Friday, March 25, 2005

Rental Market Rising Supports Real Estate Investing

Demand for apartment rentals jumped in the last quarter, giving real estate investors in various markets some hope that the renters market may be softening. The National Association of Home Builders released its Multifamily Market Index (MMI) last week, showing that there are no signs of the hot condo market cooling off.

"The improving job market is driving a rebound in apartment rentals," David Wilson, NAHB president and builder from Ketchum, Idaho, said in a press release at the group's web site. "At the same time, attractive interest rates and strong price appreciation rates continue to spur condo sales."

"These numbers indicate that a healthier multifamily housing market is emerging, one in which demand more clearly aligns with supply," said NAHB Chief Economist David Seiders. "The positive outlook for the economy in general, and for job growth in particular, means that the news for multifamily housing should continue to be good."

The MMI is measured on a scale from 1 to 100, with a rating of 50 generally indicating that the number of positive responses is about the same as the number of negative responses. The 4th quarter report continued the year-long upward trend, settling upward eight points to 50.8 for mid-rate apartments.

Like all other factors in real estate, rentals are based on supply and demand, thus the tracking of available apartments for rent fell an astounding 13.2 points from 69.6 in the final quarter of 2003 to 56.4 in the fourth quarter of 2004. At the same time, the MMI tracked call volumes from prospective renters on the rise by nearly ten percent, from 45.9 to 50. The current average vacancy rate for rental apartments is 7.8 percent, down from 8.5 percent in the previous quarter.

In a booming real estate sales market, real estate investors can come out empty handed, and it's not a happy place to be. Home sales will rise because of a burgeoning job market, low interest rates, and a low supply of homes to sell. For rentals, it can work the same way, but it can backfire even when the economy is good.

In the Washington, DC area, for instance, in the late 1990s (which was 6 years ago, now -- sheesh), rents were climbing at a very high clip -- 25 percent in some markets. I teamed up with several friends to move a single-parent and her kids from a unit that just out-priced her. She liked the location, the unit, etc. -- but the rent was moving up from $1,200 to $1,450 on the anniversary date of her lease. She found a townhouse, subsidized unit for $1,250.

Now that particular multifamily development is singing the blues, dropping its rates, offering signing bonuses, and farming heavily for renters. It became so expensive that renters started buying -- it was cheaper to have a mortgage than to rent. The rental market, on the whole, out-priced itself.

It's very tempting to keep moving rents up -- and you would think it makes sense to do so, but think of the long term. Most small investors own one or two units and can get eaten alive by dropping rates if they don't keep their ear to the ground. Most investors have a mortgage on their property. If they're making a couple hundred dollars of positive cash flow per month -- a year's worth of cash flow can get eaten up with just one month of vacancy. Real estate investing can provide astounding return on investment, just don't get greedy.

You do want to charge the amount of rent your local market will bear, but you don't want your house sitting empty even for one month just because you wouldn't drop your asking rent. An investor in my neighborhood did just that. He was listing it for $2,300 per month (the going rent), but didn't watch the local market. Other mistakes he made included: not fixing up several issues inside the house, not painting the exterior when it was obvious to any passerby that it needed it. The house sat for nearly three months.

If his payment was $1,600 per month -- he just had to make more than $4,800 in payments without any support from a renters' income. That's $4,800 he will not be able to make up for a very long time. The property eventually rented for $1,700 -- his stubbornness for holding to his desired rent, cost him thousands of dollars.

As an investor -- listen to the market (both rental and sales), keep your property in shape, and respond accordingly.

Published: March 25, 2005

Friday, March 18, 2005

Avoiding 7 Costly Mistakes of Selling Your Home

There are always appropriate steps to investing in real estate and hopefully, you've garnered many of them right on these pages. However, there are also inappropriate steps sellers can walk down when it comes time to put their house on the market.

For instance, the seller in Virginia, who thought the half bath the builder had located at the front of the house would really be better situated toward the back of the main level (though all the other similar models had the powder room in the same place for the previous 20 years). He got hung up on this detail so much, that he just had to move it -- and did -- for thousands of dollars, just so he could get it on the market the "right way." His hang-up may have settled some deep-seated emotional need for him, but it didn't draw any more buyers, and it drained his bottom line. You might say, that was a costly mistake.

Real estate broker and author Sid Davis has identified in his book "A Survival Guide to Selling a Home," another seven costly mistakes that many sellers make when it comes time to put their home on the market. In my business, I've seen each one of these mistakes played out and it just makes me shake my head as to why, sellers forge ahead with unwise strategies, instead of listening to the voice of an experienced professional.

Mistake 1: Putting the home on the market before it's ready. Most times this happens because the seller gets impatient or is a procrastinator and has pushed himself up against a moving deadline without getting the pre-sale work done. So it comes on the market with the horrible carpet (that gets replaced during the marketing of the home); or they are painting it while it goes on the market. Presentation is everything -- so get the work done before marketing the property.

Mistake 2: Over improving the home for the neighborhood. This happens with additions, bump outs, and upgrades that make the home stick out from among its competitors so much that it's an anomaly, instead of a nice addition to the community.

Mistake 3: Pricing the home based on what the seller wants to net. This pricing strategy always ends in failure. Sellers can control the "asking" price, but they don't control the "sales" price. The market does. It doesn't matter what the seller wants, the price is determined by the black-and-white, matter-of-fact reality of the market.

Mistake 4: Hiring an agent based on non-business factors. Make sure you're hiring a professional with a proven track record. It might be nice to hand over your largest asset to your nephew who just got his license -- but make sure he has a mentor to keep your deal from going south.

Mistake 5: Getting emotionally involved in the sale of the home. This is one of the biggest challenges home sellers face when putting their house on the market. Once you decide to sell your house, it's no longer a home, but a commodity. It needs to be prepared as a commodity, marketed as a commodity, and priced as a commodity. It doesn't matter what you "want," only what the market can bear on pricing. People are going to come in to kick the tires, so to speak, and you can't get emotional about how they may or may not appreciate the nuances of your home of seven years.

Mistake 6: Trying to cover up problems, or not disclosing them. Most states have a property disclosure/disclaimer form -- use it wisely. Just because you disclaim doesn't mean you cannot be sued later for the leaky basement, or dilapidated heating/air system that's discovered 30 days after settlement.

Mistake 7: Not getting your ducks lined up before trying to sell. This would involve financing, reading the fine print on your current mortgage to ensure no pre-payment penalties, not listening to the particulars of your local market, etc. If your local market is dictating lower home prices, then lower it early, not later -- it will cost you more. If the local market dictates selling your home first, then buying second, do it in that order, or vice versa.

Avoiding these mistakes is not that difficult. There are plenty of resources (like this publication) and professionals, who are there to help you step over the pitfalls. Do the research early, and listen to that voice in your head (it's probably the whispers of the finance, real estate, insurance person who's warning you of a hole you're about to step into). Sell well.

Published: March 18, 2005

Friday, March 11, 2005

When Should You Sell Your Investment Property?

The ultimate purpose of investing in real estate is to make money. I make this statement with no apologies, though it may sound greedy; however, real estate is just like any other investment -- whose primary purpose (at least should be) is to build wealth. Thus -- there should be a time in the future that the investor plans to sell.

With the Prime Directive of "buy low, sell high" laid aside, most investors grapple with when to sell. There are several sell points real estate investors should have in their business plans. Looking to the future, investors may want to sell after having reached one of the following benchmarks: the property has maximized its profit, you've located a better investment opportunity, the tax depreciation limit has been reached, or you've realized your wealth-building goals.

Maximized Profit

In most markets, there's a time when the profit is maximized and your rate of return drops. If an investor fails to monitor the local economy, he may miss the optimum time to sell a house and lose profit. If you've tracked the cost of housing across the country, you'll find that it has rarely dropped from one year to another. However, real estate is sold and held locally, thus the value of real estate may slide up and down more in a local market than when you look at it on a national scale.

I purchased my first investment property as a primary dwelling. Soon after the purchase, it dropped in value over the next several years by nearly 26 percent and lingered there for about six years. It finally recovered and I sold for a very small profit. To add insult to injury, the condos in that area have nearly tripled in value since then and are still growing. Was my selling choice good timing? It depends. Looking at the next benchmark demonstrates how to overcome bad timed choices.

Find Another Great Opportunity

Once I sold the condo, I moved into a property that was worth three times the value as the condo -- and in the same time period, has more than doubled in value. Thus, my equity in the new property is much higher than the equity in the condo today -- fortunately, my timing worked out. If various properties appreciate at the same rate and you have an opportunity to purchase the more expensive house -- your rate of return will be increased by the value of the more expensive home.

Example: A condo at $100,000 appreciates by 15 percent per year for four years, resulting in a gain of $74,900. A single-family dwelling valued at $250,000 with the same appreciation rate, however, ends up with a gain of $187,251. Do I even need to ask which was the better investment?

Maximized Depreciation

Real estate investors are allowed to depreciate their properties for 27.5 years while they have the house as a rental. Depreciation can add losses to your income on paper and thus, reduce your tax burden. Only the improvements (house, sheds, etc.) are depreciable, not the land. The IRS allows depreciation for up to 27.5 years for most investors, according to IRS Publication 946 - How to Depreciate Property. Once you've hit the maximum depreciation, some of your tax benefits disappear and it may be time to find another investment property. When you purchase another property, the 27.5-year timeline begins anew.

Cash Out

Finally -- the ultimate reason for all of this investing, collecting rents, fixing leaky roofs, and broken hot water heaters, is to create wealth. At some point, you're going to want to cash out the house so that you can send your kids to college, buy a retirement home with cash, take that round-the-world cruise, or whatever you want or need, to take care of.

As you approach investing, be sure to begin with the end in mind -- thus understanding when you need, and should sell to maximize profit.

Published: March 11, 2005

Sunday, March 06, 2005

Agents Must Provide 'Minimum' Services

The competition for your business has become even more furious in recent years, with real estate companies offering various levels of service for the plethora of customer/client types out there.

Whether you want bundled full services from a pre-approval mortgage, home purchase/sale and settlement, or if you just want to get your home in the MLS, it's pretty easy to find the company that will provide you the level of service you desire. However, state legislatures -- which govern real estate license laws across the country -- are starting to bring the hammer down on its licensees to ensure consumers receive a minimal level of service.

A recent report from the Realtor Association Executive publication, has addressed many of these issues for its members, who are the local and regional trade association reps for the Realtor industry. In its latest issue, F.P. Maxson, an associate counsel for the National Association of Realtors, states that limited service agreements, "in which the listing broker offers no services other than placement of the listing in the multiple listing service, have left many real estate professionals in an ethical quandary."

It usually goes something like this: a homeowner wants to sell his house himself, however, recognizing the power of the regional multiple listing system, he wants his house listed there. Therefore, he solicits the assistance of a limited-services broker. This is generally a broker who uses a menu-based business model: you get what you pay for -- nothing less, nothing more. The consumer pays for each step of the process, if they want it: MLS entry, contract negotiation, signs, marketing, buyer follow-up, contract performance, monitor fair housing compliance, etc., etc.

The challenge in the industry, according to NAR, is that since "homesellers who employ these limited-service brokerages are essentially representing themselves in the transaction... Often, when they encounter difficulties in the transaction process (such as an uncertainty regarding how to handle multiple offers), they ask the buyer's broker for free advice."

Maxson writes that real estate professionals say "they frequently are asked to assist the sellers in completing the transaction. To do so could leave them exposed to claims of dual agency. On the other hand, choosing not to assist the sellers places the transaction in jeopardy."

It's quite a quandary. And one that many legislatures are deciding to enter. Illinois, Texas, and Michigan have been the first to begin a minimum service requirement challenge to its licensees.

Illinois' measures were passed into law last year, while Texas and Michigan are proposing changes. All three require that if an agent is going to list a property, then there are at least three points of service that must be provided:

Accept and present all offers/counteroffers.

Assist client in developing, communicating, and presenting all offers and counteroffers.

Answer the client's questions relating to the offers and counteroffers.
The concept of a minimum level of service is growing, Missouri's Realtors are now considering authoring legislation modeled after Michigan's as their legislature gears up for this year.

The rationale behind a minimum level of service is all about raising the bar of professionalism, according to George Stephens, 2003 Chairman of the Board for the Texas Association of Realtors. "This is purely a consumer issue that has nothing to do with commissions or fees," says Mr. Stephens. "Whether a broker is charging a flat fee or a commission, he or she should be required to deliver at least those three services."

Published: March 4, 2005