Could it be housing prices are heading up, finally? Well, maybe, maybe not, but good news from CoreLogic, which announced that prices nationwide increased from March to April of this year. Although still early, some good news (for those selling at least). However, the rise in prices was not uniform throughout the country. Some states were still seeing enormous price declines. Leading the list in price drops was Idaho which averaged a 15.2% price drop from March. I'd say it must be those Idaho'ans leaving the cold weather to head south but Arizona certainly didn't show much demand increase as its prices dropped by over 11%.
Although price drops seem like a bad thing, when price drops are combined with rising rents you've got an increasingly attractive investment. Combine that with record low interest rates and it really does not get any better for those who are looking to invest for the longer term. To help make my point, check out what Marcus & Millichap wrote for their 2011 National Apartment Report: (You can access the full report by registering here)
National Apartment Overview
◆ All 44 markets will post employment growth, vacancy declines and effective rent gains in 2011, confirming a sweeping recovery and expansion in the U.S. apartment sector above expectations. This year will mark the first across-the-board reduction in vacancy since at least 1990. This is driven by the release of pent-up demand in the aftermath of the Great Recession, lower turnover rates, falling homeownership and job growth.
◆ Apartment completions will total 53,000 units this year, 46 percent fewer than delivered in 2010. New supply will again fall critically short of demand, which is expected to reach 158,000 units. U.S. apartment vacancy will decrease 110 basis points in 2011 to 5.8 percent as a result, matching the decline recorded in 2010.
◆ As vacancy in 2011 aligns closely to pre-recession levels, owners will regain pricing power. Asking rents will rise 3.5 percent to $1,067 per month, while effective rates will increase 4.5 percent to $1,002 per month.
Amazing what happens when strong demand meets limited supply. The fact that you are still able to pick up single family properties in great areas for fire-sale prices is not rational! Eventually, the market will correct and those that got in now will have made a bundle, first off of the cash flow generated from holding the property and properly managing it, then later from the appreciation of the asset itself.
For a more in depth look at a property I'm currently working on, see my previous post on why you should invest in real estate.
Showing posts with label Investment. Show all posts
Showing posts with label Investment. Show all posts
Thursday, June 2, 2011
Tuesday, May 24, 2011
Why invest in Real Estate?
The other day Zillow came out with a report that showed another large drop in housing prices. This particular report showed an 8.2% drop in housing prices nationwide year over year, certainly demonstrating for many people that real estate is a terrible investment right now. I, myself, have talked to multiple people who think real estate might be a good investment in the future but, with the expectation that housing prices will drop further, they want to wait until prices pick up.
I believe those who are waiting on the sidelines are wrong to do so. Price declines are scary for sure but, as Warren Buffet said, "I'm fearful when others are greedy and greedy when others are fearful". Price declines have corrected to the point where they are below most rational measures of value. In many places, including my town of Phoenix, Arizona, properties are so cheap that it would be more expensive to dump all building material on dirt than to buy an existing house. Sure, prices could drop a little further but it is highly unlikely that they will drop substantially more than they already have. Anyone remember back in early March 2009? The same thing was happening to the stock market, I remember reading about and hearing so much negativity about stocks and how stock market investing was no longer a good investment. Remember how that story ended? Stocks have almost doubled from their March 2009 lows and the most beaten up stocks - the banks, are up anywhere from 2-6 times what they were trading for in early 2009.
Of course, just because the stock market came roaring back after a protracted drop doesn't mean that housing will follow the exact same pattern. Obviously, there are differences in the two asset classes and, like stocks which have seen largely diverging returns based on the individual company, real estate will recover unevenly based on geographic and specific location as well as asset type. However, as I will show in a few examples real estate is a fantastic investment right now even if no appreciation to the asset is expected. Add in some appreciation and you have an investment capable of producing annual returns of 30% for the life of the asset!
How could this be you ask? Consider a property I am currently getting ready to sell in Surprise, AZ. Selling price of this property is $110,000, with all closing costs paid by the seller. Current market rents for comparable properties (4B/2B, ~2,000 square feet) are $1,100 - $1,200. (It rented a little over a year ago for $1,050 and rents have gone up since then). Additional expense assumptions are as follows:
Maintenance allowance: $100/month ($1,200 per year)
Vacancy allowance: 1 month vacant per year
Taxes, Insurance, HOA, marketing: $1,800 per year
Annual return on investment in this case is 8.3% (will be less if property management services are needed - property management typically charges 10% of rent collected)
Not a bad investment for someone looking for regular cash payments for retirement or supplemental income purposes. And much better economics and upside than purchasing an annuity, CD or bond.
Now, lets look at the return if this investment were to be financed. Assumptions:
Purchase price: $110,000
Assumed rent: $1,150
Down payment: 20% = $22,000
Interest Rate: 5%
Term of Loan: 30 Years
Mortgage Payment: $472/month
As this example shows the investment opportunity is incredible. If interested in this property give my office a call at 480 532-7999. We should also have pictures up soon on our website www.betterinvestingre.com.
We are very interested in the long term success of our clients which is why we offer 3 years FREE professional property management for any property purchased through us.
End of quick plug
The amazing thing is that although this property is indeed a fantastic deal, we are finding amazing investments throughout the valley with similar returns. It looks like Warren Buffet might have been onto something after all.
I believe those who are waiting on the sidelines are wrong to do so. Price declines are scary for sure but, as Warren Buffet said, "I'm fearful when others are greedy and greedy when others are fearful". Price declines have corrected to the point where they are below most rational measures of value. In many places, including my town of Phoenix, Arizona, properties are so cheap that it would be more expensive to dump all building material on dirt than to buy an existing house. Sure, prices could drop a little further but it is highly unlikely that they will drop substantially more than they already have. Anyone remember back in early March 2009? The same thing was happening to the stock market, I remember reading about and hearing so much negativity about stocks and how stock market investing was no longer a good investment. Remember how that story ended? Stocks have almost doubled from their March 2009 lows and the most beaten up stocks - the banks, are up anywhere from 2-6 times what they were trading for in early 2009.
Of course, just because the stock market came roaring back after a protracted drop doesn't mean that housing will follow the exact same pattern. Obviously, there are differences in the two asset classes and, like stocks which have seen largely diverging returns based on the individual company, real estate will recover unevenly based on geographic and specific location as well as asset type. However, as I will show in a few examples real estate is a fantastic investment right now even if no appreciation to the asset is expected. Add in some appreciation and you have an investment capable of producing annual returns of 30% for the life of the asset!
How could this be you ask? Consider a property I am currently getting ready to sell in Surprise, AZ. Selling price of this property is $110,000, with all closing costs paid by the seller. Current market rents for comparable properties (4B/2B, ~2,000 square feet) are $1,100 - $1,200. (It rented a little over a year ago for $1,050 and rents have gone up since then). Additional expense assumptions are as follows:
Maintenance allowance: $100/month ($1,200 per year)
Vacancy allowance: 1 month vacant per year
Taxes, Insurance, HOA, marketing: $1,800 per year
Annual return on investment in this case is 8.3% (will be less if property management services are needed - property management typically charges 10% of rent collected)
Not a bad investment for someone looking for regular cash payments for retirement or supplemental income purposes. And much better economics and upside than purchasing an annuity, CD or bond.
Now, lets look at the return if this investment were to be financed. Assumptions:
Purchase price: $110,000
Assumed rent: $1,150
Down payment: 20% = $22,000
Interest Rate: 5%
Term of Loan: 30 Years
Mortgage Payment: $472/month
Maintenance allowance: $100/month ($1,200 per year)
Vacancy allowance: 1 month vacant per year
Taxes, Insurance, HOA, marketing: $1,800 per year
First year return on investment (cash return only - no equity) = 18.6%
First year return on investment (considering equity paydown) = 24.5%
First year return on investment (with equity and with 3% appreciation of house) = 39.5%
*These returns don't even take into account the tax benefits of mortgage interest that you would be able to take advantage of.
A quick plug:
As this example shows the investment opportunity is incredible. If interested in this property give my office a call at 480 532-7999. We should also have pictures up soon on our website www.betterinvestingre.com.
We are very interested in the long term success of our clients which is why we offer 3 years FREE professional property management for any property purchased through us.
End of quick plug
The amazing thing is that although this property is indeed a fantastic deal, we are finding amazing investments throughout the valley with similar returns. It looks like Warren Buffet might have been onto something after all.
Tuesday, February 8, 2011
Phoenix Area Real Estate Market
I've been noticing a trend in Phoenix area real estate - prices keep going down!
I'll admit I'm not shocked but I am a little surprised that the market hasn't started to turn the corner yet. I was looking in the Palm Valley area today at houses and looked at a few properties which are listed on the MLS that would make fantastic rental properties. One property was a 4/2 and the others were 3/2's. The most expensive was listed at $105,000 - this in an area with a fantastic school district, great shopping and dining nearby, close to the freeway system and right near Luke Air Force Base.
The last property I rented out in that area of town had renters calling me the day I put up the sign in the yard - I ended up renting it out within 2 weeks to a great family that is taking great care of the house - and paying on time! (which is always a large plus in my book). The cash flow on the house is nicely positive even on a 15 year amort loan and that area of town also tends to draw quality family renters who are looking to get into the school district for their kids and settle down.
So going back to the properties I looked at today - and the couple I will investigate further later this week. If we were to pay market price for a property in this neighborhood (which, of course, we wouldn't) then we are looking at prices of a little over $100k for a 4/2 and $89k for a 3/2 & about 1,600 square. Using the 3/2 as an example I would legitimately expect to receive $1,200/month in rent on a property like that if it were fixed up nicely to where a family would want to move into it - less fixed up you could rent it out for $1,000 in your sleep. The 3/2's should be at least $1,100 - at minimum.
So, for this area of town (paying market prices), assuming you pay cash, then your annual yield would be ($1,200*12)/$89,000 = ~16.2% annually. Are your CD's or bank interest paying you that? The stock market has been up but do you realistically expect to make 16.2% on your money? If you finance this purchase and take advantage of the sub 5% interest rates that are out there now then after your down payment you end up with this cash flow:
Down payment = 25% * 89,000 = $22,250
Assumed fix up cost (Just a guess - I haven't actually seen inside yet) = $10,000
Total cost up front - $32,250
Monthly mortgage payment on the remaining $66,750 balance, assuming a 30 year amortized loan at 5% interest, compounded monthly = $358.33
Average taxes + insurance = $150
So, monthly cash flow = $1,200 - (358.33+150) = $691.67 monthly cash flow
Yield = ($691.67*12)/$32,250 = 25.7%
Oh, and by the way if financed that doesn't include the fact that the renter is paying off your mortgage. It also doesn't take into account any appreciation - which its anyone's guess as to when the market will start posting increases but given Phoenix's history of boom and bust I wouldn't at all be surprised to see another strong market back in the valley of the sun - if not within 5 years, at least within 10.
I'll admit I'm not shocked but I am a little surprised that the market hasn't started to turn the corner yet. I was looking in the Palm Valley area today at houses and looked at a few properties which are listed on the MLS that would make fantastic rental properties. One property was a 4/2 and the others were 3/2's. The most expensive was listed at $105,000 - this in an area with a fantastic school district, great shopping and dining nearby, close to the freeway system and right near Luke Air Force Base.
The last property I rented out in that area of town had renters calling me the day I put up the sign in the yard - I ended up renting it out within 2 weeks to a great family that is taking great care of the house - and paying on time! (which is always a large plus in my book). The cash flow on the house is nicely positive even on a 15 year amort loan and that area of town also tends to draw quality family renters who are looking to get into the school district for their kids and settle down.
So going back to the properties I looked at today - and the couple I will investigate further later this week. If we were to pay market price for a property in this neighborhood (which, of course, we wouldn't) then we are looking at prices of a little over $100k for a 4/2 and $89k for a 3/2 & about 1,600 square. Using the 3/2 as an example I would legitimately expect to receive $1,200/month in rent on a property like that if it were fixed up nicely to where a family would want to move into it - less fixed up you could rent it out for $1,000 in your sleep. The 3/2's should be at least $1,100 - at minimum.
So, for this area of town (paying market prices), assuming you pay cash, then your annual yield would be ($1,200*12)/$89,000 = ~16.2% annually. Are your CD's or bank interest paying you that? The stock market has been up but do you realistically expect to make 16.2% on your money? If you finance this purchase and take advantage of the sub 5% interest rates that are out there now then after your down payment you end up with this cash flow:
Down payment = 25% * 89,000 = $22,250
Assumed fix up cost (Just a guess - I haven't actually seen inside yet) = $10,000
Total cost up front - $32,250
Monthly mortgage payment on the remaining $66,750 balance, assuming a 30 year amortized loan at 5% interest, compounded monthly = $358.33
Average taxes + insurance = $150
So, monthly cash flow = $1,200 - (358.33+150) = $691.67 monthly cash flow
Yield = ($691.67*12)/$32,250 = 25.7%
Oh, and by the way if financed that doesn't include the fact that the renter is paying off your mortgage. It also doesn't take into account any appreciation - which its anyone's guess as to when the market will start posting increases but given Phoenix's history of boom and bust I wouldn't at all be surprised to see another strong market back in the valley of the sun - if not within 5 years, at least within 10.
Tuesday, January 25, 2011
Tax Lien Investing
Last time we discussed short sales. Briefly, today I want to discuss tax liens with a future discussion regarding tax deeds.
A tax lien is a claim attached to any piece of real or personal property for the satisfaction of some debt or duty. Pretty confusing huh! What it means is that someone didn’t pay their property taxes and now the government is after them! As usual that isn’t a good thing.
What’s bad for the neglectful tax-payer is good for the tax lien investor. Here’s why: These tax lien certificates are sold by the local counties to investors. What do the real estate investors do with them? Well, they hold onto them until either one of two things happen. First thing that can happen is that the negligent homeowner pays the county the back taxes along with fees and interest. The second thing that can happen is that the homeowner doesn’t pay the back taxes and the owner of the tax lien forecloses and takes the property free and clear.
Did you get that? Free and clear, meaning that even if there was a mortgage it is now history and you have a house for the price of one year’s worth of back taxes. As you can probably guess, that doesn’t happen all that often. As the bank understands this rule they will typically step in if the homeowner doesn’t pay.
That leaves scenario B. In this case the homeowner pays back taxes, fees and interest. The interest rate varies from state to state (even county to county) and often the investor has the opportunity to bid on the interest amount that they will receive when purchasing the tax lien. However, typically, the lien returns a high rate of interest. In Arizona the rate is 16% (although that rate can be bid down by competing investors). Meaning that if you know what you are doing – or you hire someone who knows what they are doing, it is pretty easy to return virtual risk free double digit returns on your money through tax liens. Additionally, the more you participate the more likely it is that you will hit a home run of obtaining a house simply by purchasing a tax lien at your local county auction.
I suppose I should qualify the above statement that the investment is virtually risk free. It is, of course, not risk free. There are always risks in any investment. The big difference in tax lien investing is that, contrary to the stock market, the investor controls the vast majority of the risk by choosing the correct type of property and following the county procedures. In future posts I will discuss some of the specific ways to avoid risk in this investment niche.
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