Building a Portfolio versus Building Equity

Unknown

“My portfolio is growing!  I just closed on my fourth house and I just got a promotion at work – things couldn’t be better!”  On the outset this sounds great.  Until you ask, “do you have any debt on those properties?”  The eager up-and-comer quickly responds “well, yes, but I have renters, so I’m building equity!”  As the onion peels away we start understanding the situation much better.  “I took advantage of a low down payment loan program to buy the houses so my renters (as they pay their monthly rent) are paying down my mortgage for me.  These houses will be my retirement portfolio one day.”  If this sounds familiar, then I agree with you.  I am learning about more and more “investors” who are buying homes at or near market price, adding some fresh paint and carpet, replace a few kitchen cabinets and toilets and then rent their properties out.  This strategy is only one paycheck (of the renter) away from becoming a disaster for the owner.  Simply put, the only viable reason to rent out a single family house is because either (a) you are using your own money, and (b) the rental rate is so far above your holding costs that your net profit is better than any other investment alternative on a return-on-cash basis.  Otherwise, if you are buying a house near or at market price, one missed rental payment (and usually will at the wrong time) can spell disaster for the owner.  The cost of eviction and missed payments will eat up any “discount” you bought the property for.  So now you have to ask yourself, DID YOU GET INTO REAL ESTATE TO BUILD A PORTFOLIO OR TO BUILD EQUITY?  The purchase of a rental home should made at a steep enough discount that lost rents, non-paying tenants, and expensive repairs do no cut significantly into PROFITS.  Remember profits are why you got into real estate investing to begin with!  Four home purchases made at or near market price with a low to zero down payment is speculation.  The buyer is speculating that the renter will not default, that the house will not need repairs, that economic circumstances won’t change, that a host of factors will not cut into profits.  Homes in several hot markets during 2007-2012 including Las Vegas, Phoenix and Tucson went through a boom/bust cycle that wiped out half the value of the residential market.  Short sale properties were so common few people wanted to buy them and so many more couldn’t because the banks were barely lending to even the top tier borrowers in the country!  Build a portfolio Yes, if you bought equity on the day of closing.  But, depending on a series of factors that are not under your control No.  Equity is bought on day one.  Having a strategy to cash in on that equity will be in my next article!  To your prosperity!

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The Price is Probably Right

California-Hot-hi-res

In 2017 home prices in California were priced right at market more than 2/3 of the time.  WAIT?  Is that what this data is telling us?  Well . . . YES!  If you look closely at the percentage of homes in 2017 that sold above asking price was 32.9%.  That also means that 67.1% of the homes were price at or below market.  One of the greatest challenges for home buyers is feeling comfortable long after the escrow closes and the movers have left that the price paid for that new home was a deal.  Isn’t it?  For most homeowners their home IS the largest asset they may ever own in their life so it strikes home, no pun intended!  Although the data in this share today indicates California is getting to be a very warm market, at least for those that already did buy they can rest assure they at least paid a market price.  And if they didn’t, there was a good chance that another buyer right around the corner probably would have.  Unsure if now is a good time to buy or sell a house in California?  I can help!  Feel free to message me to learn about options that are available to you!

What is the Most Important Job Skill?

Job Skills

This question was posed to me this weekend when my son asked me how I do my job.  Working in real estate I work with people from all walks of life.  More recently I engaged services with graduate student name Maria (hiding her real identity).  Maria is a full time working professionals seeking a graduate degrees through night school and online learning classes.  Maria was very concerned about how the deferral of her student loans would impact her affording a new home.  This is not uncommon.  The government has reported student loan debt well into the trillions of dollars (https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017/).  When I asked about her plan to pay off her loans she answered that; “…hopefully when I graduate I will be able to apply for a higher paying job.”  This leant me to think about my conversation with my son.  In the 80’s an important job skill was resume writing.  In the 90’s job interviewing.  In the early 2000’s it was networking.  Although these all have importance I am learning that financially independent people learn how to creatively financially engineer every aspect of their lives.  New technologies with crowdsourcing in order to finance real estate, movie, even business acquisition and start up projects is only one example of creative financing.  Let’s also not overlook job skills as a fair “trade” to acquire a service or asset.  One example would be to take an equity position in the purchase of a house in exchange for providing services to remodel and oversee the construction of the house.  One partner buys the house and provides funding for the rehab costs while the other does all the work.  This is a strategy I recently used for a house purchase of a single-family remodeling project in southern California.  With my skills in sourcing materials and labor, my partner can focus on finding funding sources that ensure this project can be completed.  Over the next two weeks I will be discussing additional creative solutions to financially engineer real estate transactions.

What This Single Mom Did To Keep Her House

House

You arrive home tired and exhausted from a long day at work only to find the house is empty and very quiet.  An envelope addressed to you is left in the usual place where you usually place your things when you arrive home.  Opening the letter you find a one page note:

I’M SORRY BUT I JUST CAN’T HERE ANY LONGER.  I’M MOVING BACK HOME TO SORT THINGS OUT.  TELL THE KIDS I LOVE THEM.

Can you imagine coming home from a long day at work to this letter?!?!  Neither can I!

But for Norah this is exactly what happened.  This was a serious problem.  The spouse, father and income-contributor of the family had just deserted a family that very much depended on him.  Norah had to make some hard choices over the next few weeks.  Because she had made the purchased the home she was living in prior to getting married, her primary residence was in her name only.  After sorting out her situation Norah had approached my colleague with the idea of selling the house for $375,000.  She would then downsize into a less expensive apartment that she and her 2 young children could start over.  Norah felt she had enough equity to cover two years of rent but still had sizable monthly bills.  One of the largest bills was her automobile loan, a stiff $400/month.  Norah still owed $9000.00 on the auto loan so the debt wasn’t going away anytime soon.  After learning about Norah’s circumstance my colleague could see she was in a tough position. Not just because of her bills, but because of her life circumstance.  Loosing the financial and emotional support of her spouse, uprooting her 2 young children, selling the house, moving into new surroundings and into a new apartment.  This would be a lot.  My colleague sat down with Norah and looked at her monthly budget.  There was no question that she earned a good living, but the auto loan was expensive.  Looking deeper into the details my colleague found that Norah had the money to cover the mortgage.  She just didn’t have much left over after paying all her bills.  To provide a solution she suggested that she would be willing to buy the house from Norah with a 5 year option.  As part of her down payment, which would be non-refundable she paid off the car note to the bank.  She then originated a promissory note with Norah in which Norah would pay her $137/month for the next 5 years.  My colleague agreed to reduced the auto loan by $1000 and then deduct it against the Option purchase price she offered.  This would keep the monthly auto payment down.  Even better, she told Norah that if during or at the end of the 5 years she wanted to buy out the option from my colleague, she could purchase the house back at a price they would agree to, or a 10% increase whichever was less.  They agreed to the deal.  Norah had to agree to not miss any payments on auto loan and maintain the property(repairs), taxes and insurance.  So what did this accomplish for both parties?

-Norah was able to continue to live in her house and keep the children in the same school district.

-Norah was able to sell her house at $375,000 without hassle by accepting the option.

-For the next 5 years Norah can sort out her financial goals without the pressure of moving and starting all over again.

-Norah will still be paying down her mortgage debt so if she sells the house in 5 years she will still have received 5 years of mortgage interest deductions on her taxes.

-For the next 5 years if Norah’s financial situation improves she may buy out the option and repurchase the house – thus never moving.

-Norah reduced her monthly expenses by refinancing the auto-loan with the Option buyer at a more affordable payment which will leave her with more money in her pocket at the end of the month.

– The buyer’s option guaranteed a minimum of a 10% increase on the purchase price if Norah were to buy out the option.  A 32% return on investment after paying $9000 to pay off the original auto loan.

-Even if Norah doesn’t buy out the option she agreed to continue to maintain the property (repairs), pay the mortgage, taxes and insurance so the buyer has zero property management issues to deal with.

Although Norah could have sold her home, this solution gave Norah favorable options in which to stabilize her life circumstances to give her the confidence to face her financial challenges from a position of strength.

Don’t overlook WIN-WIN scenarios.  The obvious isn’t always the best solution.

Contact me if your looking for solutions to your housing needs!

buyorrentmyhomes@hotmail.com