Is Florida’s Housing Market About To Get Even More Unaffordable? What You Need To Know

The Sunshine State is hot, both in temperature and in its housing market. Siesta Key Beach on Florida’s west coast is consistently ranked one of the best beaches in the world. The area has an obvious draw that brings new residents in droves—it’s been one of the fastest growing parts of the country over the last decade—along with travelers willing to pay an average of $248/night in popular destinations like Sarasota. But Hurricane Ian is estimated to have caused $67 billion in privately insured losses and an additional $10 billion in losses from the National Flood Insurance Program (NFIP), according to risk modeling company RMS

What will happen to the area’s real estate, rental, and insurance costs after this catastrophic event? That remains to be seen, but Florida’s coastal homes may become even more out of reach for everyday homebuyers, shifting the market into the hands of wealthy investors who can still make a killing on vacation rentals. 

What Happens to Real Estate Prices After Hurricanes?

After each of the most expensive hurricanes over the last 32 years, the areas impacted saw greater home value appreciation in the year following the event than the year before. For example, Miami’s appreciation before Hurricane Andrew was 3.5%, but it grew to 8.7% in the year following. The trend was the same even when the appreciation was taken as a percentage of overall appreciation for the nation, which helped to remove other factors affecting home values. 

A separate study looking at zip code-level data found a temporary dip in home values in the immediate areas directly hit by a hurricane but a strong recovery in the long run. Eventually, growth in areas hit by a hurricane outpaced growth in similar unaffected areas. That’s consistent with the Federal Housing Finance Agency’s data, which found that the hardest-hit area of Florida after Hurricane Andrew experienced a decline in transactions and stable appreciation immediately following the hurricane, with accelerated growth later on. 

A National Association of Realtors case study looked at hurricanes that made landfall in Florida in 2004 and 2005 and found that even five months after the 2005 hurricanes hit, affected regions were seeing a reduction in home sales, which the authors attributed to rising insurance costs. But the area eventually rebounded as well. 

Supply and demand explain the phenomenon. When homes are destroyed, people seek new places to live. The shortage of homes and increased building costs raise the prices of available homes in the surrounding areas. What’s surprising is that people are increasingly moving into hurricane-prone areas. It’s not just the locals relocating.

Will Florida’s real estate market accelerate as historical data suggests? Or will this be a different crisis? To answer this, it’s important to understand what was happening with homebuilding and insurance rates before the storm struck. 

Development and Insurance Before Ian

When the demand for housing in a coastal state is high, real estate developers will build. Even if it means building on top of a natural wetland marsh that would leave inland areas even more vulnerable to a storm surge. The dredge-and-fill technique, which involves piling up land taken from underwater, was used to increase the availability of waterfront housing in Florida through much of the 20th century, despite the environmental fallout. 

Then, in 2011, Florida’s former governor, Rick Scott, eliminated the state agency responsible for evaluating the risk of development and limiting new construction in vulnerable areas. Rampant development went unchecked, potentially causing more destruction when Ian made landfall and angering reinsurers. 

After Hurricane Andrew devastated Miami in 1992, most major national property insurance companies stopped doing business in Florida or began writing fewer policies. All that was left were smaller insurance providers that heavily relied on reinsurance companies, along with Citizens, a state-mandated insurer that is designed to provide last resort coverage to homeowners who lack options for private insurance. It’s a nonprofit funded mainly by homeowner premiums and special assessments. 

Before Ian, reinsurers were already raising their prices for coverage, and Citizens could only get half of what the company needed in reinsurance. Overall, Florida’s property insurers have been losing money for the past five years. Insurance costs in the state were already becoming unaffordable before Ian struck. 

What Will Happen to Florida’s Real Estate Market as a Result?

For many real estate agents selling homes near Ian’s path, demand hasn’t slowed. Some housing experts predict a temporary downturn followed by a return to the pre-hurricane, overheated market. But others say the rising cost of insurance premiums and building materials coupled with high-interest rates will eventually cause home values to decline in the area, putting an end to southwest Florida’s real estate boom. Analysts say real estate recovery from Ian may look different from past disasters because the effect of weather events is typically transient, but Florida homeowners are looking at ongoing high costs of ownership due to unaffordable insurance premiums.

More insurers in Florida may face bankruptcy. Those that stick around will raise premiums significantly. People were already paying $20,000 per year or more for modest homes, and Ian will only make costs more dramatic, says a Miami agent. Some people may not be able to get property insurance at all—and without insurance, financial institutions will not issue a mortgage. Most prospective homebuyers rely on financing, so this would greatly reduce the number of buyers, causing the value of homes in the area to fall. 

Investors may see this as an opportunity. After all, Florida’s coast won’t cease to be a beautiful place to live and vacation. Historically, homebuyers haven’t seemed deterred by disasters—the dream of owning oceanfront property remains for many. If the insurance market collapses, some experts say hurricane-prone areas of Florida could become neighborhoods for homeowners wealthy enough to buy and rebuild with cash, along with rental buildings owned by companies with plenty of reserves. The home affordability crisis will mean those building owners can charge high rents. 

But natural disasters are getting more costly and more destructive, leading some experts to wonder if we should be moving away from these vulnerable places—and whether the availability of flood insurance through the NFIP is hurting more than it’s helping. 

The Problem With Subsidized Insurance and Climate Change

Most flood insurance is provided to homeowners through NFIP policies, which are underwritten by FEMA. The program is funded by insurance premiums and by money from Congress. But after each natural disaster, the NFIP borrows from the Treasury. And the program’s borrowing authority keeps increasing as storms get more severe. 

The premiums homeowners pay for flood insurance from the NFIP reflect less than half the level of risk. The median value of properties in the program is about double the value of a typical home, so the benefits of the subsidies are going to more affluent homeowners. Some say the program incentivizes development in flood-prone areas: People choose to live in places they know are at risk of flooding because they know they can get flood insurance. When their homes are eventually destroyed, the burden falls on taxpayers. If coastal homeowners were forced to deal with the cost of their risky decisions, we might see a different migration trend. At the very least, builders might be encouraged to use more weather-resistant construction materials. 

FEMA’s new Risk Rating 2.0 is designed to make pricing for premiums more transparent and equitable, reflecting the actual risk of a specific home to flooding. But the fact remains that affordable flood insurance premiums won’t cover the damage from new hurricanes. Stronger building codes could lessen the cost next time around. But some experts say we should rethink rebuilding in dangerous areas altogether and that policy decisions going forward should discourage people from living in flood zones, not the reverse. 

Find an Agent in Minutes

Match with an investor-friendly real estate agent who can help you find, analyze, and close your next deal.

  • Streamline your search.
  • Tap into a trusted network.
  • Leverage market and strategy expertise.

find an investment-friendly real estate agent

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

2022-10-31 15:53:31

Source link

Top Investor Edition: Calgary Is Canada’s Bull Market Heading Into 2023

Real estate markets across Canada are feeling the full thrust of rising interest rates and a contracting economy, but somebody evidently forgot to tell Calgarians because their city’s market is white-hot.

Having come out the other side of a recession about a year ago that was induced by the oil and gas sector’s collapse in 2014, home prices are still below the national average, whether in the single-family detached or condominium segments of the market. Such an auspicious reality has even impelled the municipal government to target denizens of cities hampered by housing affordability woes, as well as a burgeoning cost of living crisis, through what is proving a successful advertising campaign. 

Indeed, ‘Alberta is Calling’ and exasperated urbanites are taking heed.

Natasha Phipps, founder of the Phipps Real Estate Group at CIR Realty in Calgary, and a renowned local expert is at the forefront of the city’s housing rush and has helped clients, both in the province and Canada-wide, find investment properties with propitious short- and long-term horizons. She says that the city’s advertising campaign has been a resounding success because while, say, an investment property in Toronto can be sure to yield a lofty payout, in the long run, its cash flows negatively in the near term. Such is not the case in Calgary, where investment properties’ cash flow is positive in the short term while ensuring promising long-term appreciation.

“We’re not seeing dropping property values here,” Phipps told CREW. “At the beginning of the pandemic, we were in a recession for several years, so starting prices were lower than in the rest of the country, and it kept us insulated.”

According to the latest statistics from the Calgary Real Estate Board, sales declined by 11.9% year-over-year in September, but the benchmark price of a home in the city still rose by 10.7% to $527,400 during the same period, and by 6% since the beginning of 2022.

Although well below the national home price average of $637,373, as revealed by the Canadian Real Estate Association during its last market update, purchasers of Calgary real estate, whether they’re city residents or from outside Alberta, are pivoting towards more affordable options. Phipps says there’s no shortage of those in the city.

“Townhomes are a great entry point for people new to Calgary or for first-time investors who don’t have the budget to fit into detached homes or the multi-unit sector,” she said. “They can get into a townhouse here in Calgary for well under $400,000—they average $360,000, which is an appealing starting point for newcomers or investors. There can be found in very attractive suburban neighbourhoods.”

Phipps added that the rental rates commanded by landlords in the city have steadily ameliorated in recent years to the point that a two-storey, three-bedroom house can pull in $2,300 a month. A year ago, a three-bedroom would have earned around $1,800 in monthly rental income.

However, no segment of Calgary’s real estate market is hotter suddenly than condominiums, for which sales surge by a whopping 60% year-over-year in September, reaching 5,026 transactions. As a result, new listings are nowhere near where they need to be to replenish the cupboards with enough supply to meet demand. With only 2.8 months of inventory, sellers have the leverage in condo sale negotiations for the first time since the recession.

But despite rising prices and interest rates, condos remain the most affordable option for buyers, and investors are cashing in, irrespective of short-, mid-, or long-term tenancies. This hasn’t always been the case—in fact, until recently, investors sagaciously avoided the city’s condo stock, but considering the market is early in its bull cycle, there’s no better time to invest than the present, says Phipps.

“For the first time in many years, I’m feeling comfortable suggesting the downtown market to investors,” she said. “You can buy a condo for well under $300,000 and attract a triple-A tenant in a very nice area.”

Calgary has emerged as a unique market in contrast to the rest of Canada, as buyers have, by and large, shrugged off trepidation about rising interest rates and inflationary consumer goods prices. Other local fortuitous policies, like a dearth of residential rent controls and a friendly corporate structure, are conjuring, albeit cautiously, memories of the city’s recent boom years.

“In Alberta, we can adapt to whatever a changing market bears and that is a very popular reason people are looking to Alberta,” Phipps said. “People are looking to Alberta to outrun inflation and rising interest rates; they’re seeking affordability and opportunity here.”   

 



2022-10-31 08:00:00

Source link

Why Volatile Housing Markets Are Looking Attractive to Investors

Today’s housing market has a lot of people scared, and investors are worried as well. Home prices are starting to slump, inflation is hitting decade-long peaks, and interest rates have turned everyone’s cash flow cushions into break-even deals at best. Is there any respite in the wild real estate market? And why do top investors seem so excited about it?

We’re back on another correspondents episode of On the Market, where Professor Dave has asked students Henry, James, and Kathy to bring in their favorite real estate market news for show-and-tell. These stories hit different aspects of the housing market, showcasing the cracks forming in the overall economy and what investors need to be prepared for to react. We talk about how home flips are being discounted across expensive coastal cities, why rent price growth is starting to stall, and how buyers got their negotiation power back.

We’ll also be touching on the recent inflation data, showing that we have a long way to go until we return to the good ol’ days of two-percent price growth. Then, we take a request from the On the Market Forums where we answer an age-old question: When should you sell a BRRRR property? All this, and more, coming up on this week’s data-first housing market deep dive!

Dave:
Hey everyone, welcome to On the Market. Today, we have one of our correspondence or show-and-tell shows where our esteemed panel will be sharing what they’re watching most closely in the market with you. Today we have James Dainard with us. James, how are you?

James:
Doing good. Just left a brutal meeting with the planning and or clearing and grading in the City of Bellevue. So I’m feeling refreshed after they beat me up for an hour.

Dave:
Sounds enthralling. Henry Washington’s also here to join us. Did you just get beat up by a town hall committee?

Henry:
I didn’t, but man, it’s funny, rarely do those meetings seem to go well. So maybe that’s something we should talk about at some point, how to navigate dealing with your local city officials.

Dave:
Oh, that would be fun. Kathy Fettke, our last panelists today. How are you?

Kathy:
I am doing so well. We are hosting a retreat for our company. All our RealWealth employees are here, the investment counselors, the property teams, and we’re visioning, we’re planning for the future and we’re, believe it or not, really excited, which will tie into my article later.

Dave:
Kathy, when do we get invited?

Henry:
I was just going to say, I didn’t get a Malibu invite.

Dave:
Yeah. We’re on the team. We could be in the RealWealth team.

Kathy:
You guys, it’s an open door policy with you anytime. Just come on by, but James needs to just sail on down and work outside or park more.

Dave:
Oh, yeah. Drop anchor.

Kathy:
Drop anchor.

Henry:
James can take his boat, I’m taking spirit air.

Dave:
Sounds horrible.

Kathy:
The worst.

Dave:
All right, well let’s get to today’s topics. Each of you brought a news story that we’re going to discuss, but first I just wanted to get your impact. Your, what’s the word? Impact?

Henry:
Input?

Dave:
What am I talking about? Input. There we… Thank you Henry. Henry, you host the rest of the show, it’s late for me. Anyway, I wanted your input on this inflation report that came out last week. It was pretty brutal. James is shaking his head and disgust. What did you think?

James:
I think that we might be in this for the long haul. The fact that it just keeps going up. And for a while it’s like they were blaming it on certain things and now they just can’t. Like energy was a big… There’s a lot of scapegoats that have been going on the last three to four months and they kind of pulled all that out and it’s still going up and unfortunately, it doesn’t look good for us. This could be a 12 to 24 month issue and unfortunately for us, what the fed is saying is, they’re going to put us into a recession if this doesn’t improve. And so it looks like we could be going down a little bit.

Kathy:
I’m going to give a positive other side opinion, opposite opinion.

Henry:
That’s good.

Kathy:
I’m going to let you know everything’s going to be all right now. Remember I do have an album that my daughter recorded of me singing in the car when I drive her to school and I’m happy to share that. But the other perspective is that it’s kind of flat, I mean, the positive news in this, and remember, headlines are meant to scare you and make you mad, that’s their job, so that you will watch and we are motivated by fear and that’s what’s going to get you to watch the news. So remember that. But it’s pretty flat from month to month, which is a good sign. In fact, it was slightly improving. And that tells me that in a couple of months when we’re finally comparing year over year to higher inflation, which really started at the end of last year, it’s going to be a different story. So I’m actually seeing it as positive as it hasn’t really gone up so much month to month. It’s holding steady and might really turn around in the next couple of months. So holding the vision there guys.

Henry:
Isn’t a surprise that in a volatile market things are functioning volatily.

Dave:
What do you mean?

Henry:
Is that a word?

Kathy:
What?

Henry:
Is that a word? It’s volatile right now. The inflation was high and then it dropped for a month and everybody was like, “Yeah.” And then now it’s gone back up. Essentially it’s flat. Am I the only am one that operates like, it’s a thing now, I’m operating as if it’s a thing and I’m going to operate as if it’s a thing until it’s not a thing. So we know it exists. And so as a general consumer, I think the only thing you can really do is look to hedge. And you can hedge with your real estate investments typically, and look to bring in additional sources of income, so that you can afford the higher cost of goods. I’m happy that it’s not increasing as rapidly as maybe some thought, but for me, it’s just, it’s here, operate like it’s here, use it as an opportunity to learn how to build some additional income and continue to hedge.

Dave:
Well, I guess the thing that worried me about this was that yeah, the top line CPI went down from 8.3% to 8.2%, but the core CPI, which excludes energy prices and food because they’re too volatile, went up month to month 0.6% and it’s going up. And that’s the number the fed cares about. So when we’re talking about fed policy, they’re looking at this and thinking that it’s going up. And there’s a whole lot of reasons for this, we can talk about this, but rent and housing is a big part of that. And it’s not likely, the rent and housing shelter part of the CPI is not likely to come down for at least another six months.
So I think that’s pretty concerning. And just in general, the reason at least, I look at it is, because we’ll talk about this, but most people are forecasting housing prices to go down. And in my opinion, the only time they’re going to… I don’t think it’s going to be a crash, but they’ll probably start to go down a little bit. And the only time we’ll start to see growth again is once the fed at least pauses and then hopefully reverses course and starts lowering rates. So to me, that report just made it look like it’s months out at least before the fed even stops for a second to see if this is even working or not, which they probably should.

James:
And the concerning thing is they were predicting it to go up 0.3 and it doubled what their prediction was. And that’s the scary part, is their predictions in forecasting have been a hundred percent wrong for the last 12 months. And so every time they think this is going to have this impact, they’re a hundred percent wrong. And that’s what freaked everyone out, is they weren’t just wrong by a little bit. They were wrong by a hundred percent.

Kathy:
Yeah.

James:
Even though it’s only 0.6, their forecast was way off.

Kathy:
Well, remember it was just a year ago they said inflation was transitory, so they have been completely off. I’m not going to trust very much of what comes out of their mouths, but they are saying that they’re going to keep raising well into next year, we’ll see. But again, we talked about this before, a lot has already been priced in when it comes to mortgage rates and the stock market. They react immediately when they hear those kinds of things. So I’m still going to hold that vision that we’re going to be seeing better numbers over the coming months and that might shift things.

Dave:
Totally. I saw a tweet about this today that I thought was a good description of pricing things in, that the stock market and mortgage rates, they’re not a mirror, they don’t reflect what’s going on, they’re a crystal ball. It’s people trying to forecast what’s going on in the future. And so if you look at the stock market, they’re pricing this in, and if you look at mortgage rates, they’re pricing this in. Of course things can keep changing, but it’s not like they’re waiting around for it. All right. Well, you guys helped me talk through my anxiety about interest rates. So thank you for this counseling session.

James:
I don’t know if I helped.

Dave:
I don’t know. I recovered. I could barely talk like 20 minutes ago. So not all.

Kathy:
Well, there’s one thing to remember, it’s that there are a few things that perform really well in an inflationary environment and generally it’s real estate, gold, hard assets, obviously, energy right now, if you’re going to invest in anything unrelated to real estate, it might be energy.

Dave:
For sure. Well, we’ll talk about some of the implications of this and what else is going on in the market now in mid October. But first we are going to take a quick break. All right, James, you’re up first for show-and-tell. What do you got for us for this correspondent show? What news story or thing are you following most right now?

James:
So something that I’m following, right, as we’re underwriting properties and we’re trying to predict, we’re investors in all different categories. We do apartments, syndications, buy and hold, we do development and we do short term flips. And in the short term right now with the market, those short term high yield investments are by far the riskiest right now, if you’re looking at flipping homes, it is a risky venture. But as people kind of exit the market, there’s actually a ton of opportunities out there. And so I’ve been talking to a lot of people and they’re shocked that I’m buying so many flips right now.
And the reason we’re doing this, we’re really just trying to beef up our underwriting and making sure that the deal’s bulletproof all the way through. And this article kind of talks and gives some guidance about it. It’s actually from NPR and the title of it’s Home Prices See the Biggest Drop in Nine Years Thanks to Higher Mortgage Rates. Which you would think that article would make me not want to flip properties and buy that short-term investment. But what it does is it does a really good job at guiding where the market could go and how you predict it into your underwriting.
And so, one of the speakers on there was actually Mark Zandy from Moody’s and they put in kind of his analytics behind it, which was that they feel that the peak markets are going to come down about 10% over the next 12 months. What they are saying though too is, any of the markets that bubbled heavily, which is Phoenix, Idaho, even some Austin, even Seattle, that those markets are subject to more 20% drops during those times, which we have already seen that big, big drop. Because I’m seeing in a lot of our tech spaces that we’re actually about 30% down from the highest peak sale, not from median home price, but from the peak sale number. And so it is consistent, but what the concerning thing is he says that is based on us not being in a recession. And if we go into a recession, they’re actually predicting that each, it will be more of a 20% drop for the slower steadily markets and a 30% to 40% drop in these big peak market jumps or 20% to 30% drops in the ones that jumped really high in that second quarter.
And so what we’re using, this is for our underwriting, is we’re tracking those trends. So as we’re looking at our next potential deal, it’s been very helpful to know this information, because we’re looking at the markets that already deflated rapidly. And then what we’re doing is we’re building in these predictions, the 5% to 10% off of the market. And then that’s what we’re going for with the values of these properties. Because as flippers, there’s still great opportunities out there. We’re buying homes very, very cheap compared to what we have been paying in the last 24 months. And then our goal is to make it kind of more bulletproof is, as long as we know the worst case scenario is not making money on a deal, then we’re okay to buy that deal because there’s so much pad in the performa.

Dave:
Meaning, as long as you’re not losing money.

James:
As long as we’re not losing money, it’s a win in a transitionary market. Because what you do is you don’t leave any money on the table and then you’re still going through the motions. And that’s like, if we’re looking at a 10% drop in the next five to six months based on what this article’s reading, he’s talking about a 10% drop over a 12 month period. So, that gives you that buffer. If we’re factoring in 10% and we’re at six months in, that’s 5%. So it gives us that extra 5% cushion, which is a big deal in the margins. The other thing it does is, it’s directing me towards where to buy and where the trends are. I want to go after the markets that already collapsed really quick, because those are the ones that they just came down fast and now they’re kind of hovering and those are going to be the ones that are actually going to drop a little bit less because they already had the major impact.
So I’m actually targeting the areas that have had the biggest drop because usually what happens is, it’s a domino effect and things start falling. The more expensive markets go first and then the softer markets fall last. And so those are ways that we’ve been able to look at these trends, look at what’s going on, and then look at the smart investments to make, because I do know I don’t want to sit on the sidelines right now because the buys we’re getting are just ripper deals, no brainers on the single family homes, fix and flip and then actually the small multi-family for four to eight units, we are seeing massive opportunity in those areas. And so by watching these trends, the predictability, and then also watching other… And we’re using that kind of same theory with the rental buying too. If we saw rents jump 35%, 40% in a certain market, we’re going to actually predict that those are going to come back a little bit too.
And so based on the forecast that we’re going into recession, we’re just kind of factoring those things in the deal. And you can really read it based on how high that second quarter appreciation was or rent growth. And if it’s high appreciated high rent growth, we’re building it back. And if it was steady, it’s actually a lot more predictable. Because even in the article it talks about the steady markets, they’re still anticipating growth of 4% to 5% in those areas. So it’s just really good information to build into your underwriting, build into how you’re looking at things for the next 12 to 24 months. And it really keeps you safe on that next purchase that you’re doing.

Kathy:
I was born and raised in California and I’m really used to these kind of volatile markets. You can make it a tremendous amount of money when things are going up. And then you’ve got to watch out when prices come down. I know in 2008 in California, if you bought in 2006, it took you 10 years to make your money back and because prices dropped so much, but when it takes off, oh man, that’s when you become a millionaire overnight. So if you can get into those growth markets when prices are down over time, it’s a great bet. It’s just buying at the peak. And so for markets like Seattle, San Francisco, obviously Boise, Phoenix, Nashville, Austin, if you are going to be going into those markets, you really need to understand, you need to not pay full price because you don’t have to right now.
So really understanding where those discounts are and being able to have this opportunity to get into those markets where it might make more sense than it did just a few months ago. But volatile versus these linear markets, which are the ones that we focus on at RealWealth because they’re just flat and boring most of the time, when you look at where prices aren’t changing and where rents are continuing to rise, it’s the Cincinnatis, the Clevelands, the Baltimore, these areas keep coming up because builders weren’t going there, they weren’t like, “Hey, I want to build a whole subdivision in Cincinnati. But you still have the-

Dave:
That’s literally never been said before.

Kathy:
I’m sure someone’s building there, but point being, there’s just not a whole lot of inventory and there’s still this massive group of people that maybe thought of, “Now I can buy a house.” No they can’t. There’s just not a lot of new supply in those markets.

Henry:
I’ve been preaching the unsexy markets for several episodes on this show and now them unsexy markets are starting to look a little too sexy, ain’t they guys?

Kathy:
That’s right.

Dave:
All right, well James, thank you for bringing that story. Super helpful and yeah, I think that the key is if housing prices are coming down, just understand what’s going on. And as James gave some really good advice on how to protect yourself. You don’t have to panic if you’re informed and prepared for it. So hopefully the show is helping you do that. Henry, what did you bring to school today?

Henry:
Let me check my backpack. You know me, I’m always going to look out for my landlords man. I’m a buy and hold investor, and so my article is from Redfin and it basically states that rents are growing but half as fast as they were six months ago. And so based on the recent data, it’s showing that rents are up 8.8 or 9% year over year in September across the country. And that’s cut in half from what it was. And to me, this is just another indicator that rents typically follow behind housing prices. And we started to see the slowdown in the housing market a few months back, but we still saw rents increasing. And so now it seems like things are starting to catch up from a rent perspective as far as rents going down. Some of the things it talks about, are increase in supply due to people not selling but deciding to become landlords because they got locked in at such low interest rates.
And so instead of selling that property, they’re looking to rent that property. That’s an increase in inventory as far as rentals are concerns. And then less migratory people. People have kind of either done that or they’ve had to go back to where they went because now companies are asking them to come back. So what it also talks about, which is very important is it talks about, yes, it’s cut in half, but there’s still several markets across the country who are seeing double digit rent increases still. And when you look at these markets, just like Kathy said, Oklahoma City, right? 24%, Louisville, Kentucky, 17 and a half percent, Nashville, Tennessee, 17% increase. Cincinnati, 16.5% increase. I think the most popular markets that are seeing an increase on this list that I can tell are New York City, Portland, Oregon and San Antonio both seeing all… New York is at 15% increase, San Antonio is at 12, Portland’s at 14.
So there are plenty of markets where rent is still increasing, but there are several of the more popular markets that rents are starting to then see a decline. And so what does all this tell you? For me, it’s paying attention to what’s happening in larger markets and understanding that if history repeats itself, rents will come down a little bit because housing prices are coming down a little bit. And so I need to be prepared for that as I’m looking to buy deals. And so it’s all about watching for the signs and then preparing for it in you’re underwriting. So if I’m underwriting a deal, I don’t want to have to buy a property that only cash flows with the highest perspective rent.
And an agent will tell you when you’re trying to buy a deal, “You can get $5,000 a month rent for this thing. Man, it’s going to cash flow like crazy.” Well, you might get three. So understand, understanding the trends and understanding that the larger markets might go first, the smaller markets are going to fall behind and knowing how much watching this number month over month will let you know how much to pay attention to it in your underwriting. So as you’re looking at deals, make sure that you’re conservative on your rent estimates so that in the event you get more great, but in the event you get less, you’ve planned for it. And if you’re underwriting it and it cash flows at a lower rent price, then you’re probably going to give yourself some padding and be a little safe on the buy.

Kathy:
Yeah, like you said, don’t get your rental quotes from your sales agent. Talk to the property manager please.

Henry:
A hundred percent occupancy all year long. Top, top, tippy, top rents, it’ll be great.

Dave:
Wait, is that not true?

Henry:
No one ever moves. They just want to pay tier rent always.

Kathy:
And it’s interesting what you said about rents coming, at least the growth, rent growth coming down, slowing down a bit. That’s more to my point that one of the huge numbers in our inflation data is rent. It’s the cost of housing. So to see that starting to slow down is good for future numbers.

Dave:
Totally agree.

Kathy:
Future inflation numbers are going to be good. See, the more we believe that. And Dave, you told us to stop shopping.

Dave:
I know.

Kathy:
I had this retreat, I had basket full of food and… Anyway, I haven’t been able to slow down the buying, but maybe hopefully you guys did for me.

Dave:
Well I think it’s also just the natural trend of what’s, it is just kind of happening. As the market’s slowing down and we’re kind of going into a recession things the velocity of money and everything’s just kind of… Well, the money’s starting to disappear out of the market and then people are not going to be able to pay those high rent growth anymore. It’s just not going to be affordable. I was looking that it was, what was it that 72% of consumers have less money in their savings account in the past 12 months than they did 12 months ago. 72%. And so I think what’s happening too is people are being a lot more cautious about making these decisions, even in the rental market, not just grabbing that next nice place they’re going, “Okay…”
Because we’ve even seen that in some of our rentals. The ones that aren’t tricked out that are a little bit more affordable are filling a lot quicker right now. Whereas, 12 months ago everyone was stacked full of money and they were ready to pay the highest possible rent because they wanted the nicest possible place. And so those are the consumers are also just, they’re kind of slowing down and I think that’s going to knock the rent growth down. But like Henry said, as long as you build that into the underwriting and you’re not going… Be cautious of those markets that are spiking right now, those are the ones I’d be careful in. And the ones that have just flattened out and started to chill out, those are actually the ones that you want to kind of target because A, people lose their appetite for them, so there’s more opportunity. And B, it’s already starting to slow down, so you can run your metrics a lot better.

Henry:
Absolutely. And another thing that you can think about as far as being a landlord, you want to put yourself in the best position possible. You want to be able to be flexible with what you can charge, so that you can be more diligent in your tenant selection if you have to get a certain amount of rent for a deal to make sense. And that is a higher number, you’re going to limit the amount of people that can actually afford there. And you might not be renting to potentially the best tenant. But if I can take less and open up my pool of people looking to rent, then you can have better tenant selection, better tenant screening. You can hopefully get a long term tenant.
I would gladly take a long term tenant that’s going to stay for two or three years at maybe a hundred or 200 bucks less than what the top tier rent is if they’re going to stay for a long period of time. And so it’s going to help you have better candidates and help you be in a position to where you can help people and be of benefit to the people in the communities. Because there are plenty of people who are going to be looking for housing with interest rates being so high. And the more flexible you can be with what you can offer gives you the more opportunity to make sure that you’re going to get the long term return that you’re looking for.

Dave:
That’s a great point Henry. Totally. And I love that you brought this story because it is something that’s going to be evolving. We’re actually going to be doing a show about rent and potential rent declines in the next couple weeks. So make sure to pay attention to that. And in preparation for that show, I’ve been preparing a data drop that is rent prices for the top markets over the last couple of months. And there are actually four markets that have seen year over year rent decline already. Only four out of several hundred. I’m going to see if any of you can guess. If you can guess it, I’ll give you a prize, I’ll buy you dinner next time I see you and you’ll get a free autograph copy of Real Estate By The Number.

Henry:
Oh, I’m in. Sold.

Dave:
I’ll give you each one guess. All right. If you get any of the four, I’ll do it. Kathy, go.

Kathy:
San Francisco.

Dave:
No.

Kathy:
No. Oh, I want dinner.

Dave:
We’ll still get dinner.

James:
Oh, I know this. I know this and it wasn’t the cities I thought it would be.

Dave:
You should know this. Oh I wont-

James:
Yeah. Oh, my gosh [inaudible 00:25:03]

Dave:
Henry, you got guess?

Henry:
Milwaukee?

Dave:
No. But you were kind of close because I don’t know geography. I thought Milwaukee is a safe place.

Henry:
Than Minneapolis is what you’re looking at.

Dave:
Yes. Okay. But that was your second guess. James, you can’t guess that one anymore.

James:
Is it Cleveland?

Dave:
No.

James:
Why?

Dave:
Number one, James, you should know this. Spokane, Washington.

Henry:
That’s-

Dave:
Rent has already gone down 6%.

Kathy:
Wow.

Dave:
And the number two, the four are, I’ll give you a hint in a future episode, we’ll have the data drop with all this data. But Spokane was negative 6% in September, Reno is negative 3%. St. Paul, Minneapolis, which we should probably do a show on those two cities, because they did enact some new policy. 2% down and Minneapolis, 1% down. So those are the ones. Anyway, after that there’s the low ones all end with AZ. So lot in Arizona are really slowing down. But I’ll share that soon

Henry:
Since I got to it on my second guess. Can you send me half a book?

Dave:
Yeah. Which half do you want? The top, bottom? Instead of the first or half, I’m going to rip it in half. And you can-

Henry:
I want the half Jay Scott wrote.

Dave:
That’s such a good call. It’s way better. Oh man. Wow. That was good Henry. For that I’ll autograph your book. And I’ll glue Jay’s two halves together to make you one whole book. All right, well with that, let’s get to Kathy’s story. What did you bring for us today, Kathy?

Kathy:
Well mine is from USA Today. So this is not a hard hitting story, but the-

Dave:
Swipes it. USA Today.

Henry:
Shots fired.

Dave:
Zing

Kathy:
As home sales stall, seller’s fix it, punch list budget is 50% higher, the data shows. So basically the article talks about, in the fourth paragraph it says, “Buyers were once willing to waive contingencies including home inspections. Today, nope. There were 60,000 purchases that fell through in June. That’s 14%.” Of course, June is a while back, so these are dated numbers at USA Today. Anyway, but that was 14% of the homes under contract, the highest on record. So to summarize this, I talked about it in our last show, that there’s the seller’s market and the buyer’s market. And when I’m in front of a room and I ask people, “What’s a seller’s market?” They say, “It’s a great time to buy.” And I say, “No. A seller’s market means the seller has the power.”

Dave:
Yeah, it’s kind of in the name.

Kathy:
It’s in the name. But honestly, love you all and this is wrong so many times. So many people buy in a seller’s market and sell in a buyer’s market, that’s buy high, sell low type thinking. So just know that right now things are shifting from the seller’s market, where it was good for this seller, yet I know you all were buying. And then in now it’s shifting to a buyer’s market, which means you have the power as a buyer, this is your turn, this is good news. So depending on who you are and what you’re trying to do in real estate, these markets matter. As a home builder, we’ve got subdivisions all across the country. It was a great time to be a seller the last few years, not so much today. I’m sure James could agree with me, hard to be a seller, you have to work harder.
You can’t just put a sign in front of your house and have 90 people come and try to buy it. It’s now 50 days on market is the average. So it’s taking longer, at least again, according to this article, it’s taking longer, you have to do better as a seller, you got to put more money in, it’s costing more. The cost of materials is higher. Buyers are going to demand more. So if you’re a buyer, this is your turn. If you’re a seller, you got to work harder and you got to know what you’re doing. Just like James was saying earlier, you’ve really got to know your numbers really well right now.

James:
I love this article because I’m a firm believer punching out your house. If you are in a transitionary market or a soft market, the last thing you want to do is work for 30 to 45 days to get that buyer on your property and for them to walk over a punch list items. And right now we have a lot of listings in the market, we have about 75 listings. We are pending above 50% of those, which is actually really good right now with what’s going on. But we’re doing that because as a broker we are working our tails off. We are calling every person that’s going through, we’re calling every broker to find out how many showings they’re getting that are competitive with us, because actually, what we’re doing with that is we want to get ahead, if we have another listing in the area and it’s not selling or it’s stale, we actually want to get in front of them on the price drop so we can ink before they will.
And so we’re having to work really, really hard and as you go to sell these things, they have to be punched out. We went over this for 30 minutes this morning. I have a flip that’s going live on Thursday. We punched it out five times, we’ve done a pre-inspection report on it. We are hitting everything on the pre-inspection report. And I know for a lot of flippers they do have the mindset of going, you want to leave a couple things on the table for people so they can have it and you can give it to them on the inspection. I think that is a terrible idea right now. You just want to give them the best finished product and every buyer because there’s a limited amount of buyers, at least in our market right now. We went from having 30 showings a week, which was getting us those no inspection offers to three.
If you do not want unfinished items to spook off your first three buyers, that is probably going to be one of your buyers on these houses. And so taking the time, spending that little extra money will help you sell that property dramatically faster and for more. And so it’s spending that extra 50% on the punch list, I believe it and they should be doing it. Because the amount of money you’ll get back, because as we go into a buyer’s market, buyers will beat you up on everything. They’re going to beat you up on time, they’re going to beat you up on items,

Kathy:
Because they can.

James:
Because they can and they should, they should get the right product, because there are a limited buyer pool buying it. And if you leave that item up, they might turn a $500 item into a $2,000 item or even worse, walk from your sale. So punching out your house is, I’m a firm, firm believer that you need to take the time, slow it down, do not roll them out too early, price it well and make a buyer feels really good about you, your product but also as you as a seller. If you take that little extra time, they feel better about the whole transaction. That’s how you get a deal pending in this market right now.

Kathy:
Yeah, this is the time where you still have to go back to staging. And at our Park City Project, I would say our last, we just changed sales teams, because I think they got lazy, I hope they’re not listening, but it was just so easy and now you have to work hard. And this new team is putting up the balloons and the signs and spending the money on the ads. They’re going to spend $200,000 just on marketing for this project, because they know that’s what it’s going to take. And to go international.
So again, you’ve got to work harder if you’re trying to sell real wealth is generally acted as a buyer’s agent helping people buy. So it’s like “Ah yes. It’s like our market again.” For that side of the business. Up until now, we were the ones without the power. It was like the seller saying, “No, this is the price. Too bad if you don’t like it.” It was almost impossible to even find anything. Now, we have more inventory, we’re getting better deals. For me, this is our time for that side of the business. For this side of the business that’s selling, that’s where a lot of our effort’s going to have to go. But we’re finding creative ways to do it.

Henry:
I think that I don’t want people to miss how good of a tip that was that James gave on punching out your house and getting it as ready as possible when you’re looking to sell it. If you are flipping in this market, that is a phenomenal tip. And he had mentioned that a $500 item can turn into a $2,000 item, both because of opportunity cost, because of time. You’re going to end up having to fix that thing anyway.

Kathy:
Yes.

Henry:
But now, it might prolong you closing the deal, which takes money out of your pocket for holding costs. It may have that by our walk, so you’ve got another 20, 30 days on market, right? Because you’re getting less people walking your property now. And all of that increases your costs of holding that property when you could’ve just paid $200, $300 to go ahead and fix that punch list item off the top and get that household quicker. The little things matter a whole lot more now. And I think if you got into the game of flipping houses when the market was amazing for doing so, you may not have had to hone that skill, you may not have had to think about the little things. So, that tip that James just gave you is huge. If you’re new in this game, the little things matter a whole lot more now. And you need to pay attention to those small details.

Kathy:
And even though sales are down 20% from last year, there’s still 4.8 million, we’re on track to for 4.8 million in sales. It’s down from 5.9 million last year. But that was a really a record year. 4.8 million is kind of sort of average and normal. So people are still buying and selling. It hasn’t come to a stop and people really need to realize that. 4.8 million homes, that’s a lot of homes trading hands today.

Henry:
We got spoiled. Kathy. I’m spoiled. I listed a house last night, late last night. It’s now, what time is it here? 12:00 01:00. It was one when we started. So it’s about what, 01:30 now and I don’t have a showing yet.

Kathy:
Oh.

Dave:
Oh my God. Did you drop the price?

James:
Drop price?

Henry:
Exactly.

Dave:
You got to drop it.

Henry:
I got to.

James:
Drop price.

Henry:
It’s been… Gosh-

Dave:
I’ll make you an offer right now. Henry. 20% under list price.

Henry:
Just six [inaudible 00:35:34].

Dave:
Or whatever it is. I don’t even know what it is.

Henry:
I would’ve had 10 showings by now, but I put it on the market last night and not even half a day has gone by and I don’t have a showing yet. So woe is me, the market’s crashing.

Dave:
Send your thoughts and prayers to Henry

Henry:
Ts and Ps.

Dave:
Yeah, I mean think generally speaking, there’s a reason. It’s called the buyer’s market and the seller’s market. And if you’re an investor, there’s a benefit to either one. When you’re buying, there’s one, there’s benefits to that, when you’re seller, there’s one and you just need to adjust and act accordingly. So thank you all for all these tips. There’s super helpful to navigating this market. As we’ve sort of all said, there is risk in this market, there is risk in this kind of environment, but there is also opportunities. So really this is the time to really know your numbers, understand your market really well, and look for those great opportunities that are coming around like everyone here was talking about. So we do have a question from the forums that we will get to, but first we’re going to take a quick break.
All right, for the last part of today’s show, we are going to go to the BiggerPockets forums and discuss a question from Kaohe Bruher. I hope I pronounce that right, my apologies if I didn’t. The question is, “When should you sell off a BRRRR property?” My question is, “When should you sell off a BRRRR property? My subject property is in Hawaii, there’s a saying, everything has a price, any feedback? Much appreciated.” So we’re not getting a lot of details on the specific property here. So let’s make this a philosophical question. Henry, what do you think?

Henry:
When should you sell off a BRRRR property? Not, never. look, I’m not a big proponent of the BRRRR. I’m more of a HELOC guy. So if it’s me, and like I said, there’s not a lot of information here, so I’m going to go off myself, I’m a buy and hold investor typically. So if I bought a property that I bought undervalue, added value to it and then got the rents where I wanted them to be, I would typically just look to do a line of credit instead of a refinance on that. And then that gives me access to that capital for me to use it when I need it. It’s a whole lot cheaper for me to do that too, because when you refi, your interest is going to be front loaded on that new loan and you take out a new loan at a higher amount.
And so I’m assuming they haven’t done the refinance already. If they’ve done the refinance already, the best time to sell it would’ve been when the market was at its height, the next best time to sell it is now. Right? We’re still seeing fairly decent prices on homes and they’re starting to come down and we don’t know exactly when they’re going to peak again because we haven’t seen the fed level off on interest rate hikes yet. But if you are selling it because you need money and you haven’t done the refinance yet, I would look at a HELOC instead. It’s cheaper money, you don’t change your mortgage so you keep your cash flow, you get access to the money and you only pay interest on it if you have to use it.

Kathy:
Yeah, I mean it’s hard to know without seeing the numbers. But if you have already taken all your money out of that deal, you did a refi, you got all your money back and you’re kind of at zero basis and you’re locked into a low rate and it’s cash flowing, I can’t see a very good reason to sell it. Because if you sell it, well first of all, if you just sell it, you’re going to pay capital gain tax. If you don’t want to do that, then you’re going to have to 1031 exchange. What are you going to buy and how is it going to cash flow with the rates?
I mean, obviously there are markets where you could still get cash flow and as we were talking about, you can find some really good buys right now. So if your Hawaii property, after taking out all your cash is really not cash flowing that well, and you have a tremendous amount of equity in it and you’re able to sell it because that market, it’s Hawaii, maybe somebody really is looking for their place in Hawaii and you could take a bunch of cash, and you found something else that’s better, that you could 1031 into that it still works with the high rates then I don’t see a problem with that.
I mean we help people do exchanges all the time because they have too much debt equity sitting in the property. And sometimes the equity line is just not big enough. In a place like Hawaii, if you made hundreds of thousands of dollars, your equity line might not go that high. So again, it just depends if you can find that replacement property and that replacement property performs better than what you have.

Dave:
I’m glad you brought that up Kathy, because my answer was going to be a mathematical one, which is try and figure out the return on equity. And Kathy was just talking about that. A really popular metric is cash on cash return and return on equity is sort of a similar idea, but instead of just the money that you put down to invest in the property at the time of purchase, you use the total amount of equity that you have in the property. So that’s the money you’ve put in as well as the money that you have earned by the market appreciation or any forced appreciation.
And that will tell you how efficiently your property is generating cash flow for you. And to Kathy’s point, you can do that calculation for the property that you own. And this is true of not just a BRRRR, this is for regular investments too. But you can do this analysis and say like, “Okay, I’m getting, let’s just say a 10% return on equity in this property, but everything in the market that I could buy is only 7% return. So what I own now is a better cash flow for me.” Or if you do the analysis in everything that you could go buy, to Kathy’s point is better than what you’re doing, sell it now and then reallocate that capital to something that’s going to earn you cash flow more efficiently.

Henry:
Okay Dave, I guess I’ll take your half of the book too.

Dave:
I actually did write that chapter, I wrote that chapter and there is actually, I did do a YouTube video on that on BiggerPockets that could help you calculate that if you want to do that.

James:
And I am a huge return on equity guide. That is how I built my whole portfolio out. Every year I audit every property I own, what is my return on equity. And because I think it’s one of the, in my opinion, and I know it’s different than a lot of people else is, I will sell anything. If I get the right price and I can move it into a better investment engine, I will sell it. I will not sell my wife, I will not sell my kids and I will not sell my dog. But everything else is for sale.

Dave:
What about your kidney?

James:
And so even right now-

Dave:
Your kidney?

James:
But will I still have one remaining?

Dave:
Yeah, you can live with one.

James:
How much is it number?

Dave:
[inaudible 00:42:25] But we’ll see.

Kathy:
Everything has a price.

Dave:
I live in Amsterdam. I’ll go ask a guy.

James:
Okay. Hey everything is for sale. I mean even my boat’s up for sale right now. Because it’s like why wouldn’t I try to sell it? It’s a juiced up asset. And when riding the peaks valleys is where you make your biggest amount of wealth. We acquired a ton of properties BRRRR in 2007, 8, 9. And they didn’t have much equity then, but they had great equity and after three years we were able to look at that return and then trade those out for numerous different units. Because at the end of the day when I’m doing a BRRRR, I have something right now. I have a duplex for sale in Queen Anne Washington, which Queen Anne is a class A neighborhood, it’s completely renovated. I have 400 grand in equity on this thing and I have a rate of 3.95 on a 30 year fix that’s cash only, 1400 bucks a month with no money left in that deal.
And people were always like, “Well, why would you sell that? You have no money in, you’re making a great return. It’s in a great area?” Because if I have 400 grand sitting there, I will trade these two units for eight. And not only that, I’m going to buy a value add where I’m walking into equity immediately, creating more wealth on that and then I’m going to take that new gun powder and trade out again. And I’m a constant trader. And I know the one negative part about doing that is, your overall cash flow in the short term is not good, you’re always trading into more equity positions. But it’s short term pain for long term gain for me. I am chasing to get to a certain unit count that will pay me a certain amount of cash flow so I can chill out.
I need to get a lot of units to get to there. And by trading those out and returning the equity, that’s how I increase the portfolio, because equity is no good for me until I use it. And if it’s just sitting there, it’s going to go up and down. And so I’m always looking to, what is my return on equity? Can I beat it in the current market with the cash flow? And then what kind of equity position can I get out of that deal if I’m buying another value add?
And so I don’t do a trade for another turnkey, but if you go and you’re taking that BRRRR, you buy another value add, you BRRRR again, you might be able to get two more out of that. And so just keep building that equity and then use it, just don’t bank it. It’s the biggest mistake I see investors make out there. And just one thing about trading, use the right mechanism. You need to use the 1031 exchange, defer your taxes, use it that way. Because if you start eating the taxes, it all gets washed out. So do it in the right method too.

Dave:
Totally. I think that’s one of the more painful lessons I learned when I first started investing. I was building up all this equity and I was so proud of it. And I was like, “One day I’m going to sell this property and I’m going to make a lot of money.” And then a few years later I was like, “Man, I should have taken that money out and reinvested it a long time ago.” Because I mean, that’s sort of the key to building your wealth over the long term, is reinvesting your profits. And if you keep your equity in these homes, you’re not reinvesting it, even if it’s jacking up your cashflow a little bit, you’re getting more cash, the efficiency that which you’re earning that cash actually starts to go down and you’re using a lot more money to make slightly more cash and that’s just less efficient.

Kathy:
Yeah.

Henry:
So my takeaway is, buy Dave’s books, he’s good at numbers. And then go ahead and get on the pre-order list for James book, How to Flip Houses Like a Rockstar, Holding Rockstar. And then we’ll be all good, man.

Dave:
All right. Well, let’s see if anyone can get James’ Kidney off him too. See what offers you get.

James:
I’ll take a bit.

Henry:
Shoot me a number.

James:
Hey Henry, if I can get enough money on my kidney, can we go get a rental in Arkansas? I needed a good affordable market.

Henry:
You probably only need half a kidney for a rental here in Arkansas.

James:
Let’s get two rentals.

Henry:
I could probably get a guy in Arkansas to come pick it up from you too.

Dave:
I also, James, I’m just going to call bullshit right now on the idea that you’re going to chill out at some point, you’re addicted.

Henry:
Right.

Kathy:
Yeah.

Dave:
There’s no way you’re ever going to chill out.

James:
Yeah. Valid point.

Dave:
All right, well this was a lot of fun. Hopefully that answers the question for our forum poster. Kaohe Bruher. Thank you for posting. If you want us to answer your questions, you can do that on the BiggerPockets Forums. Let’s just before we get out of here, remind everyone where they can connect with you all. Kathy, where should people find you?

Kathy:
Realwealth.com and my fund, my Texas single family fund is growdevelopments.com. And of course, the RealWealth Show is my podcast.

Dave:
Awesome. Henry, what about you? He’s dancing.

Henry:
Hey. The best place to find me is Instagram @thehenrywashington on Instagram or check out my website henrywashington.com.

Dave:
All right. And James?

James:
Very similar to Henry, my Instagram is @jdainflips. We do a lot of free educational stuff on there. And then also we have our [email protected], not henrywashington.com, but jamesdainard.com.

Dave:
All right, great. And I am @thedatadeli on Instagram or you could obviously always find me on BiggerPockets as well. Thank you all so much for listening. Hopefully this show is really helpful to you. If it was, don’t forget to share with friends or give us a great review on either Spotify or Apple. We appreciate all of you and we will see you next time for On The Market. On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media. Copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show, On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

2022-10-31 06:02:49

Source link

What Happens If I Can’t Pay My Mortgage?

While you might have felt perfectly capable of making mortgage payments when you bought your house, sometimes financial situations arise that affect your ability to make regular mortgage payments. This can have a huge negative impact on your credit score and can put your home in danger of being repossessed if you don’t take immediate action. Luckily there are options that can give you time to turn your finances around. Here’s what you should do if you can’t pay your mortgage.

What Happens If I Can’t Pay My Mortgage

Determine the Reason You Can’t Pay

In most cases, people do not fall behind on mortgage payments on purpose. Rather, there is an underlying reason that you can’t afford to make your mortgage payments. Once you figure out why you can’t pay your mortgage, then you can take steps to remedy the situation.

In some cases, short-term financial issues make it difficult to make mortgage payments. Falling behind on mortgage payments could occur due to loss of income, as many Canadians experienced during the Covid-19 pandemic. Or sometimes, an emergency expense causes a budgetary shortage, forcing you to pick and choose what gets paid in a given month.

In other cases, long-term financial issues make it difficult to make mortgage payments. If you pay an excessive portion of your income, making you house poor, then you might be in constant danger of not being able to make your mortgage payments. Or your mortgage is an acceptable portion of your household bills, but you have an excessive amount of other debt like vehicle loans or credit card debt.

Whatever the reason for falling behind, if you can figure out the underlying cause, you can start working on correcting it.

Make Alternative Payment Arrangements

Regardless of why you can’t make your mortgage payment, once 15 days have passed, you will be charged a late fee. Those 15 days are a grace period, so if you pay your mortgage before the days have elapsed, you will typically not be charged any fees or penalties. At this point, you have a few options for catching up:

Short-term mortgage payment deferral – If you are dealing with a temporary setback, then deferring your mortgage for a set amount of time could be a good option. This allows you to repay the missed payments later, plus any interest accrued over the deferral period.

Make reduced payments – A forbearance plan allows you to make reduced payments or sometimes no payments for a set amount of time. This is another good option if you are dealing with a temporary setback.

Extend the original repayment period (amortization) – Extending the amortization period could lower your monthly mortgage payments and make them more affordable.

Add the missed payments (arrears) to the mortgage balance – Your mortgage lender might be willing and able to add the missing payments to your mortgage balance and spread them out over the remainder of your mortgage period, thus increasing the mortgage amount for the rest of the term.

What If You Can’t Catch Up?

Once 15 days have passed without you making your mortgage payment, there will be a late fee, and after 30 days, your loan will officially default. At this point, your lender will report your overdue payment to credit bureaus, which will begin to impact your credit score.

The foreclosure process will begin if 120 days have passed and you still have not made a mortgage payment or any alternative arrangements. When your home is foreclosed on, your mortgage lender will take possession of your home and remove you from the property. While the process varies by province, the ultimate goal is to sell the property and use the proceeds to pay off the remainder of the mortgage.

If the house sells for less than the remainder of the loan, you will be required to pay the difference. This is called a deficiency judgement and requires additional legal action from your lender.

Although you might feel financially secure, sometimes unexpected situations arise and you may find yourself asking, “What happens if I can’t pay my mortgage?” In this cases, don’t wait until it is too late. If you think you might have trouble, talk to your mortgage lender right away to work out a plan. They are much more willing to help you if you approach them ahead of time rather than letting your mortgage default. If your finances are sound at the moment, then use the opportunity to build an emergency fund, should you run into financial trouble in the future.

2022-10-30 12:48:04

Source link

Real Estate Horror Stories: Navigating Six-Figure Losses

There’s a dark side of real estate no one talks about. Crime, destruction, theft, violence—you name it, we’ve dealt with it. With the spookiest day of the year coming close, we’re going to tell you all our terrible real estate tales. Everyone on podcasts and YouTube wants to show you how easy it is to invest, how it’s an assured path to wealth, and rarely what type of mistakes you can make. But we’re flipping the script, bringing in some of the best and brightest in real estate to show that the grass is usually greener where the septic tank is.

Today’s guests, who have all collectively succeeded at failing, are Andrew Cushman, Jamil Damji, and Matt Faircloth. If you’ve been a BiggerPockets listener, these names may sound familiar to you, but if you’re brand new, let us introduce you to these industry giants. Andrew is a multifamily expert and one of the smartest names in the game on screening and underwriting (analyzing) properties. Jamil built the nation’s largest wholesaling operation and is an expert guest on On the Market. And Matt, CEO of the DeRosa Group, literally wrote the book on Raising Private Capital.

But these titans of industry only made mistakes at the beginning of their careers, right? Not quite. They share today a selection of stories that will make you realize that the only successful investors are the ones who can both literally and figuratively weather a strong storm. And if you think it’s all cash flow and cruises for these investors, you couldn’t be more wrong.

David:
This is the Bigger Pockets podcast, show 681.
And this was a big one. Because we put the insurance carrier on notice the day before we got in line before everybody else. If you have a fire at your property, okay, you’re probably the only one making a claim. But if you’re in a situation where a hurricane devastates a hundred miles of coastline, can you just imagine the volume of claims the insurance carriers are processing? We saw properties that sat untouched, unrepaired for two to three years because they didn’t get their claim in fast enough.
What’s going on everyone? I am David Green, your host of the Bigger Pockets Real Estate podcast here today with a special Halloween episode, brought to you by me and some of my good friends, including today’s co-host Jamil Damji. Jamil, Happy Halloween.

Jamil:
Happy Halloween, man. I’m super happy to be here. And it’s a scary, scary, scary show.

David:
Yeah, it’s a scary and fun show. In today’s show, we are telling real estate horror stories in the spirit of Halloween. We are going to be joined by my friends Andrew Cushman and Matt Faircloth as we all share things, basically deals gone wrong and what we did to try to survive them. Jamil, what were some of your favorite parts of the show?

Jamil:
Oh, man. Just how prepared Andrew is, first and foremost. Secondly, Matt’s hat? Get out of here. And third, you are the best Sergeant Slaughter I have ever, ever seen.

David:
Flattery will get you nowhere, Jamil.

Jamil:
Yeah.

David:
But that’s probably not true. This is my first time ever dressing up for Halloween and it’s here with you guys today. Before we bring in the show content, let’s get to today’s quick tip. And it is, it’s very tempting to want to skimp on insurance and when nothing goes wrong, that can feel like a good idea. But reconsider that after listening to today’s show, you may never want to skip on insurance again. Make sure that you are underwriting thoroughly and preparing for what could go wrong, not assuming everything goes right. All right. Without any further ado, let’s get to the show.

Jamil:
And today we are going to be sharing our multi-family horror stories. Andrew, I hear you’ve got something to share with us.

Andrew:
Yes. I’m Andrew Cushman. I’m addicted to multi-family and I have some horror stories.

David:
Hi, Andrew.

Jamil:
Hi, Andrew.

Andrew:
Hi, guys.

Jamil:
You’re in a safe place, Andrew.

Andrew:
Thank you.

Jamil:
Tell us about it. What happened, Andrew?

Andrew:
Well, this was back in the early part of my career, 2013, so we were two years in. This was Dallas, Fort Worth, Texas, and this was our maybe third or fourth deals. And it was one of those situations where the broker tells you it’s a C property, but that’s because no broker or seller will ever actually tell you that it’s a D. It’s always just a C. It’s like a Dove bar. If you bite into a Dove chocolate bar, it’s pretty sweet. But if you bite into a Dove soap bar, it’s kind of bitter. And we were sold chocolate and we got soap.
And so on the day of closing, I’m sitting there in the office and it’s getting in the afternoon like, “Man, what is that smell?” And it just kept getting worse. And a couple hours before the end of the day, we found out that the sewer pipes underneath the building… It had crawl spaces and this was built in the ’60s, that means plywood floor and then there’s two to three feet of space under there. The sewer line had broke and spilled the entire crawl space with about two feet of sewage water and all the stuff that floats in that. And not only affected the office, it affected every other unit in the building.
That was Friday afternoon of closing. That was a great start. Saturday, the first weekend that we owned it, one little red flag that we missed at the time was that there is a convenience store right next to our property where let’s just say unsavory transactions would occur. And on that Saturday evening a transaction went bad, started a little scuffle, which somehow ended up over our fence and onto our property. And we ended up that night with a quadruple homicide plus four stabbings. I was like, “All right, probably can’t get a whole lot worse from here.”
And then at the other property that we bought, basically at the same time, five o’clock in the afternoon, somebody climbed up on top of the leasing office, busted out the skylight and threw Molotov cocktails down through the skylights into the office in an attempt to burn it down. That was my intro to Dallas, Fort Worth. It was very exciting. Needless to say I figured, “well, it can’t get a whole lot worse from here.” We did eventually sell those properties and get out of them and everything turned out. But what came out of it and what changed is way back in episode 279, we talked about the screening process for properties. Those two nightmares are a big part of where that came from.
The mistake we made is we did go to the market in person to check them out, but one of the things we do now is we do Google Street View, we take the little yellow man and make him walk around the neighborhood and see if he gets robbed. What we missed is that convenience store, because it’s in a low income neighborhood, is going to be a real problem. The median income there was too low to support the rents, and then crime was high. When you take low income, high crime and then unsavory neighbors and put those together, you’ve got a very rough property that has been extremely difficult to turn around because you can turn around a property but you can’t turn around the neighborhood.
Now what we do is we screen. We won’t buy a property that doesn’t sit in a median income area that’s high, and that’s going to vary by market, but for us it’s 40 to 50,000 at least. We only buy in low crime areas. We do a thorough street view and then we send somebody in person if it looks good. And for us, we don’t buy 1960s properties anymore because the physical decay, it can be overwhelming, especially if you haven’t budgeted for it. Yeah, that was some of our early horror stories and it framed what we did for every deal after that. And fortunately we haven’t had anything like that after that. But yeah, it was quite the fun introduction to multi-family.

Jamil:
Wow. I mean, that’s obviously a nightmare, but it gave you a lot of tools that will keep you out of a nightmarish situation in the future. And I think that that’s the whole purpose of waking up in a nightmare, is to not have them over and over and over and over again.

Andrew:
Exactly. I mean, we don’t regret it because it made us that much better for the… I don’t know, whatever, seven or eight years afterwards. And we also did things like hire Mr. Slaughter here to come live at the property and patrol it for every night and every day. I think we had two or three officers on there. We let the police practice with their canine units on the property, try to help tamp things down. Yeah, we learned a lot and it heavily affected our process going forward. And again, fortunately we have not had to deal with that any further since then.

Jamil:
Incredible. I’ve been accused of being an unsavory character myself as Hugh Hefner, and I would have to say that I take pause and a little bit offense to you wanting to stay away from unsavory characters. I think everybody deserves a place to rest their head and wear a bath robe. But thank you so much for sharing that horror story with us, Andrew. It was enlightening to say the least. Matt.

Matt:
Howdie partner.

Jamil:
Howdie to you. I also hear you’ve got quite an interesting horror story that you’d like to share with us. Hopefully, you’ll be able to tie in how this horror story and that hat came to be.

Matt:
The hat, brother, is just sometimes you got to be the sheriff on a property as a property owner and you got to knock heads, whether that’s on a C class property, B class property, whatever it is. There’s going to be things that an owner needs to police and remove, whether that’s improper management, bad books, theft, which is what my story is about my friend, or whatever that may be. Or tenants that are bad actors and making bad choices or having bad deals go down at the convenience store across the street. Almost called it a drug store. No, convenience store. Probably was a drug store as well. But yeah, we are kind of cops and bringing multi-family to the next level.
This story is that. This involves probably my first triple digit multi-family property; it was 198 units. This is the first time that we had bought something anywhere near that large. And it was in Fayetteville, North Carolina and Fayetteville’s all one syllable, Fayetteville. And we had bought it and the property manager that we had hired was new to North Carolina and they had a regional manager, which is property managers are structured with a regional manager that’s over typically a bunch of properties that have site managers that work and that sit at the property and have maintenance teams and that.
But the regional sits over the whole thing and it’s really their job to grow and manage the existing portfolio. Regional was really solid and she put a great site team in place and a week after we closed, she quits. And so the property management company had a change of heart and decided, “Well she quit. We don’t really want to hire a new person right now, so we’re going to try and manage this property in Fayetteville, North Carolina from Atlanta.” And so they tried to manage it way remote. And so what that equated to was the site team was really left to run the property by themselves. And so you got somebody that’s hours and hours away that’s responsible for keeping their eyes on the property.
And when the cat’s away, the mice will play, my friend. And that’s just how it goes. Nobody with this hat was watching the property aside from us. What happened, very quickly, two things. We had identified to the property manager, to the site team that “Hey, we want to renovate all these apartments because they’re all very circa 1970 with lovely wood paneling on the walls and 1970s stock kitchens and whatnot. And we knew that the tenants were paying $500, $600 a month in rent for ones and two bedrooms, whereas the market was 800 $900 a month. And we were going to make major investments in the property to bring those units up to new condition.
The site manager took it upon themself to write a letter to all 198 tenants, telling them, “Hey, new manager is going to make some major investments in this site. And just so you know, when your lease renews, you’re going to go from 500 to $800, just be on notice.” They put that on every tenant’s door. We went from 80%, we went from 80% occupancy to 30% occupancy in two months after that notice was posted. Again, without a little bit of tact and that kind of thing, and then when the cats away, the mice will play. That was obvious nightmare number one is just occupancy falls way off and that. Fast forward, we ended up having to remove that property manager, not just because of that, because a lot of egregious issues that we had had.
And the second issue, horror story that came up had to do with yet again, not having a regional sitting over this property. The maintenance technician was there and I still remember his name, still remember his face. Every time I came on site, man, he’d be outside picking up trash with this little long stick with the claw on the end of it that they use and with a little bucket. And he’d plant new flowers. I was told by other site team members that a couple days before I would come down, he would plant some new plants just to show off a little bit, the property and all. He [inaudible 00:12:12] call me sir. Yes sir, no sir, the whole time. And very respectful, got my cell phone number, would call me every here and again to tell me how things were going. And yes sir, no sir, the whole time.
And he had a bunch of vendors lined up to do work on the property and people that he knew from the neighborhood were renovating apartments and stuff like that. And he was the best and he was my best friend and I thought that he was the one that was going to bring that property around. And I defended him when other people started to tell me, “Hey, that guy’s not doing his job sometimes and this and that.” “No, you know what? He’s great. And not just because he calls me sir, he’s amazing and I love the way he shows up.”
We terminated the PM company and my business partner, Justin, goes to the site a week later and a guy in a beat up pickup truck… Any real estate investor knows what the truck of a local scrapper looks like. The guy who’s there, whose job is to collect scrap metal and take it to the scrap yard and they get dollars per pound for it. Local scrapper truck pulls up with a truck full of metal that he’s found around the neighborhood and he says, “Hey man, you got any appliances to sell me today?” And I’m like, “What are you talking about appliances?” And my partner Justin was like, “Well no, we don’t sell you guys appliances.” And he says, “Well no, the guy that works here, the maintenance tech, he’s been selling me appliances that you guys pull out of these turned apartments. He’s been selling them to me for $300 for a full set of appliances.” And I’m like, “What?” “Oh yeah, yeah.”
And so in a business, when you’re in multi-family when you’re turning apartments, the appliances that you pull out of one apartment when you renovate and upgrade, those appliances could be used for parts and spares and maybe a tenant loses their refrigerator where you can give him the refrigerator you just pulled out of the apartment after it’s been cleaned and use it until it’s soon enough to buy a new one. This guy was selling all of our appliances to the guy in the beat up pickup truck.
Then it turns out, did a little bit of digging, that there was a homeless guy living on site. And we approached him and we said, “You’re living in one of these apartments?” And it was furnished. He had taken furniture he had found in the neighborhood and had a furnished apartment that he was living in, with a key. Guy had a key. And we were like, “How did this happen? How are you living here?” “Oh, the maintenance guy has been renting me an apartment. I just pay him in cash, $400 a month in cash, then he’s been letting me live here.” And I was like, “Where are you getting the money from?” “Oh, well, I do work orders for him and some of the other guys and I do some odd jobs around the site and they pay me and I just pretty much give the money back to him in rent.” This maintenance tech was selling used appliances to a local scrapper guy and had a homeless guy live in one of our apartments who was also doing his work orders.
And the third, again, it keeps going. The third time, the thing that came up, on that same site visit, the guys that were turning the apartment… When you’ve got a multi-family property like this, you tend to find a local contractor, a couple guys in a truck or a bigger outfit or whatever to go and replace cabinets and clean out the apartments and put in new flooring and you end up spending somewhere between four to 7,000 a unit to turn these apartments around.
Well they said to us, “Well, okay, who are we paying our commission to?” And we said, “What do you mean, your commission?” And they said, “Well, every time we turn an apartment we had to give a $500 commission to the maintenance technician as his fee for him referring us to this job. Do we have to give that to you guys now?” And we’re like, “No, no, no, no.” There was more, but it was just one of these lessons, Jamil, that you’ve got to have oversight and you can’t just trust a yes sir, no sir kind of person who’s going to tell you what you want to hear. And by the way, the fact that he was planting flowers two days before I came should have been a sign. You should be planting flowers period, not just when the owner’s going to come to town to put your best foot forward when the owner’s in town to make yourself look good.
Just bottom line is oversight, oversight, oversight. People watching, watching staff. Because again, can’t say it enough, you need people wearing this hat here and when the cats away, the mice certainly do play.

Andrew:
Sounds like you had yourself quite the entrepreneur there.

Matt:
He did well.

David:
I would think so, yeah.

Matt:
Yeah. You can’t slight him for trying and that, but he certainly did try very hard. But unfortunately he was an entrepreneur with our money in that. I’m glad to have gotten him on down the road to whatever his next venture was.

Andrew:
You moved him into the business development role, right?

Matt:
We hired him. Yeah. Let me use your superpowers for good.

Jamil:
Ever had a moment like that, David, where the cat was away and a mouse came out to play.

David:
First off, let’s get something clear right now. This is my podcast and I still run it and you’re welcome in my ring. But Matt Faircloth, the next time you show up for a Halloween episode dressed in your three year old’s cowboy hat, think that that kind of effort is going to fly here. You got another think coming? Okay, brother? Now I’m going to let it slide because that was a really good story. You bring me some good content, but I expect more and I’m going to see more in the future.

Matt:
I promised to get a full sized cowboy hat next time. Well said.

Jamil:
Speaking of the future? Why don’t you tell us about your multi-family horror story, David, because I’m sure with all the experience you have in the business, there’s got to be some spooky things that have happened.

David:
You asked me a question before I went onto that ridiculous tirade right there. What was it about?

Jamil:
I asked you if you had ever had an opportunity to see the mice come out to play when the cat went away?

David:
That happens more I’d say with employees in my businesses than it has with any actual investment property. I haven’t had a situation like that yet, but oh my goodness, have I had some horror stories. By the way, I think Andrew might have one that we’re invested together on one of those properties, the hurricane one, so he’ll probably get into that. But I just had a big 1031 that I didn’t really want to do. Long story short, somebody had stolen title to my properties. We’re a bit of a target, we’re in a platform like this, so I had to sell them very quickly, which forced me into a 1031 that I didn’t want to be in. And then I learned in the middle of the 1031, there’s a rule that no one had told me the entire time.
And that is when you sell your property, you have 45 days to identify your next properties and 180 days to close. We all know that. No one told me that you can only identify twice as much real estate as you sold. If you sold $5 million of real estate, you are only allowed to identify 10 million, which is the ones that you can pick from. Now, normally that is not an issue because most people don’t have that much capital to deploy. In my case, my portfolio was almost free and clear. I sold about $4 million worth of real estate and I could only identify $8 million worth of real estate. However, I had to reinvest almost $4 million, which is very difficult to do if you can only identify 8 million. What makes it worse? I did not know that this was a problem until day 44 of my 45 day identification period, which created a very interesting 24 hour period where I had to identify properties and basically if I identified anything that I didn’t have in contract, it wasn’t going to close.
It was too risky to put a house on there that I didn’t know I could put in contract. I had to go out and put properties in contract in one day that then I had to close. There’s no way, I couldn’t not close on these properties. A lot of your inspection strategies, they’re not going to work in that scenario. First story, that set me up for some of these horror stories that are going to come, as if that wasn’t a horror story enough.
During this period of time, one of these properties, we had a survey conducted and it turned out that there was a 30 foot encroachment of the neighbor’s lot onto my property. Basically, 30 feet of the property I’m trying to buy, the survey reported was hanging over the neighbor’s lot, meaning if they wanted they could just come take a chainsaw and cut 30 feet off of my house. Now, it’s not that uncommon to have some form of an encroachment. Boundary lines don’t always get drawn super clear. It’s very odd that you have 30 feet of a house. It’s usually like a gutter hanging over or something like the fence didn’t get put in the right place.
This was very significant. And this was a house, it was more than a million dollar house, it was like 1.2 million and it appraised at 1.35 million, so I was excited about buying it. It was coming with a lot. This is what’s funny is I bought this property and I got the lot next to it. And even though they had all that space, they still chose to build their house as close to this other lot as they possibly could get. I’m in this position now where if I don’t close on this thing, my whole 1031’s going to blow up. We had to tell them that we were in a 1031 to get them to go into contract in one day. So the seller was actually a pilot. He’s flying his plane and we’re desperately trying to find houses that we could put into contract.
What we did was we had his agent look… The seller’s wife looked up who the flight attendants were on the flight, sent them a text message via the plane’s wifi. They go knock on the cockpit door and they’re like, “Hey, I got to read you the terms of this deal to know if you want to put in a contract.” And he’s like, “I’m flying a plane, I don’t want to deal with this, I’ll deal with it later.” And they’re like, “No, no, no. We’ve got four hours and you’re not going to land for three and a half. You have to make the decision right now.”
He already wasn’t super happy with how this whole thing went down and I don’t think he got the price he wanted. He got the price he was willing to get. He didn’t know about the foreclosure, but basically the seller’s like, “I’m not fixing it. You can just go to HE double hockey sticks here.” And I’m like, “I don’t want him to know that I have to close, but I also don’t want to buy a property that’s 30 feet hanging over the neighbor’s lot.” I’m in a bit of a horror story here. We went back and forth for probably three weeks on this. I tried to buy the portion of the lot that my house was hanging over into from the other guy. He didn’t want to do it. I tried to make the seller buy it. He didn’t want to pay any extra money.
Long story short, it turned out that it was just the surveyor was an idiot. Didn’t know how to do their job, it wasn’t a problem. We had a second survey order that showed there was nothing here, so there was this three weeks of sphincter tightening that did not have to happen. I suppose that muscle doesn’t get worked out very much. It definitely got worked out during that period of time. That horror story ended up being just a haunted house that didn’t have real ghosts.
But during that same 1031, I did run into a cabin that I bought in the Smoky Mountains that came with a pool. Now, pools out there tend to be inside of a structure. They’re not just built out in the open because they would freeze during the wintertime. The pool was awesome and it would almost double how much I could rent this cabin out for. It’s very hard to find those. They rent for a lot more. It’s a really big pool in a huge structure. The problem is the pool is leaking. The pool is being redone. When I put it in contract, I wrote into the contract I, the pool has to be evaluated by a licensed professional to the buyer’s satisfaction. And if I don’t like it, I can back out, get my earnest money back.
However, this 1031 disaster could stop me from being able to back out of the deal. Now I’m locked into it and I don’t want the seller to know that I’m locked into it. I want them to fix the pool. And the work that was done, basically, they plastered it. It was still leaking afterwards, so you don’t know how bad the problem is. I don’t know a ton about pools and no one out there could really give me the answer of, “Is this an issue where we’re just going to fix some leaks and plaster, or is this the plumbing itself is leaking and it’s not going to hold water?”
I’d already negotiated about $25,000 in closing cost credits when I put it under contract. The seller wanted an early close. I wanted a delayed closing. He was threatening to just basically not close at all if I went past the close of escrow. That forced me, like I can’t bluff anymore if he threatens to not do it. I was able to negotiate an additional $30,000 credit in order to fix that pool from the seller, not knowing how bad it was going to be. It was kind of like, well I don’t know if that’s enough, but it’s better than losing the entire 1031 here, so I went forward with it and we get done, we go fill up the pool, it’s leaking again. We send out another pool specialist, they say, I think you need to redo the whole pool.
It’s probably going to be like 55 to $65,000 I would guess, just because it’s hard to get people out there. I’m kind of working with traveling contractors now to go out there and rebuild an entire pool, which technically I got most of the closing costs put towards the pool. It just made the deal not quite as good because I was intending on using those for furnishing the property. It was a new construction cabin even though the pool had been built by some terrible builder. That was a bit of a horror story that we’re still trying to work out.
There’s another cabin that I have under contract right now. Funny story, Did you guys know there was a Nashville, Indiana?

Jamil:
No.

Andrew:
No.

Matt:
No.

David:
Freaking south man. They’ve got the same names for cities in all kinds of different states. I didn’t know that either. What I thought I was doing was going under contract on a cabin with an appraisal of 1.365 in Nashville, Tennessee, and I’m getting it for 1,000,050, so I feel really good about this. And then [inaudible 00:25:36]

Jamil:
There’s a book you should read, Long Distance Real Estate Investing.

David:
Yeah, that’s exactly right.

Matt:
I want David Green money where I can just buy houses wherever they are and whenever they are, just because I don’t want to pay taxes.

David:
I hadn’t closed on it yet, but I’d realize about two weeks in, “Oh, this is not Nashville, TN. This is Nashville, IN.” That T and the I is a very big difference in [inaudible 00:25:57]

Matt:
One more dash across that I.

Andrew:
Talk about cross your T’s and dot your I’s.

David:
Very nice there, thank you. The good news is the fundamentals of the deal don’t change. It’s underwritten with the same information the seller has. Previous guests that are booking. We have a very good understanding. Right now it’s bringing in about $160,000 a year in revenue. There’s ways that we can bring that up higher. But I just was shocked like, “Oh, this is not even in the same state that I thought I was buying this property, but it was still almost $300,000 of equity. I’m going to move forward with it.” Well it turns out it’s in a very rural area.
Now, we’re having a hard time finding a lender that wants to lend on it because they haven’t heard of Nashville, Indiana either. It’s in a very remote location. It is making good revenue, but that still makes a lender nervous. And it’s also on six acres of property, which is another thing that lenders don’t like. They like the actual improvements to have more value than the land. Luckily the seller has extended escrow like three times on this because we have to go find different lenders and then we have to order a new appraisal. That hasn’t turned into a horror story yet, but it was very, very close to one when I realized I was buying a house in a completely different state than when I had looked at the contract and looked at the numbers and said, “Sounds good. Sign me up.” Didn’t notice that it was in Indiana and not Tennessee.
I barely averted a horror story in Jacksonville. I had a property that was leaking sewage similar to what Andrew was saying from underneath the house. And the property manager came and said, “Hey, it’s going to be about $26,000 to fix this.” And I’m like, “The whole house is only worth like 110,” it might be worth it to just let the house go. “What on earth are you talking about? $26,000.” “We’ve sent three plumbers. This was the cheapest bid we could find.” And I was like, “Well, what’s going to cost that much money?” Of course, crickets, they can’t ever tell you what the person’s doing, they’re just relaying this information.
The plumbers were saying, we basically got to rip apart the entire foundation of your home to try to figure out where the leak is coming. I sent a couple other plumbers out that I made a phone call and I found one that said, “Oh no, I can tell you it’s coming from either this bathtub or that one. If it’s that one, I don’t even need to dig into the foundation. If it’s the other one, I’m just going to cut right down through the bathroom, figure out where it is, I can fix it.” And then long story short, that was a $4,500 problem, not a $26,000 problem.
One of the things you got to learn is when you get the first piece of information, don’t freak out. It’s usually coming from someone who’s not very interested in saving you money. They’re interested in saving themselves time, which is frequently the case with property managers. And then the last example I have came from a house that I closed on in the Smoky Mountains. This is before the market shifted. It was listed at 1.6, I think that we ended up getting it for 1.64. But with a $65,000 closing cost credit. Very, very big number, which we were basically going to have set up where the seller, rather than running the money through escrow, was going to put it towards a contractor that was going to go and make the repairs that needed to be made on the house. And I gave it up to them. You could make the repairs before we close or you could do it this way and you could make it after. I believe that was the details.
Well, they ended up, once they realized the deal’s going to close and we had waved our financing contingency, they just turned off the air conditioning to the entire cabin. And this was a cabin with a pool inside of it where there’s a lot of mildew, so you can imagine in a couple days, it’s amazing how fast that mold spreads. It’s like a peach redition there. Super humid, middle of summer. The entire pool room is mold everywhere. Basically, the agent was like, “Well there’s nothing you can do, you got to close.” I was like, “No, no, no, no, no.” “There’s nothing you could do. You’ve got to close on this.” They still have to deliver the property in the condition that it was in when we put it into contract, even without a contingency, that’s part of the contract.
The sellers didn’t want to budge. They were like, “Nope, you have to buy.” We ended up at a standoff and I was like, “Well, good luck trying to keep our earnest money with this and you’re going to be taking back a cabin with a ton of mold in it. You’re not going to be able to sell it for a couple months as you try to get that fixed.” We negotiated an extra maybe 10 or $15,000 of credits to get the mold closed. We closed and then we had to go in there as soon as it was closed and fix all the mold, which actually worked out well because we also needed time to get furniture ordered and get some tweaks made so the property could be ready to be rented out to other tenants and get pictures taken.
We didn’t actually lose any time of having that house on the market because we just fixed the mold at the same time we were doing other things. But those are all situations that could have easily blown up a deal and cost a ton of money and just made someone not want to invest in real estate at all.

Andrew:
Sergeant sir, may I make two comments?

David:
I’ll allow it.

Andrew:
All right, two things. Number one, I love all these stories because we all get on this podcast and we talk about these deals and these successes and it sounds so easy. And the reality is, that even someone like you who’s been doing this for a long time, tons of deals, tons of knowledge, still has challenges and real world problems. And so everyone listening, you go out and do this, expect problems. And if you get problems, it doesn’t mean you’re necessarily doing it wrong or you’re not going to succeed. We’re all still having problems even today.
The second thing is, I love the story of you hunting down the flight attendants and getting them to message the pilot. One of the things you ask at the end of most podcasts is what is the one thing that separates successful investors from those? That right there, the relentless persistence and creativity. Who would’ve thought to, “Well, let’s see, I can figure out who the flight attendants are, get through the plane’s wifi, message them and have them interrupt the pilot.” One out of a hundred people would do that. But that’s what separates us. I love those stories you told.

David:
I appreciate that. Everyone in your world will typically tell you it can’t be done. It’s not hard to get a lawyer, a CPA, an agent, and anyone like, “Oh we can’t do it. He’s flying right now.” Rather than asking the question, “Well how could we do it? How could this work?” And so I appreciate what you’re saying there, Andrew, but I think if we just ask different questions, how could this happen? A lot of the time the answer isn’t that wild.

Andrew:
That’s true.

Matt:
Before you get there, I wanted to compliment you on something because I’ve seen a lot of newer real estate investors think that no matter what happens, the seller’s in control and they’re going to tell me, “Oh you got to close and oh, too bad with the mold. Yours.” There’s like this three pages deep in the contract that says that the buyer agrees to take the property as is. But I think that it took some strength to come forward and say, “No realtor, I’m not going to close. They have to give me a credit,” because you underscored something that most contracts say and that the seller has to deliver the property pretty much in the condition that it was when I saw it.
If the conditions changed, if I’m buying a house and a storm comes through and a tree splits that house down the middle, guess what? That’s not the same house that I looked at. And that mold story should get underscored to anybody listening that you are in control. You don’t have to close. You do have the right to raise a flag and say, this is not the condition that I was aware of and I want some consideration or something because conditions have changed.

David:
Well thank you, Cowboy.

Jamil:
I experienced something very similar to that David, when I was trying to sell the Playboy mansion and they did an inspection of the grotto. A lot of things happened at the grotto.

David:
You could imagine what would show up in that inspection. How did the conditions change?

Jamil:
That was wild David. Incredible, incredible story. But it absolutely shows just how seasoned of an investor you are and the fact like we’ve heard from Andrew and Matt that you can remain in control and with the right mind and the right knowledge, you can absolutely take control of the deal and put yourself in a better situation. Thank you for sharing that with us. I think we all became a little bit smarter and wiser for it.

David:
Well, before I throw it to you, Jamil, I think Andrew also made a point that’s worth mentioning. When you listen to a podcast, there’s this concept called survivor bias, which means you typically only hear the stories of the people that survived and did well. We hear about Elon Musk, we hear about Bill Gates, we hear about their empires. We don’t hear about the hundred of thousands of entrepreneurs that failed because no one wants to interview them on a podcast. And if they did, nobody would listen to it. We’re like, “What did you do that made you suck? I want to be like you.” It’s always the opposite.
What happens is you only hear the people sharing their best stories because not only are they the ones on the podcast, but they don’t want to come and show you their warts. They want to put the filter on their portfolio that makes it look as good as possible. And we were kind of joking around earlier that you ask an investor how many properties they have and they tell you how many doors they have. They’re like, “Well technically it’s got a garage door, a side door, a screen door, a bathroom door, a front door. Yeah, I got 12 doors.” Maybe they have one house. That is just how investors, especially when they’re at meetups and they feel the pressure to look cool, they want to talk.
And it creates this air that mistakes never happen. Nothing goes wrong. People don’t lose money. And that the baseline expectation is that and if you get anything less than the baseline, you’re not good at this and you should feel bad and you shouldn’t invest. But if you actually sat and watched some of your heroes at work, you would find that it’s complete chaos. In fact, I’ll even tell you this, in the military, it’s not much different.
I had this impression of the military my whole life that it was like this disciplined, orderly place because you always hear about discipline, discipline, discipline. And then I met friends that were in the military and they said, “No, it’s complete chaos. It’s madness, it’s logistical nightmares. It’s frantically trying to figure out why this thing got delivered to the wrong place and how we’re going to get these people this thing. And there isn’t enough shoes of this size for this area,’ and the reason that they value discipline so much is it’s so necessary in the chaos.
And then I started to notice as it became more successful and I started to meet other successful people, man, the pretty buttoned up version that you see on Instagram of any of these guys walking through their flip is never what their business looks like. They have employees doing dumb things. They have maintenance people running side hustles off of their own properties and selling their appliances. They don’t even know what’s happening in their CRM. They probably don’t know what’s happening on their tax bill. It’s absolute madness for every single successful person that you see, they just don’t share that. Nobody wants to get up there and say, I don’t know what my numbers are, I just know that I’m making money because I still have capital in the bank.
That’s a much more realistic picture of what this is than this super tight, perfect edited video that you get where someone says, “Here’s how you analyze a deal.” As everyone knows, you cannot control for everything that goes wrong in a deal. I’m going to wrap this up by just saying, if you’re making success, if you’re staying somewhat profitable, if you’re acquiring properties, you’re probably doing better than 90% of the people that are out there. It’s not perfection that you’re striving for, and don’t let that become your baseline.

Matt:
David, can I add to that? Because I just want to, first of all, high five you and I think it’s brilliant and I think that what really creates success is trying again after failure. Like the property I talked about in Fayetteville that got down to 30% occupancy. We brought in a new manager, we refinanced the property, we renovated it, we got it up to 95% occupancy. Had you accepted, “Oh, moldy pool room, guess I got to just take it. No, I’m going to put my boxing gloves on and fight and stay in the ring. I’m not going to lay down.” And I think that that’s really what failure is. Quitting at a setback.
The real success is trying again at a setback, because it’s funny, I just listened to Ray Kroc’s personal story called Grinding It Out. Two of my gut buddies in GoBundance referred it to me, so I just listened to it. Ray failed a ton of times, but he tried again. He grinded it out and he tried again after failure. And I think that that’s what really underscores success as a real estate investor as well. As you said, you’re going to have stuff stolen, you’re going to have a broker try and push it to close on a deal where you’re getting duped on or something like that. It’s really being willing to fight again and try again and then that’s really what defines success. Not no failures, certainly not.

David:
That’s a great point. Yeah. Jamil, I want to ask you, you’re sitting there in a bathrobe, you’re obviously in a posh hotel, you’re looking fantastic. It would appear that everything in your world is working out about as perfect as it could be. I mean, your beard is symmetrically perfection. I can’t imagine that you could have any horror stories. Am I wrong?

Jamil:
You are absolutely wrong. In fact, you spoke of warts and I’ve got a wart juicier than the end of any witches nose that we would see on Halloween.

Andrew:
I hoped I would never hear the words wart and juicy used in the same sentence again.

Jamil:
Well, let’s get into it. Let’s get into it. As you all know, I’m on a Bigger Pockets podcast called On the Market and had an opportunity to dive into a deal that I was in escrow in Phoenix, Arizona. And this is where I’m going to actually blame my co-hosts for helping me push me along and getting into this deal. Because for those of you that don’t know, I’m a wholesaler. I primarily wholesale property. Very rarely do I hold. And here was an opportunity. And the reason why I even got into the opportunity is I had a massive tax bill last year and I keep being told from my fellow real estate investors and every single one of my co-hosts on the On The Market podcast to buy houses, buy property, so I can depreciate it and lower my tax bill. And here I find this opportunity in Phoenix, Arizona.
It’s a 53 unit off market property in a class neighborhood. It’s a B class building, but it’s an A class neighborhood. In fact, it’s around the corner from my house, so walking distance. I can go there, I could hang out, if I ever got in trouble at home, I could stay in one of the units. That would be my doghouse. I’m looking at this opportunity because a) it would provide me a great depreciation situation. I would write off a lot of income. I was able to get into the deal at 12 and a half million dollars. Now that deal, although it seems like,” Hey Jamal, that sounds a little bit pricey at 12 and a half million dollars for 53 units,” right two days after we had gotten under contract, I had a potential wholesale buyer. I had a multi-family buyer who wanted me to sell my contract to them at $15 million.
That would’ve been an immediate two and a half million dollar wholesale fee. Now, as a wholesaler, to me that would’ve just been an incredible situation. I would’ve been able to get their earnest deposit to replace my earnest deposit. I could have assigned the contract over and possibly have made two and a half million dollars. I bring this situation to my brothers and sister on the On The Market podcast and I say, “What should I do? Should I buy this property or should I wholesale the property and make a quick fee?”
Now I was convinced, thoroughly convinced that Jamil, it’s really important that you hold, it’s really important that you invest for cash flow and it’s really important that you keep more of your money instead of just generating cash or your wholesale business and giving it all to the IRS. And so I make the decision that we are going to move forward with purchasing the property. Now, to kind of set the stage for you guys where this is in my career, this is just recent. This is two months ago. We get into contract on the property. Well, a few months ago we get into contract on the property in April, and market is really hot right now. We’re not seeing really anything coming around.
There’s talk of potential rate hikes, but we’re still not there yet. And my business partner, who was very, very experienced in the world of multi-family, a multi-family broker herself, had assured me that we would have lenders just throwing us money for this deal. And we had a financing contingency. Our earnest deposit on the property was $475,000. Immediately, guys, I just want to explain to you, I’m getting nervous because I don’t… Even though I do a lot of transactions, typically in my wholesale business, I can do anywhere between 50 to 80 transactions a month, so I’m really not afraid of buying and selling property. But I’m nervous to put out all of this money in earnest deposits.
And as we’re checking the boxes through our escrow time, the financing contingency date is coming around. And I’m nervous because we don’t have a loan quote. We don’t have any commitments from lenders yet. And I asked Sophia, my business partner in the deal, if she is confident that we are going to line up lending. And she was so confident that the lenders who had all given her commitments were going to come through. In fact, her answer was “Jamil, it’s not how much, it’s how little we’re going to have to put down. We have lenders right now who want this building, they want to be the lenders on this loan. I can almost guarantee that we’ll be able to get this thing done at 90% leverage.”
And I imagine that, a building 53 units and 90% leverage… As somebody that’s not primarily investing in multi-family real estate, this just seems like an amazing opportunity. And I’m with someone who I trust, who I will absolutely… Who I believed would have the contacts and the relationships in the industry that would actually come through. And so there we go. We blow through our financing contingency and we deposit another couple of hundred thousand dollars into the file. And now we are in $475,000 hard in earnest money.
And the rate hikes start and they happen fast. And it was so dramatic how quiet the lenders became because as I’m reading the headlines and as I’m watching the retail housing market just come to a grinding halt, I get very nervous about whether or not we’re actually going to have a lender that’s going to come and make this deal happen for us. And I’m calling Sophia daily. I’m asking, “Do we have anything? Has anybody given us a firm quote? And as the days progress, her responses become less and less assured. In fact, we get to a point where she made a phone call to me and she was in tears.
She said, “I’ve been in the business for near a decade and I’ve done hundreds of deals and I’ve never had my lending partners ghost me before.” And we are talking about a multi-family horror story here and it’s a Halloween episode, guys, but this isn’t the kind of ghost that you want. This is the kind of ghosting that when you got near a half a million dollars up for grabs it’s the scary kind of ghost. And I feel terrible. I feel terrible about the situation as a whole. Because for me, the first thing I had said to myself before I got into this deal was, “Jamil, you are so talented at what you do,” and this is me talking to myself in the third person so I apologize if I’m offending anybody with that.
“But you know what? I’m really talented at finding deals. I’m really talented at wholesaling and I always tell myself, don’t get out of your lane. Stay in your lane, fool. You’re good at what you’re good at. You understand what you understand. And now you’re playing in this world that I had not ventured into before and I truly am worried. What am I going to do?” As the days get closer and closer to our close of escrow, it’s obvious that we are not going to find a lender. In fact, all of the loan quotes that we were getting back had the building valued at $8 million. Now imagine that. You get into escrow on a property and it’s 12 and a half million. You’re able to find a buyer immediately for a two and a half million dollar lift.
So I would go so far as to say that the value of the building was 15 million. If I could find a buyer two days after going under contract for an additional two and a half million dollars, I’d say the value of the building was maybe even more than 15 million, considering how fast that buyer would come to the table. But the fact that I allowed myself to get bullied into moving forward with this deal and purchasing this deal instead of just wholesaling it like I should’ve, because I would’ve at least gotten that earnest deposit from the buyer. At the end of the day what ended up happening was we had to walk. We had to walk away from the deal. We did not close. There was no way that we could finance the property at the purchase price. The lenders did not like the deal.
We tried to go back to the sellers and renegotiate. We explained to them that everything had changed, that the world had been flipped upside down. And this building was no longer worth the 12 and a half million that we were in contract at, not even close. And they were not willing to negotiate with us. They had us pinned up against the wall and they walked with our $475,000. And that was a really tough lesson for me at this level. Now, I’ve been in real estate since 2002. I’ve been doing this for 20 years. And the first time that I ever went broke was when I got out of my lane in 2007 and I started investing in condo conversions.
And so this whole game of wanting to get involved in something that’s outside of your expertise, and again, that was the first time I was in multi-family was back. This is the second time I tried to get involved in a deal and I got burned. And it was really tough. It was a really tough pill to swallow, especially because I consider myself an expert. I consider myself somebody who should have known better and I didn’t.

David:
Well, that is a situation where the market shifted so drastically and so quickly. I guess Andrew and Matt could probably support this if I’m right or not, but I imagine you had cap rate expansion at the same time as interest rates rising, at the same time that lenders are pulling back and saying, “Oh, we don’t know what’s going on in the market so now we don’t want to lend out all of our capital.” And it went from all systems go full steam ahead to slamming on the brakes at the same time. And when you had all three of those things happen, you get put in a situation where it looks like you made a mistake, but at the time you put the deal under the contract, there was no way of knowing that was coming.
And I think we get used to real estate just, well this is the way it works. This is just what we do. Do you know what’s in the contract as an agent? No, but I don’t need to, because it always just goes fine. I don’t have to understand the mold situation like Matt brought up. We had a similar situation at the one brokerage where we had probably 50 clients that had rate locks and rates went up so fast so quickly from what the Fed did that the lenders literally said, “We are not going to honor the rate locks. We will not lend at that. We’re just not giving the money.” And we had to go call over 50 people and say, “Yes, your rate was locked. We didn’t realize that this could happen but lenders are just saying whether they have a legal right to or not, we’re just not doing it. We’re not funding. If you want the money, it has to be at this.”
“Yeah, we told you 15% down and we changed our mind. We don’t want to lend our money at 15% down. Now it’s 25% down.” And we’re talking about people that were in the high fours to mid fives that were bumped up to mid sevens. And this is at the last couple days for some of them before they closed. You look like a total butt head having to tell somebody that. But it just happens. The market shifted so radically fast. And we’ve been talking about how hot the market gets, but it could cool off just as fast. And we’re used to seeing this type of thing with cryptos and securities and equities and now it’s happening in the real estate space and it’s absolutely wild.
That’s a horrible story. Jamil. I remember when you reached out to me, I was like, “Oh, I bet he just needs a little bit of capital. We’ll bridge the gap,” and then you explain it more. And I was like, “Oh God, that’s true. It went from 15 million to 8 million.” There isn’t a thing that you could do on this one.

Andrew:
That’s one thing that I think a lot of people miss or underestimate is how quickly the capital markets can shift.

David:
Yes.

Andrew:
You go back to 2007, you could hear the collective sphincters of lenders just tighten and it just shut off. There was no nothing-

David:
In synchronicity throughout the entire country.

Andrew:
And then the domino effect goes from there. That’s probably one of the most important things to watch.

David:
We saw that in COVID. Remember that when there was [inaudible 00:51:00] in place and they were like, “Nope, no loans going out at all. Fannie’s not lending. Freddy’s not lending. Doesn’t matter where you are in your escrow.” Nothing you can do.

Matt:
Hey Jamil, I appreciate your vulnerability because, and David talked about this before about how people… There’s a real estate investor persona on social media that we’re all superheroes and we’re either closing deals, going on vacation or going to a Mastermind, one of those three. And because that’s all real estate investors do according to social media. That’s it. We don’t ever deal with anything else, any problems or whatever, we’re just hanging out with people or closing deals. That’s it. And I appreciate your vulnerability because it is those things that are listed are maybe 3% of real estate investing. The 97% is grinding it out and dealing with deals and dealing with curve balls and that, and it takes courage to put out the other 97% of real estate investing that sometimes you lose, sometimes you end up having the wins that you can’t control change. Kudos to you on getting real man.
If you had that deal over again, aside from not doing the deal, what would you do different? If you don’t mind just throwing that out there.

Jamil:
Well, first things first, I should have put together the wholesale situation because truth be told, if I had put together the wholesale deal, which is what I am good at doing anyways, I would’ve had the buyers earnest money locked in. The buyer that was going to take the property from me in the first place. They were all cash, so they wouldn’t have even been subject to this situation with the lending. It would have been the perfect scenario.
Now, on the other side of that, I wouldn’t feel good about this person buying this property from me at an inflated price anyway, so there’s that other side of the coin. I’m not interested in finding a bigger fool. I don’t believe in that. I believe that everything that we do finds a way back to us. And again, my intentions weren’t bad in originally wholesaling the deal. My intentions are always good when I wholesale. I want to provide value to my buyer, I want to provide value to my seller, and I love being in the middle, and I love being able to create value for myself by connecting the dots.
First things first, Matt, what I would’ve done is I would have followed my instinct to always take the bird in the hand. That’s the man that I was built to be, and I should always eat my birds when they’re in my hands.

Andrew:
Yes, I guess that is the next step. That’s why you have the bird in your hand.

Jamil:
Right.

David:
Yeah. Why not eat it. Even if it’s crow.

Jamil:
Even if it’s crow.

Matt:
I love it.

Jamil:
I should have-

Andrew:
Oh man, good job, David.

Jamil:
I should have just done the thing that I know how to do.

David:
You need to make a YouTube video about it. Have a bird in your hand as the thumbnail for the video and tell this story. Yeah. However, we’re also resulting. You guys know the poker term where we look back and we say it didn’t work out. We’re like, I should done something different. If you’d to close on that deal and saved all of your money and paid no income taxes for the year, this would be an example of you telling everybody else, “Hey, this is the way you got to do it. I wholesale. Instead, I went into this thing. I like Matt’s question because maybe on the next deal you do the same thing, but you figure out a way to protect the earnest money deposit.

Jamil:
No, you’re absolutely right, David, and Matt, the thing that we actually made an error on with the contract is in that we put this thing under contract when everything had gone bananas. Sellers were dictating terms and it was a very oppressive contract. But when I spoke to Sophia, my business partner in the deal, and I asked, “Is this normal? Is this level of aggressiveness part of the way that people are transacting in multi-family right now?” Because for me, even though the market had gone crazy, when I’m buying distress property, I still have an out. I still have an inspection period. I still have a way to negotiate a change in condition and accordingly, that just wasn’t available in the multi-family space at that time.
I think it’s really important to understand this and for the greater Bigger Pockets audience that’s listening in, guys take notes to this. When things start to get super heated, when the market just gets so crazy that people are throwing away due diligence, that people are putting caution to the wind. When you are starting to see these conditions present themselves, understand that they can’t last long, and that just might be the time when you sit something out. Matt, I would’ve written a different contract. I wouldn’t have gone into that deal where the earnest deposits were so aggressive, I wouldn’t have gone into the deal where the timelines were as tight as they were. I felt nervous about it right out the gate.
I took another individual’s word. This is another thing, the reason I’m a real estate entrepreneur is because I don’t like putting my destiny into the hands of other people. But when I’m ready to write a check for $450,000 and somebody else is telling me that, “Don’t worry about it. We got the lending covered.” I mean, what’s wrong with me? Really though? Where was my discernment at that time? And so there’s a lot of lessons here and it’s a lot about me. I really think that I allowed the heat of the market. I allowed greed, because I thought I had an incredible deal and the greedy goblin inside of me let me make decisions that were outside of the benefit of my family. And I made a huge error. And you know what? You’re right. I had to be vulnerable and I’m sharing this so that people can understand what it looks like when you’re making a wrong turn.

Matt:
Oh, thanks again for your vulnerability, man. I feel that. What I got is that I think it’s only time to get great in business at one or two things. And dabbling at $12 million is one of those things where it’s like, man, this could go great. It might not. If I want to buy a fixer upper or a wholesale or an Airbnb in a market that your wholesale business is playing in, I’m calling you. Somebody that’s closing 80 wholesales a month, dude? What? That’s insane. The fact that you built that level of a business is off the charts. If I want to either learn how to wholesale or to buy a wholesale deal in one of your sandboxes, you’re the guy. And if you’re looking for a negative K-1 or something like that for passive losses, maybe a lesson is there’s others that can help with that kind of thing that could have helped you structure a better contract or whatever, man.
I love your attitude around it. I think you obviously shook it off. I appreciate you going there and I think that it’s one of those lessons just this business can deliver really, really bad right hooks. And as I said before, it’s one of those things where the successful real estate investor is the one that doesn’t let the right hook knock them down, they just stay in the ring. You’re going to make that money back with your wholesale business. I mean, you’ll just double down on wholesales and this’ll be just a really expensive but lesson you’ll easily recover from because of what you built already because of your core genius and your core greatness in the business.

Jamil:
Thank you Matt.

David:
And your amazing sense of fashion.

Jamil:
Yeah, I think I’m going to start adopting the look. Yeah, I’m going to adopt the look as an everyday thing.

David:
It’s very natural for you. Andrew, did you want to share your last horror story about the flood?

Andrew:
Yeah, this is a horror story that unfortunately is very timely.

David:
I was almost going to say, not to cut you off, but we may be hearing horror stories when this comes out from the actual situation going on in Florida right now where there’s a hurricane coming and you can’t control that. You don’t know what’s going to happen. This is a great example of the fact that trying to blame yourself for things you couldn’t have seen coming never works.

Andrew:
Right. The previous example I got, I talked about we sold those properties, basically investors broke even. We just got out of it and moved on. This one has a much happier ending. We purchased 150 units down in Lynnhaven, Florida, which is Panama City beach area, Florida panhandle. This was fall of 2016, I believe we closed in November. It was a C plus property in an A minus area for real, and so a ton of opportunity. We renovated it, took us about 18 months. We bumped the rent. We had just gotten to stabilization.
Our manager, we said, did a great job, and she moved up in the management company, went offsite. New manager came in. Three days later, 1:30 PM on October 10th, 2018, Hurricane Michael came through with 161 mile an hour winds, the strongest hurricane in recorded history to hit the Florida panhandle. And I have a screenshot that I keep of the eye wall of the hurricane directly over our property. And in three hours time we went from a hundred percent occupied to 9% occupied. The property used to be covered in beautiful tall pine trees. They all came down and sliced up the buildings like bread. And we actually had a guy who the next day we had to chainsaw him out of his unit because he was trapped in the unit.
What did we do to make that potential tragedy, potential horror story not be any worse than what it could have been? For one, I am a wannabe athlete trapped in a nerd’s body, and one of the benefits of being a nerd is I’ve always loved meteorology. I was watching this storm since it formed. It was a wee baby storm in the Northwest Caribbean, and I had a gut feeling that this wasn’t going to be good. One of the things we did is our team… And if you have a property in any area that is subject to disaster, whether it’s hurricanes or fires or whatever, sit down and think through what can you do to prepare for the event that you might not be able to control. There’s still ways to mitigate it.
Number one, we got tons of supplies in advance. We had cases and cases of bottled water. We had mounds and mounds of sandbags. We have tons of plywood. We basically forced everybody except for a few stubborn folks to just get the heck out of town, get out of your units. That’s a big reason why we had no injuries despite 18 inch trunks coming through the buildings. The next thing we did… These two things made a huge, huge difference.
We actually had one of our big contractors from Atlanta come down to the Florida panhandle and stay at a hotel the night before about 50 miles inland. He was still safe, but he was very close to that. He’d be able to come help us out that very next day. Again, I mean, we knew this was coming. Also, the day before the storm, we filed a claim with our insurance carrier, even though the storm hadn’t hit yet, we knew this is not going to be good. And the thing is, you can actually go back and cancel that claim and just say, “Oh nope, nevermind. Zero claim.” We put the carrier on notice the day before that we were expecting a claim.
And then we also knew we were in hurricane country. So we had $350,000 sitting in the properties reserve account just in case something happened and we needed it. So what happened? Three hours later, knee deep water in the parking lots, buildings either flattened, destroyed, ripped apart. Again, I think I mentioned this, we had no injuries. The next day we were able to start remediation because we had our contractors already lined up. They came straight to us. We were able to bring water to the residents. We were able to have a generator and have one unit with power. Power was out for something like three months. We had one unit that had power so people could come in, cool down, charge phones, all that kind of stuff.
We were able to pay contractors immediately with our 350,000 to get in there and start cleaning up, get water out of units, get the trees off of the unit so that the building doesn’t suffer more damage from additional rain. It’s Florida, it’s humid. Those things will turn black with mold in 72 hours if you don’t deal with it. And this was a big one because we put the insurance carrier on notice the day before, we got in line before everybody else. If you have a fire at your property, okay, you’re probably the only one making a claim. But if you’re in a situation where a hurricane devastates a hundred miles of coastline, can you just imagine the volume of claims the insurance carriers are processing?
We saw properties that sat untouched, un repaired for two to three years because they didn’t get their claim in fast enough and it took that long for them to get through the process. We had our first quarter million dollar check from the insurance carrier two weeks in. Also, we had what’s called loss of rent insurance, meaning with 14 units left, we didn’t obviously have the income to pay the mortgage or those expenses or salaries anymore. Well, the loss of rent insurance, the insurance company cuts a check to cover all of that, and so we were able to keep our staff and still pay the bills and still pay the mortgage. We never defaulted. We were never late.
And then this is a beautiful thing from our side and from our investor’s side, we bought that property for $4,125,000. When it was all said and done, 18 months later after we’d renovated it, the insurance carrier invested a little over $6 million on our behalf renovating and repairing that property. So now we basically have a 2019 construction property and it’s like, “Well, wait a second, Andrew, how do you buy a property for 4 million and get insurance proceeds of 6 million? It’s called making sure that you get full replacement value policies that are rated for whatever disasters could hit your area. If you’re in Texas, you need to be covered for hurricanes, wind, and hail, all that kind of stuff. You’re in California, maybe earthquake.
On the Gulf Coast it’s called category rated insurance for named hurricanes. And the lender will say, “Oh, you only need $70 a square foot.” We said, “No, no, no, no. It actually would probably cost us a hundred. We’re going to pay more on our insurance premiums to make certain we’re covered.” And a lot of times if you gamble and just get a lower premium by lower coverage, it’s going to work out just fine until you have a building burned down or a hurricane takes out the whole property and you max out the limits just trying to get the place rebuilt.
Today, that property, like I said, it’s effectively 2019 construction, the net operating income is 50% higher than it was before the hurricane. And the building that we bought for 4 million, even in today’s environment is worth 18 to 20 million. People will ask, “Oh man, what do you think about buying in areas where you can get hurricanes or fires or all this kind of stuff?” And you can do it, as long as you properly evaluate and mitigate the risks. Honestly, that was probably some of the 18 most stressful months I’ve ever had in multi-family. And that first 24 hours of just sitting here on my computer watching the hurricane pass directly over us knowing what was happening, the amount of rain and 160 mile winds, and I had staff and people who lived there, was again probably one of the worst experiences I’ve had multi-family. But with proper mitigation strategies, even horror stories can end up working out well.

Jamil:
I think this is not a horror story, brother. I think this was a hero story. The amount of planning, the things that you had in place there, there’s maybe this many people on the planet who care, who care to have stockpiled water, to have had resources, to have done the things that you had done as a property owner, as a business owner, as somebody who has been given the position in life where you’re truly in charge of people’s safety and of people’s livelihoods. I’ve never heard of somebody being that well prepared for a disaster before because look, it’s not human nature to do so.
But I have to say, Andrew, you impress the hell out of me, man. That was an incredible, incredible foresight. And I think that anybody who had the opportunity or has the opportunity to live in one of your properties or to be anywhere near you with respect to how you do business is a lucky person.

Andrew:
Well, and I got to give credit to our onsite team and staff. They are the ones who enacted everything and made it happen and delivered the water and cut the pine tree and got the contractors, all that stuff. I mean it really… I’m sitting out here in California, safe and warm and dry and they were the ones walking through knee deep water and knocking on doors and making sure everyone was safe. It really came down to having an awesome team in place. And then like you said, having some things set up in advance so that they could do that.

Matt:
I commend you too, Andrew. And I think that on the analytical side with regards to insurance, it is tempting when you look at a deal to say, “Okay, well maybe I’ll do some co-insurance here,” which is where the insurance company kicks in some money and you’re pretty much self-insured, where if you need a hundred thousand worth of damage, if that happens to one of your properties, the insurance company kicks in maybe 80% and you have to kick in 20%. In exchange for that co-insurance your premium’s going to be much, much less. That is penny wise, pound foolish when you have an issue like you did because you would end up losing 20% of that money that the bank kicked in to renovate your property.
I commend you for being more analytical about it. And I’ve seen many, many real estate investors make insurance errors. And as you said, maybe you never need it, maybe you just keep that cash flow and you drop your premium by 10%, 15%, and that just goes right to your bottom line. Or maybe a real catastrophic issue happens that you need insurance on. And the more real estate you buy, the more likelihood of having an insurance claim is going to come up in the future. I commend you for not being penny wise and pound foolish on your insurance, which enabled you to pretty much build a brand new apartment complex with the insurance company’s aid.

Andrew:
And there’s one other thing that’s really important that I forgot to mention. If you have a little kitchen fire that’s going to cost five grand, don’t worry about it. But if you have a building burn down or something significant, go get a really experienced public adjuster. Because the insurance company’s going to send out their own adjuster and their goal, they run a business, it’s not nefarious, but their goal is to collect premiums and not make payouts. And so they will send an adjuster out and try to give you as little as they can for the damages. A public adjuster will basically argue on your behalf of, “No, this shouldn’t be a hundred thousand, this should be 150.
On any kind of catastrophe like that, it is a full-time job. The contractor scope for repairs was 1,100 pages. There is no way I had the skill or ability to negotiate with the insurance company over that kind of thing. The public adjuster, again, who we talked to a couple days before the storm, we made sure we were front of his line. He really is a huge piece of why that worked out well is because we had somebody advocating who knew how to advocate in that kind of scenario on our behalf.

David:
Jamil, before we get out of here, where can people find out more about you?

Jamil:
You can find me on my Instagram @jdamjil. I also have a YouTube page where I share all kinds of tricks and tips on how to get a great wholesale deal. And that’s just youtube.com/jamildamji.

David:
Andrew, same question.

Andrew:
Yeah, I shouldn’t be but I’m a social media ghost, so best way to find me is just Google Vantage Point Acquisitions. It should bring up our website, which is vpacq.com. There’s a couple different ways to contact us on the website or you can also connect on Bigger Pockets and on LinkedIn.

David:
And Matt?

Matt:
Sure, it’s Sheriff Faircloth here. You can get a hold of us at derosagroup.com, wearing my son’s sons cowboy hat. D-E-R-O-S-A group.com, D-E-R-O-S-A group.com. You can pick up a copy of my book, Raising Private Capital, Bigger Pockets best seller over there. You can join our investor mailing list and you can check out our social handles on our website, derosagroup.com.

David:
Guys, this has been one of the better shows I think that we’ve ever done. We showed the warts, we showed the cream that we use to fix those juicy warts. We got to see Jamil in a robe and we got to see me actually for the first time in my life dressing up for Halloween. We also got to share some amazing horror stories that I hope everybody benefits from.
Each and every one of you, I want to thank you guys for being here, for sharing the ugly as well as the good. I hope to see you again. We’re going a little long, so I’m going to get us out of here. Listeners, if you like this, let us know in YouTube, log in, go to the comments, tell us what you liked, what you didn’t like, and if you want to see more of this content in the future, and then be sure to share and subscribe. Thank you very much.
This is David, Sergeant Slaughter Green for Jamil Hugh Hefner Damji, Andrew Hang Loose Cushman, and Matt didn’t know we were doing this today, Faircloth, signing off.

 

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Check out our sponsor page!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

2022-10-30 06:02:33

Source link

Sustainable Architecture: Designing an Eco-Friendly Home

In recent years, environmental impact has been a topic on many people’s minds, and you might be searching for ways to live more sustainably. Over time, sustainable architecture strategies can positively affect air quality and resources, and even save you money. Sustainable architecture isn’t just for people who are constructing a new home. Anyone can apply these strategies to make their home an eco-friendly place to live.

What is Sustainable Architecture?

Sustainable architecture is a term that refers to the way a building is designed, constructed and inhabited. The building is designed to maximize natural resources like airflow and sunlight and is constructed using environmentally friendly materials. It also uses renewable energy sources for heating, cooling and plumbing.

Active vs. Passive Sustainable Design

Homes built to be sustainable typically use an active sustainable design, a passive sustainable design, or a mixture of the two.

Active sustainable design strategies often use purchased energy sources like electricity and gas as energy sources. However, active strategies can also include solar panels, wind turbines, geothermal heating and cooling or high-efficiency HVAC systems that leave small environmental footprints compared to their less sustainable alternatives.

Passive sustainable design strategies use natural elements for energy conservation. These designs will consider factors such as wind patterns and sun orientation to construct a house that uses as little energy from machines as possible. Homes will have windows that allow cross ventilation for better airflow during the warm months and more insulation for warmth in the winter.

Strategies for Building a Sustainable Home

If building a sustainable home is important to you, then there are several things you can do to make it happen:

Only build the size you need – A smaller home requires fewer materials and less energy to run. A tiny home may not be for everyone, but a small home is typically large enough to live comfortably.

Green building materials – Whether you are building a home from scratch, or doing renovations on your existing home, an easy way you can make your home more sustainable is by using materials derived from natural materials and renewable sources. These can include cork, bamboo, stone, straw, and brick. You can also incorporate recycled plastics and reclaimed wood. In fact, you can build an entire tiny home from a recycled shipping container!

Green roofs – Although green roofs are more common in larger residential buildings like apartments, they can be built onto a single-family home. They typically feature a rooftop garden or grassy area with trees and plants that can improve air quality and moderate the temperature inside the house.

Native landscaping – A manicured artificial lawn is one of the worst things you can have if you want to build a sustainable home because it contributes to rising carbon dioxide emissions and loss of wildlife. Native landscaping incorporates trees, shrubs, and flowers naturally occurring in a region into a home’s yard and is a much better option for the environment. Using native landscaping helps wildlife thrive, promotes biodiversity, and reduces air pollution.

Strategies for Making Your Existing Home More Sustainable

If you already live in a home that is not very sustainable but want to make it more environmentally friendly, there are a few things you can do:

Compost – Instead of throwing out food waste, toss them in a compost bin and use it later as fertilizer for your garden. It will also save the landfill from being unnecessarily used.

Conserve water – Canada is one of the worst countries in the world for water usage. Be mindful of the amount of water you use, and strive to use less. You can take shorter showers, install low-flow, dual-flush toilets, and use low-volume bathroom and kitchen faucets. Outside, collect rainwater and use it later for watering your plants.

Use energy-efficient technology – One of the first things you can do to reduce energy consumption in your home is to swap out all your lightbulbs for LED bulbs which use less energy and last longer. A smart thermostat is a bit larger of an investment but can help regulate heating and cooling in your home while you are not there.

In a sustainable home, you can feel good about choosing to be more eco-friendly while not giving up your comfort. Everyone can do something to make their home more sustainable – even simply using a little less water can make a difference. With just a few changes, your home can be less impactful on the environment.

2022-10-29 18:12:46

Source link

The 1% Rule, Turnkey Rentals, and Escrow Accounts Explained

Is the 1% rule in real estate still relevant? Who shouldn’t be buying turnkey rentals? And why is an escrow account favorable for scaling real estate investors? All these questions and more are coming up in this Rookie Reply.

We’re back at BPCon 2022, and joining us is fellow investor and turnkey operator, Zach Lemaster. You may have heard Zach’s episode on the BiggerPockets Real Estate Podcast or maybe you’ve used his turnkey company, Rent to Retirement, before!

Zach helps us answer an array of questions, some from semi-passive turnkey investors and some from active investors. We touch on investor lines of credit and how to secure them, the 1% rule’s relevance in 2022, whether or not to get preapproved before finding a deal, buying off-market, and much more! Zach also poses three questions every investor should ask BEFORE investing in turnkey rentals.

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Ashley:
This is Real Estate Rookie episode 230.

Zach:
I think when a lot of people start shopping for investment properties, especially the rookie investor that’s just building out their criteria. It’s okay not to have all of your criteria in the very beginning because I think that’s a dynamic process. But often they’re looking at proformas and looking at properties and trying to mash that to make sense for them instead of coming up with their criteria first and I think you build that over time. But it’s all about taking action at the end of the day and critiquing your investing goals.

Ashley:
My name is Ashley Kehr and I’m here with my co-host Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week we bring you the inspiration, information and stories you need to hear to kickstart your investing journey. We always like to start these episodes by shouting out some folks from the Rookie audience and this week we want to give a shout on someone who left a five star review on Apple Podcast. This is Big Brand Investor. So this person said, “I’m a motivated rookie and I just wanted to say this is by far the greatest platform I utilize on a daily basis. The information you guys provide for a rookie investor is so invaluable, I look forward to getting my first property. Thank you.” With three praise hand emojis. So Big Brand Investor, we appreciates you and if you haven’t yet, please do leave us an honest rating review on whatever podcast platform that you listen to. So Ashley Kehr what’s up? How are you?

Ashley:
If you leave us a five star review, Tony will read it.

Tony:
I will read it. If you leave a one star review, I will delete it.

Ashley:
I wish you could actually do that but instead I would just be crying. So we are at the BiggerPockets Conference live in San Diego.

Tony:
Beautiful, sunny San Diego. This is the dopest backdrop for a podcast I think I’ve ever seen. So moving forward, we’ve already told the BiggerPockets crew that we are only recording podcasts in this room moving forward. So we need you guys to leave a bunch of five star reviews for this episode specifically and talk about how much you love the backdrop that way we can keep this going.

Ashley:
And we’re trying to figure out how to fit this in the back of Tony’s car. Did you bring your truck?

Tony:
I did bring the truck.

Ashley:
Okay, perfect.

Tony:
I did bring the truck.

Ashley:
We’re loading this thing into the back and taking it home.

Tony:
But we’re excited, it’s cool to be here at BPCON, there’s so much energy. I walked into their morning session this morning and it was like a sea of people. It was so crazy to have so many investors kind of all in the same space here to learn, here to network, it’s been fantastic.

Ashley:
So last night it officially started with a kickoff party and event and then today is all day sessions, tomorrow sessions and another ending party. But I feel like I’ve already met so many people, learned a ton of things just from walking around the hotel, going on yacht parties, from coming in just a day early even. So I think if you are going to some kind of conference, an event either maybe come in a day early or stay a day late to do even more networking out of the conference setting because that’s so overwhelming. Getting into the conference setting, meeting people, you’re trying to get to your breakout session, things like that but…

Tony:
When you can come early and share a drink with someone and just get to know them in a more relaxed setting, it makes the rest of the conference so much more enjoyable because now you’ve got that buddy you’re going to be hanging out with. And I remember one of the first big conferences I went to, I bumped into a friend that I had met at a meetup a few months before and I hadn’t seen him since a meetup. We met at that conference just by chance, we both ended up going there. We spent that whole weekend together and then he was actually the person that introduced me into short term rentals. So it’s like you never know where these networking opportunities are going to take you or the impact they’ll have on you.

Ashley:
I agree. So our first guess that we’re having on today is going to help us with the Rookie replies.

Tony:
Yes.

Ashley:
So we are excited to have Zach on today. He is from Rent to Retirement and he is going to help us answer the Rookie reply questions.

Tony:
Yeah. Zach, he’s got a really crazy backstory. He was interviewed on the OG Podcast. We’ll link his episode in the OG Podcast in the show notes. But he’s built Rent to Retirement to be this really big company but even before that, he had a pretty wild ride as an investor himself. So anyway, we brought him on to kind of talk turnkey properties and just some other issues that rookies might be dealing with that his expertise could lend itself to.

Ashley:
We know that on Saturday you guys get sick of Tony’s dry monotone voice and my laugh. So we thought it would be great to have somebody else come in and answer some questions to really break it up. So let’s bring Zach onto the show.

Tony:
So, Zach. Welcome to the podcast, excited to have you brother.

Zach:
So excited to be here, man. This is BPCON, it’s awesome, pleasure is all mine tony.

Tony:
Yeah, awesome. So we’re going to jump into some questions we have from the Rookie audience. The first one comes from Heidi G [inaudible 00:04:40] and Heidi’s question is, can someone explain a non-key log line of credit? We’ve been told to check into a commercial line of credit to have cash for off market purchases. We’re looking at four to five doors, we have about $600,000 in equity across our rentals with no mortgages on them. But I don’t have a firm grasp of requirements and a process for commercial lines credit. So what is your insights or your thoughts on there?

Zach:
That’s a loaded question. Historically in our experience with commercial lines of credit or business lines of credit, which is not what you get in the mail saying you qualify by for $75,000 credit that’s usually just the advanced credit card. Generally we have the most success working with a local bank that you’re building a business relationship with and you’re building up your line of credit if it’s non-secured over time. And typically, they want you to have the same amount of liquid cash available that you’re taking out, you build it up over time. But based on that question, Tony I think it would make, at least in my opinion, a lot more sense to maybe just take out a mortgage on those properties or even a [inaudible 00:05:43] that they have significant equity on. I think that’s going to be a lot more accessible and allow them to expand the portfolio.

Tony:
That’s a really good point. I mean, think about if they have no mortgages that might be the easiest path. Just go get a mortgage and you don’t even have to worry about the line of credit. But you mentioned that the smaller mobile banks, what does that process look like? So if someone walks through a bank, what am I asking for? What documents do they need? Just kind of break it down for us.

Zach:
I think it’s all relationship based, when you’re talking about local credit unions, local banks this is really where it gets relationship based banking where you need to have experience with them. They need to see significant deposits coming in. Usually you’re building rapport with them all the time. I think it’s very unlikely for someone to normally just get a business or commercial line of credit that’s not secured, just walking in the first time in a bank without building that report and that relationship over time. So it really is relationship based banking and I think having a business with them, developing that over time.

Ashley:
Think about a retail store or something, if they’re going to get a commercial business line of credit they’re probably putting up their inventory or something like that as collateral. Is that correct?

Zach:
Oh, A 100% yeah. If you half collateral a true commercial line credit or business line credit, that’s not secure. That’s what we kind of talked about when we think of a line of credit. But if they’re actually securing it against a business or an asset, something like that, it’ll be much easier to collateralize that. But in my opinion, again, I think they just collateralize the properties they own free and clear.

Ashley:
I think so too. I think that’s the best option. And the only loan that I would say that they would be better off is if they actually have a brokerage account where they’ve invested a bunch of money into the stock market and then do a line of credit against that. Because you’re going to get the best rates because it’s so liquid. But other than that, yeah, definitely going that route with putting the dot on the properties because you’re probably going to have to show them a lot less if you’re trying just to get it an unsecured loan.

Zach:
They’re in a good position [inaudible 00:07:46]

Ashley:
Congratulations, you have lots of options. Okay, we’re going to go on to question number two. Help me out here, I found an off market deal two weeks ago and agreed in a price with seller. He said he was ready to move out and wanted this done quick. Let me note that I have not been pre-qualified, so I started my search for a lender and today I spoke with a local one. I stopped by the seller’s home today and told him that wheels were rolling and I’ll have an answer for him upon a pre-approval of the loan. He raised the price by pay because he installed a new AC unit, he paid 4k. I brought him down to 93.5 and he said, okay, just three minutes later, sorry, I’d rather not sell because a new home will be more expensive. So now in order to avoid this from happening again, I realize I need to get them in contract as soon as possible. My dilemma is this one, do I submit my application with the lender, find out if I’m pre-approved even though I don’t have a home to buy or just wait until a good deal is on the table again? Only reason I’m a little unsure about qualifying is due to my DTI, but at the same time, I don’t want to hurry to pay the credit cards if not necessary.

Zach:
Good question.

Ashley:
Yeah.

Tony:
Sounds like a lot of sellers we’ve been dealing with for recently change their mind.

Zach:
I believe the question we’re hearing is you get qualified with the lender first and then find the dealer for vice versa, is that the base question?

Ashley:
Yeah.

Zach:
I think you know what your financing options are because otherwise, you don’t want to be putting things under contract if you can’t actually qualify for financing, and you need to know what those terms look like. We work with a lot of newer investors looking to build their portfolio and often the concern is, well I don’t want to run my credit, they don’t want my credit to be. But people really don’t understand. I think fundamentally where your credit needs to be to qualify for loans and how minimal of an impact a credit search or a credit report can actually have. We run our credit like multiple times a month all year round. We’re still able to stay above at 740, which is kind of the highest threshold, at least from a conventional standpoint. What do you guys think?

Ashley:
Well the first thing is if you have credit card debt, I recommend you paying that off because that is probably the worst debt that you can have. And I wouldn’t wait until you decide to get a home or not. I would pay that off just because the interest rates on that are astronomical. So I would take care of that first definitely.

Tony:
Yeah, I agree with you Zach. I think understanding what your financing option should be set, number one. It’s easy to go out into your properties under contract, but like you said, if you get a property in your contract with half a million, which only prequalified for 250, now you’re in a really sticky situation. So you’ve put down EMD or you’ve got some other contractual things you’re obligated to now you can’t close. I think understand that [inaudible 00:10:33] is important. Now if you are in that situation where you do have a good property, gets a great deal under contract and something Ashley and I talk about a lot is if you can’t get qualified for that loan, you don’t have the capital available, can you find a part of it does or can you get a hard money loan? So it’s kind of bridge that gap. So best route is getting the financing first, but if you get a good deal under contract and you can’t get the financing, I would say find a partner, then you kind hard [inaudible 00:10:56] to help you out.

Zach:
A 100% partnership is huge.

Tony:
Yeah. All right. So let’s look at the next question here. So this one comes from Derek Moore. Derek says, I have a duplex that I’m looking into that is off market. The numbers are good and the house appears to be in decent condition, though I haven’t yet had a GC or inspector walk through it yet. The duplex comes from active tenants that are current on the rents, allegedly. The place doesn’t need much repairs mostly [inaudible 00:11:20]. Here are my questions. One, should I pay to get the house appraised before I do any repairs? Two, when asking for the rent roll, is it normal to ask for base bank statements shown that the rent was actually paid? And three, is it a good idea to keep the tenants in the home if they are occurrence on rent have lived you home for two more than three year? So question number one, let me just repeat it for you because I know it was lot. So question number one is, should I get the house a free before I make any repairs?

Zach:
Well, I think it really depends on your buying situation, but generally the bank is going to require an appraisal and you want the appraisal to be at the highest value. So I would say you wait until the home is repaired and then you have the appraisal.

Tony:
Maybe I’m reading into it, but he said it’s an off market deal. Maybe he’s going with some kind of hard money or something to that extent. So say that he’s going hard money or he’s got the cash, but do you still get an appraisal in that situation?

Zach:
We buy a lot without having state for appraisal, but we also know what the value is. We run our own DPOs or we run comps to know. I think appraisals are good to have, but they’re also very subjective in some cases. And if a bank requires an appraisal, then you’re going to have that. But I think the more important thing is know your numbers, know your ARB, the repairs that are going into it because the appraisal really does matter in that case.

Tony:
So if you’re buying off market and then say for Derek’s situation, say he is buying off market, it’s a cash transaction or hard number transaction, would you still recommend you get an inspection done on that properly or what’s kind of your process?

Zach:
I got an inspection down and appraisal is an inspection to some degree on its own. But yeah, I think inspections are something we always recommend to everyone no matter how experienced or new you are. And it gives you better negotiation standpoint as well.

Tony:
One of the things that we love to do is we’ll do an inspection room property and we’ll send our handyman to meet the inspector on the same day and they are hanging on, just walk behind the inspector, take it down of everything they’re calling out. And then as soon as the inspection’s done, we have a scope of work and a bid on what it would take to repair that inspection report. So I agree, I think it’s a great negotiating tactic once you’ve got a property in your contract to allow this, that would be a little bit more reasonable, which was probably more difficult than last year because everything is going crazy. But I think is we get into the back half of this year and early next year, those will give you a little bit more witness.

Zach:
You’re so dialed in on your systems, you’re going to bid and the inspection [inaudible 00:13:50].

Tony:
Yeah love it. Okay, so question number two, when asking for the rent roll is as normal to ask for the bank statements showing [inaudible 00:13:56].

Zach:
With our experience with sellers, you get rent rolls in all shapes and forms. I don’t know if it’s inappropriate, I’m curious to hear what your guys’ opinion is on this, but I think kind of most of mom and pop owners maybe don’t have their finances prepared well enough to really give you a clean accounting, at least historically when we’re buying rentals that are already rentals, usually there’s an issue there. They’re not monitoring the income on it but don’t know.

Ashley:
Yeah, what we usually do is we send out an estoppel agreement to the tenants. So we have them fill out the name, the contact information we have them state basically the things that are in the lease. So what’s the rent you pay, when’s the last time you paid rent, what repairs and maintenance need to be done in the property, Things like that. So we kind of match what they say with what the landlord said and kind of see how that correlates.

Zach:
And for anyone that doesn’t know for estoppels, because I think this is more common in the commercial space and maybe not so much in the residential, but basically the tenants verifying that the lease is correct and they’ve been adhering to the leases. Did I say that correctly?

Ashley:
Yes.

Tony:
What happens if there’s a discrepancy between what the tenant says is happening and what the landlord says is that happened?

Ashley:
Yeah, so then that’s where you go back to the landlord and say, this is what your tenant stated and signed and then ask for the follow up proof. So that’s when it would probably be appropriate to ask for the bank statements or if they’re using some kind of property management software where they can show that the ACH went through for print off that report for you or copies of the canceled checks to show that the tenant did pay and what the amount was that they actually paid.

Zach:
So actually, are you asking every seller to allow for a tenant to estoppels every property-

Ashley:
There is a tenant in place, yes.

Zach:
I love that. That’s great due diligence. Leave the tenant place.

Ashley:
Yeah. Is it a good idea to keep the tenants in the home if they are current on run and have lived in the home for two or three years?

Zach:
I think you have to adhere to that lease, you can’t evict them if there’s no grounds to do that. But if they’ve been a good tenant, why would you change that? I mean if they were vetted appropriately, a lot of times would be inherit tenant they don’t have a history of being a great tenant, at least with properties that are underperforming. But if you have get a good tenant, those are hard to come by, so keep them.

Ashley:
Them. Yeah, I think in Derek’s situation, he mentioned that he wanted to do repairs in the beginning. So I think it really depends on what kind of repairs you’re doing. So if you need the tenants out to do a major remodel so that you can get the appraisal, refinance, pull your money back out, then yes you probably want to ask the tenants to leave. But it really depends on the lease. If they are in a two or three year lease, you can’t just ask them to leave. You can ask, but they don’t have to leave. But if they have been paying, they keep the property in good shape, you can do the repairs around them, you might as well hold on to a good tenant.

Zach:
We’ve had a lot of tenants that have been extremely happy that we’re coming in and repairing and improving their living situation as well. That also opens the door to if there’s been poor communication with the previous landlord, you can repair those relationships, improve the house and actually rekindle that relationship with a tenant as well.

Ashley:
Yeah, one thing we’ve done too is getting the option to the tenant say, we’re going to do these repairs, your rent is going to increase to this amount on this date or you may vacate at the end of your lease. So I think getting the option too is a good-

Zach:
I love that idea. You find that most tenants end up staying?

Ashley:
Yeah. And another thing that we’ve done too with coming into a property where there’s tenants in place, if they’re paying way below market rent already and there’s not maybe a couple things that need to be fixed, we do a slow rental increase too, which we’ve found people love that. We show them comps like, okay, if you’re going to move into a similar property that’s the same amount of bedrooms, bathrooms, same kind of upgrades that we’re still going to be a little bit below market rent or at market rent. So if you move, you’re going to end up paying more or the same amount, plus you’re moving expenses. So then we slowly do a rental increase, maybe $25 a month till they get to that point, or $25 for two months in the next two months, it’s $50 increase. So we’ve learned that that has really helped a lot too, doing it that way to keep these tenants of paying. We had one tenant that lived there for 30 years and she was about $200 below market rent when it was, and that’s what we did that gradually increased with her and-

Zach:
I think just took the goal for longest occupancy.

Tony:
30 years?

Ashley:
And that was also bought it five years ago. So 35 years now.

Zach:
That is golden bucks, I love that.

Tony:
All right, so next question for you Zach. This one comes from Nodi [inaudible 00:18:44], I hope I got your name right. So Nodi says rookie question here, I’ve been looking at different deals out there in order to learn how to run the numbers and I’m especially interested in rental properties that are turnkey. I used the BP rental calculator on this deal and I recently saw a house that was on sale for $149,000 with a monthly rent up 1150. Clearly this doesn’t meet the 1% rule. I run the numbers myself on BP calculator and had a positive cash flow $200 per month. My question is, what am I missing here? I thought that if the problem doesn’t meet the 1% rule, it would have a negative cash flow. Is this common to find with turnkey properties?

Zach:
We have these conversations all the time because people want to invest based on rules of thumb. But I encourage them to invest based on their criteria and their goals. The 1% rule really doesn’t exist in today’s market, and if it does, maybe it’s a property that’s at a low price point that may not be in a good area. I can tell you with it’s the main turnkey properties that we offer, there really isn’t any 1%. We can go into a C or D plus area to try to on paper show a 1% rule. But remember when you’re evaluating based on those numbers and proformas just an anticipated performance, you could have a tenant that moves out in the house of vacant for six months out of the year and then it really doesn’t matter at that point. So I guess the way that I would encourage people to approach their investing is to have a baseline criteria, know what numbers do work for them based on their financing and investing needs, and then try to obtain those and also be conscious of the locations that they’re investing in. I think the 1% rule really doesn’t exist to be quite honest anymore. And I think if you are looking at 1% rule type properties, be cautious about the neighborhoods that they’re in.

Tony:
I think so many rookie investors, they come to us and they want to know what market should I invest in? What city should I invest in? What’s a big deal? Should I buy this or not? And a lot of times it’s almost impossible for us to get those answers because like you said, everyone has their own criteria, their own level of return they’re looking for. So people ask me that question, I always say, depends, what’s more important to you? Is appreciation more important to you? Is cash flow more important to you? Is the return on your investment.More important to you? There’s so many different things you can look at when you’re evaluating a yield and there are ways that the 1% rule, 2% rule, all these other rules can be beneficial, but at the end of the day they’re just rules of thumb, they’re not laws of real estate investing. So it’s answer no, just question I think [inaudible 00:21:20] said, it’s like what is your goal? If $200 in cash flow is good for me, you getting a decent cash from cash return and it’s invited to you, doesn’t matter if, is that on [inaudible 00:21:28], right?

Ashley:
And kind of touched on your point that you know are hitting the 1% role in today’s market or in the last two years that it’s probably low income area, more affordable house and going to be a headache property. And I can completely attest to that where I buy $20,000 duplexes that were way of more than hitting the 1% rule, but they were cutting properties and also I was not hitting 50% rule. So per deal, you’re supposed to have your expenses 50% of what the monthly rental income is, and since the property taxes were so high in this market that you weren’t hitting that rule. So that should show that you can’t just rely on one rule of thumb or even one ratio or one statistic. It’s all about what your criteria is, what your goal is, and then building out all of the ratios, the rules, and then pulling from that as to building the big picture instead of just one thing.

Zach:
I think when a lot of people start shopping for investment properties, especially the rookie investor, that’s just building out their criteria. It’s okay, not to have all of your criteria in the very beginning because I think that’s a dynamic process. But often they’re looking at proformas and looking at properties and trying to match that to make sense for them instead of coming up with their criteria first. And I think you build that over time. But it’s all about taking action at the end of the day and critiquing your investing goals.

Tony:
All right. So I’m going to jump into the next question. This one comes from Christina [inaudible 00:23:02] and I hope I got your last right. So Christina says that she’s about to close in her first property. It’s a turnkey condo with tenants and proper manager already in place. The original plan was to self manage but keeping the PM was part of the propriety of the deal and the numbers works every area. Do I actually get the keys to the condo or does the PM and the tenant keep them? Am I required a 90 day notice to terminate with the PM? I’m sorry. She says I am required a 90 day notice to determining with PM but am required to keep them through the end of the lease. Tenant is required a 60 day notice. Should I provide contact info to the tenant and build a relationship if I’m thinking of self-managing opportunity? I’m not required to ask for insurance as a better pay out of pocket annually versus escort with what else should I need to know?So I’m going to try and rephrase that so I get the big questions here. Okay, so the first question is, does she actually get the keys to the condo once she closes it or does a PM intend to keep them? And then should she start building a relationship with that tenant now knowing that once that contract is able terminated, she plan self-manage, and then is there anything else she should know and the insurance, she should ask her that.

Zach:
Yeah, 10 more questions, we’re trying to get through them. I think this is very applicable to your last point about it just depends, you what I mean? First of all, consult with your local attorney. State laws vary depending on how you interact with the tenant. Personally we do not self-manage any of our properties at this point because our time is better spent for building our business. And so we want to have management but have right management in place. Typically the keys go right to the management. I never see those keys when I’m moved by our property, nor do I want them, I don’t want to have them. We don’t engage with our tenants. I personally like the anonymity of not having tenants to know who we are. They should be engaging with the management and that’s why you have a professional property management in place.
As far as escrowing, this is one thing for tax and insurance, we actually paid it on our own. You don’t escrow with mortgages, whether it is a conventional loan or commercial property that we buy. We always pay our own tax and insurance because I just don’t like, even though it’s more convenient, I don’t like having to the bank, they prepay it basically they collect it up front so you’re paying it in advance and that can be a lot of money when you have a lot of property. But you also need to remember to do that if your taxes are due twice a year… Don’t let that lapse. You don’t ever want that lapse. So it depends.

Tony:
I’m the other way, I’d like to have my insurance and taxes compounded with my mortgage monthly payment because I like the convenience of it and I’m the king for getting [inaudible 00:25:45]. So I know that I’ll be the first guy who doesn’t have insurance on any of his rental properties business for getting to make that payment. So I like that convenience. But your point too about the manager has the keys, it’s like yes, the owner, obviously you own the property so if you want get the keys, you can get the keys. But the whole reason you’re paying this property manager is so that they can hold the keys if [inaudible 00:26:04] we’re supposed to do. We’ve sold off all of our long term results for what we did have ours, I didn’t know what any of my tenants looked like. They were in multiple states away. So if I bump into them on the street, we wouldn’t know each other from some other random person. I love that.

Ashley:
I’m a little bit different. I like to maintain control. So at close I like to get a study keys, I like to have the tenants contacts information and I like to have a copy of the lease all upfront instead of it just going directly to the property manager. I like to have those things with me too so that I always have some kind of control over my property. Especially as you’re starting out, I think your first property even, I mean I understand as you get to build and grow and scale, it’s just not feasible to have this rack in your basement of all the keys for all your units. But yeah, I think it’s perfectly acceptable to ask for keys at closing for the property that you are purchasing. But when the tenant moves out or anything like that, you’re going to be probably putting in a new lock, getting new keys on too for the property.
As far as the property taxes and insurance goes with escrow, right before BPCON started on Saturday, we released an episode about my property tax bill that wasn’t paid. And I’ve actually had a couple people come up and talk to me about it already. Great timing for me to vent on a podcast and it’s a release for BEPCON but it was where a property tax bill wasn’t paid and Tony and I talked about and he’s like, Well you should just put them all into escrow. So that’s something I have to talk to my commercial lender about. On the residential side it’s very easy to have that happen, but on the commercial side it wasn’t. And I think one reason that I was always kind of against it was that you’re paying the money up front where instead it’s just one bill, you pay it in here. So if you’re purchasing the property and then your insurance is due every… You’re usually you pay it up front, you pay a years of property taxes up front, years of insurance up front. Well then if you’re escrowed you start paying and adding to the following years where instead I could use that money for something else and then the end of the year pay it. So that’s kind of my reason to be against it. But after having a hard back, I’ll probably be more expert to escrow.

Zach:
So is that how you get tenants to stay for 35 years person? But that’s a good clarification point, Ashley. I think generally conventional loans, single family, small multi, it’s expected for the lender to escrow though.

Ashley:
Usually almost always required, don’t have an option.

Zach:
Every see kind of on the commercial side and grow your portfolio. Sometimes they will refuse or escrow, they won’t even escrow into it. Like our property management for some of the retail centers we buy, they actually pay the tax and insurance but it’s not technically escrow into the loan. But yeah, I’m right there but we need something to make it or we’re paying it.

Tony:
So I just want to touch on that last piece, so is there anything else maybe a new [inaudible 00:29:10] we should know about buying turnkey properties?

Zach:
Turnkey is a great way for people to get started to diversify, especially if their local market is too expensive to get started or to scale beyond what they’re doing on their own. Even if they’re an active investor, turnkey is a great way for them to just add doors to their portfolio strategically, which in my opinion is kind of the name of the game here. I think what we’re all trying to achieve.
But do you know who you’re working with? You obviously want to invest in the right locations with the right people. Just because you’re buying turnkey does not mean that you are safeguarded from any normal risk that real estate would you still have tenant issues potentially. So just know that going into it, I think that’s the biggest disconnect when we work with investors that are wanting to buy turnkey is just thinking that this is going to be completely passive and it still is active to some degree even if you have a great tenant property management set up. But it can be a great way for people to get started, avoid some pitfalls to diversify and scale over time.

Tony:
So let me ask this question Zach. So we reinvest in fair Airbnbs vacation rentals and it’s very kind of sexy asset class right now. A lot of people looking get into it, but also caution and lot people know that it’s not for everyone. Not everyone should be buying vacation rentals and managing themselves because there’s definitely more work to do is that asset class versus others. So who would you say maybe is turnkey not for? What kind of investor does it maybe not work for?

Zach:
Oh that’s a great question because I want to conform it to everybody come by house with us now. I think the person that can do better on their own, being an active investor that understands the risks of being an active investor that really enjoys that. And two, short term rentals, they’re full on management. Even if you have management, that’s why you pay them 20, 30% possibly more. But the people that are really excited and passionate about doing their own thing with real estate, they don’t want to be a passive investor yet. You probably can obtain better returns actively investing, but there is more work and potential risk with that course.

Tony:
And the thing I always say is to be good anything and investing be time, desire, and ability. And if you’re missing any one of those key ingredients, you’re going to struggle. And if you can I guess fill that gap with a terms company or whatever it is, you’ll probably find more success. Because if you don’t have the time, it’s going to be very difficult to find an undervalued asset to rehab it, to get it stabilized, to manage those in its long term. If you don’t have the desire, even if you have the time and the ability, you’re going to hate doing it. So you need the [inaudible 00:31:55] of all those things.

Zach:
And it’s just important to be honest with yourself. I think. That’s excellent points to be honest with what your goals, what your time, experience level is and then take action accordingly.

Ashley:
And it’s such a great way for new investors to get started to learn from what other people are doing. You get a whole team, you get everything there so that you can say, okay, this is how this operates, this is how this operates. And then if you want to go on to start borrowing yourself or something, you have already kind of watched firsthand, those resources, the team you need kind of go into play. So I think for rookies turnkey is a great option just to get started. Especially, if you’ve been in analysis paralysis, you’ve been delaying taking action cause you don’t have time. And it’s been years that you’ve been wanting to do this, like that I think is a perfect candidate for getting into turnkey.

Zach:
The mindset aspect of it, actually I’m so happy that you said that because so many people and especially in the VV community, they get stuck, they’re excited about real estate, they get stuck in the analysis paralysis. That first property in my opinion is not important financially. It’s important to mentally, emotionally. And if turnkey’s an access way to get you started, then do that. We have so many investors that come back years later and they haven’t bought from us for five or six years, but they’ve gone out and built this insanely large portfolio and been extremely successful and they’re like, hey, those first couple properties gave me the confidence to go out and do that. And I love hearing those stories, so thanks for mentioning that point.

Ashley:
Yeah, that’s really awesome. Just one last question about turnkey is what are maybe three questions that someone should be asking a turnkey provider when vetting them?

Zach:
I definitely would say track record is the most importance. Let’s talk about the markets and make sure that their model and their business, it meets real criteria, because not all turnkey is created equal. People work in different markets that you have different niches in business. Some people do short term, long term, multi-family, new construction and development. So just make sure one, that business I think matches your goals and criteria at least fundamentally make sure that they have a quality and track record and you want to check references and due diligence just like with anyone that you jump into business with. And the third question is to do these properties makes sense for my criteria. And if they do, then I think you take that.

Ashley:
Well, that was great and thank you so much for joining us here live at BPCON. Can you tell everyone where they can find out some more information about you and possibly reach out you?

Zach:
Absolutely. You can visit renttoretirement.com. That’s rent T-O retirement.com. We have all links to social media. We’d be happy to talk about anything you’re doing investing, We do short-term rentals, we do multi-family new construction. We have our hands in a lot of stuff. And we’re here to add value. Please reach out. And you guys, thank you so much for having me. This has been a lot of fun, BPCON2022.

Ashley:
I’m Ashley at WealthfromRentals and he’s Tony at Tony J. Robinson on Instagram. Thank you guys so much for listening and we will be back on Wednesday with a guest. (singing)

 

Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Check out our sponsor page!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

2022-10-29 06:02:11

Source link

How To Sell a Haunted House – And How To Avoid Buying One!

Superstitions, stigmas and the supernatural – whether you believe in them or not, they can have a very real impact on how long it takes to sell your home and the price you’ll get for it. As a homebuyer, even the mere thought of a haunted house can have you running for your life. With that said, there’s always an upside, and in the case of a stigmatized house, an unbothered buyer could be in store for a quick closing and a great price.

Did Someone Say *GULP* Haunted House?

Most people would agree that living in a murder house might be creepy, and it may be enough to turn buyers off, regardless of tight market conditions – which some industry observers might consider even scarier than an other-worldly house guest. Whether or not you believe in the paranormal, it can impact your decision to buy or your ability to sell.

What is a “Stigmatized Property?”

According to the Ontario Real Estate Association (OREA), a stigmatized property is one with non-physical, intangible attributes that “may elicit a psychological or emotional response on the part of a potential buyer.” Aside from past murders and current hauntings, there are some other factors that can be considered stigmatic and thus, problematic:

Unlucky Numbers

Some swear by numerology while others have real-to-them reasons behind their inclination toward – or against – certain numbers. So much so, that something such as a specific street address, the floor in a building, a unit number or a price tag can take some houses on the market, out of the running. In Canada, the number seven is considered to be lucky by some, while 13 is thought to bring bad mojo. To avoid unsellable units, some condo developers will omit a 13th floor in their buildings. Even a closing date of Friday the 13th can bring on bad vibes.

Feng Shui

The principles of Feng Shui hail from Chinese culture, and focus on the arrangement of your environment to allow for a gentle flow of energy, known as “chi.” Good Feng Shui is thought to promote good health and fortune. Bad Feng Shui in a home can include a staircase facing the front door; a “poison arrow,” when a T intersection or tree is pointed at your front door; or a front door that aligns with a back door, causing chi to rush through and out – along with your luck.

What are the Rules of Disclosure?

In order for buyers’ agents to serve their clients well, they should be aware of any stigma sensitivities. “RECO takes something of a ‘buyer beware’ approach to the issue of disclosure and stigmas, and notes that the representative for the seller has no legal requirement to disclose a stigma; in that case, it’s up to the buyer and their representative to find out.”

Tips for Homebuyers

Since the seller has no legal obligation to disclose stigmas, concerned homebuyers should be proactive about asking questions, doing their research and, when in doubt, just ask the neighbours! This doesn’t only apply to ghosts, but can be an all-around good strategy to learn more about any home you’re considering purchasing.

Tips for Sellers

If you happen to live in a haunted house and are selling, consider applying some simple home staging strategies to downplay your home’s creepy characteristics. Paint it a fresh, bright colour inside and out. Declutter and remove personal effects, like the photos of your dead ancestors and their urns that line the fireplace mantel. If your furniture is damaged or outdated, consider renting some more-contemporary pieces to user your home into the modern age. Of course, you’ll want to clean the place from top to bottom, to get rid of any cobwebs and skeletons int eh closet. Consult a professional real estate agent to help you determine popular selling features in your area, and how you can raise your old home from the dead, so to speak.

The Up-Side of Buying a Haunted House

On the other hand, if you’re a homebuyer who’s willing to overlook some silly superstitions, stigmas and spirits, a haunted house or one located at #13 Elm Street just might offer a real steal of a deal! Connect with a RE/MAX agent to help you negotiate an offer.

Find an Agent

2022-10-28 16:02:13

Source link

5.8M Homes Needed by 2030 To Tackle Affordability Crisis

The Canadian real estate market is experiencing a correction period. While many industry observers are stopping short of calling this downturn a crash, it is clear that the once-sizzling housing sector is being doused by rising interest rates and broader uncertainty surrounding market conditions. So, are we still experiencing an affordability crisis?

In September, the national average home price tumbled 3.9 per cent from the same time a year ago to $637,673, according to the Canadian Real Estate Association (CREA). Even when Toronto and Vancouver – two of the hottest housing markets in Canada – are eliminated from the equation, the typical residential property in the country sold for more than $500,000. While this is immensely lower than the roughly $800,000 at the height of the coronavirus pandemic, it is still expensive for the average Canadian household.

Does this mean that Canada is still going through a housing affordability crisis? Indeed, during the 2021 federal election campaign, affordability was one of the main public policy discussions. However, months later, it is a topic that no longer appears to be on the front burner, as prices have been falling.

While the Bank of Canada (BoC) is pulling the trigger on aggressive rate hikes, which will subsequently increase mortgage rates, it is not exactly certain that Canadian real estate market prices will sustain their downward trajectory. This is especially true when demand is expected to climb over the next decade, but supply will fail to keep up.

5.8 Million New Homes Needed by 2030 To Tackle Affordability Crisis

A 2018 report by Canada Mortgage and Housing Corporation (CMHC) projected that Canada’s housing stock would increase by 2.3 million units by 2030, bringing the country’s housing stock to nearly 19 million housing units.

This past summer, the CMHC published an eye-opening report about the state of the nation’s real estate market moving forward. The agency explained that 3.5 million additional homes must be constructed by 2030 to achieve affordability.

“Increasing supply will be difficult. Critically, increasing supply takes time because the time to construct is significant, but so is the time to progress through government approval processes,” the report stated. “This delay means that we must act today to achieve affordability by 2030.”

But is this doable? Many hurdles will need to be overcome to achieve this figure.

Today, the construction industry is going through a labour shortage, the economy is still suffering from rampant price inflation, higher borrowing costs have weighed on new housing construction activity and softening real estate market conditions are ubiquitous across the country.

“There are supply issues, labour shortages at the moment and the cost of financing is going up, so clearly there are short-term challenges,” said CMHC deputy chief economist Aled ab Iorwerth during a conference call in July.

In August, the Standalone Seasonally Adjusted Annual Rate (SAAR) for housing starts for all areas in Canada tumbled three per cent to 267,443 units, according to the latest CMHC data.

With a growing population, more international students, and an increasing number of newcomers – Prime Minister Justin Trudeau’s three-year plan to welcome more than one million immigrants to Canada will intensify demand for residential properties. As a result, both the cost of homes and the price of rent are expected to accelerate over the next decade.

How Bad is Housing Affordability in Canada?

Is buying a home an uphill battle for most Canadian households? Not necessarily. Are home-ownership costs enormous? Yes, says the Royal Bank of Canada (RBC).

In late September, RBC Economics published a research note that concluded “buying a home has never been so unaffordable in Canada,” driven by soaring interest rates that are lifting ownership costs to record-high levels.

“The Bank of Canada’s rate hiking campaign since March has added hundreds of dollars to mortgage payments that come with a home purchase. This, along with the jump in property values during the pandemic have made it more difficult than ever to become a homeowner in Canada. RBC’s national aggregate affordability measure reached 60 per cent in the second quarter, surpassing the previous worst-ever point (57%) in 1990,” senior RBC economist Robert Hogue stated. “Affordability worsened everywhere in Canada: The deterioration over the past year has been off the charts in most markets with only parts of the Prairies and Quebec having experienced deeper erosion in the past.”

The silver lining is that declining prices nationwide should help mitigate some of the elevated ownership costs heading into 2023, the bank noted. But for how much longer prices can slide remains to be seen.

2022-10-28 14:41:48

Source link

Top Investor Edition: The Future Looks Bright In The Sunshine State

It’s hard to think of another period during which Florida was in the news for all the right reasons. America’s third-largest state is slated to break 22 million residents by the end of this year in large part because of job creation and its state government’s refusal to implement severe COVID-19-related strictures like those in New York and Massachusetts. 

Moreover, buoyed by a subtropical climate that includes mild winters, Florida’s tourism is heating up, with Orlando averaging more than 75 million visitors a year. That bodes well for the city’s real estate market, says Shaminder Gogna, broker of record and founder of Condoville Realty Inc., a Toronto-based firm that’s opening up a new office in Wynwood Miami.

The new Condoville office is assisting a prominent international developer with a multi-phased condominium project in Osceola County, one of the only counties containing a Disney World Park. In fact, the development site is two minutes from Disney Park and five from its theme parks. It is also about 22 miles away from Orlando International Airport, which Gogna says is creating a lot of buzz in the investor community because it will appeal to short-and long-term tenants alike. 

“The ability to purchase this opportunity in this area with the freedom to live as a resident, rent short-term and long-term is a game-changer,” he said. “Competing sites in the area have several occupancy restrictions in fine print. On top of that, you’re purchasing at Day 1 pricing with several hundred suites developing on site over the coming years that will automatically generate profit in your purchase as real estate prices continue to surge upwards.”

Construction on the first of two buildings in phase one, a seven-storey mid-rise—the next two phases will be high-rises—will commence in the next two months.

“You’re probably making $1,000-1,500 a month with projections of 85% occupancy, however, that’s a pretty conservative projection because Orlando receives 75 million tourists a year and that figure is continuing to grow as COVID travel restrictions vanish,” Gogna said. “Florida’s tourist visits jumped by 20% in the first half of 2022 compared to the same period in 2021—and remember, the state didn’t really shut down during COVID, so it was getting plenty of visitors even back then. 

“The labour force also increased by 6% year-over-year in April of this year, so we continue to hear this great story of housing demand across the board from local residents as well as travellers that is contributing to the growing pool of renters there,” Gogna added. He also noted Florida’s long tradition of attracting snowbirds has become more aggressive as first-generation immigrants look for sun and warmth in the winter months while staying close to home and the ability to access financing programs from TD and RBC has offered US property ownership without purchasing cash.

Florida has long been attractive because it’s an income tax-free state, and, in addition to its booming population, its favourable corporate tax structure has been enticing scores of companies to relocate to the Sunshine State.

The development is also sure to reap promising ROIs for investors, considering that Orlando’s home prices surged by 30.1% in the last year, thereby promising robust rental income and long-term appreciation.

“Orlando has typically been all about the Disney attractions, but it’s becoming a tech hub for the defence, finance, and medical industries, while Miami continues to grow its reputation as a start-up hub,” Gogna said. “What we’re finding is given the corporate tax structure and billions of dollars in tax incentives from local governments, newly founded companies all have Florida on their radars. Continued growth with regard to business infrastructure and investment is triggering population growth, and just like we’re seeing in Ontario, homes can’t be built fast enough.”

 



2022-10-28 14:14:00

Source link