Crisis or “Semi crisis” – what does that mean for the mortgage market?
by Tom on September 16, 2009
in Market Musings, banks
Here’s my take on things:
- The market has recovered too far too fast for what’s happening in the financial world. It’s not justified.
- There will be some adjustments to that at some point.
- If the adjustments (a downturn) in the market are relatively minor, it will help interest rates because money will move from the stock market to the bond market.
- If it’s a nasty “Sept. 2008″ type of event, we could see people move money from the stock market and the bond market into cash. That would not be good for interest rates.
I was talking to my good friend, Jeff Brown, about it the other day and he asked me, “What do you think are the odds of a truly nasty meltdown happening within the next 3 to 9 months?”
My answer, “30 to 40%.”
Tom Vanderwell
Jim Rogers: I Expect a Currency Crisis or Semi-Crisis | The Big Picture
The current recovery is just a consequence of the fact that consumption fell so dramatically in 2008 and people have to buy things they need in 2009, Rogers told “Worldwide Exchange.”“How can the solution for debt and consumption be more debt and more consumption? How can that be the solution to our problems?,” he said.
“I would expect there to be a currency crisis or a semi-crisis this fall or next year. It’s crony capitalism, Bernanke and Greenspan have brought crony capitalism to America … but that’s not going to solve the world’s problems,” Rogers added
Fork in the Road – Part 2 – It’s Coming Fast!
by Tom on July 23, 2009
in Guest Posts, Market Musings, Realtor Thoughts
On Tuesday, I posted Part 1 of the Fork in the Road Series by Jeff Brown from Brown and Brown Inc. Tonight, Jeff’s talking about the timing of it all. Let’s just say the clock is ticking…..
Read it and then call Jeff at 619-889-7100 or call me at (616) 292-7559 and let’s talk about how the market is going to affect you and how we can help you navigate through it.
Tom Vanderwell
Real Estate Investors — Are You In ‘Wait ‘n See’ Mode? Breaking News: Time Ain’t Your FriendPosted @ 8:41 pm – Filed under Buying Income Property, Economy, Financing, Market Correction, RE investment strategies, San Diego Property Owners
Let’s talk a little real estate history tonight, along with (takes a deep breath) some governmental lessons we’ve already lived through, if not learned from. (That screamin’ you hear in the background is my high school English teacher.) This isn’t a post on politics as much as it’s a review of the litter left on the roadside by history — litter some of us prefer calling empirical evidence.
As I said last night, the ’70’s was the first time economic policy went full speed executing the combination of massive spending + tax hikes + huge increases in our money supply. That troika proved beyond a doubt to be THE slam dunk recipe for record inflation, real estate appreciation not seen in my lifetime ’till then, or since the end of WW II for that matter, interest rates over 15%, and a continued marginal tax rate for the biggest income earners of — wait for it — here it comes — 70%! If you lived in California back then, and found yourself in that tax bracket, you netted roughly 21¢ on every subsequent dollar of income after taxes. In technical terms, I think economists call that a disincentive.
History has recorded the result. A recession lasting years. Loss of jobs, property, and hope so staggering, the ‘Misery Index’ was born. It was the first really bad times I’d experienced as an adult. Compare our status quo now to the economic nightmare of the early ’80’s.
Back then there was rising unemployment, a recession, double digit interest rates, and a mortally wounded real estate market. Now? We have rising unemployment, a mortally wounded real estate market, proposals for higher taxes, and massive new spending everywhere we look. The point is that we appear to have much in common with the period ‘76 through give or take ‘83/84. A mercurial rise in real estate prices followed by recession, and severe lending challenges.
Interest rates aren’t 15% now you say? True enough. But ask the nearest real estate investor the difference between losing a great deal due to high rates, or underwriting so silly even ultra-conservative investors raise eyebrows. There is no difference, as the result is identical — no deal.
Here are the results demonstrated in the ’80’s and the circumstances preceding them in the ’70’s. Do they sound somewhat familiar?
# High marginal tax rates — rising rates on capital gains
# An unreliable source of real estate financing
# High unemployment — still on the rise
# Massive government spending — with no end in sight
# Historic increases in the nation’s money supply
# A gravely wounded real estate marketI now quote a relatively (couldn’t resist) credible source on the subject of insanity. Einstein put it succinctly when he so pithily said — “Insanity: doing the same thing over and over again and expecting different results.”
Under what rational school of logical thought does anyone think we’ll end up with different results this time out? Please, don’t answer, as it’s a rhetorical question.
Here’s where I bring up two very important factors which are currently in play — only one of which was existent in our historical example. First, regardless of what the LameStream media would have you believe, real estate remains fiercely local in nature. What’s true in San Diego can be almost foreign in another region. This isn’t opinion. While Las Vegas is floating face down in the water, some selected regions are producing very solidly positive fundamentals — a result which still acts as a siren song to prudent real estate investors.
Second, the status quo in which we currently exist doesn’t include, at least for the moment, double digit interest rates. Hence the window I wrote of last night. That window has a shelf life people. Those in ‘wait and see’ mode will find themselves up the river without a paddle — or newly acquired income property with rapidly rising net operating incomes and low fixed rate financing.
Those who took advantage of this same window back in 1979 soon found themselves in an atmosphere of upward spiraling rents, crashing vacancy rates, and ever increasing cash flow.
I dunno, sound OK to you?
It’s time to move it or lose it people. Tick tock.
Take a minute and give me a call. One thing most folks tell me is how they learned answers to questions they hadn’t known to ask. 619 889-7100 will find me. Have a good day.
A Fork in the Road
by Tom on July 21, 2009
in Guest Posts, Market Musings, Realtor Thoughts
Here’s another guest post (part 1 of 2) from my friend and real estate investment connoisseur Jeff “Bawld Guy” Brown. Jeff spends his days helping people invest in real estate as a road to retirement (something everyone is having a harder time reaching these days.)
Jeff and I have spent considerable time discussing his “fork in the road” theory and I’ve got a couple of thoughts to chime in:
- I think there’s a very high probability that he’s right and the next few years are going to go one of those ways.
- I think that it’s worthwhile reading not only for those who are investors, but anyone who has a financial stake in the real estate world.
Take the time, read it over and then either e-mail Jeff Brown or call him at (619-889-7100) or e-mail me at Straight Talk or call me at (616) 292-7559. We’d both like to talk with you further.
Tom Vanderwell
P.S. Part 2 will be coming Thursday night
Are We Coming To A Real Estate Investment Fork In The Road? · BawldGuy Talking
Are We Coming To A Real Estate Investment Fork In The Road?Posted @ 7:15 pm – Filed under Buying Income Property, Cash Flow, Economy, Financing, Market Correction, RE investment strategies, San Diego Property Owners, Texas
Yeah, I know, there are more than two schools of thought when we start talkin’ about what’s next in the national economy — especially in the context of the oh so important real estate markets. I get that. But the fork I see are two roads really more or less going in the same direction, which I realize is confusing. Hang with me.
This isn’t new ground by any stretch, as many have written endlessly on ‘what’s next’ — to the point we’re all hittin’ the weary wall. Sooner or later though, it’s gonna break one way or the other, something on which there is universal agreement.
The most likely direction I see us taking is on the same sad dirt road on which we found ourselves in the ’70’s and early ’80’s. I was gonna go all linky on ya, but decided it’d be far more instructive to simply begin the discussion.
Inflation followed the ‘74-75 recession. In fact, it was the first time it had ever reached double digits in my lifetime — at least to my knowledge. From ‘76 through fall of ‘79 inflation was an infection and the doctors seemed to have gone fishin’. For example, San Diego real estate went up a more or less steady 2% — a month — for those nearly four years. We’d never seen anything like it.
When it predictably hit the fan, prime rate was over 20%, FHA was about 16.5%, and both were there to be seen, not used by anyone but the most desperate. It’s a very close call in my opinion, but I think we’re maybe about to be headed that way.
The other road on which we may find ourselves sports the above mentioned inflation but without the accompanying robust economy. Seems oxymoronic doesn’t it? But the phrase ‘Stagflation’ was born just about 30 years ago. Inflation was off the charts while recession deepened. Interest rates remained high for so long, I remember celebrating at the local steakhouse when I closed a deal with an interest rate under 12%. Not makin’ that up. When rates finally dropped to single digits we nearly became euphoric.
Here’s the common denominator between the two scenarios: Both will have windows of opportunity (already open) for real estate investors. And no, this isn’t some convoluted NAR message saying “It’s a great time to buy real estate”.
In either case the entry level home buyer will find themselves shuffled off the stage. Either rates will be way to high, or prices will have left them behind. Meanwhile the supply of rental property, affordable that is, will begin to shrink. Nobody, or in any case very few, will be building. Vacancy rates will tumble as rents find new heights. This is already happening in some regions. Texas is one major example as you may have already guessed.
Those who lock in relatively long term, low interest rates now, will find themselves in the Catbird Seat. My hands-on experience with this came in San Diego of course. Vacancy rates not measured in percentages but rather time — sometimes hours. Really. Owners insisted on month to month rental agreements so they could follow (read: adjust to) the upward trending rents. Folks who’d began with a ‘break even’ property found themselves awash in cash flow a year or two later.
They did this at rates of 7.5-9%! When rates almost doubled shortly thereafter, they found themselves with slowly rising expenses, a fixed cost for borrowed money, and very quickly rising rents. Gimme that combination any time. That combo is in your future, in my humble opinion, no matter what happens.
The key though is to act before the bull’s waste product hits the wildly spinning metal blades. Once the interest rates and/or prices get their death grip on what makes investment sense — your ship will have sailed — whether you’re on it or not.
There’s no ‘being late’ to this particular party. That great deal at 5-7% becomes an easy ‘I’ll pass’ at 8-10%. So if you’re late, the party will go on without you.
I’m very interested in what you have to say — including how long you think this current window of opportunity might last.
If you wanna talk about how you might take advantage yourself, gimme a buzz at 619 889-7100 or email me. Have a good one.
Guest Post – Being a Seller in a Buyer’s Market
by Tom on April 28, 2009
in Guest Posts, Market Musings
Once again, I’m turning to my friend, Jeff Brown, for today’s guest post. Jeff has an uncommon ability to generate the type of “Straight Talk” that is needed in today’s markets.
I hope you enjoy this!
Tom
Selling Real Estate In A Buyers’ Market? Here’s How To Turn The Tables · BawldGuy Talking
Disclosure: In order to avoid hurt feelings I’ve taken some liberty with some of the facts of the example used. These changes are insignificant as they relate to the main theme. They’re required, in my judgment so as to protect the privacy of others. You’re free to continue reading now.This example recently took place in a smallish northern California city.
First of all let’s face something that may be our currently reality — it’s entirely possible real estate in general is beginning its painful U-Turn as we speak. It’s also entirely possible it ain’t. From my vantage point, which allows me to see more than a few markets up close and personal, there’re too many signs for me not to think something might be afoot. But I digress, and besides, we’ll not know for sure until our rearview mirror tells us, right?
Buyers in markets so heavily tilted in their favor tend to behave accordingly — Duh. They make sometimes insultingly low-ball offers. Insist sellers pay a large part if not all their closing costs. Want price adjustments at every turn, mostly from the leverage they perceive available to them during the inspection period. They do it until they sense the seller is about bleed out, then smile, back off, and wait for the escrow to close.
So the million dollar question is, just how does a seller successfully shift the balance of power? Can it even be done? You bet your bloodsucking vampire-buyer it can. It’s so simple, yet so many sellers are afraid to implement the approach. I’ve never understood why.
A recent example comes from our own files. Our seller, as we warned him from Day 1, had to swallow pretty much everything the buyer wanted. Still, the final price was a record high in that neighborhood since about August of last year. Not bad. The buyer had made his offer literally hours after it had hit the market. He wanted it. And why not? The property itself was nearly perfection personified — a factor which shouldn’t be lost on you.
Every time we yielded to the buyer’s agent (on one point after another) it was quietly mentioned by us how this was a buyers’ market and we really had little choice. Once we arrived at the bottom line, which was, according to our seller, written in his own blood, we made one itty bitty request of the buyer’s agent.
We’d like the deposit, which was nearly $10,000 on a sales price under $500,000 — to become permanently/irrevocably non-refundable on the last day of the inspection period — passed by escrow through to the seller at the end of business that day. We’d been so reasonable throughout, he felt he couldn’t/shouldn’t refuse this one small request.
Then the appraisal came in low. The agent said that was ‘unexpected’ but the seller would need to ‘adjust’. We politely demurred, instead saying the buyer would need to be paying for more of his own closing costs than previously agreed. “He doesn’t have it” replied the agent. “Then I guess we have a problem, ‘cuz the seller just ain’t in the mood” said the ‘other’ Brown. Continuing politely, he said, “You’ll need to figure a way to make it far more palatable for the seller. He’ll adjust to this farce of an appraisal, but your client will hafta come up with a lot more than he has so far. This is a two way street.”
One wonders what the conversations must’ve been like between the buyer and his agent at this point. There was simply no way, no how the buyer was gonna walk away from his nearly $10,000 deposit — and everyone knew it. The best part? That deposit was like the 10 ton elephant in the room nobody (needed, wanted to) talk about — especially the buyer’s agent.
We may hear from various buyers and/or agents saying they’d surely not ever allow a deposit to ‘go hard’ as it’s called. Fair enough. But I’ve been able to make it happen over half the time in every buyers’ market in which I’ve participated, with the exception of ‘74-75. Why not then? Gimme a break, as I was 23 at the time and hadn’t yet had the full advantage of all the mentoring I’d eventually receive.
If you’re a seller in a buyers’ market, please put this strategy into play. Buyers and their agents tend to become more than a tad cocky, and will often let their guard down. I call it IBS — Invincible Buyer Syndrome. It’s often exacerbated by a much worse malady — IBAS — Invincible Buyer’s Agent Syndrome. The really pivotal players more times than not in this approach are the buyers’ agents themselves.
Anywho, give it a try. In this example it generated about a 7% increase in our seller’s ultimate net proceeds — not a bad result, all things considered.
Wanna talk? Call me at 619 889-7100 or email me through the Contact BawldGuy widget up top. Have a good one.
I believe they call this a “Twofer”
by Tom on February 5, 2009
in Guest Posts, Market Musings
Why would they call it a “Twofer?” A couple of reasons:
- Because David Shafer and Jeff Brown are two of my real estate and investment friends who I’ve had the privilege of engaging in many online, in person and over the phone discussions with and I respect them both and their views very highly.
- Because I’ve promised David that I’d write a review of his book but due to a variety of issues, I haven’t been able to, so instead (for now) I’m taking the liberty of guest posting the review that Jeff Brown wrote of David’s book.
Read the review, buy the book, talk to Jeff, talk to David, talk to me. We’ll all be better off for it!
My First Ever Book Endorsement — David Shafer And Uncommon Wisdom · BawldGuy Talking
David and I met a little over a year ago. He not only has the innate ability to understand what works, he’s also a pro after my own heart. Instead of taking things at face value, he thinks. What a concept. He bases his investment philosophy and his real life investment strategies and choices on historically empirical performance evidence. You might be compelled to ask, “What will they think of next.” But there I go again, being Captain Obvious. Imagine, someone who demands to know the real facts — the real life historical performance data of available investment options — before making a decision.I’ve never endorsed a book on these pages, and for excellent reasons. Though I know of several books for which I hold much respect, the average person simply can’t translate most of what they teach into their own reality. The whole “I did this and so can you” has a fatal flaw. Allow me a baseball analogy. (Hey! I heard that. No groaning allowed.)
You and I can read how to throw a Hall of Fame curveball written by Sandy Koufax till our eyes dry up and fall out. The best curveball most folks will end up throwing though, would be a pitch that might discernibly change direction. You might understand the principles, but you soon learn there’s a reason the definitions of amateur and professional are so different. Duh.
Same goes with investing for retirement. David’s book, Dr. Dave’s Uncommon Financial Advice is exactly that — uncommon. One of the most consistent threads I found in reading it cover to cover — twice — was his underlying advocacy of ‘Call the guy’. Deal with real pros. Does he recommend specific investments? Yep. Does he back ‘em up with real life data? Yep. Is there some ‘how to’ and ‘you can do this’ included? Yep. The difference is, the things he tells the reader to do themselves can be done successfully by a smarter than average eighth grader.
Anything involving concepts more complex in nature? He strongly advises to call the pro — period.
He demonstrates in detail why some of the so called ’solid investment’ axioms of the last couple generations are nothing but the product of cynical marketing. How 401(k)’s are Uncle Sam’s way of collecting more taxes in the long run — from the very taxpayers he’s purporting to help. I dunno. Ever read that before?
Here’s a sampling of what you’ll learn:
# The real scoop on the massive failure of mutual funds as a retirement vehicle.
# Why investing in an EIUL is how the wealthy have been doing it for years.
# Why 90% of Americans must rely on government and others after retirement.
# Why diversification is a four letter word.
# Paradigm changes in thinking that must be adopted to retire well.
# If leverage isn’t part of your retirement plan — prepare to be disappointed.David Shafer’s new website, Shafer Financial is well worth your time. He offers the reader real value — a rare commodity these days. He’s been a regular read for me since I met him.
I endorse this new book without reservation, and furthermore encourage my readers to take the hint and purchase it today. You can make that happen by going here.
I love the way Dave writes. As I recently told him, he’s the only guy I know who manages a vanilla style while making it work. How does he pull that off? I don’t like vanilla ice cream, but give me enough chocolate sauce and I’m there with a spoon. His chocolate sauce is the impressively rich detail he provides in the form of empirically historical evidence — all performance based. You’ll find yourself, as did I, rereading passages as you mumble, “I never did really believe those mealy mouthed SOB’s”.
The Power Of The 21st Century Real Estate Investor: No Longer Hostage To Geography
by Tom on January 12, 2009
in Realtor Thoughts
This is another guest post from my friend Jeff Brown from San Diego. Had breakfast with Jeff the other day. A great guy and someone with a very solid sense of what’s important in real estate. I hope you’ll take the time to read this…..
Besides the real estate investment myths that have survived for decades, maybe the most costly carryover is this one: “Gotta stay local. Must be able to drive by my properties or the world will stop spinning, the sun won’t rise in the east, and McDonalds will stop sellin’ hamburgers.”
Really?
So many ‘age old truisms’ have fallen by the wayside in the 39 years since I started doin’ this. Exchanges are now ‘delayed’ instead of having to close simultaneously. Yeah, you heard right, simultaneously. You think identifying your uplegs in a tax deferred exchange bring with it a little pressure? Gimme a break. Try closing three properties being traded into seven properties — and all the lenders, title companies, ad nauseam have to cooperate so that all 10 properties close on the same morning. Sometimes I look back at those ‘cowboy’ days and wonder why more investment brokers didn’t just drop dead in the last days of an exchange. 
But I digress.
Along with all the white noise driving us nutso, the information/communication age in which we live has also made buying real estate hundreds or thousands of miles away a real option. When I woke up one day back in the last months of 2003, knowing San Diego income property was no longer viable, I removed Brown and Brown’s San Diego borders. No longer would we or our clients be shackled by the artificial limitations of geographic location.
An example in real life.
Here’s the Reader’s Digest version of a couple who decided awhile back to Get Outa Dodge and get serious about their retirement.
Their ‘Dodge’ wasn’t San Diego, but very similar. The numbers simply made no sense anymore. They listed their rental home and triplex for sale. When they sold we came in and turned the sales into exchanges. When they closed we already had six properties waiting for contracts. About 40 days later those properties closed and their exchange was complete.
They signed all documents from beginning to end either in their own kitchen, or the escrow company. They received full inspections with any work needed done to their satisfaction. Property management came in at the end just before closing and captained a smooth transition. All loan docs were signed in their own home, at their convenience. The tax deferred exchange was handled by us while using an Accommodator in San Diego. How well do we know this company you ask? Well, I know the owner. My dad did business with his dad beginning around 1964. Now we do business with each other. That’s how well. Over 40 years of earned trust and demonstrated confidence.
I did business with them before delayed exchanges existed, or were even a gleam in the Starker family eyes. Who’s Starker? That’s a long story, but suffice to say they’re the reason we don’t hafta close exchanges simultaneously anymore. God bless them.
A multi-property, multi-state exchange managed by our firm in San Diego. Their properties were in a different state. The properties into which they traded were in yet another state — as was the lender. Their new real estate attorney (referred by guess who) resides in still another state.
Sensing a trend here?
Wherever you or your properties are, in today’s vastly reduced world, just isn’t relevant. What’s relevant?
The boundaries holding real estate investors hostage to their local market exist only in their minds. When regular folks can successfully do all these things, and without leaving town once — if that’s their preference — then all the roadblocks are only imagined.
Most local real estate markets around the country are not candidates for investment. You may correctly infer from that statement there are local markets proven to be not only attractive now — but also show all the signs of being fundamentally sound economically for a long time. We used to call places like that San Diego. Alas, times change. Those who recognize these changes and act accordingly will prosper. Those who don’t will no doubt realize years later, they were victims of Stockholm Syndrome, the real estate version. Bonding with the market that’s held you hostage ain’t the way to the retirement for which you’ve planned and worked so hard.
‘Local’ today is anywhere we want it to be. Anywhere it makes sense to be. Anywhere that will significantly advance your journey to retirement — or speed up that trip. Hey, now there’s a thought. Ponder that. But not too long, OK?
Tic Tock.
Use your local computer to get ‘puter’s attention. We’ll end up in a real life conversation about what local real estate market might be best for you. Meanwhile, browse through some of the podcasts and see if they don’t speak to your circumstances or what you’ve thought all along. Have a good one.
Some Straight Talk about Rents Part II
by Tom on November 10, 2008
in Uncategorized
We ran part one of this series last week from my friend Jeff Brown. Here’s the second part of it. Enjoy!
Real estate investors’ life blood is slam dunk knowledge of neighborhood rents. If they don’t know, or worse, think they do and are wrong, not much good happens. In fact, mistakes in what an income property can realistically produce in, ah, income, can lead to what Grandpa used to call unintended consequences. He liked to sugar coat bad news whenever possible.
Monday’s post talked about discovering rents/vacancy rates for a property in a neighborhood. Let’s add to that today by fillin’ in some potential comparative flaws.
By having the rents reliably documented in a given neighborhood, you’ve established a solid baseline from which you can now make informed decisions. Still, if you don’t include the following, you’re not outa the woods yet, and could still find yourself scratchin’ your head after the fact.
What’d he say?
Let’s say you’ve established rents for 2/2 bath units with 800-900 square feet. Operation clipboard yielded bunches of info on this unit. You have 14 to compare. The range of rents however, have you a little confused. Why is there a difference from low to high of over 15%?
I dunno, let’s look at the replay Coach.
Here’s what you’ll no doubt discover. The units rentin’ for $1,000 look the same as the ones goin’ for $1,175 — from the outside — especially to the dufus who just drove by. But the latter have 2 full baths instead of 1.5, and their kitchens sport dishwashers, which aren’t in the cheaper unit. If you’re a tenant and can afford the extra $175, are you gonna grab the bigger second bathroom plus a dishwasher to boot? If there’s estrogen in the equation you are. Oh, and did I neglect mentioning the granite tiled kitchen countertops? Bingo.
Knowing these differences is crucial to understanding the various neighborhood rents — anywhere. This goes for differences in parking too — both in quantity, quality, and location. One building offers 2 off street spaces per unit, the other just 1. Then there’s covered vs uncovered. Does the property you’re thinkin’ of buying have garages? Woo hoo! Garages are the gold standard.
One unit has a wall air conditioner and a wall heater, the other central heat and air. How’s the floor plan? Women especially are sensitive to what I’ve termed ‘I Love Lucy’ kitchens and floor plans in general. All these things, and the list is loooonger, affect the ultimate price for which you’ll be able to rent any particular unit in any neighborhood.
This is how more experienced real estate investors add value. They accomplish it by addressing what’s known as functional obsolescence. You know, a carport turned into a garage. An I Love Lucy kitchen quickly/cheaply morphed into the 21st century. Forced air heat & a/c added, especially in areas where they’re either expected or the weather dictates. One of my all time favorites was when a client, back in the late 90’s called up all excited, breathlessly tellin’ me about a great find he’d made on a couple fourplexes on separate but contiguous lots. When I asked what made them so good, he said the price was way lower than what I’d sold him months ago just around the corner.
I smiled. Knew exactly the units to which he was referring.
I said, ‘Hey Mike, before ya go off halfcocked, go out there again and check to see how many gas and electric meters there are for each fourplex.’ Yer catchin’ the drift here, aren’t ya?
Of course the prices were way below everything else. The owner paid all the power and gas for his tenants. In a 6% capitalization market, that meant a price reduction of at least $80,000 or so.
Oh. Never mind. It’s always the little things, isn’t it?
The central concept here is to understand what makes one unit more valuable to a tenant than the one across the street. The amateur drives by, quickly checks Craig’s List, or worse, asks the agent who sold them their home, what the rents should be. The pro looks at units, judges them if you will, much the same way a farmer looks at livestock at an auction. In other words, he wants to know exactly what he’s gettin’ for his money.
And the congregations said…..Duh.
If you were eyein’ a fourplex, and your personal operation clipboard showed that $30,000 would raise the rents on each unit by $200 monthly, what would ya do? Well, it depends, you answer cagily. Fair enough. Let’s say you can buy it for the market capitalization rate of 6% in that area. Now would ya do it? Would ya?
I’ll be puttin’ the real life answer in the comments section no later than end of day Thursday. I’d love to see what you come up with and your reasoning.
Meanwhile, back at the BawldRanch, where the heck have ya been? You can find me by clickin’ on the Contact BawldGuy doohicky. I love talkin’ with new folks. It’s like a fix. That’s ‘cuz I’m like, addicted to this stuff. Have a good one.
Some Straight Talk About Rents
This is another post by my friend Jeff Brown of Brown and Brown Inc. He writes at Bawld Guy Talking and almost everything I read of his is rock solid advice for those who are investing in real estate. I hope you’ll enjoy this one too….
I won’t quote here, something I recently came across, so as not to embarrass the author, who was surely well meaning. Seriously, some of the things I’ve read this year about establishing rents and vacancy rates are amateur at best, and hopelessly misleading at worst. Some of the advice has been off the wall.
Here’s something ya don’t wanna do in your attempt to find out neighborhood rents.
The #1 mistake would be asking your neighborhood real estate agent. That’s not in any way a slam on house agents. But knowing rents isn’t in their job description. Chances your kid’s teacher, who owns a duplex down the street is a far better source than the agent who sold you your home.
So how do you, as a real estate investor, find out what the rents are on that property you have your eye on? Since yer investing mucho dinero I suggest you, or somebody you trust, do the following. (Of course, this in addition to getting estoppel agreements from the tenants when you buy. Always get those.)
1. Grab a clipboard/pen/paper.
2. Head out to the neighborhood of interest and park yer car.
3. Spend as much time as possible talkin’ to tenants, on site managers, and others you see, in person, belly to belly.
4. Make note of ‘For Rent’ signs and their phone numbers, then call them while standing there. Ask the pertinent questions.
5. Make extensive notes about the interiors/exteriors of everything you see. I bring a camera when I do rent surveys. I make a note of the order of what I see, and describe the picture I took, in order to make it easier to match pics with market info.
Here are some of the questions I typically ask:
What’s the rent? The deposit? How thorough is their background check? Do they take Section 8? In their opinion, are they under rented for the neighborhood? Silly question? Hardly. Many landlords, for various reasons, mostly subjective in nature, keep their rents lower than everyone else’s. Sure, you’ll figure that out while doing this ‘boots on the ground’ rental survey. But how much better to hear it from the landlord straight up? What’s the square footage. (take the answer to that one with a grain or two of salt)
On site managers as a breed, generally love to help out those who don’t try to BS them. I tell them exactly who I am, and what I’m doin’. They appreciate the honesty and the opportunity to strut their stuff. It’s similar, only much, much better when you run into the occasional owner occupant of multi-family income property. Think they pay attention to what the rents are? You bet. They’re almost always pure gold.
5. Visit, in person, all the local professional management companies in the narrowly defined area. They want your business, and will offer any help they can. The caveat I’d add, is they sometimes tend to understate their vacancy rates. Duh They realize they can’t fabricate their rents though, as they can so easily be verified.
Try to talk with several tenant’s in a building if possible. See a maintenance guy around? They’re solid gold info machines. Take him around the corner to the coffee shop and pump ‘em ’till the well’s drained. It’s more likely than not some of the other owners in the area use him too.
The highest quality source are other income property owners. You’re thinkin’, well duh, of course. Yeah, me too. But after having read some of the articles, posts, real estate forums, and emails on the subject, not one said to query income property owners themselves. Go figure. They can also tell you things only long term locals would know. Who maintains their property better or worse than others for instance. Or, who’s been experiencing an outa whack string of vacancies lately. Drugs?
And yes, you can look at Craig’s List. But a word to the wise — use it as your secondary data source. Asking prices for rents are roughly equivalent to pending sales — not worth all that much. Tellin’ a buyer for yer units that the guy down the street is ‘askin’ $1,200 for his new vacancy’ usually doesn’t cut it, know what I mean, Verne? Again — amateur night.
In the end, the more time spent with your own boots on the ground, the more hard, reliable data you’ll accumulate. Can’t tell ya how many times, whether I was workin’ for the seller or the buyer, that my first hand knowledge, based upon my own shoe leather, made the difference. It’s called income property for many reasons, not the least of which is — the value is based upon the property’s income stream, quantitatively and qualitatively. If you don’t know the facts, you could either miss out on a good deal, buy a pig in a poke, or find yourself out of a sale you thought you had.
Over the years, I’ve saved clients literally millions of dollars in both acquisitions and sales ‘cuz I was able to undress the other side’s claims for rent. If I’ve said rents should be higher, I always had empirical, documented evidence awaiting any skepticism. It works almost every time. Real is real.
The best result for a buyer of income property is when you or your advisor does what I’ve recommended here, happily discovering the rents are easily 20% below market. Talk about some pretty quick equity gain.
There’s more, but you get the picture, right? Driving the neighborhood, or Heaven forbid, askin’ the local real estate agent, is the surest way to stay woefully ignorant about what might be the most important data required for the sale/exchange/purchase of income property.
So, you haven’t called, you haven’t written — what’s the deal? Get a hold of me and we’ll figure things out.
