Month: September 2016

by Tim Herriage Tim Herriage No Comments

Did "Pending Homes Sales" really fall or is this a case of NAR "data envy?"

8-16-pending-sales-data-correxThe media dutifully announced an August 2016 slow down in pending homes sales of 2.4 percent in bold black headline type normally reserved for a headline announcing a Declaration of War. The National Association of Realtors (NAR) press release behind this headline states for third straight month this pending sale drop was caused by meager inventory and accelerating prices. It is the second lowest month in 2016. The July index number was revised and now these so-called pending home sales are down 0.2 percent compared to August 2015.
Influential (and The Daily Shot – a graphical economic blog) pushes back hard explaining that “the result from the NAR is simply wrong as everyone knows U. S. home sales are extremely seasonal. The NAR does a terrible job in their “seasonal adjustments” – often making month-to-month movements meaningless. The association should learn from the energy industry which constantly deals with seasonal patterns” (such as increased travel, seasonal driving patterns, summer versus winter gas blends, refinery maintenance, etc.)
The Daily Shot continues, “When comparing the index with the previous two years, without silly season adjustments, pending homes sales are actually doing well for this time of year. August 2016 and year-to-date pending home sales are ahead of the previous two years.“
I have watched the NAR and followed how they publish housing data for the last fourteen years after spending five years immersed in Wall Street traded asset reporting. The NAR has a severe case of “data envy.”
Let me explain: I have just returned from a trip to Europe and the joke in most major cities is the competing height of the Roman Catholic or Protestant church steeples. This based on who built first. “Steeple envy” led to the latter church having a higher steeple, just because they could.  Sadly the NAR has gotten into the reporting competition with Wall Street analysts (e.g. S&P, Corelogic CASE Shiller and others,) not understanding the metrics and trading pace of commodities. These metrics do not fit. Houses as an asset do not compare, whether it is value, utility, tradability or measurement, period.
Home sale data is nowhere near as exciting as the ups and downs of daily stock, bond or fund trading data, so in an effort to be relevant the NAR has unwittingly created artificial metrics or representations that misstate reality. And that’s just the start of the disconnect with theoretical national housing numbers versus real local data effecting specific housing market, neighborhood or house performance. National data makes for dramatic headlines that serve no one as unlike stocks, bonds and funds, a house is not a tradable commodity that can be bought or sold on a phone call or web transaction. Add the fact that the NAR, as an organization, is in denial about investors who make up nearly 30% of their annual customers and this further muddies the outcome.
This is another case of taking media headlines on housing with a grain of salt. 2020 REI is expert in understanding this snapshot data, where it fits in a data series and market context and then what these trends mean to you and your portfolio. For advice and help……

by Tim Herriage Tim Herriage No Comments

Is a Crisis in Housing Affordability Good for Investors?

This is a classic good news bad news story, with short-, mid- and long-term benefits for investors, flip and rental provided you understand the issues and have access to good advice.
RealtyTrac/Attom Data Solutions 2016 Q3 Home Affordability Index reports that one in four of the 414 most populous counties (of approximately 3200 counties) in the U. S. no longer fall within traditional affordability criteria as measured by their index. In 89% of these markets, house prices rose faster than incomes. House prices are up 60% since Q’2 2012, while wages are stagnant with only 6% growth over the same period.
Zillow’s August Real Estate Market Report ranked Dallas as the second fastest appreciating housing market with year-over-year home prices increasing at 12% to $193,900, and rent prices increasing 3.6% to an average $1,543. Meanwhile for sale housing inventory dropped by 20.6%.
House price rises are outpacing income increases. This means home ownership remains out of reach for many prospective buyers, as they reach traditional home buying demographic. Due to the lack of well-paying job creation in all but a few markets, buyers cannot easily qualify for loans thus keeping a home purchase out of reach for many.
An “….unhealthy combination (rising prices and wage declines) resulted in worsening affordability in 63% of markets despite mortgage rates that are down 45 basis points from a year ago,” said Daren Blomquist, senior vice president at ATTOM Data Solutions.
These leading markets lead for a reason. They are economic centers creating well-paying jobs that attract people. This is not going to change quickly so they remain good markets for existing investors and those that can afford to buy into them provided rental houses can be found that still generate positive cash flow. For a real investor, appreciation or tax benefits should still be considered bonuses, although real, cannot be relied on over the long term.
The solutions to housing affordability lie beyond housing specifically, but in growing the economy generally. First, incomes needed to qualify for a loan to buy a home (income to debt ratio) must be met with available reasonably priced housing inventory. This begins with jobs with real income growth and reasonable financing to make building (homebuilders) and buying (as borrowers) feasible. These issues are not gated by the building or realty industry but are subject to regulatory and economic forces.
The fact we have heard few specifics on housing from the presidential candidates is odd, as there is general recognition that housing is the first engine of economic expansion. Over-restrictive financial regulation (FHFA, CFPB, etc.,) developed over the last 8 years have effectively discouraged building all but unaffordable homes and luxury apartments now approaching oversupply. Housing inventory, where it is needed at price points needed, is delayed or missing.
Buy-to-rent investors and landlords can expect this beneficial situation remain in key markets for at least the next 36 months as currently land availability, entitlement fees, financing and building costs are all working against increasing affordable inventory and no reasonable fixes have been proposed.
If you are a flipper needing homeowner borrowing help 2020 REI loan consultants at 3L Finance can help.
For rental owners the most critical argument rests in maximizing income, without aggravating rental vacancy rate by being the last to rent as the most expensive rental in the neighborhood.
Dallas/Fort Worth is just such a market where properties are in demand and inventory scarce with both house prices and rent rates still appreciating, but at a slower rate. 2020 REI can help you invest in this active market with advice, buying or selling investment grade property. Go here for help.

by Tim Herriage Tim Herriage No Comments

Numbers Count. Do you Care? Succeed with Real Estate Partners (Part 2.)

Many people interested in the returns real estate offers feel they are not qualified to do the work. They recognize succeeding with just a weekend education course is remote but a viable alternative is to work with turnkey fix and flip or buy-to-rent companies that populate this country. In this case understanding a property financial analysis is indispensible.
Before you begin don’t make the assumption that turnkey investment provider does all the work, and the investor sits back and collects the checks. The issue is you should understand how things work, especially the financials. This is because the market does not adhere to the standards or regulatory oversight of stocks, bonds and funds.
Real estate investing is not “armchair investing.” It may be “hands-off” investing in that you are not swinging hammers or cleaning up after tenants, but it is very definitely “brains-on” as far as understanding the strategy, financials and exit plan, otherwise how do you know you are not being taken for a ride. This is why basic real estate financial literacy is vital.
Before you jump at this opportunity understand the variations on turn key process. The most complete arrangement is where you do business with one company who helps you buy, renovate, sell or turn into a rental, property manage, account and report. There are a number of companies that do all of this, however they do subcontract things like renovation and maybe property management. The key is a singular point of contact and responsibility to you as an investment client.
Other companies will contract with you, using your money to buy the house, fix it up, and help you find a tenant – then assign management to an associated or third property manager. The advantage often is the property can be purchased more inexpensively, but the investor offsets time and uncertainty for income. This is not what we define as turn key experience as the different contractors are driven by different goals that are not necessarily those of the investor. This further complicates any financial analysis because of disconnect physical and financial processes.
Some turnkey vendors provide the investor with a leased-up property already generating income. This removes many of the uncertainties of price and contingencies of unknown costs, delays and time it may take to renovate, sell or find a tenant. Experienced turnkey vendors are going present you with a pretty detailed spreadsheet prior to acquisition of a particular property. If they are not willing to do this, walk away. You also need to understand the numbers you are looking at.
Ask your turnkey vendor these questions: Can I buy the house you are showing me as the typical investment house? Do you own it as principal or acting as agent? Is it renovated and habitable by a renter? If not what will it take to bring it to market ready condition? Is the property leased to a rent-paying tenant paying market rent? (check rents at If any answers are in the negative get more inquisitive.
2020 REI Companies Consulting Services is happy to offer a second opinion on any analysis on a property you may be considering.
Current real estate accounting standards are quite sufficient for any analysis, but using them requires understanding. The information we are going to present is here to help.
These analyses and explanations follow standard real estate accounting rules and will be broken out with examples. Where appropriate we will also provide you with some baseline rules related to industry insights that have served and real estate investors well over the years. 2020 REI invests using these same rules.
It is the intention of this blog to update this data and provide on-going education to those involved in the investment in real estate. The blogs will provide building blocks related to real estate analysis and progressively work towards more complex financial return metrics. It is important to have a basic understanding of cash flow analysis before you begin any real estate investment or buy real estate as an investment. Investors can avoid pain if they use and implement the analysis and decision tools we will present going forward.
If you want a second opinion on any investment you are about to make, 2020 REI Consulting is happy to provide a second opinion.
DO YOU CARE ENOUGH TO MAKE MONEY? Succeed with Sound Real Estate Analysis (Part 1.)

by Tim Herriage Tim Herriage No Comments


Real Estate FinancingInvestors particularly agree that home price appreciation is a good thing especially if you are able to realize this through a sale or successful refinancing. Investors are already on inside owning property and on their way up the property ladder, but to maintain this upward momentum properties, Investors need sellers/buyers and lenders to facilitate first-time and move-up home purchases. Most investor exit plans need a qualified and willing buyer who can close on the deal but home price appreciation can make finding these people more difficult, especially with a conflict housing confidence among vital buying audiences.
It is widely held belief that buying a first home is a step up onto the ladder toward a secure future. Not only is this belief core to the American Dream, this bottom rung of the property ladder is a seen as a vital starting point to individual wealth building by most modern economies. It is seen as a step toward maturity and adulthood. But what happens when the markets do not cooperate with plentiful affordable properties, adequate jobs with incomes that makes buying a house feasible, coupled with a mortgage lending environment that can help close the gap between savings and what is need for a home purchase?
Current home values are near or past their pre-crisis peak in about 25% of U.S. metros. These inevitably are the most popular and populous, making for competitive markets. This confirms market value recovery but at the same time as a gap is growing between renter and homeowner sentiment.
According to a Housing Confidence Index released by Zillow September 1st 2016, current homeowners and renters agree that home values are going to continue to appreciate but the confidence in home value appreciation held by current homeowners is very different from the confidence of renters.
Homeowners: Zillow found existing homeowners are becoming increasingly confident that now is a good time to sell, but more so than buying on a ratio of 70 percent sellers to 65 percent as buyers. The most confident homeowners were concentrated in Western and Southwestern cities.  If they are reluctant to sell as they do not see buying as that attractive, they cannot move-up, therefore allow a more affordable home come to market.
Renters: Only 38 percent of the renters believed it is good time to buy. In cities like San Francisco, New York, Seattle, San Jose, and Boston renters lacked confidence in their ability to afford a home.
Zillow Chief Economist Dr. Svenja Gudell says, “The overall health of the housing market looks great at first glance, but dig a bit deeper you’ll find inequality between renters and homeowners. Even though the confidence of the majority of homeowners and belief now is a good time to sell, they’re holding off because they expect home values to continue to appreciate and want to ride the wave. They also don’t want to turn around and become buyers in a competitive market.”
“On the flip side, renters aren’t nearly as confident as homeowners—they’re discouraged by the shrinking number of homes for sale and rapidly rising prices. As housing gets more and more expensive, these trends are not sustainable in the long-run, especially once mortgage rates start to rise.”
An investor does not have to do anything provided the property they own is cash flow positive.  If they are trying to sell a flip qualified buyers (retail homeowners or investors) are necessary to a sale as a successful exit strategy. It is essential the investor has a realistic plan and pricing strategy, as well as real estate brokers and lenders who can generate buyer interest and in the case of buyers, particularly other investors, an ability to help get them funded.
2020 REI Companies includes a Consulting division that evaluates the current state of the investment, the investors goals and what options make sense, whether maintaining a steady state, refinance, exit or exit and a re-investment.  2020 REI Companies include an investor-focused brokerage like many around the country that can help investors sell properties. Investable Realty can help you sell retail or to the many investors they serve that will buy properties with the potential to be cash flowing rentals. Investable Realty is associated with another 2020 REI company, 3L Finance who specializes in investor funding. For Investable Realty go here. For 3L Finance go here.

by Tim Herriage Tim Herriage No Comments

Numbers Count. Do you care? How to Determine Effective Gross Rental Income (Part 3.)

The gross income must exceed expenses to produce a net income or net yield, otherwise why invest?
The basic idea behind a real estate investment cash flow analysis is to ensure the property you wish to purchase generates positive cash flow from the first month. More specifically, the rents collected from the property should pay for the monthly operating expenses of the property and pay any loans taken to purchase of the property.  Here are the cost elements that need to be understood to get to effective gross income.
If purchased properties do not generate positive cash flow from the date of acquisition, it can be argued that someone buying this property is not a real estate investor but a speculator. They are betting that appreciation will occur and cover any operating or ownership losses. These standards we are discussing here are focused on real estate investing.
Based upon much of the marketing information and analysis used by professionals and vendors of real estate investments, it is apparent that some professionals and the investing public are neither knowledgeable on the subject nor skilled in the preparation of real estate financial analysis. To address this issue this chapter discusses cash flow analysis to determine the rental income versus the rental expenses and thus the yield.
The standards were generally developed around accepted accounting principles and mirror those practices generally used in the commercial, multi-family and now the institutional single-family rental business. Do not let any software vendor or real estate professional tell you there is another way to do this. Your banker, accountant and any IRS examiner expect you to use these accounting terms and methods.
Rental Accounting Terms & Quantifying Rental Income
These terms apply equally to a single-family dwelling (house) or multi-family units.
Rental Income – This is also known as “Scheduled Rents” or “Gross Scheduled Rents.” This number represents the total rental revenue that the property would achieve upon the collection of the rents from tenants of the occupied units as well as the potential market rents from all of the vacant units. This is determined based on a 12-month period using the current market rental rates for your particular property.
In Practice – Facts inevitably intervene between theory of no vacancies and practice to cause some income shrinkage between rents “scheduled to be paid” and “actual rents collected.” 
Market Rent – This is the amount of rent that can be charged for the property given its physical and other market characteristics. Market rents are derived from known rents currently charged for a similar property in this market. Rents are generally determined by the market and competition, hence the term market rent. 
In Practice – A single family home should generate a monthly rental rate of between 1.00% and 1.33% of the purchase price to support a 100% financed transaction. For example, if you purchase a home for $100,000 you should ideally rent the home from between $1,000 to $1,300 per month to have a positive cash flow.
Future Improvements – If the property in question is currently not generating market rent, there are changes can be made to bring it into line with market rents. This means determining any costs necessary to bring the property up to par. This cost should be included on the capital investment side (or property purchase cost) of any cash flow analysis.
Gross Rental IncomeRepresents the total of Rental Income plus Other Income.
Other Income – Other Income comes from revenue sources other than rental of the property or rental units. Such income may include late fees for single-family dwellings or in the case of multi-family properties, any coin-operated equipment such as washers and dryers, soft drink and candy machines, cable TV service and electronic games. This category also includes any rents from storage lockers, boat docks, and parking for which tenants may pay.
Effective Gross Income – Represents Gross Rental Income less the Vacancy Allowance and represents the best estimate of the available funds which will be collected during the year and available to pay operating expenses and debt service.
Vacancy Allowance – It is unlikely that the single-family dwelling or all of the multi family dwelling units will be rented and occupied 100% of the time. It is important to factor the vacancies and downtime the investment property is estimated to have over a year’s accounting period. Allowances are made for tenants moving in and out of properties (lag time) or units and any time it takes to ready the unit for leasing to a new tenant, This is especially important as we have already assumed in our Rental Income estimate that 100% of our units are leased at the beginning of the year. A lack of urgency in leasing standards and tolerable vacancy levels by a property manager can negatively affect an investor.
It is important to have a good understanding of the submarket in which the property is located. For a well-located property where there is demand for rental property, use a 4% to 6% vacancy allowance. This allows for 15 to 20 vacant days per year per dwelling unit. For a less desirable location where there are multiple competing properties for lease you may allot a 15% to 20% vacancy rate that would equate to 55 to 73 days vacant.
The time it takes to lease a property will have a significant impact on the cash flow of your investment property. This is why it is important to purchase investment grade property in attractive areas where people actually want to live.
The other factor to include in your Vacancy Allowance estimate is an allowance for uncollectable rents. This is why sometimes this category is also referred to as “Vacancy and Collection Allowance”. This may be not be a factor if you are purchasing property in great locations with high demand from credit worthy tenants; however if your property is located in less desirable area with less qualified tenants, this figure could add another 2% to 3% to your Vacancy Allowance.
Leasing incentives also count against gross scheduled rent. This is the inevitable “one month’s FREE” rent. This means a loss of one month’s income over the course of the lease. This is typically applied as a lease-free month in the last month of the lease.
In Practice – If information related to vacancy rates is not readily available, many investors use a vacancy rate of between 4%-6%. This vacancy rate rule of thumb is only applicable to existing properties as if you were building an apartment building from scratch and leasing up the building for the first time the vacancy rate would be much higher.