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The state of long term real estate investing – the perfect storm is here

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The perfect storm for investing

If you’ve either dipped your toe into the real estate investment market, or are thinkin’ of divin’ in for the first time, I’m here to tell ya — you’re on the right track. In the 35 years since I transitioned to the investment side of the business, we’re now, and have been in the only truly perfect storm I’ve personally witnessed in my adult life.

What does that mean? 

It means the price/rent ratios are back to 1959 — literally. Can’t recall how many real estate investment books I read as a young man. I stopped reading ’em for one reason. You had to live in East Toilet Seat, Kentucky to find the stuff about which those books ranted and raved. Not a viable strategy. Now? There are a few regions offering those same price/rent ratios.

There are a precious few of these markets where there are astute builders puttin’ up 2-4 unit income properties. The only thing you should take away from that nugget is — brand new.

The news gets better

Some of those regions are governed by those who believe in capital investment, low or no income taxes, and are very pro business to boot. Also, the locations for many of these income properties are in the 8-10 range of quality.

Then there’s the interest rate.  Investors in 1-4 unit properties are, and have been, payin’ just over or under 5%, 30 year, fixed. To give that some historical context, I submit my personal experience since being licensed in the fall of 1969. It took about three decades for me to see a freakin’ conforming owner-occupied loan with a rate beginning with a number less than a seven — literally. Yet today, qualified investors are lockin’ in loans at less than 5%?!

Two trends are icing on the cake.

As a consequence of some of these regions having become ‘destination points’ for people moving from other states, the supply/demand ratio has tipped in the investor’s favor. This has resulted in the simultaneous blessings of vacancy rates heading downward, while rents themselves are steadily either holding strong or rising.

As Dad would say, ‘This, Son, is a good thing.”

Real estate investors can now acquire new or near new 1-4 unit investment property in golden locations, with stellar price/rent ratios, while generating impressive cash on cash returns due to historically low interest rates, falling vacancy rates, and rising rents. Oh, and if you’re the owner of income property not in these regions, take the hint. You need to tax defer your equity the heck Outa Dodge, and you need to get it done around 4:30 yesterday afternoon.

There’s a technical term we real estate investment brokers employ when all these factors become reality simultaneously. It’s called a Perfect Storm. As I mentioned earlier, it’s the first one I’ve seen since I began doin’ this in 1969. I suspect it’ll most likely be the last I’ll see in this lifetime.

Invest now. Do it.

If you have the wherewithal to invest now, do it. Do it wisely, but do it now. Don’t be one of those geezers who’re always regaling whoever will listen about the time they coulda, woulda, shoulda, but never did.

The state of real estate investing is very good indeed.

Jeff Brown specializes in real estate investment for retirement, has practiced real estate for over 40 years and is a veteran of over 200 tax deferred exchanges, many multi-state. Brown is a second generation broker and works daily with the third generation. With CCIM training and decades of hands on experience, Brown's expertise is highly sought after, some of which he shares on his real estate investing blog.

Commercial Real Estate

When office hunting, don’t call a Realtor first

Often, a startup’s first step when hunting for offices is to call a Realtor, but that is not necessarily a good idea – do your homework first.

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do not call realtor

do not call realtor

Are you getting ahead of yourself?

So you want to buy a building for your startup business? Do you really want to do that? Should you really do that? I am sure you have pondered over these questions in your mind a million times by now if you are actually on the phone asking a REALTOR to show you some places in the location of your dreams! After all, the REALTOR is the first step right? Finding a great affordable location?

WRONG. Your REALTOR is actually the person that you should be talking to LAST. Now I know this seems counter-intuitive, but there are some pretty important steps that must be taken first before looking for a location. Any REALTOR out there that either sends you active listings or takes you out looking for space without the following steps being completed first is either just hunting for a paycheck, or isn’t worth their salt in the industry and is about to make some pretty big mistakes on your behalf.

Before you look for your space…

Here is a quick protocol someone should do before they even start to look for space:

  • A well-built business plan. This should be at least 5-10 pages long. You can actually get great examples and templates at SBA.gov or your local Small Business Administration where you live. Have that business plan ironed out. That is going to then provide you with a monthly rent or loan payment allowance and based upon the information in the business plan that figure may also be altered.
  • A personal financial sheet is going to be needed. This will tell the landlord or the lender, if you and your business will be bankable.
  • Money. Bottom line, it takes money to make money. It doesn’t have to be your money, but it does have to be accessible to you at all times. There will be things that your lender or landlord won’t cover and that will be on you. Consider this the term you probably by now have heard “skin in the game.” Oh yeah, and whatever figure you think you will need to have in your head, double it.

The takeaway

I have had the painful privilege of dealing with hundreds of small business startup’s in my day, and I have also witnessed REALTORS unknowingly destroy a business success before the doors even open. Most of which could have been avoided if the startup would have had these three things figured out before they called the REALTOR.

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Housing News

Housing’s silver lining: turning REOs into rentals

While housing sputters along near the bottom, most entities are cynical of the market, while one company is expanding rapidly and seeing success in turning REOs into rentals while revitalizing communities and getting involved in the up-and-coming real estate hot spots.

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REO-to-rental market

With a continually struggling housing market, the prognosis for the sector is still poor, but there are areas of the nation and types of investments that are improving greatly, pointing to signs of life in real estate. One company embodies the signs of health, a family-owned company in Memphis that focuses on the REO-to-rental market.

Memphis Invest converts distressed REO properties to rentals, and they place a tenant, so it is a performing asset for private investors. The company recently released their first quarter activity report, showing a 67 percent year-over-year increase in the number of its homes sold to investors. Of those, 82 percent were REO, thus providing the nation a great example of how the REO to rental strategy can help revitalize communities one home at a time.

Chris Clothier, Partner at Memphis Invest is one of the nation’s leading experts in single-family rental real estate services and attributes the company’s growth to lower prices and lower interest rates, as he notes they have “removed many barriers for both novice and experienced investors, and these individuals are now getting heavily involved in the single-family rental housing industry.”

Clothier added that many investors have no interest in being a landlord, so they work with companies like theirs to allow remote involvement. “That ease of entry and passive involvement also lead investors to move beyond two or three properties and into portfolios of seven to ten,” said Clothier.

Cities primed for growth

The REO conversion market is heating up, and Clothier points to Memphis, Dallas, and Atlanta as hot spots. “We obviously like Memphis and Dallas,” said Clothier, “and feel that they will continue to be strong markets for single-family rental investments, and we continue to look toward expansion into Atlanta and possibly Nashville. These southern cities are some of the fastest growing areas in the country and have solid, fundamental economies in place. Large employers, solid infrastructure and solid future demand for their core industries mean consistent demand for good housing in these markets. In light of the shift from home ownership to renting, much of that housing demand will be for high quality rental housing.”

Making an important distinction, Clothier adds, “So MSAs with growing economies, solid fundamental industries and growing populations are prime areas – not simply cities with high concentrations of foreclosures.”

What government programs should be expanded or contracted?

In an election year, there is much focus and introspection as a nation as to what our government is doing to help or hurt the economy, and Clothier takes an optimistic look at which programs are beneficial.

“A federal government program that I would like to see expanded is the Federal National Mortgage Association’s (FNMA) role in providing funding to SFH investors,” said Clothier. “This is a group that can and will adhere to stricter guidelines designed to offer protection to FNMA’s portfolio. I would love to see FNMA expand their financing options for investors beyond 10 properties and couple that expansion with tighter lending requirements such as higher down-payments. If investors were asked to put 35 percent to 45 percent down on investment properties in order to obtain mortgages number 11-20, I feel this would draw many investors who are sitting on the sidelines holding 10 mortgages back into the market. These are typically investors who would like to be participating but would prefer to stretch their capital further by using financing.”

Clothier noted, “In addition, I would love to see the federal government work with local governments to turn over foreclosed properties in extremely blighted areas for the local government to remove dwellings and take the properties back to unimproved land. This would greatly reduce crime in these areas, discourage vandalism and blight and when the time is right, allow a community to re-invest and rebuild areas.”

Company growth plans

Where does Memphis Invest see their company headed? “Our growth demands are predicated by the appetite of our clients,” said Clothier. “We are constantly being asked for more options to diversify portfolios and are answering that demand by entering Dallas and Atlanta.”

The company says they will be managing over 2,000 properties in Memphis, Dallas, and Atlanta by the end of 2013, representing $200 million in real estate value. “Future plans involve identifying additional markets that include Nashville, among others, and continuing to meet the demand of the new investor,” noted Clothier.

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Investments

Millennials learning from their Boomer-parents’ mistakes

As Boomers lost their pants with IRAs and 401Ks, Millennials are increasingly seeking out real estate investments and planning out their retirement, taking into account the losses of the previous generation.

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A sizable Millennial clientele

Though the percentage of my clientele who’re 35 years old or younger is less than half, it is significantly sizable, and happily so. Roughly 20%. In any given year, I now have more clients in that age group than in any 10 year period between the time I opened my real estate investment firm, January of 1977, and 2006. This is an excellent trend, if six years can be counted as a trend — and for just one firm.

I bring this up in order to sound the alarm to the children of Boomers. As a Boomer, I view this development as possible evidence of Millennials and their big brothers ‘n sisters eschewing the advice of their elders. This is a good thing.

Millennials learning from others’ mistakes

I view that as a silly question. Boomers as a generation, are retiring ugly, or at best, boring, generally speaking. Millennials and their older sibs are simply using their heads, nothin’ more and nothin’ less. Would you take shooting lessons from a guy with three missing toes? Nor would I — and I wouldn’t take retirement advice from a 69 year old barely makin’ it, whether it was a parent or not.

Based upon first hand experience, I’ve come to admire Millennials. So many of ’em seem to be from Missouri — in other words, ‘show me’. They don’t necessarily buy the story sold them about 401Ks and IRAs being the likeliest road to a solid retirement. After all, it worked so well for their parents — NOT.

I applaud them. The fact so many of ’em are landing on real estate as a vehicle to retirement, shows freshly gained wisdom — and a lotta reading. History shows us that in good times and bad, in recession and in boom times, even, maybe especially in times of economic inflation, real estate not only holds its own, it triumphs. And no, citing your Uncle Fred’s disastrous experience with real estate doesn’t change any of it. People have lost fortunes investing in gold, yet it remains on the ‘A’ list of wise, long term investors.

Staying away from 401Ks and IRAs

So, in case I’m not being clear, the point is to STAY AWAY FROM 401Ks AND IRAS.

They will suck you dry for no readily apparent reason. Sometime around your 45th to 50th birthday it will hit you like a red hot anvil, falling from the sky. ‘Holy crap, I’ve screwed the pooch’. This nasty little thought bubble happens when a 40 to 50-something realizes they have $132,000 in their so-called ‘retirement plan’ at work. This is followed by the horrifying epiphany that there’s no way in hell they’re gonna build that paltry figure into even a laughably viable figure, allowing them to retire to a life of bitter resentment, and endless ‘StayCations’.

Here’s my advice: Get out of your 401K/IRA — period, end of sentence, no exceptions. 

If ya can’t get out, at least stop throwin’ good money after bad, and stop contributing. And no, your next objection about forgoing the ‘hugely beneficial’ employer match, is better left unsaid, to avoid embarrassment. Remember, the vast majority of your parents had employer matches too. Let’s review, OK? How’s that been workin’ out for THEM lately?

Invest in real estate.

Get outa your 401k/IRA if allowed. Pay the taxes and penalty. You’ll be lucky to end up with 50-60% of the original balance. That’s the bad news. The good news? If a solid real estate investment program, beginning with half your current capital balance can’t slaughter the ultimate long term results of your crummy employer retirement plan, then somebody’s not payin’ attention.

Let’s conclude with some real numbers, shall we?

If your parents had invested when they were your age, say back in 1975, they’d of enjoyed two impressive upturns, and one historically colossal upturn in real estate values. Same with rents. If their luck was less than cool, and they retired a couple days before the aforementioned historical bubble burst, where would they have been then, and where would they be now?

So happy you asked, as I lived through those times and know how the final chapter works out. They lost big time — give or take about a third of the value of their real estate investment portfolio, almost faster than they could watch it happen. Yet, having spent just over 30 years investing and/or exchanging when times were good, and waiting when times were bad, they easily built that portfolio into $2.5-3 Million. They paid off their home too. They’re debt free. Imagine that. They never bought into the myth of the employer match or any other such Barnum and Bailey hokum.

From the day they retired their monthly income has never fallen below five figures monthly. Most likely $12-15,000. Know what you’ll never hear them paid to say?

Hi — Welcome to WalMart! I rest my case.

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