Airbnb about its financing initiative, “will be able to work with participating lenders to recognize Airbnb home sharing income from their primary residence as part of their mortgage refinancing application. The three mortgage lenders in the initiative are Quicken Loans, Citizens Bank, and Better Mortgage.”
No doubt short-term rental income will be increasingly accepted for mortgage applications, along with a proper accounting of the costs required to operate such facilities.
The Question of Shared Equity
No doubt other loan programs for short-term rentals will become available if only because the market for shared-income properties is large and growing. But, while the market is attractive, it will require careful underwriting to ensure that residential financing is not being provided for investment properties or for borrowers who cannot afford to finance without rental income.
Or, maybe we need to look at this differently. Affordability is a big issue for many borrowers, especially first-timers. Research by ATTOM Data Solutions found in March that median-priced homes are not affordable for average wage earners in 71 percent of US housing markets. Many would-be buyers are being frozen out of the marketplace. But, if you can’t buy a home outright, perhaps it makes sense to buy part of a home.
Looking forward, we are likely to see an increase in shared equity arrangements:
The rate of real estate investors that are fixing and flipping homes hit a near-decade high in the first quarter of 2019, according to a recent report from ATTOM Data Solutions.
In its first quarter 2019 Home Flipping report, ATTOM found that fix-and-flips deals represented 7.2 percent of all home sales during the first quarter — the highest rate since the winter of 2010. While flipping might be making a comeback as of late, ATTOM notes that gross profits fell.
Investors that homes flipped in the first quarter of 2019 saw an average gross profit of $60,000, which is a dip of about 12 percent from an average gross flipping profit of $62,000 in the previous quarter. That margin is also down from $68,000 in the first quarter of 2018 and hit its lowest average profit since the winter of 2016.
Providing a more detailed analysis, ATTOM analyzed the top 10 U.S. markets that had 50 or more flips in the first quarter of 2019 and with a population greater than 200,000 people.
The Memphis, Tennessee, metro is atop the U.S. flipping charts with a 13 percent home flipping rate, according to ATTOM. That’s up 10 percent from the previous quarter, however, Memphis is the only metro in the top 10 to report an annual decline of 9 percent.
Huntsville, Alabama, and Phoenix, Arizona, follow up Memphis with an 11.4 percent flipping rate, followed by Atlantic City, New Jersey at 11.1 percent, Las Vegas at 10.9 percent, Durham, North Carolina at 10.6 percent and Raleigh, North Carolina at 10.3 percent.
In total, ATTOM found that 85 out of 138 metro areas analyzed in the report posted a year-over-year increase in their home flipping rate in Q1 2019, including Columbus, Georgia, which is up 83 percent; Raleigh, North Carolina up 73 percent and Charlotte, North Carolina, up 65 percent.
While ATTOM found that flipping rates are up quarterly in every metro area, the annual percent change in gross returns has declined in every metro area in the top 10, with the exception of Clarksville, Tennessee.
Among its broader analysis of 138 metro areas with at least 50 home flips completed in the first quarter of 2019, those with the highest average gross flipping ROI were Pittsburgh, Pennsylvania at 131.2 percent, Flint, Michigan at 127.6 percent and Shreveport, Louisiana at 112.5 percent.
Homes flipped in the first quarter of 2019 took an average of 180 days to complete, which is an uptick from the average 175 days for homes flipped in Q4 2018 but down from 182 days in the winter of 2018.
Among the 138 metro areas ATTOM studied, those with the shortest average days to flip were McAllen-Edinburg, Texas at 127 days; Memphis, Tennessee at 136 days and Raleigh, North Carolina at 142 days.
If you ever interact with Renters Warehouse, a curious term is likely to stand out.
The phrase “Rent Estate” is strategically used throughout Renters Warehouse’s website, blog articles, and social media, beckoning visitors to learn about its mission to revolutionize the single-family rental industry. The term, which was trademarked by Renters Warehouse in 2015, is a part of the company’s goal to transform how everyday Americans perceive real estate investing as unattainable and risky.
Think Realty spoke with Renters Warehouse CEO Kevin Ortner about the origins of the phrase and why the company created it. Here are some excerpts from that conversation.
TRM: What is Rent Estate?
KO: Rent Estate is essentially using real estate over the long term to create wealth. Rent estate is real estate for the rest of us. It’s about democratizing real estate investment, and making it less scary or unknown to the ordinary American.
TRM: Why did you create the term?
KO: It helps differentiate us within real estate investing. When we talk about real estate investing, it’s different from what so many people think of. In the era of HGTV and all these flipping shows, many people think how you invest in real estate is to buy a piece of property, fix it up, and sell it. That’s not what we believe in and that’s not what we do. Our approach is less sexy than that because it’s not $25,000 or 50,000 profit in a couple months, but it’s much less risky and it’s easy for everyone to execute.
TRM: What was the trademark process like?
KO: We’ve tried to trademark other terms and we weren’t successful because they were too general and had to be used in the industry. We were really excited we were able to trademark this one. We had some legal counsel involved, and it was about a six-month paperwork process before waiting on the government.
TRM: Why should investors consider Rent Estate?
KO: Rent estate is a long-term play that takes advantage of all the great things that come with owning real estate, including income on a monthly basis. You can depreciate the home on your taxes and you can build equity over time. You’re also going to get the appreciation that comes from the market and you can leverage that.
TRM: How is Rent Estate more accessible?
KO: Rent estate is the only investment an ordinary American can walk into a bank and borrow money to buy. If you went to your banker and said, ‘I want to borrow $100,000 to buy Apple stock,’ they’re going to laugh you out of the bank or call security. But if you go to that same banker and say, ‘I want to borrow $100,000 to buy an investment in real estate,’ you’d get the money right away. Why that’s important is because you can buy into this type of investment for much less cash down. You don’t need $100,000 to buy that $100,000 investment. You can have $20,000 and then on top of it, you use someone else’s money — your tenant’s — to pay that mortgage down.
With the ongoing certainty of sunrise, the use of renewable energy is becoming cheaper, more attractive, and more common.
The promise of free fuel coupled with better technology is changing the energy economy by reducing our need for oil, natural gas, coal and nuclear power. Every Tesla and Prius you see on the road, along with every wind farm, dam and solar array you see or read about, represents less demand for traditional fuels. As these changes begin to take hold, it’s little wonder that the price of West Texas Intermediate crude fell from $141.95 a barrel in 2008 to just $55.80 in early March.
The essential benefit of renewable energy – with sunlight virtually everywhere – is that it can replace much of the coal, oil, and natural gas we now extract, transport, and burn. The global, political and environmental implications are substantial and undeniable. After all, nobody wants another oil spill, or political conflicts over fuel. And, if energy costs can be reduced at the same time, that’s a very pleasant bonus.
But, how to we move forward in effectively harnessing the power of the sun?
While the increasing use of renewable energy is inevitable, the path forward is unclear. Yes, a lot of free fuel is out there, but there’s a huge difference between the promise of sunny days with billowing winds and the certainty of reliable power. At stake are future revenues and profits worth hundreds of billions of dollars as well as entirely new approaches to power generation and distribution.
California’s Solar Mandate
Starting in 2020, every new home constructed in California will be required to have some form of solar capacity. While it should be noted that the requirement is not specifically for each home to have its own onsite or rooftop solar system (centralized or community systems are potentially allowed), this mandate is definitely a game changer for builders, homebuyers, mortgage lenders and installers alike.
Outfitting new houses with solar panels can be advantageous to buyers because home builders will be able to purchase at wholesale prices and install systems while homes are still under construction. Savings can be passed on to home buyers or at least be part of the new home sale negotiation process. When the market is strong, builders can charge a premium and when sales slow down, buyers will be able to buy at discount.
Sounds fairly straightforward, right? Not so fast.
If you’re interested in real estate as an investment, it’s certainly fun to watch those TV shows with the fix-and-flip investors turning a beat-up old house into someone’s dream home. And of course, it’s entertaining to see them raking in five-figure profits while they’re doing it.
Other TV shows, seminars, and books lay out the excellent cash-flow opportunities and long-term profits available from rental-home investing. You watch an investor shop for bargains, possibly bidding at a tax auction, or maybe negotiating with a home seller to get a rock-bottom deal. You see the numbers all laid out for you, with a nice monthly positive cashflow to take to the bank.
While it can be exciting to watch these shows or attend the seminars, these active real estate investment strategies are not for everyone. The truth is that many people have the assets available to buy rental homes, but they’re not doing it because they don’t have the time or the inclination to be an active investor. They have no desire to pick up a hammer or to supervise contractors for a fix-and-flip, nor do they want to scour the local market for a ready-to-rent home and compete against other investors for it.
If you’re in this rather large group of investors who see the value in real estate, mainly rental properties, there is a better way. You’ve possibly already checked out real estate mutual funds and maybe those crowdfunding websites where you can invest passively. The question is whether there is something in the middle that will yield the cashflow, overall returns, and tax advantages of active investment without the active part.
There are successful active real estate fix-and-flip investors and rental property locators who know what to do, but they are splitting their time between those activities and seeking funding. Many use local private money or hard money lenders to fund their deals. These specialty lending sources can charge higher fees and interest for short-term money to fund repairs or to flip a move-in-ready home to a rental investor.
There is an opportunity for short-term, high-yield investing if you team up with one of these investors, funding their deals to take your profits out in shorter periods — from days to weeks. Real estate wholesalers specialize in locating deals that they can sell, either to a fix-and-flip investor if the property needs work, or to a rental investor if it’s ready for a tenant.
Start investigating opportunities in your area by attending a meetup group at one or more local real estate investment clubs. They’re all over the country, and most will let you visit one or a couple of sessions before requiring you to join. There, you’ll meet investors of all types, as well as vendors and contractors involved in all phases of real estate investment.
You have an excellent chance of meeting someone who has the skills you lack (or don’t have time to use) but who is seeking funding. Of course, you’re going to want to be careful, check references, and ask for their previous deal breakdowns, especially if you’re funding a short-term flip. If you’re going to buy a ready-to-rent home at a price below current market value for good cashflow in a market that’s a little outside of primary markets, you can talk to wholesalers at these meetings. Get them to show you the numbers for previous deals and the rents that their buyers are getting.
Once you connect with a successful wholesaler, you’re dealing with someone who understands what you want in a rental home, and they will go out and find homes that will bring good cashflow and they will deliver them to you. All you need to do is buy the property. If you don’t want to be a landlord, you can hire management for 8-10 percent of your monthly rent to take care of that as well.
You can enjoy the advantages and returns of active rental property management without the bother of the active part.
If you’re in the business, you probably already know that real estate investment can be one of the most lucrative financial pursuits out there. In a prosperous economy and a housing market that seems to be going from strong to stronger, it’s easy to get caught up in maximizing your profit. But all good things eventually come to an end — or at least become, well, less optimal. So, the real question you should be asking yourself is “what’s my long-term plan?”
Noble Capital has been in the real estate investment sector since 2002. And when the Great Recession hit, we had to take a step back and figure out how we, as a company, were going to survive. The proliferation of sub-prime mortgages and subsequent creation of collateralized debt products infected almost every corner of the American economy. As a result, all lending activity froze, and traditional real estate investment opportunities completely dried up. But packing it up and walking away just wasn’t an option.
In a housing market downturn, the sales of residential properties typically suffer. Since this is a key strategy for our borrowers, we had to change direction. A down economy may decrease demand from home buyers, but people still need a place to live in any economic environment. So, the logical strategy was to shift from selling properties to renting them. That way, our investments could still flow in cash rather than sit idle and lose money.
If you aren’t taking advantage of the strong housing market to build your portfolio of rental properties, you’re leaving yourself wide open to failure. The robust housing market in many areas of the country right now is a blessing for savvy forward-looking real estate investors. You should resist the urge to go from one flip to the next without building your real estate portfolio. The wise strategy is to flip a couple of properties then renovate the third with the goal of holding it as a rental, so you have regular income in the event that there’s downward pressure on the housing market.
The concept makes a lot of sense — build an income-generating portfolio to sustain you during the lean times. But, being a real estate investor doesn’t so neatly equate to being a property manager, so mind the gap! Completing a renovation or construction project is one thing, but managing properties is a completely different beast. Being a property manager requires a different skillset than home construction and renovation and comes with its own set of unique problems.
If you aren’t a people person, you’ll need to become one quickly (or at least learn to fake it). Interacting with tenants is probably the most significant difference you’ll encounter when you become a landlord. Keeping the property occupied is a critical function of your operation. If you don’t have tenants, you’re losing money. You need to anticipate move outs (tenants don’t always give you proper notice), and you need ample time to market, make-ready, and rent the property. Conversely, you may be forced to evict tenants on occasion. This is never an easy thing to do, but you have to be ready to step in if your tenant’s occupancy jeopardizes your investment. Falling far behind on rent or allowing the property to fall into disrepair both cost you money.
Not only do you lose money if you don’t have renters, but the longer your rental property sits vacant, the greater the chance that problems could occur. Unused plumbing and other systems in the home can begin to degrade, and if a pipe bursts, there is no one there to report it to you in a timely manner. But a vacant property can also become a target. Occasionally, properties are vandalized, but in some areas, the more distressing scenario is that your property may become an attractive habitation for squatters. It may seem like a random concern, but we’ve had to deal with it on many different occasions. Unauthorized occupants, or what I’ve heard referred to as “Property Pirates,” can cause any number of problems and cost you loads of money from repairing property damage to clean-up costs. If you’re dealing with squatters, typically law enforcement will need to check on the property daily. Installing lights with motion sensors (particularly around the back of the house) is a good deterrent, and it helps to have a good relationship with your neighbors who can help keep an eye out for you and alert you of any unusual activity.
If you delve into the world of property management, you’ll also likely need to augment your professional network. If you’ve built or renovated homes in the past, you probably have a list of preferred contractors for various types of work. But you’ll need plumbers, handymen, electricians, etc. who can be available for smaller jobs on short notice. And unless you plan to be available 24/7 for as long as you rent the property, you’ll need to have someone you trust to serve as a backup when you can’t tend to tenant requests.
While this isn’t an exhaustive discussion of a property manager’s responsibilities, you can see that there are some significant differences from being a traditional real estate investor and some unique challenges, as well. Ultimately, being able to flip the switch from investor to landlord could be your safety net if the market takes a turn for the worst. So, start thinking about your strategy for building your real estate portfolio sooner rather than later. That way, you’ll be prepared when that day comes. And history has taught us that, eventually, it will.
When it comes to making money in real estate investing and building your kingdom, there are really only three kinds of cash to be aware of: Cash Now, Cash Monthly, and Cash Later.
1. CASH NOW
Let’s face it, we need money to live and pay the bills. Without this cash we would have to go back and work for someone else. If you’re not a full-time investor, monthly expenses are probably keeping you from quitting your job and working for yourself. If you are employed, your Cash Now is that paycheck, right?
Cash Now can also be the money that you get from “Flipping” properties. Whether it be from Wholesaling, Rehabbing, Subject To, Lease Option or Pre-Foreclosures, we need the cash from each of these investing models to put food on our tables and clothes on our (and our children’s) backs.
Cash Now is good. It’s that chunk money. And it’s fun! But if you don’t continue to do the work, then no cash comes in. (Wow, that kinda sounds like a job!) It’s great for capital building, but it doesn’t make me as free as I would like to be. How about you?
2. CASH MONTHLY
While those big (Cash Now) checks are coming in, you can reinvest in something that will give you monthly cash — buy and holds. Getting passive monthly income from single family, multifamily, storage units, mobile homes or even notes provides those monthly checks.
Cash monthly will give you more freedom. Freedom to do what you want, when you want. I’m not telling you to stop your Cash Now generator. I’m saying to get some Cash Monthly… use some of your Cash Now and buy yourself some freedom!
Pretty soon you will be building a kingdom. You’ll have enough Cash Monthly to be able to take a month off in summer or what ever you desire!
Do you see how Cash Monthly will give you freedom? But wait … there’s more.
3. CASH LATER
Now that you have Cash Now and Cash Monthly, Cash Later takes care of itself. It comes when you sell, exchange, or refinance those properties somewhere in the future.
With properties you have an appreciating asset. Not only is it appreciating every month, but your tenants are paying off your mortgage.
So between the appreciation and the mortgage pay down, your equity just gets bigger and bigger! You can sell your property and get a lot of cash.
If it’s creating a lot of Cash Monthly, you may want to keep those checks coming in. If so, then you will want refinance to get your cash out, but not 100% of your cash, which will only get you in trouble. Take out about 75% of your cash leaving 25% equity in the property, that way if there is a downturn in the market, you’re protected. Not only that, at 75%, you should still have a decent positive cash flow. Did you know that you do not pay tax on any of the money that you take out during a refinance?
Now take that money and go buy some more real estate! You’ve just increased your net worth because you have increased equity in one or two more properties instead of the building that you started with. Can you see how your kingdom is being created? Can you see how it can be created in a short time? Holding single family houses will make you money. Holding apartment houses will make more, and the more doors you have the more rich you get! Which do you prefer?
Though the concepts are simple to understand, don’t be fooled into thinking they can be easily implemented and executed. These are the basics of real estate and how successful real estate investors work in order to maximize their earnings.
Now go become a Cash King or Queen!
Deborah Razo, Founder of the Women’s Real Estate Network (WREN), a community where women in real estate excel and empower each other. We share experiences, resources and tools to help one another grow both personally and professionally. Learn more at www.WRENinspires.com
The current economic expansion is set to complete its tenth year this fall, surpassing the 120-month expansion of the 1990s for the longest in U.S. history, dating back to the mid-1800s. However, despite a low unemployment rate and robust job growth, several forward-looking indicators have started flashing warning signs causing the outlook from my peers in the economics profession to turn negative. In a survey earlier this year for the National Association for Business Economics (NABE), two in three economists surveyed expected that the next U.S. recession would begin by 2021 (though not me for reasons discussed below).
Despite the potential warning signs and negative sentiment among my peers, the economy looks pretty good. The unemployment rate as of March 2019 sits at 3.8 percent, a very low level by historical standards. However, the unemployment rate is a poor predictor of future economic activity. The average number of months between the cyclical low of the unemployment rate and the start of the next recession is seven months.
Financial market indicators, which move faster than economic data, have pointed to a deterioration in growth prospects. The yield curve slope, or the spread between long-maturity bonds like the 10-year Treasury and shorter maturities such as the two-year Treasury, has flattened substantially in recent months. When this measure of the yield curve slope inverts, a recession almost always follows.
The slope, as measured by the difference between the 10-year and two-year Treasury for April 12, was at just 16 basis points. Not inverted, but close. If you stick this yield curve metric into a simple probabilistic model of recession over the next 12 months, the implied probability of a recession starting over the next year is about one in five. That’s up from an implied probability of about one in six a few months ago.
Why might the yield curve invert? One key factor driving the slope of the yield curve is the likelihood of future monetary policy actions. Since late last year when financial markets expected further rate hikes in 2019, expectations have shifted dramatically. Market-based measures of expectations are now pricing in a significant probability that the next Fed rate move could be a cut rather than a hike.
Housing Markets Typically Lead the Business Cycle
Housing has typically led the business cycle in the United States, and housing market indicators have also been flashing warning signs recently. Home sales, housing starts, and house price growth all declined last year. While single-family house prices increased nationally in 2018, some regional markets experienced declines in house prices with sharp declines in house price growth rates in many markets in the western United States. For most of the economic recovery, residential investment was adding to overall GDP growth, but in the last three quarters, residential investment subtracted from growth. Fading housing market activity is a typical precursor to U.S. recessions, so many bearish analysts pointed to 2018 housing market indicators.
The decline in housing market activity wasn’t too surprising when you consider what happened with mortgage interest rates in 2018. At Freddie Mac, we track mortgage market trends very closely. My team helps run the weekly Primary Mortgage Market Survey, which tracks the average rate on several popular mortgage products going back to 1971. By far, the most popular product is the 30-year, fixed-rate mortgage. After nearly hitting a five-percentage-point average rate last fall, rates have fallen to 4.12 percent in our survey for the week of April 11, 2019.
The run up in rates last year was a significant factor driving the housing market slowdown in 2018, and this was not unprecedented. My colleagues at Freddie Mac have studied periods of interest rate increases and found that, following a period of sustained mortgage rate increases, home sales fell about five percent and housing starts fell about 10 percent. That isn’t too far from what we experienced with existing home sales in the fourth quarter of 2018, which were down eight percent from the fourth quarter of 2017 and housing starts were down about six percent over the same period.
Thinking Beyond the Business Cycle
Mortgage rates declining in early 2019 is a reason for optimism about housing market activity, but there is more reason for optimism than just the short-term boost from lower rates. When we look at housing market activity, it helps to think beyond the business cycle. Statistical decomposition of housing market indicators reveals medium-term (8-32 years) and long-term (>32 years) trends are important drivers of housing market activity. These trends reflect demographics that, over the long run, will dominate housing market activity. To think about this, we need to consider the housing market lifecycles of both the young and the old.
The Millennial generation will drive housing market activity for years to come. They have been slow to start their housing lifecycle compared to earlier generations, partly because of sociological changes and partly because of economic factors. My colleagues and I examined the factors driving household formation and homeownership for young adults of the Millennial generation as compared to Gen Xers at the same age. We found that sociological factors, like delayed marriage and lower fertility rates, were significant drivers of delayed household formation and homeownership among Millennials. However, these factors were dwarfed by economic factors such as declining labor force participation and higher housing costs. Our research showed that higher real housing costs explains almost half of the eight-percentage-point decline in young adult homeownership rates for Millennials as compared to Gen Xers.
On the other end of the age spectrum, my colleagues at Freddie Mac looked at the housing choices of seniors. They found that seniors born after 1931 are staying in their homes longer, and aging in place, resulting in higher homeownership rates for this group relative to previous cohorts. In total, seniors are holding 1.6 million housing units off the market by aging in place.
The boost in demand coming from the aging of Millennials and extended lifespan of seniors is putting pressure on a housing market that is unable to build enough homes. The result is continued pressure on house prices. Despite the recent moderation in house price growth, house prices are still outpacing incomes.
Over the next few years, housing demand will provide a boost to housing market activity. However, a significant longer-term risk is that the imbalance between supply and demand will trigger another house price bubble. The experience of the last decade shows that the inevitable collapse of a house price bubble is far more painful than the ebb and flow of the typical business cycle.