Month: July 2016

by Tim Herriage Tim Herriage No Comments

WELCOME TO “GENERATION RENT?” – transient status or a lifetime sentence?

7-29 HOMEOWNERSHIP RATES
This week the U.S. Census reported that the U.S. homeownership rate fell to 63.4 percent in the second quarter of 2015. Is this a bad news or a good news story?  It depends on your perspective.  SFR Landlord, tenant or aspiring homeowner?
This number is down from the 63.7 percent recorded in the first quarter and down from 64.7 percent in the same quarter of 2014. It marks the lowest homeownership rate since 1967.
 
AMERICAN MAGIC REALIZE AMERICAN DREAMS
Homeownership is considered an essential part of the American Dream. Unlike most modern Western economies, the U. S. decided nearly a hundred years ago that stimulating mortgage lending by local banks was a great way to move an economy forward. This ultimately led to the secondary market for mortgages and the government-sponsored enterprises of Fannie Mae and Freddie Mac. Add-ons and excessive social and financial engineering pushed homeownership rates beyond “natural numbers.” Too much of “a good thing” essentially helped us into the Great Recession.
It is worth noting that other modern Western economies that have adopted many American financial techniques to promote homeownership have all landed at natural homeowner to renter ratios. These are all in the low 60 percent and this is when their average city house price to average annual income are two and three times that of most U.S. cities.
“GENERATION RENT” IS A STATUS NOT A SENTENCE
For large portion of the SFR rental population, “Generation Rent” is a transient economic status not a lifetime social sentence. Current national economic favor landlords. These conditions are a constant in economically popular markets and neighborhoods and are the targets of wise investors, but this is not always the case in all markets and neighborhoods. Changes in business conditions, growth or regulation/stimulus can mean a turnaround.
Many SFR renters aspire to homeownership. Currently there are a number of barriers such as available credit, tight consumer mortgage restrictions and house scarcity that delay fulfilling that aspiration.  At some point in the future these will ameliorate and benefit from a future mortgage market stimulation cycle.
7-29 RENTAL VACANCY RATESVacancy rates have not been so low since the 1980’s and favor landlords. We expect assuming rental rates continue to rise at a faster rate than incomes, this fact will push some renters to buy, but this will be measured in fractions of a percent in homeownership.  Although small relative numbers, these are still billion dollar opportunities for the real estate industry.
INVESTORS BENEFIT
And if vacancy rates rise to make your SFR rental property no longer viable as a cash flowing business, the house can always be sold to an aspiring homeowner creating an equity event on top of years of positive cash flow derived from rental payments.
Selling or Buying? Investable Real Estate can assist

by Tim Herriage Tim Herriage 3 Comments

RENT READY COSTS? – The Estimated SFR "Make-Ready" Contribution – Part 7

Two weeks ago we estimated that Fix, Flip and Resell activity for 2015 was a $9.7 billion dollar business. Separately we analyzed the Renovate-to-Rent that we estimated to be a $22 Billion dollar business segment in 2015. Renovating to rent is a one-time event. This was covered in Part 6 (read it here).
The fix, flip and sell and reno-to-rent segments pall in comparison to the amount spent to maintain and/or “turn” 24 million rental houses. This entirely separate recurring component of the SFR rental market. This means investors and landlords contribute at minimum $18 billion in make-ready activity to the American economy. And this is only about 32% of the rental house inventory spent mostly in local markets.
BASELINE NUMBER OF RENTAL PROPERTIES
As we discussed in Part 1 of this series, residential buildings fall into two classes, single or multi-family. For lending purposes the Federal Housing and Finance Agency classifies anything less than five units as a single-family residence, so the 2 to 4 unit segment is included in the SFR category and is most likely owned by a small investor. This single-family home segment, (one to four units) says 22,972,468 households occupy properties owned by small investors, but we must also account for vacant rentals. Allowing for rule of thumb vacancy averages, 23 million homes plus 5% for vacancies equals a total of 24,150,000 to cover all rental houses nationally.
RENTAL TURNOVER RATE
To identify what these rental refurbishing or turn numbers are, we need to understand the average duration of a tenant lease and occupancy for the different rental structures, but most importantly detached single-family homes.
A 2002 “Duration of Residence in the Rental Housing Market” study from Lusk Center for Real Estate, School of Policy, Planning and Development and Marshall School of Business, University of Southern California, looked at 12 years of survey data from Bureau of Labor Statistics’ (BLS) Consumer Price Index (CPI) housing and The American Housing Survey of 44 metropolitan Statistical Areas.
The data covered rental transaction history for single family detached, du-, tri- and four-plexes. This set the average annual turnover at 41%, for SFR to four-plexes with the lowest rate being 32% for detached SFR rentals. We will use that as our baseline being fully aware there are many other social, economic, geographic and demographic factors that can affect turnover rates. Thirty-two percent turnover allows us to be conservative.
ANNUAL “MAKE-READY” ACTIVITY
Thirty two percent of 24,150,000 most likely means that 7,728,000 rentals are “made ready” each year after a tenant moves out, in preparation for a new occupant. This can be simply a light cleaning, painting and rekeying, or a full renovation and update. To simplify the estimate process and remain conservative we will use numbers for a lighter refurbishment, knowing full well this can go significantly higher based on wear, tear, real damage or modernizing dated finishes and appliances.
Following the house by category spread, and using a light refurbishment rule of thumb, the annual rental make ready volumes and dollars look like this at a constant 32% turnover rate:
Class                          Market %      Units     Est.$              Labor        Materials
Annual Universe                           7.728M
$500K and up               >1%           772K       >$5K                 $4K         $1K
$100K to $500K            84%           6.491M   <$2K                 $1.5K     $500
<$100K                         15%           1.159M   <$1K (?)          <$600      $400
Based on these estimates and assumptions, at minimum make-ready revenues look like this:
– 772K luxury rentals mean about $3,860 billion in make ready revenues.
– 6,591,000 mid market rentals at $2K per refresh, equal $13.182 billion.
– 1,159,000 affordable rentals at $1K per refresh, generates $1.16 billion.
It is not unreasonable to assume the actual number is considerably higher although given the tendency for landlords to be as economic as possible in make ready activity, we are using safe assumptions to estimate this baseline economic contribution.
A $ BILLION RENTAL RENOVATION CONTRIBUTION?
Based on these estimates, renovating houses bought-to-rent by investors generates at least $18.182 billion every year in national economic activity if just 32% of SFR rentals undergo vacancy, refresh and a lease-up to a new tenant. Again sixty percent is spent in local labor property manager and general contractor services and profits and forty percent to local and national materials suppliers. This does not include any rental documentation, tenant screening or lease-up expenses or commissions earned by property managers or others.
NOTE: This number also does not include any maintenance and repair activity that are a constant factor in rental property ownership. Traditional accounting rules suggest setting aside reserves of 3 to 5% of the asset base for maintenance and repairs. Next week we will attempt to estimate these numbers for 24 million SFR rentals in the current national inventory.

            For more on how 2020 REI delivers renovated rentals to investor clients, get to know our team at Investable Realty.

by Tim Herriage Tim Herriage 1 Comment

MORE NEW HOUSES – SHOULD RENTAL INVESTORS WORRY?

New data from national economic sources show three facts that on their face should cause rental investors to be concerned. More houses are being made available to homeowners to buy. But the real reason these reports are celebrated is, as a reason to buy stock in the home building industry, not reallocate investment from the high yield rental house segment to lower yielding and less stable equities. To make things worse, again these are national numbers, measured and delivered in the context of exchange traded assets not houses.
HOUSE PRICE APPRECIATION EASING
 Case-Shiller HPAFirst chart, courtesy of the Daily Shot, shows the national HPA index “slowing” to a historic 5% appreciation rate. TDS points out that 5% is twice the appreciation rate of wage growth, confirming the viability of well-located rental property.
By using a convenient but national number this only provides a 30,000-foot view of necessarily granular neighborhood data analysis a savvy investor depends on to select and buy a rental house. . If your investment house is generating positive cash flow, appreciation is another added benefit.
FEWER HOUSES AVAILABLE FOR HOMEBUYERS
INational For Sale Investoryf you are currently a rental family interested in buying a home, especially in your existing school district, markets are not cooperating.
Inventory is limited, prices keep appreciating and financing is still complicated and tight. Your current rental home likely remains attractive and the course of lease resistance.
 
 
WHAT ABOUT NEWLY BUILT HOUSES?
a.   HOUSING STARTS!
7-29 housing startsIf the reported June building run rate applies to all of 2016, 1.2 million new houses will be available across all of the U. S. The 2015 U. S. Census Bureau data on new household growth shows that the growth number was 1.33 million with an expected bias to strong economic hubs in the Sunbelt.
In 2016 the number of new households is anticipated to grow by 1.43 million. This is 300,000 more than the annual average of the last five years of just over 1.0 million.
All this new house activity ignores the aging out and obsolescence of about 300,000 older houses a year that are removed from inventory. “A teardown and new build on the same site” requires a recorded permit (+1) but in fact does not add to total housing inventory as the teardown is a deduction in inventory (-1.)  All houses lost are a net negative against additional newly build houses.
On top of this we are also playing catch-up for the years between the Great Recession and now when new builds were at half today’s rate.
b. HOUSE PRICES
new Build Housing Price PointsBehind the promise of new houses becoming available there is a second contradiction to the need for affordable homes. Home building business models favor bigger houses. Just as large $60K to $100K SUVs offer the most profit for automakers, so do larger homes offer a similar margin to a homebuilder. Building a few large homes is less effort (land, money, staff and sales efforts) than building many affordable homes. Understanding and acting on this is vital especially if you are a public company.
This chart shows that the new build sweet spot for homebuilders is currently for houses in $400K to $500K range. Under typical circumstances, rented at market rent, this puts the rent required for positive cash flow outside the budget of the average middle class tenant.
JUST GOOD NEWS FOR RENTAL INVESTORS
These builders remember the blood bath of 2008 and are not getting ahead of their capacity to finance pre-sale inventory so markets, price points and wiser business practices are all working in favor of keeping rentals in high demand.  If you are interested in owning SFR rentals in sound mid-market priced houses in good neighborhoods, school districts and with easy commute of growing economic hubs, let us know.
 
 

by Tim Herriage Tim Herriage No Comments

HOUSE SALES UP, BUT WHAT DO THESE NUMBERS MEAN TO RENTAL INVESTORS?

June 2016 sales of existing homes were the strongest numbers in nearly a decade. This was attributed to low mortgage rates, helped by Britain’s decision to leave the European Union that is causing heightened investment in U. S. 10 Year Treasuries (U. S. mortgage rate benchmark,) scarce housing stock and an improving economy.
7-22 Existing Homes Sales
Per the National Association of Realtors, June sales were up 1.1% over May to settle at an annualized run rate of 5.57 million, achieving the highest level since February 2007.
Sales for May were revised down 20,000 to 5.51 million from an initially reported 5.53 million.
All charts courtesy The Daily Shot
 CONTRADICTING EXPECTATIONS
The Wall Street Journal surveyed economists who had expected June sales would decrease 0.7% to a pace of 5.49 million. Economists were expecting 2016 sales to moderate over 2015.
If the professionals are forecasting uncertainty, this is not good for individual homebuyers about to make the decision of a lifetime. Rental investors should embrace this uncertainty as it keeps those careful tenants considering a home purchase, off the market for a little longer.
DOES VOLUME TRANSLATE TO VALUE?
With the increase in volume however we are seeing a slowing or reduction in the generalized national housing index. This is the sort of dangerous data that a Wall Street economist will use to validate the argument that housing, as an investment commodity, does not hold its value. As we discussed in a recent blog http://www.2020rei.com/stocks-good-houses-bad-only-if-you-use-stock-market-metrics/ using “convenient numbers” that allow simple comparisons of value is deceptive.
7-22 HPI reportAlthough this chart shows national house price appreciation (HPA) eased a little the rate is still ahead of the national inflation rate ensuring well-located SFR rentals will remain in demand. Also missed in these charts is the fact the annual HPA rate is a compounding number, so even a moderating number is piled on top of previously higher numbers.
 
 
BEWARE “THE TYRANNY OF AVERAGES”
Make sure that any valuation of a specific property uses local market comparisons, or if a rental property, is analyzed to verify it is generating positive cash flow, making this property the basis of a viable rental business.National averages are merely a starting point and no indication of specific value. Do your own local due diligence.
BEHIND THE NUMBERS
A monthly national rate change statement, just like publishing a monthly index number is a snapshot of the housing market. These may generate a “feel good” number but gives little context, however comparing the growth rate of hourly earnings to house price appreciation, a deviation shows up with HPA beginning about 2000 with loosening credit, the 2008 correction and then a return to the same HPA rate. Note this House Price Index (or HPA) chart is not to the same timeframe as HPA rate above.7-22 HPI vs Income
INVESTOR LESSONS
Major political and economic events, or any expected regulatory changes from future administrations are not forecast to mitigate housing demand or major changes in mortgage credit availability. Demographics and demand are a foregone conclusion. This means investors buying well-located rental properties in strong Sunbelt economic centers will be faced with continued demand for safe, convenient and market priced SFR rentals. In keeping with the NAR marketing message, “Now is a great time to buy a (positively cash flowing rental) home.” We add, “in a market with great job and economic performance like the Dallas/Ft Worth Metroplex.” For more call 2020 Companies.

by Tim Herriage Tim Herriage No Comments

Fairway America’s Client Elevate Private Capital Launches $20M Fund Through SBREFund

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Fairway America, LLC recently announced that Elevate Private Capital has launched a $20 million fund through SBREfunds. The Elevate SFI Fund LLC will be used to buy and flip single family homes in the Dallas/Fort Worth area. CEO of Elevate Private Capital, Tim Herriage, believes this will create a sizable rental portfolio for the company. Fairway America CEO, Matt Burk, foresees the establishment of a new community of investors, entrepreneurs, and fund managers, brought together through awareness and visibility. Read the full article Here.
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by Tim Herriage Tim Herriage No Comments

STOCKS GOOD, HOUSES BAD? Only if you use stock market metrics

Measuring the value of an asset is based on what a person would pay for it at market. This is how a value or price baseline is arrived at.
The value of a publicly or exchange-traded stock is presumed to be set at the close of each business day based on the last recorded sale of the day for this stock. This is the market price of the stock (as a commodity,) or a price that is known as the market-to-market price. Does this apply to house values?
“CASTLE OR COMMODITY?”
Houses are different. First each one is relatively unique in style and location. Second, a definite buyer is needed with a particular use of that house, either as family home for a homeowner or rental property for an investor.
Houses are classed as non-exchange traded assets because there is no central trading exchange and they are not as easily or inexpensively traded as stocks. The house selling market is fragmented by locale and inefficient in spite of efforts to automate and take online. Compared to stock and commodity markets, the relatively low turnover volume of houses sold in any market makes it pretty hard to normalize the data and turn into an accurate index that all houses can be measured against. We contend because of the fragmented nature of the inventory getting to economically manageable housing data results in meaningless summary valuation conclusions as shown here:
Manageable Numbers = Meaningless Conclusions
Now add time.
A 20-YEAR CYCLE?
Historically most houses only change hands about once every five to seven years. The annual resale transaction volume is 5% of the total housing stock, nationally and in most markets. Historic annual resale volumes confirm this and mean that a sales model that would sell through the entire stock of existing houses would take 20 years. This also means that 95% of houses are not for sale at any one time.
To accurately value the total housing market or as a national number would require predicting when a house would sell some years hence, factor in demand and inflation to come up with a price based on a model that reflected a 20-year sell-through rate. This valuation method is known as mark-to-model.
To use this to arrive at the current or future value for a house that is not on the market, and create a current market value or a meaningful national number, is as equally illusory as the mark-to-market valuation assumption. Housing does not fit conveniently into stock market valuation methods.
ADD BAD SAMPLE SIZES
Over a typical year .41% of these houses trade per month representing less than on half of one percent of the total market. This sample is significantly less than is normally allowed for economic survey or index error rates.
This does not stop residential real estate forecasting by S&P Dow Jones Indices Case-Shiller Home Price Index that attempts to track house price fluctuation by sampling that .41% of monthly house sales on a mark-to-market basis. For example in Phoenix (where prices are published) they take a sample of about 4,500 houses where they can find a “sale pair.” This is the last recorded sale and the current monthly recorded sale for a total inventory of 1.3 million plus existing SFRs (US Census Bureau 2013.) They measure the difference in value over the elapsed time (month, year, decade?) then normalize and average for all 4.500 homes arriving at a price change rate for the entire Metropolitan Statistical Area? This sample is well below any margin of error and is frighteningly unscientific. At least Zillow (and there is controversy with Zestimates too,) tries to normalize values based on all local sales using a square footage, property proximity and sale date, more like an appraiser does.
DO YOU CARE?
Either way this means nothing to anyone who is NOT selling (or refinancing) a house, but it does create homeowner anxiety.
The breathless media reporting of rising or falling housing values probably contributed to much of consumer value panic and contagion of the 2008 housing recession.
More importantly this is a lesson in why stock market valuation metrics (and their expert opinions) are not applicable in housing, but even more particularly in rental housing.
For buy-and-hold investors the real value of a rental house is as the basis of a rental business. You care about cash flow and profit. If you are flipping its the buyer, bank and their appraiser that will help set your final sales number. A rental is about positive cash flow as a business not so much as real estate. Most traditional SFR real estate measurements are restricted to appraised value, not the rental capitalization rate. If you are seeking to build a profitable rental business and hard asset based portfolio, the 2020 REI Group can help.
 
 

by Tim Herriage Tim Herriage 2 Comments

FOUND A GREAT DEAL? Do You Need Realistic Funding Fast?

Seems there is a “rule to investor life.” A deal shows up but the money necessary to make the deal does not. Or if it does, it is costly? Another investor with cash or a more responsive lender scores the deal and you are back to the search. If this is your story there is now a solution.
A real estate entrepreneur reality is that access to the amount of money needed to buy houses, (renovate and build a real portfolio,) is often not easily available when the opportunity arises. Deal opportunities and funding availability never seem to be synchronized.
INVESTOR DRIVEN LENDING
You have heard lenders say this before “for investors by investors.” Sadly it’s a great marketing line until the borrower runs into the institutional underwriting committee.
Now there is an agile and unique lender that actually understands your business and cares about your results.  3L Finance is a member of investor services leader, The 2020 Real Estate Investment Companies.
3L is a team of real estate entrepreneurs that are building a lending business founded on basics. 3L Finance understands what investors and lenders need, mutual speed and independence from a single source of capital. 3L Finance can most likely fund your deal.
Their clients are investors who may need help every step of finding and being successfully funded with the appropriate loan package in time to make the deal. Prompt responses, returned phone calls and emails are essential to make any deal happen.  As obvious as this level of service seems, unresponsive vendors during the search for money can cost an investor a deal.
INVESTOR/LENDER INSIGHT & ADVANTAGE
Tim Herriage and Andy Williams are the founders of 3L Finance. “We are both former Marines,” says Herriage. “We got our start in private sector jobs by grinding it out on the streets of Texas finding and buying houses. We bought houses at the kitchen table. We bought the hard way. We used “hard money,” and tried to talk banks into giving us loans.  We formed relationships with private lenders but were always looking for new sources of capital.  The bigger obstacle to our success was not finding the deals, but finding the money. We spent more time looking for money than houses.  We both hated that part of the business.”
After buying hundreds of houses and years of personally chasing capital, Herriage and Williams were recruited to help Wall Street lenders understand and lend billions on dollars to other investors. “The lessons we learned on the inside of the lending process, we are now applying to give our clients’ a borrowing advantage,” says Williams at 3L Finance.
Why 3L? 
3L stands for Listen, Learn, and Locate and arose in a conversation between Herriage and Williams. “All these investors want is someone to listen to their story, learn about their business and help them locate the capital they need,” said Williams  “We concluded that chasing money got in the way of chasing houses. We knew how to fix that.”
That simple conversation launched the 3L Finance and an agile lending solution.  If you have deals and want 3L Finance to be on the lookout for better, cheaper, or faster money that fits within your plan talk to 3L.  They will find options for you based on what works for you. #l is standing by to help you complete that deal.

by Tim Herriage Tim Herriage No Comments

IS RENOVATING HOUSES TO RENT A $21 BILLION DOLLAR BUSINESS? – Part 6

Last week we estimated that Fix, Flip and Resell activity for 2015 at $9.7 billion dollars. This pales in comparison to renovation for investors who buy and renovate to rent. What is spent to maintain and/or “turn” the entire SFR rental market is another business we will look at next week.
Revisiting 2015 NAR and RealtyTrac data of 1,090,000 homes sold for investment purposes, just 179,778 of these were “fix, flip and sell.” This means 910,000 houses most likely went into the national SFR rental pool.
How big an economic contribution does making these houses ready to rent?
RENOVATING BUDGET FOR RENTAL USE
Like renovation for retail sale, rentals are also influenced by property class, location, and property condition, knowing this property is going to end up as a rental.
The tasks to make the property an attractive tenant rental, without going beyond the neighborhood or local market finish standards, are determined by understanding what else is available (competition) and what is the demand. The 2020 REI Group is happy to offer advice on this.
RENOVATING TO RENT?
Getting to meaningful rental house renovation numbers, just like resale, rental properties, start with the property class considerations that should have been a core part of any pre-purchase analysis.
We will use the same rules of thumb used in Part 5, with minor adjustment to determine the volume of houses destined for rent by the same three classes of home, luxury, mid-market and affordable. Luxury ($500,000 to $1 million plus,) is 10 to 15 percent of the total market. We will use 5 percent. For mid-market homes (appraised at $150,000 to $499,000) we use 80 percent of houses sold as renovated for rentals. Affordable homes are defined as anything below $150,000 and we use 10 to 15 percent of market total.
Luxury Rentals: Because of capital costs to buy and renovate a luxury house, these are not normally cash flow positive as rentals, so are more likely to be fix, flip and resale candidates. Renovations in this market typically exceed $100,000, however we expect no more than five percent of luxury properties to may make there way into the rental pool. These luxury houses are bought more for appreciation (and tax benefits?) in trophy markets rather than rentals. Rental income offer a luxury house owner a minor cost offset, unless there are some extraordinary circumstances such as acquiring the property by way of an inheritance or a gift. These are typically renovated to the style and finish of the owner, thus falling in line with the $100,000 plus renovation. Five percent of 910,000 equal 45,500 homes.
Mid-market Rentals: This median range house (ARV = $150,000 to $500,000) comprise around sixty percent of the resale market but make up a sweet spot for serious investors, small funds and institutional SFR investors. Their analysis has concluded A and B class production houses in mid-market neighborhoods, built after 1990, are the most desirable rentals. We estimate this is about 80 percent of the rental renovation volume where a typical rental renovation, light to heavy, ranges from $12,000 to $30,000 or more. Older A & B homes, nearer to economic hubs, are back in vogue but typically require more renovation. These are harder to find and fewer in number, but for this estimate we will stay with base estimates. This means about 728,000 mid-market homes are renovated at an average of $21,000 each.
Affordable Rentals: Just because these houses are cheap it does not mean they are a good deal. Class C and Section 8 rentals and neighborhoods require special expertise to be profitable. This is estimated 15 to 20 percent of the total housing rental renovation volume, or 182,000 homes. If renovations occur they are typically less than $10,000 but have a shorter life-cycle adding to management complexity of this class of property.
IN SUMMARY
In 2015 NAR & Realty Trac data suggests 910,000 homes were bought to be rented. Following the “house by category” spread and using rules of thumb, the buy-to-rent renovation volumes and dollars look like this:
Class                          Market %      Units     Est.$              Labor        Materials
$500K and up               5%           45K        >$100K           $60K         $40K
$100K to $500K         80%           728K         $12–30K      $6–18K    $5 –12K
<$100K                      15%           182K          $10K (?)     >$6K         >$4K
Based on these estimates and assumptions:
– 45,500 luxury rentals mean about $4.55 billion in renovation revenues.
– 728,000 mid market rentals averaging $21K mean $15.28B in renovations
– 182,000 affordable flips averaging $10K generates $1.82B in revenues.
A $22 BILLION RENTAL RENOVATION CONTRIBUTION?
Based on these estimates, renovating houses bought-to-rent by investors generates at least $21.65 billion in national economic activity with sixty percent for local labor and general contractor profits and forty percent to local and national materials suppliers.
This does not include any rental turn or refresh activity. Next week we will attempt to estimate these numbers for 24 million SFR rentals in the current national inventory.
            For more on how 2020 REI delivers renovated rentals to investor clients, get to know our team at Investable Realty.

by Tim Herriage Tim Herriage No Comments

MORE AMERICANS DEPEND ON RENT FOR INCOME

It is clear more Americans are awakening to the potential of rental properties as a source of recurring income. Today there are about 24 million single-family residential properties in the rental pool. This is a huge cottage industry worth over $7.0 trillion dollars generating hundreds of billions in related activity each year. Since 2010 Wall St. interest has added visibility, however 4.4 percent of American households were way ahead of Wall Street in investing in buy-to-rent houses.
 If you have interest in taking advantage of this reliable recurring rental income, 2020 REI Companies can help.  Check out our portfolio of real estate investor products and services companies.

by Tim Herriage Tim Herriage No Comments

HOW TO AVOID HOUSE BUYING RED FLAGS THAT DESTROY INVESTOR INCOME

I have bought over 1,200 SFR properties in my own name and considered tens of thousands of others doing underwriting due diligence for a major investor lender. I offer these initial observations to you to help you avoid mistakes I have made. If these conditions exist your pre-purchase analysis may be unnecessary. There are exceptions to this that an experienced investor may be prepared to live with.  Think of this as a pre-analysis sanity check. If an investment property doesn’t seem right, it probably isn’t a good investment.

  1. The first question does this a location fit my strategy?

Any location works if it fits a pre-determined strategy and a plausible exit whether this is a candidate for a flip, mid-market or Section 8 rental, or a wholesale opportunity. A property in one zip code may be a sound fix and flip, but a similar property in another zip code equals an ideal rental, while this same property in yet another zip a Section 8 or wholesale candidate. Understand your strategy, your expertise and your financial capacity as it relates to this property.

  1. Now look at the characteristics of structure?

Does this house meet the fundamentals of typical house in the neighborhood? A 3 bed/1bath house in a 4bed/2bath neighborhood is less desirable. Is there just a car port when this is a neighborhood of homes with two car garages?

  1. What is the condition of the property?

First this is relevant to the cost of a renovation and secondly, how fast the house can be renovated, marketed sold or rented. Adding time effects holding time and carrying costs while delaying exit and payment. A property renovation when targeting distressed assets is 20% to 40% of purchase price and capped at the expected sale price. If it works as a flip, this can positively affect velocity of capital. Any delay works the other way. When rentals take an extra month to lease-up this affects the return on the investment over the first three years. More delay equals less return.

  1. What are the inherent risks in this asset?

Do you see a defect or a functional obsolescence in the property that you (a buyer or a renter) will have to live with or overlook to sell or rent? An example is access to fourth bedroom through a third bedroom rendering the description as a fourth bedroom questionable. Maybe a garage that has been badly incorporated as living space thereby losing garage space necessitating uncovered parking? Achieving a workaround during any renovation is an added cost that may still not remove “a wart.”

  1. Are there other external influences that reduce property desirability?

Is the property close to a power plant, transmission line, overly busy street, apartments, school, open field, commercial, or a particularly noisy/troubled apartment building? No amount of renovation or “cheery marketing copy” can make these less intrusive or more peaceful for the next occupant.
If I am doing a flip I want the house that has potential to be the nicest house in the neighborhood. Paying attention to this will lead to a faster sale.
If this is to become a rental I want this to become the safest house in the neighborhood for my tenant based on location and operation.  Paying attention to these considerations means the property will rent faster, for a better than market based rent, to an insightful tenant and who will stay longer. This reduces my vacancy rates and maintenance and management overhead.
If you are uncertain about your search and analysis process we are happy to offer advice and assistance. Contact us to learn more about our consulting programs.

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