This blog emphasizes condos and townhomes, which have their own set of problems such as a mismanaged HOA, special assessments, and general volatility. With that said, I prefer to own a single family home. With a single family home you get your own yard, you usually get to modify it to suit your tastes, and you usually don't have to worry about the HOA monitoring the use of your property.
But despite that, some of the older single family homes in established California areas might be the WORST real estate investment you can make. They were GREAT investments for their long time owners, but for those trying to buy one today, don't be surprised to get a rude awakening in the future.
For one, there is Proposition 13, which limits the annual tax increases at 2%. Scour Redfin.com , focus in on established, older communities such as Beverly Hills, San Gabriel, Burbank, Glendale, Torrance, etc and you will see many homes listed for $700,000 and above that have property tax assessments of less than $1,000. If you were to buy a $700,000 home right now, you will be assessed somewhere in the neighborhood of $8,000 per year. So the current owner with the cheap property tax has a disincentive to sell. The result? A block full of old timer homeowners who are reluctant to sell their under-assessed homes, and end up passing away and bequeathing these old homes to their children. Wealth is passed down the generations. This leads to a lack of supply, which drives up prices for newer buyers looking to buy in those neighborhoods.
To compound the problem, single family homes are usually much older than condos and townhomes. Sure, people balk at paying HOA dues but keep in mind that these old single family homes are usually not particularly well-maintained. While the old owner enjoyed paying the tiny tax bill and the home when it was newer, he ends up selling you a much older home completely with deferred maintenance and a sharply higher tax bill when you take ownership.
And we're not done there. Mortgage rates were around 18% in the early 80's, which meant buyers were not able to afford the large loan balances prevalent today. From the early 80's, mortgage rates gradually fell through the years, going to 8% in the 90's to the sub 4% we have today. And guess what? Home sellers raised their asking prices to account for the lower monthly payments afforded by low mortgage rates. The result is a home price that appreciated much higher than the rate of inflation in the past 30 years.
Combine the lower rates with Proposition 13 and now you have the 800 square foot home in Culver City that commands $700,000. Repairs or warranties not provided. Property needs "TLC".
Realtors will tell you to hurry and buy before rates go up. But what will happen if rates go up? The home price will come down. But isn't the economy improving and thus home prices will appreciate? Perhaps, but an improving economy is synonymous with rising interest rates. And if rates rise, prices will have to fall.
Sunday, February 1, 2015
Wednesday, August 6, 2014
Negotiating with Tenants
More often than not, you will be approached by a current tenant as their lease term is about to expire. They will ask for concessions in exchange for signing another one or two year lease. And as a landlord, you will feel compelled to give them concessions if they are proven reliable tenants. Always keep in mind that the market dictates the price. Never let emotions get in the way. If they had a second baby and need a $100 discount per month to make ends meet, only do that if the current market conditions dictate. It is easy to test the market. There are rental ads everywhere, sometimes dozens within your immediate vicinity. Compare square footage, age of building, amenities, etc.
As a young landlord over a decade ago, one reliable tenant said her business wasn't generating the cash flow it used to, and their mounting childhood expenses made it very painful to pay the rent. I offered $25 off the $1,500 monthly rent. She talked me down to $1,425. I was afraid to lose the steady rental stream she provided. I even knew that the going rate for my building was $1,700 and she was already paying hundreds below market. I folded anyway.
And guess what? I should've kept it at $1,500. If anything, she would've stayed even if I raised the rent to $1,550. I know I sound heartless when I say this, but this is a financial business as much as it is a relationship business.
And sure enough, I soon found out that she and her husband took the vacation of their dreams in paris and took a cruise down the Rhine River. An excursion that would've costed at least $10,000 even back in 2002.
They ended up moving out a year later, left a mess, and balked at me giving back "only" 90% of their security deposit. Their kids crayoned all the walls and damaged the hardwood floors beyond "normal wear and tear".
Remember that in the end, it's a business deal.
As a young landlord over a decade ago, one reliable tenant said her business wasn't generating the cash flow it used to, and their mounting childhood expenses made it very painful to pay the rent. I offered $25 off the $1,500 monthly rent. She talked me down to $1,425. I was afraid to lose the steady rental stream she provided. I even knew that the going rate for my building was $1,700 and she was already paying hundreds below market. I folded anyway.
And guess what? I should've kept it at $1,500. If anything, she would've stayed even if I raised the rent to $1,550. I know I sound heartless when I say this, but this is a financial business as much as it is a relationship business.
And sure enough, I soon found out that she and her husband took the vacation of their dreams in paris and took a cruise down the Rhine River. An excursion that would've costed at least $10,000 even back in 2002.
They ended up moving out a year later, left a mess, and balked at me giving back "only" 90% of their security deposit. Their kids crayoned all the walls and damaged the hardwood floors beyond "normal wear and tear".
Remember that in the end, it's a business deal.
Sunday, August 3, 2014
Another Housing Crash Looming?
I've always been a proponent of buying and holding for the long term, maintaining properties diligently, and establishing productive landlord/tenant relationships. For the past few decades, that formula worked like a charm.
However, times have changed. We are in a period of unprecedented uncertainty with an unconventional monetary policy that has kept interest rates artificially low. Currently a 30 year mortgage can be had for around 4.125%, which is still historically low. Rates staying at these levels for a decade or more is a very unrealistic expectation.
Inflation is starting to tick up, and the Fed officials are getting more heat than ever to start raising interest rates. A true "market" mortgage rate would probably hover around 7% in a sluggish economy. Imagine if mortgage rates crept up from 4% to a still-very-low 5.5%? That is very possible in the near future (maybe 2015?). Owners on the fence will be rushing to sell their homes, and it would cause an avalanche of pessimism to counteract the buying fervor of 2013.
When I started this blog in 2012, I saw some incredible opportunities with distressed sales and low prices, especially with condos and townhomes. I no longer see those bargains. I don't think the market is "super expensive" like it was in 2006, but some areas are starting to look frothy. The rental parity isn't there anymore.
However, times have changed. We are in a period of unprecedented uncertainty with an unconventional monetary policy that has kept interest rates artificially low. Currently a 30 year mortgage can be had for around 4.125%, which is still historically low. Rates staying at these levels for a decade or more is a very unrealistic expectation.
Inflation is starting to tick up, and the Fed officials are getting more heat than ever to start raising interest rates. A true "market" mortgage rate would probably hover around 7% in a sluggish economy. Imagine if mortgage rates crept up from 4% to a still-very-low 5.5%? That is very possible in the near future (maybe 2015?). Owners on the fence will be rushing to sell their homes, and it would cause an avalanche of pessimism to counteract the buying fervor of 2013.
When I started this blog in 2012, I saw some incredible opportunities with distressed sales and low prices, especially with condos and townhomes. I no longer see those bargains. I don't think the market is "super expensive" like it was in 2006, but some areas are starting to look frothy. The rental parity isn't there anymore.
Wednesday, November 28, 2012
Does Your Listing Agent Really Work for You?
For whatever reason, there will come a time when you will sell your property. When it comes to selling, there are two choices. One is to hire a real estate agent to list and market your property. The other option is to sell it yourself. I do not have experience doing the latter but the influx of tools such as redfin.com and zillow.com are making me consider selling without a listing agent in the future.
Let me start by saying that some real estate agents provide value and work diligently to make the sale as smooth as possible. But any homeowner has to keep in mind that while the listing agent ostensibly represents his client, his personal interests come first. That's natural and completely understandable. But as a homeowner looking to sell, you must educate yourself in addition to the information given from a biased party.
Here are some nuggets of wisdom from my most recent dealings with a listing agent:
1. The agent presented "comps" from 3 months prior to benchmark what my home was worth. But I was selling in a rising market and felt that the comps were already outdated. Always do your own benchmarking with tools from websites such as redfin.com (if it serves your location)
2. The agent wanted to list my investment unit for $260,000. I felt I had a more accurate pulse on this particular market. I thought that $285,000 was more than reasonable based on my own research. The agent said that a similar unit sold for $260,000. I said that unit was 100 sq ft. smaller and faced a busy street. An agent would rather get a quick sale, even if it's under market value. $20k to $30k does not make much of a difference in the agent's commission but it will make a BIG difference in your bottom line. My home ended up selling for $293,000 with multiple offers on the first week. The market sets the price, not the agent.
3. The agent asks how urgently you have to sell. There are good reasons why your agent would ask, but I would generally advise you not to lay all of your cards on the table. If the agent knows you are a "motivated" seller then guess what? They will let the buyers know. Remember, what you say can and will be used against you.
4. I would never pay more than 5% commission on both buyer's agent and listing agent combined. But I don't advise to shoot for 3.5% combined because the agent on the buyer's side will not have much of an incentive to take their client to your home. 2.5% per side is more than reasonable, and be sure to have the listing agent include complementary professional photography to list your home.
Let me start by saying that some real estate agents provide value and work diligently to make the sale as smooth as possible. But any homeowner has to keep in mind that while the listing agent ostensibly represents his client, his personal interests come first. That's natural and completely understandable. But as a homeowner looking to sell, you must educate yourself in addition to the information given from a biased party.
Here are some nuggets of wisdom from my most recent dealings with a listing agent:
1. The agent presented "comps" from 3 months prior to benchmark what my home was worth. But I was selling in a rising market and felt that the comps were already outdated. Always do your own benchmarking with tools from websites such as redfin.com (if it serves your location)
2. The agent wanted to list my investment unit for $260,000. I felt I had a more accurate pulse on this particular market. I thought that $285,000 was more than reasonable based on my own research. The agent said that a similar unit sold for $260,000. I said that unit was 100 sq ft. smaller and faced a busy street. An agent would rather get a quick sale, even if it's under market value. $20k to $30k does not make much of a difference in the agent's commission but it will make a BIG difference in your bottom line. My home ended up selling for $293,000 with multiple offers on the first week. The market sets the price, not the agent.
3. The agent asks how urgently you have to sell. There are good reasons why your agent would ask, but I would generally advise you not to lay all of your cards on the table. If the agent knows you are a "motivated" seller then guess what? They will let the buyers know. Remember, what you say can and will be used against you.
4. I would never pay more than 5% commission on both buyer's agent and listing agent combined. But I don't advise to shoot for 3.5% combined because the agent on the buyer's side will not have much of an incentive to take their client to your home. 2.5% per side is more than reasonable, and be sure to have the listing agent include complementary professional photography to list your home.
Monday, November 26, 2012
My Condo Investment Criteria
The bulk of your short term profits/losses will take place at the time you purchase your investment property. I've established a set of criteria with conditions to be met prior to my investment.
1. Rental parity - Will my monthly mortgage/taxes/HOA dues undercut the rental market, and if so, would it be enough to cover projected vacancies and maintenance? This is the first and most important factor to consider.
2. Building age - I only purchase units built after 1970. There is no precise science to this, but based on my observations on plumbing and electrical problems with older buildings.
3. HOA matters - Your investment will be in jeopardy if the HOA's finances are in peril, or if the HOA enters litigation. If an HOA is under litigation, then most lenders will not finance purchases of units under that HOA (in other words, cash only). This drops the price of each unit tremendously. Conversely, if you have the cash, you may WANT to purchase a condo under HOA litigation because once the lawsuit ends you may profit handsomely from a sudden spike in values.
4. Nearby primary residence - While I outsource the majority of maintenance issues, there are times where my direct involvement is necessary.
5. Would I want to live there myself? - I only invest in areas where I can envision a family member living in my unit if I decide to step away from the landlord business. This means a safe area, decent neighborhood aesthetics, and good schools. Whether the housing market booms or busts, a place to live in a safe area will ALWAYS be useful.
6. Regulatory climate - I only invest in areas where there is no rent control, no section 8 housing, and a legal environment where the courts do not predominantly view the tenants as the victims. I am by no means elitist and I hope it doesn't sound that way, but that is the honest truth. I know many well-intentioned landlords who have been ruined by bad tenants and courts that see them as slumlords despite receiving no rent for months. I want the world to be an affordable place to live, but rent control and section 8 do not really alleviate this issue and usually results in neighborhoods that get worse over time.
1. Rental parity - Will my monthly mortgage/taxes/HOA dues undercut the rental market, and if so, would it be enough to cover projected vacancies and maintenance? This is the first and most important factor to consider.
2. Building age - I only purchase units built after 1970. There is no precise science to this, but based on my observations on plumbing and electrical problems with older buildings.
3. HOA matters - Your investment will be in jeopardy if the HOA's finances are in peril, or if the HOA enters litigation. If an HOA is under litigation, then most lenders will not finance purchases of units under that HOA (in other words, cash only). This drops the price of each unit tremendously. Conversely, if you have the cash, you may WANT to purchase a condo under HOA litigation because once the lawsuit ends you may profit handsomely from a sudden spike in values.
4. Nearby primary residence - While I outsource the majority of maintenance issues, there are times where my direct involvement is necessary.
5. Would I want to live there myself? - I only invest in areas where I can envision a family member living in my unit if I decide to step away from the landlord business. This means a safe area, decent neighborhood aesthetics, and good schools. Whether the housing market booms or busts, a place to live in a safe area will ALWAYS be useful.
6. Regulatory climate - I only invest in areas where there is no rent control, no section 8 housing, and a legal environment where the courts do not predominantly view the tenants as the victims. I am by no means elitist and I hope it doesn't sound that way, but that is the honest truth. I know many well-intentioned landlords who have been ruined by bad tenants and courts that see them as slumlords despite receiving no rent for months. I want the world to be an affordable place to live, but rent control and section 8 do not really alleviate this issue and usually results in neighborhoods that get worse over time.
Monday, June 4, 2012
Laguna Niguel = Prime Location
Address: 30902 Clubhouse Dr. 13A, Laguna Niguel
Bedrooms: 2
Bathrooms: 2
Size: 1,059 sq. ft
Laguna Niguel is a family friendly bedroom community in south Orange County. This particular property is located roughly 2 miles from the ocean. The city is well-manicured, and the good schools, public safety, and proximity to upscale ocean resorts such as the Ritz Carlton and the St. Regis indicate an affluent demographic in this area.
The La Vista complex at Laguna Niguel was one that was hit hard by the recession, primarily because these went on sale at the peak of the housing bubble and speculators bailed out when the market tanked. On the bright side, that has resulted in opportunities for current buyers. Photos and the calculated breakdown are as follows:
The ROI on the down payment of $42,000 is estimated at a shade less than 8%. But keep in mind that that figure does not take into account gains made on principle via monthly mortgage payments.
Bedrooms: 2
Bathrooms: 2
Size: 1,059 sq. ft
Laguna Niguel is a family friendly bedroom community in south Orange County. This particular property is located roughly 2 miles from the ocean. The city is well-manicured, and the good schools, public safety, and proximity to upscale ocean resorts such as the Ritz Carlton and the St. Regis indicate an affluent demographic in this area.
The La Vista complex at Laguna Niguel was one that was hit hard by the recession, primarily because these went on sale at the peak of the housing bubble and speculators bailed out when the market tanked. On the bright side, that has resulted in opportunities for current buyers. Photos and the calculated breakdown are as follows:
The ROI on the down payment of $42,000 is estimated at a shade less than 8%. But keep in mind that that figure does not take into account gains made on principle via monthly mortgage payments.
Listing price: $210,000
Down payment (20%): $42,000
Expected monthly rental income (based on Zillow.com rent estimate): $1,786
Monthly mortgage (30 year fixed @ 3.75%): $778
Monthly maintenance and repair budget: $100
Monthly vacancy budget: $100
Monthly HOA dues: $352
Monthly property tax: $183.75
----
Monthly profit: $272.25
Monthly profit: $272.25
Annual return on down payment investment (not including mortgage principal gain) : 7.8%
Sunday, May 6, 2012
My own eviction story
CalculatedCondo is filled with posts on potentially good condo investments. However, keep in mind that being an investor and landlord takes plenty of work on its own. There is usually no such thing as easy money, and even a prudent real estate investment will prove to be the same.
I am a landlord of condominium units in both LA and OC. Some properties were purchased on the cheap whereas others, not so much. It took me a few years to work out the finances to make sure my properties were generating positive cash flow. But even with positive cash flow there are pitfalls. The greatest pitfall is a bad tenant.
I've managed more than a dozen tenants during my ongoing stint as a landlord. But 2010 was the first where I grew complacent on having reliable tenants, so I did the unthinkable: I did not do a thorough background check on a prospective tenant.
This rental applicant was the head of a household. I had a soft side for families with young children so I gave them extra consideration. And frankly, the rental market was soft at the time so I did not have a good pool of applicants to choose from. The monthly rent I asked for was well below comps. He came with his wife and two young children. While he was pleasant and generally seemed like a decent person, I had that strange "gut feeling" that this wouldn't work out. But I gave them the benefit of the doubt. Here were the warning signs early on:
1. They wanted the place ASAP
2. They were initially reluctant to show a photo ID
3. They initially left the social security number on the rental application blank
4. Their reported income was too low for the monthly rent, but they assured me that they did freelance work on the side that would double their reported income
5. Their previous landlord did not return my calls
The problems started only three months after they moved in. I had to constantly remind them to pay their rent and they presented the following excuses that are not unique amongst insolvent tenants:
1. They moved jobs and have a brand new pay schedule
2. They had an unforeseen medical/car repair expense
3. They "lost their phone" and found it after a week
A landlord has to walk that fine line between maintaining a landlord/tenant relationship and becoming more "businesslike" and post the 3 day notice to perform or quit. After six months, I decided on the latter. When they received the 3 day notice, they promptly called me; not to pay the past due rent, but to complain about repairs. Here are signs that you REALLY have trouble in your hands.
1. The tenant goes on the offensive after the 3 day notice rather than giving payment
2. The tenant contacts local housing authorities for repairs that were not brought to your attention before
3. The tenant seems to know the housing codes that he can use against you, even if you were clearly acting in good faith and you were quick to answer maintenance requests
4. The tenant also seems to know the eviction procedures
The tenant said the heater was not working and said that therefore, according to local housing codes, the unit was not habitable. I got that. But I told the tenant that if they had notified me, it would've been taken care of in a reasonable time. I then received a call from the local authorities (fair housing, city code enforcement, etc) and I told them my side and stuck to it. I could tell by their tone that they sympathized with my situation.
Finally, after 5 weeks since the initial 3 day notice, I went to court to seek an eviction judgment. The tenant was there and told the judge that I was not willing to fix the heater and therefore she caught a cold and missed work, and her children got sick so she incurred additional medical expenses. Through my eviction attorney (professional legal help is highly recommended), we presented evidence via email correspondences that I was acting in good faith and the tenant was not giving me adequate access to the dwelling. After 5 minutes, the judge ruled in my favor. And two weeks after that, the tenant was locked out by the sheriff.
The entire ordeal costed me the following:
lost rent: $3,400
legal fees: $1,100
locksmith: $100
sheriff: $25
---
Total: $4,625
I can't stress enough the importance of doing a thorough background check to protect your investment and your personal health. I was fortunate that the judge ruled in my favor. I was also fortunate that the tenant did not damage the dwelling prior to leaving.
After the eviction, I went on the county superior court website and found out that the tenant that I evicted had a string of eviction records from the previous 5 years. Check your local court websites and access their online case databases prior to signing any lease.
Good luck to all!
I am a landlord of condominium units in both LA and OC. Some properties were purchased on the cheap whereas others, not so much. It took me a few years to work out the finances to make sure my properties were generating positive cash flow. But even with positive cash flow there are pitfalls. The greatest pitfall is a bad tenant.
I've managed more than a dozen tenants during my ongoing stint as a landlord. But 2010 was the first where I grew complacent on having reliable tenants, so I did the unthinkable: I did not do a thorough background check on a prospective tenant.
This rental applicant was the head of a household. I had a soft side for families with young children so I gave them extra consideration. And frankly, the rental market was soft at the time so I did not have a good pool of applicants to choose from. The monthly rent I asked for was well below comps. He came with his wife and two young children. While he was pleasant and generally seemed like a decent person, I had that strange "gut feeling" that this wouldn't work out. But I gave them the benefit of the doubt. Here were the warning signs early on:
1. They wanted the place ASAP
2. They were initially reluctant to show a photo ID
3. They initially left the social security number on the rental application blank
4. Their reported income was too low for the monthly rent, but they assured me that they did freelance work on the side that would double their reported income
5. Their previous landlord did not return my calls
The problems started only three months after they moved in. I had to constantly remind them to pay their rent and they presented the following excuses that are not unique amongst insolvent tenants:
1. They moved jobs and have a brand new pay schedule
2. They had an unforeseen medical/car repair expense
3. They "lost their phone" and found it after a week
A landlord has to walk that fine line between maintaining a landlord/tenant relationship and becoming more "businesslike" and post the 3 day notice to perform or quit. After six months, I decided on the latter. When they received the 3 day notice, they promptly called me; not to pay the past due rent, but to complain about repairs. Here are signs that you REALLY have trouble in your hands.
1. The tenant goes on the offensive after the 3 day notice rather than giving payment
2. The tenant contacts local housing authorities for repairs that were not brought to your attention before
3. The tenant seems to know the housing codes that he can use against you, even if you were clearly acting in good faith and you were quick to answer maintenance requests
4. The tenant also seems to know the eviction procedures
The tenant said the heater was not working and said that therefore, according to local housing codes, the unit was not habitable. I got that. But I told the tenant that if they had notified me, it would've been taken care of in a reasonable time. I then received a call from the local authorities (fair housing, city code enforcement, etc) and I told them my side and stuck to it. I could tell by their tone that they sympathized with my situation.
Finally, after 5 weeks since the initial 3 day notice, I went to court to seek an eviction judgment. The tenant was there and told the judge that I was not willing to fix the heater and therefore she caught a cold and missed work, and her children got sick so she incurred additional medical expenses. Through my eviction attorney (professional legal help is highly recommended), we presented evidence via email correspondences that I was acting in good faith and the tenant was not giving me adequate access to the dwelling. After 5 minutes, the judge ruled in my favor. And two weeks after that, the tenant was locked out by the sheriff.
The entire ordeal costed me the following:
lost rent: $3,400
legal fees: $1,100
locksmith: $100
sheriff: $25
---
Total: $4,625
I can't stress enough the importance of doing a thorough background check to protect your investment and your personal health. I was fortunate that the judge ruled in my favor. I was also fortunate that the tenant did not damage the dwelling prior to leaving.
After the eviction, I went on the county superior court website and found out that the tenant that I evicted had a string of eviction records from the previous 5 years. Check your local court websites and access their online case databases prior to signing any lease.
Good luck to all!
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