Getting Set For The Next Big Change in Your MarketPosted on May 6, 2014 by
To get ready for the next change in the market and the opportunities it will produce, you need to be constantly improving your portfolio. Your long-term strategy may not change, but how you achieve your goals will change if interest rates climb dramatically, or if the government changes the rules, distorting the market.
Improving and Safeguarding Your Profits By Upgrading Your Investments
When I started investing, one of my early buys was a year old, nine-unit apartment building. It was my goal to get that building paid for and live happily-ever-after on the rents. Then I met the tenants.
What is your vision for your personal perfect real estate portfolio? Have you changed your idea of what you want to own? I surely did! I still drive by that nine-unit building, and every time I do I am thankful that I don’t own it today.
As you learn more, you should improve your investment strategy. Markets change, your financial situation will change, opportunities change, and hopefully you get smarter. When you make smarter investments, you will make more money.
Do You Have to Choose between Safety and Higher Profits?
There is a perceived balance in the world of investments between safety and yield (profit). Investors pay more for an investment that they think is safer, and therefore their return on that investment is often less.
Of course, no one actually knows what will be safer. You can buy stock in a company or a bond secured by a company with a long history of good credit, say General Motors, and still lose your money. (GM bondholders eventually received about 10 cents on a dollar after the bankruptcy. The stockholders received nothing).
Today’s successful company can become tomorrow’s bad headline. Unless you have an inside connection, it’s hard to know what’s really going on in any company.
Getting Insider Information
When buying real estate, you have inside information. While that may be illegal in the stock market, in real estate, knowing when a seller has to sell, or why they are selling is information you can have if you ask. Today I talked with a seller who told me what he paid for the property, how much he spent on the house, that he owned it free and clear, and that he would rent it. All inside information.
In addition, you know the rental market. You know if a house will rent soon or slowly; you know if the rents in your market are going up, and the likelihood of finding a great tenant. This insight to both the quantity and quality of income gives you the confidence to buy with high leverage in strong rental markets.
Set Your Purchase Price Based on Today’s Income
I always buy based on a conservative projection of income, based on renting to a long-term tenant at low retail rents. They stay for a long term partly because of the favorable rent, but more importantly because they like me as a landlord. Today, I have a list of potential tenants referred to me by my existing tenants. Be a fair and responsive landlord, and you will attract the best tenants in your town.
The final piece of inside information you have is the knowledge of owner financing, and how to make an offer, which gives you an almost guaranteed profit. This is all legal and fair, because the seller is not under any obligation to sell to you, until you both agree. Unless it’s a good deal for both of you, it won’t happen.
Don’t Pay Too Much Based On Puffed Up Income
One disturbing trend today is landlords who are squeezing more than market rent from properties by renting them short term or renting to multiple unrelated tenants. You can probably collect more rent if you rent by the week or by the room. But both of these approaches take more of your time, and both would certainly wear out the house and its parts faster.
The real danger is that those who acquire property based on higher income projections are likely to pay a higher price for the property, expecting to have more money to make the payments. In my town complaints about short term rentals and renting out rooms in single- family neighborhoods and are getting attention. If the rules are changed (or enforced) these landlords may lose the extra income they have bet on, and unless they have deep pockets, they may lose the property.
A similarly flawed strategy is buying and immediately selling on a lease option. You can sell for a high retail price to a buyer who cannot qualify for a loan and has only a small down payment. But the chances of this person closing at the inflated price are slim. If prices increase, then they will be more likely to close the lease/option purchase, IF they can get a loan. That’s a big IF.
If you buy a house well below the market, your risk is lower. But again, if you fixate on the potential sales price to a lease option buyer, you might pay too much when you buy.
Is Debt Your # 1 Enemy?
As you gain more wealth, you are likely to become more conservative in your approach to investing. To many people this means paying off your debt. Reducing your debt is seen as a strategy to safeguard what you have.
Debt is not always the enemy, nor does it necessarily increase your risk. In fact being free and clear might make you more attractive to an aggrieved party or a con man.
In my 20 + years as a Habitat for Humanity board member and now for the last six years in my role with the Fuller Center for Housing, I have helped structure financing to protect our homeowners. A significant threat to a Habitat or Fuller Center homeowner is that they will borrow against their homes at high interest rates from a predatory lender. We protect owners by recording a second lien, which is forgiven if they make all their payments on the first lien. Today this second mortgage encumbers 100% of the homes value, making it less attractive to predatory lenders.
Being Safe is a Moving Target
Safety is not a big issue when you have little. If your entire net worth is $1,000, (the net worth of about half of all Americans) you are likely to take big risks with little hope of a return. They buy a lot of lottery tickets.
If your net worth is $100,000, the amount of risk you are willing to take probably depends on your education and how you acquired the money. If you inherited $100,000 and have no education in how to invest, you may just put it in the bank to keep it safe, or perhaps blow through it.
Personally I’d rather give it away or spend it on a grand vacation rather than risk it in a marginal investment. Of course, if you invest it wisely you can make the gift, have the vacation and keep the money.
If your net worth is a million dollars or more, and you made it yourself, you have learned to balance risk and return.
To learn more about how to be prepared for the next big change in the real estate market, be sure to attend John Schaub and Peter Fortunato’s upcoming two day seminar in Tampa, FL on May 17th & 18th called “Booms, Busts and Beyond… Evolve or Perish”. At the seminar, John and Peter will teach you the investment strategies you need to know to protect and grow your investments in today’s ever-changing real estate market. See page 3 for more information.