Friday, November 30, 2007
One of my dogs even injured the top of her nose by repeatedly sticking it through one of the fence's small rectangular slots. She had a perpetual raw and bloody spot on her snout. She must have given up that futile feat, as it seems to have healed. However, it is my dogs' daily goal to get to those chickens, but it's something they just can't have.
Well, I have to admit that that's how I have been feeling lately. Not about chickens, but about real estate. Declining-priced real estate to be exact. I feel like the wolf in Little Red Riding Hood, who salivates at the thought of devouring one of those pigs. His efforts, however, are thwarted again and again.
I have searched my truncated MLS listings to track the prices of homes in areas that I'm familiar with. I have mentioned in a prior post how the area where I own a home now is dropping significantly. One of the homes we sold two years ago is for sale for about $50,000 less. I can't help thinking that I could buy it again and sell it later--over and over. It's an unusual way to make a profit in real estate, but at least I would be ahead of the game.
Every time I consider using a bit of our equity line to purchase another rental, I have flashbacks of losing an amount closer to a million dollars than not. Even though I don't cry over it and I'm moving on, the entire process was a traumatic experience and I don't want to risk a penny right now. Sometimes I feel downright frustrated over the debacle. How did we make such a humongous mistake and why couldn't we fix it before we unloaded everything in a fire sale?
Anyway, I am inundated many times a day with news of how prices are dropping. I check the MLS to see the deals that I could be picking up (mind you, most prices in most of CA are still no where near what it would take to break even on a rental, but some areas are pretty darn close). I am very open and, if the absolute right thing comes along, I may have to take it. Nothing close yet. But I just keep circling that coop and salivating. This is the market that we have been waiting for since 2000.
The other day a good friend of mine in Oklahoma talked about us getting into a development situation with her husband, an experienced and successful businessman. There is a niche area in that state that is appreciating wildly because of one single reason, which does not always indicate a solid market. Part of our research into areas where we purchased homes was how the economy was supported. If people moved there solely based on one big company, we would pass because we knew what would happen when the business moved or declined. We liked to see diverse corporations, tourist activities, colleges, etc., or at least an area that was close to a town like that (like Temecula).
So this Oklahoma idea crops up and I took it quite seriously because I have been researching this niche for over two years now. I spoke to my husband about it and he nixed it right away because--and I've said this many times on my blog--we just don't have the money to invest. I think that we may not be in a position to buy more property until the prices start to rise again. Buy low, sell high. Well, we've sold high in the past, but the buy low may elude us on this go-around.
Needing more living space in our home, we even considered buying another property in Wine Country Temecula to move into and renting out our little ranch. Although the prices out here have dropped significantly, there is no way that we could move and not spend a ton of money with the down payment and expenses. Plus, there is always the fact that, with the tightening loan restrictions, we probably couldn't qualify right now. We are looking into adding on for as little as possible.
We've talked to some contractors. I thought that they were hurting in this real estate economy, but no one told them that. The prices for construction out here are higher than ever and the contractors that we've spoken to are very busy. Can someone shed some light on this for me? How do I find a competent contractor for a cut-rate price?
I'm nervous and excited about where we will be one year from now. A majority of the money we make from our new business is going back into the business, which doesn't leave us anything for picking up a foreclosure. My husband found out yesterday that one of the stores in Old Town will be marketing a line of souvenir shirts that directly competes with our products, so we'll see how far this road will take us.
We're open to anything right now, but are wary of everything.
Thursday, November 29, 2007
That being said, not all real estate agents are equal. Unfortunately today, not all agents are employed, either. The roller coaster market is not the reason why I never became an agent. When asked, I would tell people that being a realtor would take all the fun out of it for me. The good ones work night and day. Weekends off are a thing of the past. And why is it that agents have to have the top of the line cars? None of these things were appealing to me. It's a myth that they set their own hours. Realtors are at the beck and call of their buyers, sellers, title companies, lenders, appraisers, termite inspectors, other agents . . . Ugh! Who, in their right mind, would want to answer to so many people?
However, since many agents have been forced to find a new line of work and I was once a human resources expert, I would like to offer them some employment advice:
~When you are hired as a host or hostess at a restaurant, don't give the patrons a tour of the property on the way to their table. Remember, they just came in to eat, not buy the place.
~If you are applying as the flagger of a road maintenance crew, take off your high heels and business attire. It won't benefit you there.
~As the greeter at Wal Mart, you don't need to ask anyone, "Do you see anything you like?" as they walk through the door.
~If you are a receptionist at the auto body shop, it's not necessary to pretend that the cars aren't broken. You don't need to stand in front of one with a missing fender and try to distract the customer.
~When you are waiting tables, your hourly wage is not based on upselling the patrons. So, if they say that they would like a meal in the $10 range, there is no need for you to point out the $12-$15 entrees.
~As the new sales associate in the lingerie department, it would be unwise to inform a customer that they can always "add on" to make it bigger.
~When interviewing for that coveted job at the car wash, don't call the manager several times a day to ask if he's made up his mind yet.
~If you've been hired to work the front desk at the police station, don't try to plaster your face on every flyer you hand out.
~When filing records at the urologist, don't take down personal information in order to start a mailing list.
~Now is a good time to trade in your BMW for a used flat bed. With a driver, you'll be able to finish your newspaper route more quickly from the back of a truck.
If every broke and unemployed agent follows my advice closely, they should have no trouble finding a minimum wage job to tide them over until the next hot market comes along.
Wednesday, November 28, 2007
So, let me get this straight. Let's say that I bought a rental in 2001 for $187,000, which I did, and it was worth $405,000 in 2005, which it was because I sold it for that much. However, if I had kept it, it would only be worth $340,000 by the end of the decline. Sorry, folks, but I'm still trying to figure out what the problem is here. As far as I can see, I made a killing either way. Since my profits (or losses) in real estate are never realized until I've sold the property, I don't end up losing anything in the above scenario, except my over-inflated expectations. Right?
Oh, but there are some exceptions to this pretty picture, aren't there? One caveat is for those who bought within two to three years of the start of the decline. That really stinks because, if you are one of those people, then you're stuck. You can't refinance out of an increasing loan--unless you had put a good chunk of money down. You can't sell for what you paid, which would still garner a loss anyway. And you may not be able to keep up with the payments on your adjusted rate.
The other exception is, of course, those of you who refinanced at the height of the market. If you pulled out much of your equity, then you may be sitting on a loan that is valued at more than the house. Not good. If that's the case, then you're stuck in the same way as the scenario above.
Neither one has happened to me--yet. In June, 2008, my 4.75%, 5-year fixed loan will adjust to 2.75% over the One Year Constant Maturity Treasury Rate. If it adjusted today, my rate would be 6.85%. This will cost me $575 more per month. I have been planning my refinance since last June because that's what responsible borrowers do. But I still have not decided the route to take. The one good aspect of this is that my principle has declined dramatically because of the low interest rate of the last five years, so a refinance amount will be considerably less. The bad news is that it's probably going to cost me more no matter what.
As many of you have done, I have spent much time pondering what my next course of action would be if I had a loan that I could no longer afford and if selling my house would result in a short sale. In other words, what would I do if I were stuck?
I guess this did happen to me, in a way, this summer. If you have read all of my posts, you'll know that in August, both incompetent property managers in different states independently decided not to pay my mortgages because they weren't collecting enough rent for all of the expenses. Maybe it's better that it didn't happen to my primary residence (although we were about a day away from skipping our first payment before the apartments sold), but I lost more money from desperately selling off the apartments than I would have by losing my own house. Go figure. However, I did not have to sell for less than I owed on them. That could be a silver lining, I suppose, if we use a very loose definition.
OK, back to the question of what I would do if I were losing my primary residence. Do you really care? Let's pretend that you do. Now, I know that my situation would be different from the average American who is on the verge of losing his/her home. But this is my blog, so I'll have to stick with what is familiar to me.
The assumption is that I have already called the bank and tried to negotiate a lower interest rate or to keep my 5-year rate for a bit longer. Surprisingly, they've said "no." You mean that I have to abide by the loan docs that I signed?!
I think the first option I would look at is renting out my primary residence and living in a small, cheap apartment for a while--yes, even with all seven children, if management would allow. Of course, renting my home would not come close to covering the payment, I'm sure. However, working out the numbers may show that I would have a smaller out of pocket each month until I could refinance or prices went up and I could sell.
My second option would be to determine how long it would take me to sell at a slashed price and how much I would lose. The end result is probably the same--small apartment. Although, I may opt to buy a smaller home with affordable payments. As a real estate investor and business owner, it's a given that I would have to qualify under "stated income." This is not the most desirable rate, so buying a smaller property may not work for us at this point in time.
Option three is to evict one of our tenants and live in the rental. Those payments, especially in the ginormous TX house, are much lower, but both will eventually adjust, also.
Number four is to sell one of the rentals (yeah, like that's possible) and use the money to buy us some time or pay down the loan on a refi.
Frankly, I don't know what I would do. Pray. It hasn't happened to us yet, so I'd better just focus on refinancing before June.
Tuesday, November 27, 2007
The media would have us believe that the ramifications of this horrible real estate market and loan fiasco are far-reaching. Everyday there is an article with yet another angle of the foreclosure mess. We've already heard about the furniture stores, contractors, real estate agents, lenders, and others going out of business. We've read about city's sprucing up vacant homes, slimy pools breeding mosquitoes, and the private mortgage insurance industry faltering. Just so we won't be caught off guard, I thought that I would make a list of possible story lines generated to keep real estate in the headlines:
"Man Swallowed by Growing Interest Rate"
"Children: 'They can have the house. We only want the Nintendo Wii.'"
"Christmas at the Homeless Shelter"
"Grass at Foreclosed Home Asks for Last Dying Wish"
"Ghosts Take Over Empty Houses"
"Neighbors Wanting to Keep Up With The Joneses Are Forced to Move Out" (this one may take a minute)
"I May Have Signed the Loan Papers, but I Can't Read!"
"The Decline of Residential Bugs Due to the Lack of Crumbs from Vacant Homes"
"The Increase of Residential Rodents Due to a Large Supply of Available Homes"
"Utility Companies' Revenues Decline--No One Home to Waste Energy"
"Foreclosures Force Appliance Repair Services and Plumbers Out of Business"
"Once Noisy Neighborhoods Enjoy Peace and Quiet"
"Builders Offer 'Buy One Get One Free' Special"
"Husbands Delay Completion of 'Honey Do' Lists in Hopes that Bank Will Take Over"
"Foreclosure Reality Show: Watch as a Family Experiences the Pain, Humiliation, and Marriage Strain of Rising Mortgage Payments"
"House Goes Into Foreclosure While Owners Vacation in Bahamas"
What do you think the media will come up with next?
Monday, November 26, 2007
The article cites several reasons for growth in these areas. First of all, they didn't experience the rapid appreciation of other states, like California and Nevada, so they didn't rise much to begin with. Secondly, there is a strong job market, which, of course, brings people (hence, buyers) to the area. The third reason is explained as "the sun," i.e., long stretches of good weather. Huh? I guess places like California, Nevada, Arizona, and Florida don't fall under the first and second reasons, so the third one alone doesn't qualify. Otherwise, they'd be looking pretty right about now.
Let's look at Salt Lake City. Utah is typically more affordable than other places, and, as prices rise there and drop elsewhere, the median price gap is becoming smaller. The article states that the median price in Salt Lake City is $10,000 more than the rest of the country. Although housing permits are down this year, and there are many high-end homes on the market there, the demand for affordable housing in Salt Lake City is still high. Also, commercial construction is up 40% and the apartment vacancy rates are less than 2% (Doh! We should have bought there instead of OH and KY!).
The article emphasizes that the latest stats are no guarantee that the drop in prices won't affect these areas. It may be that, since they took much longer to appreciate, they may be behind in the quagmire. It reminds me of when my family moved from L.A. to Apple Valley (high desert San Bernardino about 1 1/2 hours east). Things moved real slow up in AV, but the LA trends and pop culture would catch on up there eventually. I think it's the same in the appreciating areas. However, they took longer and didn't rise as much as the places hurting now. So, if there is, indeed, a downfall coming for them, it may not be significant. Since there are jobs and the houses are still affordable, I don't see why things would slow down for them at this point in time.
Just to ensure that you don't get an upbeat and optimistic impression about real estate, the last paragraph of the article partly reads, "The devastating drop in real estate in parts of Florida, California and Michigan have made potential homeowners skittish in general (so don't expect the buyers in these markets to be shopping for homes in WA, UT, PA, NM, TX, or OR any time soon). A whole layer of subprime borrowers are facing financial ruin and foreclosure (thanks for the reminder, yet again). It's difficult to envision a scenario that sees them rejoining the real estate market in a meaningful way anytime soon (not that there are any other buyers out there)."
Wednesday, November 21, 2007
April 22, 2007, was a beautiful clear Sunday. We were driving to church that morning when we passed one of the many wineries out here. This particular winery allows vendors to shop their wares to tasters every weekend. As we drove by, my husband looked over at me and said, "I have a crazy idea and I don't think your going to like it." Well, that was a positive set up that made me want to hear more. I rolled my eyes and asked, "What?"
His idea was that we sell souvenir embroidered polo shirts. As soon as the last word left his lips, I was excited about it. It was the best thing that either of us had come up with in a long time. That day, on our way back, we stopped at those same vendors and tried to find a similar product, but no one knew where we could buy one. The next day, we visited many of the winery gift shops, and again, these items did not exist. Wineries sold apparel with their names on it--not a generic one that commemorated a visit to the entire region.
We decided that we would launch our products at the annual Temecula Valley Balloon and Wine Fesitival. However, the deadline to become a vendor was in ONE WEEK! Yikes! We only had an idea. In that week, we filed for a business license and reseller's certificate, (we received our business insurance a couple of weeks later), contracted with a friend to do the embroidery, developed our logo, trademarked it, filed our fictitious name, got our PO box, started ordering apparel from distributors, and applied to be a vendor at the festival, which was June 4. We had much to do.
It was a very exciting time, consisting of many family meetings and late nights. We made it to the festival with our men's and women's shirts, hats, canvas bags, blankets, sweatshirts, and more. We also had created a kids line of embroidered apparel, bearing our "Whine Country" logo (hence the name of this URL). We were at the festival with 300 other vendors. It was quite an experience. Things were slow until Saturday evening when it got chilly and we sold out of our sweatshirts, women's light jackets, and blankets. We made all our money that night. Within a couple of months, we were breaking even!
Well, in those few months, our business has evolved somewhat. We now rarely sell directly to consumers. My husband developed a broad base of wineries, hotels, and retailers who buy our products for resale. We still offer our original apparel (although the polos never really took off), but have added promotional products that have become very hot sellers. One product, in particular, has everyone out here really excited. We received our first order yesterday and have almost sold out already. To protect our business and territory, I don't want to spill the beans yet. Once we have established some reorders and have a solid customer base (we are branching this product to other areas and types of businesses), I will let you know what it is. Bear with me. I'm not being coy. We just can't afford to screw this up. Business people will understand this.
So, that's it. That's what we do now. My husband works, but his office is right off the kitchen and his clients are within a ten mile radius. The best part is that we own this business and we have total control over it. I hope to be able to give you even more details about it later on.
Happy Thanksgiving, everyone! I will not be posting for a few days because I'll be busy visiting with my family. I'm sure you'll be doing the same. I'll catch up with you next week.
Tuesday, November 20, 2007
Carol, you always mention your losses of about $700,000 in the past past two years but never described how this affected your family. Do you still have savings? Is your husband looking for a job again?
As for the accurate total of our losses, I probably won't know this until my husband records the capital expenses and sales on Quick Books for our accountant after the beginning of the year (he's a little behind since we've disposed of the properties). I will post it as soon as I know. I think the $700K is a low estimate. We lost some of it from the equity of the houses that we traded for the apartments. The rest came from our own funds for capital repairs and monthly expenses to run the properties.
We used our entire savings, equity line, credit card limits, overdraft--you name it--while trying to keep the apartments afloat and pay our own living expenses (not to mention my son's private college tuition). The good news is that we were never delinquent on anything (until our PM's decided not to pay our mortgages for the apartments). The bad news is that it was really stressful.
My husband, who had been in fundraising for non-profit Catholic organizations (sales by trade and degree), was able to take on a client for a couple of months twice during our ordeal.
My children knew that we were running out of money. We didn't buy anything except food and what was absolutely necessary. My children were always well cared for and had everything that they needed. However, there is so much waste in a day and so much junk that we normally buy, so "cutting back" really just meant that we were well fed and clothed. We received a bunch of hand-me-downs that I used to refuse, but these clothes were in such good shape that we were thrilled not to have to buy any clothing besides socks and underwear. One day we needed to buy the dreaded shoes. They are so expensive and it seems that someone in the family needs a new pair everyday. We were in the shoe isle at Wal-Mart when the worker pointed out some clearance items. These boys tennis shoes were $3! So we bought one in every size that my kids would be growing into and stocked them in my closet for future use. My children would have to do without variety, but they wouldn't have any holes in their shoes.
We stopped eating out--fast food and all. The kids never asked for anything when we went to the store. They knew that, at this time, we had to conserve in every way. I even started washing the laundry in cold water and drying multiple loads together. During the summer, I could take the wash out of the dryer while it was still wet and lay it out on the couch to dry. We drive a twelve-seater van, so we had to cut way down on our driving, too. We presented our situation as a good way to sacrifice. After all, we were still more fortunate than many in this world. And, I have to admit, living that frugally was an uplifting experience for me. I can't explain it.
In 2005, I endured two miscarriages. In 2006, we were blessed with another pregnancy. Our seventh child (second daughter) was born healthy and thrives today, but my pregnancy was wrought with problems. The baby was born premature and had to spend five days in the neo-natal intensive care unit. The prenatal procedures, delivery (fifth C-section), and postnatal care for both of us were very costly. We have good private PPO insurance, but the deductible and co-insurance limits are high. The pregnancy and delivery occurred in the same calendar year, so, after all the limits were met, our medical follow-ups were covered 100%. It's possible that the stress from owning the apartments played a role in my medical complications. (If someone would like to criticize me for having a baby at that time, don't bother. Each of my children is precious to us and to each other. I'd like to hear my kids being told that their baby sister was "bad timing.")
In April of this year, my husband had an idea for a business. In and of itself, having an idea is not a big deal. We have been batting around business ideas for years, but few have proven to be worth attempting. The last good business we owned (for the bad ones, you can read "Wrong Businesses" from October) was an errand running company in the early 90's. At that time, there was only one other company performing the same services in San Diego, but they were concierges in office buildings. We had private clients all over town. That business did well.
However, my husband worked 24 hours a day, it seemed, and we were too green (mid-20's) to hire an employee (I had a job). Our contractual housekeeper had broken a small glass fish when he was cleaning the penthouse of Mrs. Pardee (as in Pardee Homes) and she wanted her $5,000 reimbursed. My husband handled the most valuable assets of many wealthy clients, so this episode scared us into thinking that we could lose everything if an employee made a mistake. He decided to finish his college degree instead of expanding the business. Ever since then, we have been looking for another opportunity. In 2003, we almost bought a Papa Murphy's Take 'n Bake Pizza franchise. We backed out at the eleventh hour because none of the franchises in San Diego were making a profit and most have since closed down--although the ones up north and in colder states were booming. Finally, this year, he had a doozy.
Since this post is already somewhat long, and I've answered the questions posed to me in the comment, I will give you the doozy details tomorrow. Stay tuned . . . .
Monday, November 19, 2007
Well, on Thursday night, I got to the computer rather late. I was tired and couldn't think of anything to write about (for those who know me, I'm telling the truth--really). It bugged me that I couldn't come up with one unique thing. As I lay in bed, I had a fantastic topic for a post. I thought about getting up to write it down so I wouldn't forget, but it was so good that I knew I'd remember the next day. (You can see where this is going now.) I woke up the next morning with a blank. Erased. Nada. Gone.
It bothered me all day, almost to the point of distraction. No matter what I did, my writer's block was crippling. You know how not making a decision is really making one not to act? It annoys me when people do that, but I was guilty. My inaction at creating a post was really a decision not to write one on Friday. The idea never resurfaced.
So here I sit. In front of an almost blank page. Considering that I haven't said one stitch about real estate yet, none of my prior words on this post count. Ugh!
I received a comment on my last post asking how we get along after losing so much money and whether or not my husband is looking for a job. I will be addressing these questions tomorrow.
I thought it would be fun (for lack of a better word) to compare what $400,000 would buy around the country. Rent amounts are estimates only, based on current listings.
Dallas, Texas (75218)--3,434 square feet, built in 2007, rent $2,500 (remember the high taxes)
Raleigh, North Carolina (27614)--3,450 square feet, built in 2001, 1/4 acre, rent $1,900
Seattle, Washington (98136)--1,520 square feet, built in 1931, rent $1,500 (This is one of the few areas that is still appreciating.)
Denver, Colorado (80210)--2,264 square feet, built in 1954, rent $1,500
San Diego, California (92126)--1,321 square feet, built in 1999, rent $1,800
Boston, Massachusetts (02124)--1,736 square feet, built in 2002, rent $1,600
Taking PITI, HOA, PM fee, and appreciation rates into consideration, where would you buy?
Thursday, November 15, 2007
I've had some bad financial years in my life, but the last two, by far, have been the worst. The excitement of owning commercial property waned quickly. However, up until three months before we were in contract, we maintained an optimism (foolish, I admit) that one or both of the properties just might eventually perform close to our projected numbers. If those numbers were on the positive side of the number line, then it never happened. Not even close.
At one point in the winter and spring of this year, our property management statements from Ohio reported a positive cash flow. We were thrilled! This happened for three months. We never received a check because the management contract indicated that payments were made every three months. At the end of that time, I was instant messaging the PM about something else, when I told him that we were reconsidering the sale of the property because his statements showed that we were finally in the black. We had been expecting this for some time and thought that he had a handle on the expenses at last. My husband had been working closely with him about minute details of what the costs of running the apartment should be. The statements indicated that we were making $3,000 every month. Not great, but better than owing $7K.
"Well . . .," he wrote on IM, "the numbers are the way they are because I haven't placed some extra repair and maintenance expenses on them for the last few months--ones that are not monthly recurrences."
"Yes, that's right," he explained. "I wanted the numbers to look good for you in case there was an interested investor."
"WHAT?!!" After my shock subsided, I asked him, "Do you realize that this would look like we were intentionally hiding something? I'm not selling the apartment this way. I can't lie about the numbers!"
So, he did what I asked and reported ALL expenses that had been incurred. It turned out that we owed him around $15,000. At least we straightened it out before we disclosed a bunch of lies. Whether we knew about it or not, we felt liable.
And so it went, month after month, for each apartment.
The one in KY started "breaking even" about a year before we sold it. Our young, and very competent, PM thought that paying the utilities and insurance due the prior month with rents from the next month constituted breaking even. I tried to explain to him that it actually meant that we were behind every month. He didn't get it.
When that PM in KY left and we hired the worst management company ever (you can read about all of these people in my prior posts), we really thought we'd make money because they filled the complex so quickly. Well, you remember how that ended. I think that management mistook our property for a shelter because no one was required to pay the rent.
Yep, financially, it was the worst two years of my life. It's over now and I'm eternally grateful. No more monthly statements that made our hair stand on end. No more endless phone calls. No more bad news in e-mails and on IM. No more wondering how we were going to pay two management companies thousands of dollars every single month. No more frustration and stress.
Having the apartments sold almost makes me not care that we lost a fortune. . . . almost.
Wednesday, November 14, 2007
Do they have a point that vacant homes can attract the undergarments of society? Yes. But, when we had a vacant house in a beautiful neighborhood that we were selling in 2005, there was a break in. It appeared, by the sheet that we found, that someone was getting some temporary free housing. Creepy? Yes. Indicative of foreclosures? Not always. In this development, we had the nosiest neighbor across the street. She lived at her window. She also noticed that the front door of our rental was left open one night. She thought it was a careless realtor, so she traipsed across the street to shut it for us. When she found out later that it was a break-in, she freaked out--running from neighbor to neighbor to inform them that she actually had some important news this time. It was in escrow, so we had to disclose the crime. Thankfully, the new owners understood.
The article states that the homeowners also have to take any renter that they can get. Again, this can be said of any investment property. There were times when our houses were vacant for months. We still didn't take any renter we could get because we knew we'd be sorry. In the fall and winter, having a vacant home was the kiss of death. On one hand, I hated to reduce the rent for the entire lease and then raise it on them in a year--only to have them move. Then try to find other renters during the same season. On the other hand, I'd rather lose $100-$200 per month for a year than have a $1,595/month rental vacant for three months. Still, I never took just anyone who came along. In California, the financial implications of doing that are tremendous.
I am so tired of the media taking a shred of truth and blowing it way out of proportion in regard to this real estate fiasco. But, then again, what's new? It's their modus operandi. It sells papers and advertising. I read all of the stories about this country crumbling because the real estate market is so bad. Others must be clicking on them, too, because they seem to be abundant this week. The process of choosing articles to include in the media uses the same theory as selling real estate or anything else--supply and demand.
And my most favorite part of the article is? "Historically the most affected areas were lower-income and were prone to subprime and predatory lending, irresponsible house flipping and mortgage fraud . . ." (emphasis added). Of course, we can't have an article about how neighborhoods with foreclosures are going down the toilet without a slap at investors. I, personally, don't know anyone who made a living of "flipping" houses in "lower-income" areas (maybe buying, fixing, and then selling to new homeowners--not flipping, as in buying just to turn around and post a sign again for a profit). But, if the media says it's true, then it must be so.
NEWSFLASH: Just in case you think I'm blowing the whole "investors are the root of all evil" theme out of proportion, I just found this quote in this story:
"Much of the risky lending that helped fuel the housing boom dried up this summer when investors lost their appetite for these loans, after tens of billions of dollars worth of mortgage-backed paper all but evaporated. The credit scare has thrown a chill on all mortgage lending, threatening to prolong the ongoing housing slump."
Who is the journalist kidding? You mean that the lending fiasco wasn't a result of homeowners getting into loans that they knew they couldn't afford and then walking away? And greedy lenders shoving the products down the public's throat? Oh, I'm so glad that this has all been clarified for me now.
Tuesday, November 13, 2007
Hot: offer full asking price or more
Not: don't offer anything because you can't afford to buy and wouldn't be able to get a loan anyway
Hot: push other buyers down as you approach the front door of a house for sale
Not: there are no other buyers
Hot: answer the door while you're viewing a property, pretend to be the owner, and tell the agent and buyer that the house is sold
Not: No one would be knocking because the owners haven't lived there since the bank took possession
Hot: can't get the lender on the phone because he's so busy
Not: your lender calls asking if you know of any job openings
Hot: place an offer before the sign goes up in the front yard
Not: consider lowballing after you've seen a sign in the front yard, on the corner, at the strip mall, by the light, with the twirler down the street, and the banner strapped across the second story with the new reduced price
Hot: knock on doors and ask if the owners have thought of selling . . . to you
Not: have too many preforeclosure doors to knock on
Hot: think that being $300 in the red every month is good
Not: have to be $1,500 upside down because your interest rate adjusted up, you can't sell the house, and you don't want to give it to the bank
Hot: buy houses sight unseen
Not: view 20 foreclosed properties before you find one that doesn't smell like rat urine
Hot: have to lower the rent you're asking because there are 10 other investment properties on your street
Not: raise the rent because there are way too many tenants for the number of rentals available
Hot: hear from the media and other naysayers that real estate is experiencing a bubble, but you keep buying anyway
Not: hear from the media that those darn investors caused a bubble that popped and now all real estate sector workers are out of jobs
Yes, I, too, am guilty of many of the hot market behaviors, but I don't intend to make those same mistakes again. I need to remember to hang back when everyone is buying and jump in when others are running away.
Monday, November 12, 2007
Yesterday, there was this story on MSNBC.com. Surprise, surprise. Yet another insurance industry (PMI) that may not be able to pay for losses incurred--this time, though, the products being insured are loans.
We, as most people, avoided paying private mortgage insurance (PMI) by placing 20% down or using the 80/10/10 or 80/15/5 or even 80/20/0 (the first number indicates the percentage of the first loan, the second would be a second loan or equity line, and the third is the amount of the down). These are also referred to as "piggyback loans." By structuring your loans this way, you avoid the PMI payment because you are borrowing part of your down. The only drawback is that the second loan could have very high interest rates. However, if the payments for piggyback loans are lower than a loan with PMI, then it sometimes makes sense to go that route (although each loan may have its own fees).
Many buyers do opt for PMI, though, as we have in the past with some of our rentals (back then, it was so easy to wait a few months, have the house appreciate 20%, and then refinance out of the PMI--and maybe get some cash out). Your PMI payment is based on the amount of your down. It can range upward of $300 a month. It really stinks to see the PITI and then another $200-300 for what seems like nothing. It's an intangible service. Apparently, with the PMI companies in jeopardy, maybe it really was for nothing.
It does appear that all those who had a hand in the real estate money pot have been adversely effected by the downturn in the market. Let's take a tally in no particular order:
Real Estate Agents--Agents were a bit over-confident a few years ago. I mean, how hard was it to place a sign up and, within hours, weed through 10 offers--some over the list price? Bidding wars are hard, I know, but at least they mean money for realtors. And what were they doing with all that money? Buying nicer cars, bigger homes, newer offices. You would think that, if they knew anything about real estate, they would have been saving all the money that they were making for the predictable lean times. Now, I bet they'd list a house for a cup of coffee and a hot pizza--but they only show the ones with the highest splits.
Lenders and Mortgage Brokers--How complicated can it be to process a loan application when your only requirement is that the person is breathing? And make mega bucks doing it. These casualties of the downfall deserve everything they've gotten (I don't mean the little worker bees, I mean the corporations). Lenders knew exactly what they were doing when they were underwriting loans whose payments would be increasing in a few short years; and offering already debt-laden consumers equity lines of up to 125% of the home value. Gee, why didn't they stand out in front of casinos and ask gamblers if they wanted to borrow some money? The results would have been the same. And brokers were aware that they didn't always disclose the full truth. Now many are out of business. But, by golly, they got their points, origination fees, processing fees, and kickbacks.
Homeowners--Who are really to blame for the fall of real estate prices--lenders or buyers? Well, the lenders couldn't have sold their deceptive products if there was no market for it. Although this country tries to pin the blame on investors, we are not the majority of the people losing our homes. Most are everyday, ordinary citizens who wanted something that they couldn't afford. When told that they actually could afford it, they believed the very people who would be profiting from their purchase. Hello?! It was the consumers who fed the fire of appreciation. That's all there is to it.
PMI companies--So, one more industry dipping their finger in the greed pie. Victims? Hardly. As they were raking in the dough, neither the CEO's nor the government (that ordinarily wants to regulate every breathing second of our lives) ever stopped to ask if the PMI sector would remain solvent in a downturn of heavy foreclosures. I guess we know the answer to that now.
Builders--As they were snubbing their noses to investors at the same time that they were scratching out the current phase prices and making them $30,000 more, builders had been riding the heyday since around 1998. They were invincible. They had a product that people were camping out for. What a feeling for the sales office personnel to park around the RV's and step over sleeping home buyers in line. They could be rude and people would take it because they were dying to place their deposits on 10,000 square foot cul-de-sac lots (but, in reality, would have taken anything). Even the best developers were selling substandard products (we had water leaks in three of our homes) in order to keep up with the demand. Oh, yeah, life was sooo goooood! Now what? Home prices are being slashed and builders are placing substantial losses on the books. Why do I get the feeling that they are still making a pretty penny by building and selling homes?
Investors--I have to go easy on us. After all, we were the ones trying to improve our lives and provide nice living accommodations for others. We were smart enough to buy homes that other people would pay for --ideally. It didn't always work that way, I know, but at least we tried. Yes, many investors are motivated by money and greed and wanting to get rich quick. But others were willing to buy and hold and not make their first million in a year.
We were preyed upon by real estate agents, mortgage brokers, PMI providers, and builders (only when they needed us to close out a phase fast). But we weren't victims and neither was the PMI industry. We were willing participants in a game that ended too soon. When the market starts to recover, all the same players will start again and we will be doing the same dance. Only this time, I hope that we all will be just a bit wiser.
Friday, November 9, 2007
Every rental we have owned, except for one, belonged to an HOA. Some of these associations charged very little each month ($29) and just maintain the common property. This is the current situation with our house in Texas. Other HOA's charge much more (upwards of $100), but have communities with pools, tennis courts, walking trails, etc. (like the home we own in California).
I will admit something that may be a bit embarrassing--we actually prefer to buy rentals in areas regulated by an HOA and enforced by a management company. I know what you're thinking, "Are you insane?" Well, yes, I am, but let's stick to the topic. When we started buying rentals, resale value was just as important as rental value to us. We also wanted to attract tenants with all the amenities. We knew that an HOA would enforce the rules that would help the neighborhoods keep their value. So, if my neighbors decided to paint their house yellow or purple, they would not be allowed to do it. If they wanted to place a blue tarp over the side yard for a dog run, no can do. If they let their front lawn die, they would be fined.
That being said, I firmly believe that HOA's and the management companies that enforce the CC&R's are a huge PAIN in the behind. We have received numerous notices about the most benign situations. My all-time favorite is the ole "didn't take the trash cans back from the curb after trash day in a timely manner." Let's stop to think about that one for just a second. The little inspector drives from house to house, furiously writing down the littlest infraction. He or she then proceeds to the office, writes the letter or marks the postcard, and mails it. At least one to three days lapse until we receive it. Hello! Do they think for a minute that the trash can is still at the curb by the time the notice is acknowledged? Is this what they spend our HOA fees on?
(This is why the most experienced investors who I have talked to avoid buying in an HOA. Plus it reduces cash flow. After all, they reason, if the community is new or almost new, and we aren't holding it for 30 years, there isn't much reason to worry about the neighborhood going downhill anytime soon. If it's older and kept up nicely, then it didn't need an HOA in the first place. Plus, that's what the chamber of commerce is for in some areas. As far as attracting tenants with the pool, it may have helped us rent the house faster, but the rent still had to be competitive.)
So, I get the notice and call the tenant or e-mail the PM. You see, I have to because at least one of the HOA's we belong to requires that you complete a form, no matter what, and fax it immediately to the management company, or face the threat of a lien on your title.
Me: "Hi, this is Carol. Well, it seems that the HOA has yet another complaint. Apparently, the trash cans are still at the curb."
Tenant: "Ah, okaaaay. Today is trash day. Where should the trash cans be?
Me: "No, not today's trash day. Let me look at the notice and see what day they were talking about. Oh, yes, I see here. It was two weeks ago."
Tenant: "I took them up the day after trash pick-up that week. Ah, sorry."
Then there's the dreaded landscaping: "weeds in the planter, grass is yellow."
Tenant: "Hello?" (I'm really surprised they answer the phone when I pop up on caller ID.)
Me: "Hi, this is Carol again. Well, it seems that the HOA says you have weeds in the planter. Is the gardener I'm paying for coming every two weeks like he's supposed to?"
Tenant: "Yes, he is and I really like him. I don't have weeds in the planter, and everyone's grass on the block is yellow. It's January!"
Me: "Right. OK. The notice says they were out there two days ago and there were weeds. Are you sure?"
Tenant: "I am now standing in the front yard and can't find one weed. Wait, let me get the magnifying glass. (Long pause.) Oh, yes, I found a weed seed sprouting in the planter under the hose."
Me: "Could you please pull it so I can report back that the problem has been remedied?"
Tenant: "Yeah, right."
And we can never overlook the "dead tree in the front yard." Mind you, the tree is about three feet tall and one and a half inches in diameter. You can't even see it over the weed whacker protector.
Thursday, November 8, 2007
As I mentioned in a past post, if you can believe it, we used to visit housing developments just for fun. Once we became serious investors, that changed. I started picking up the freebie magazines, marking the possibilities, calling the offices, then visiting only when I was sure that I'd be placing a deposit. Remember when most builders were friendly to investors in the early 2000's, then stopped selling to them? Ha! Now they practically put up signs inviting us in--but why would I want to stop and fill the time for a bored agent? They can blame investors all they want for the downturn in the market, but we're the ones they use as needed.
The communities we visited today (from the high $300,000's to the low $500,000's) were almost sold out. I was very surprised until I asked one of the agents if the prices had dropped. She said that they had by $150,000, if you count the incentives that they were offering. She told us that most people are qualifying under 30-year fixed, full doc loans, but that they did have some good stated income loans available, too. She said the stated income loans are with 5% down and 7-year fixed programs. She claimed that the interest rate for that program is around 5.875%. We were told in one community that they are not accepting investors, but the other agent with the same builder said that they are, with special approval because it is the end of the phases. Both had only a handful of homes left to offer.
I have to say, though, the models were less than appealing--especially the ones from 1,700-2,100 square feet. They did have one 2,057 square foot house from a closed phase, with upgrades, for $349,000, which is a good slashed price. Still, the rent on that one would be around $1,795-$1,895 on a good day in the spring (this is Temecula, after all). At 5.875%, PI alone would be $1,962. HOA fees and TI would take your payment to over $2,600, plus PMI, if you opt for the 5% down program. Hmmm, I wonder how deep the discounts will be in December.
As an aside, I was perusing the 92532 (Lake Elsinore) zip code where we own a rental. I couldn't believe that some of the houses, which were selling 18 months ago for $450,000, are now $299,000-$350,000. Out of 123 homes, I'd say that 70-80% were foreclosed or short sales (I didn't actually count, but it seemed that many). I was able to view the pictures of the interior of the homes. I can't understand why people would buy such nice upgrades, furnishings, big screen TV's, upgraded landscaping with Palapa huts, built-in BBQ's, and such when they knew they couldn't afford it. Come on---did they really need the water softener? Maybe they could afford it then with their low, low mortgage payments, but they should have known that it wouldn't last forever. It's just so sad.
It is tempting for me to try to find a way to buy now, but I know very well that this is not the bottom, so I wait and pray that I won't have to sell anything for at least a few more years.
Wednesday, November 7, 2007
Basically, an appraisal lists the amenities of the subject house, and then three other recent comparable sales (comps) in the close vicinity. The house being appraised is given credit or deductions based on how it compares to the other three. So, if the subject property has four bedrooms, but a comp only has three, this would add a certain amount of value to the price. If one of the comps has a larger lot, then money would be deducted for the house being appraised. And so on, and so forth for square footage, bathrooms, number of garages, cul-de-sac location, pool, upgrades, view, etc. Then, at the end, more is written to specifically describe why the house is given the value that it is. Other than that I really don't know how appraisers perform their magic.
We have a few interesting stories about our experiences with appraisers and appraisals. There were at least two occasions when an appraiser did not feel that the price that we were trying to refinance or sell at was justified. Both times we were successful in having the appraisal changed. One time, I was refinancing four of our homes with PHH/AMX. On one of them, the value came in around $20,000 less than I expected. I had a fit and told my loan agent that the comps in the area were higher. She told me to write it up. So I copied the comps that I had, described the home in terms of the added value characteristics, and was successful in bringing up the appraisal to what I felt it was worth.
Another time, we were selling a home that we had recently bought, but never rented out. It had been around four months later and we listed the house for $40,000 more than what we bought it. After six months, it was in escrow and the appraiser was sent out. He was very unhappy that we were trying to sell it for that much more after such a short period of time. Hello! We had a buyer dying to close and move in. My agent and I harangued the poor guy until he relented and gave us the value that was on the sales contract. I remember distinctly that my agent told me that the appraiser said that we were asking him to over inflate the price of the home, which will lead to a market crash one day, and that investors just needed to slow down a bit in order to stabilize the values. Whatever! Just change your appraisal already! Real estate was HOT and there was no way a crash would be occurring any time soon. That was 2005.
Then there are the appraisals that we paid for ourselves. We found an appraiser out here who we liked to work with because they had a reasonable turnaround time (many companies wouldn't give a non-lender the time of day). We hired this company to appraise three of our homes because, after speaking to our lender, the tenants were interested in buying them (although none did). I would order the appraisal and say, casually, "It appears that the appraisal should come in at (and I'd name the amount)." I would suggest a value about $10,000 more than I wanted. This way the appraiser would feel that he didn't kowtow to me. I must have been hotter than the market then because, by golly, I was able to guess (read: suggest) the amount of the appraisal before it was completed.
So, as the real estate bubble burst, so did my impression that appraisals were objective, fact-based, incorruptible documents. I guess it's true that nothing is written in stone.
Tuesday, November 6, 2007
"We plan to hold until the prices rise again."
Your blog is very interesting. I think I found it from a post you made on patrick.net. It is interesting to see someone in the middle of the housing crisis, rather than on the sidelines. But comments like the one you made above make me think, "Do you not know where this market is headed?" The housing market is starting a huge multi-year collapse. This is only the beginning. Housing prices will fall for years. It might be 5-10 years before the prices are back where they were in 2005. Do you think this "housing crisis" stuff is just mainstream media hype, and it will blow over in a few months? I'm curious to understand your mindset.
Here is my response:
You've made an excellent point! I'm very humbled by the intelligence of my readers (I'll make an exception for Mr.Boom). You're right, I am flippant sometimes when it comes to the media. However, this is my point: Yes, there is a downturn in the real estate market. This is cyclical and expected. The media presents the information with "the sky is falling" mentality. If you recall, we heard that the market was bottoming (or topping, depending on how you look at it) out every quarter during the boon. Well, it finally happened when it was supposed to happen. The difference this time is the impact on the finance sector.
Didn't you see that coming? I did when my neighbors in Sabre Springs were borrowing 125% of the value of there home in HELOCs. We knew that five years later, they would be losing their houses because the market would be slowing down significantly. Unfortunately, first mortgages have had a worse impact on home ownership than expected. Frankly, it surprised me (and it shouldn't have) that soooo many people did not make provisions when they knew that their payments would be increasing. Our five-year rate is set to adjust in June, 2008, and I've been planning what we'd do for about 18 months now.
I do not think this is a matter of blowing over in a few months. History tells us that it will take longer. The most important aspect to remember is that housing has never completely collapsed--not in the sense of buying stock in a company that goes out of business. There is nothing you can do to "make" back your investment there. The asset is gone. In RE, though, history shows that, eventually, prices have always risen (even with the adjustment for inflation). If you peruse the U.S. Census Bureau site, you will see that, in the long run, single family homes always appreciate.
Here is an example of a page on that site. In this graph you can easily see the decades where RE appreciated quickly, then the plateaus. If you look at the 60 year history that the graph represents, you can see that RE has a proven performance of appreciation.
It may be 5-10 years before the prices are back. But they will be back and correct up even higher. It has always happened this way. Can you lose money in the short run? Of course! But if everyone were able to hold onto their investments, they would make money eventually (and there wouldn't be a downturn because the supply would be so small). Also, people alive today should remember that the market heats up and the market cools down, so maybe they will be prepared next time--especially the investors.
So, I'm sorry if it seems that I don't take the current market seriously. It's kind of like when my 6th or 7th child is sick. I worry a little, but because of my experiences with the other children, I know that they will probably be better soon. I just have to watch them for a while. The past in real estate tells me that the market will be well again at some point in the future, too.
Monday, November 5, 2007
"uhhh, Mr Grey........Like a Woman!?...Grow up! What's the point!? How your "feeling"...is the problem! - Mr Boom"
I had no idea what the writer was talking about! I know that there is a popular show on television called "Grey's Anatomy," but I have never seen it because we don't have our TV hooked up to any service. Since it made no sense to me, I rejected it.
Then I read my post again. I had asked if anyone else knew how I "felt." I mean, so what if the comment doesn't make any sense? I went back to my e-mail and tried to publish it, but I was told that the comment already had been moderated. So, I'd like to thank the writer for providing me with the opportunity to write an entire post around unintelligible comments.
But let's attempt to analyze: I don't know who Mr. Grey or Mr. Boom are. But I'm not Mr. Grey, so I can assume that Mr. Boom is an alias. "Like a Woman!?" is a sexist comment, but I don't care because I'm not a femi-nazi. However, why is there a question mark after it? Yes, I would like to believe that I am like a woman. Why would I want to be anything else? Because I'm a woman who has feelings, does that make me immature?
In real estate investments (as I can assume in others, as well), after all of the due diligence has been performed, you have to go on instinct and "feeling." There were times, during the purchase of our Ohio property, where I would have to put my head between my knees because I thought I'd faint at the prospect of having a $20,000 PITI. That's a "feeling" that I should have run with and pulled out of the deal. But I convinced myself that the rents would easily pay the mortgage and I was just being a nervous ninny. So, Mr. Boom, if you really are an investor, are you telling me that you are completely objective and have no "feelings" about a property that you are about to purchase? Please!
With the apartments, I did not view them myself. My husband did. So, I guess that Mr. Boom is implying that my husband is like a woman. Maybe if I had seen them myself, we would not have purchased one or both. So, is my husband like a woman who needs to grow up? Or, do all women need to grow up because we all have feelings? Hmmm. It's a good thing that men don't have any feelings. Right?
Mr. Boom, please tell us what you're talking about! And, by the way, have you ever invested in real estate?
Saturday, November 3, 2007
My ex-PM in Ohio contacted me today and told me that the new owner (who took over on Aug. 31) has fired her new management company and hired what my ex-PM calls, "The last management company he would ever use for that complex." This is not unusual. PM's are constantly bad talking each other to owners. The new PM knows my ex-PM and is now asking for advice in regard to the property.
I can't help but be smug about this because all through the closing process, this buyer, who, by the way, was very sweet and savvy, kept insinuating how bad my PM was (I can't totally disagree with her there) and how smart she was to find this very capable company. She just felt so sorry for me and my lack of experience. Her new PM went through the complex like they owned the place and made us jump through hoops before we closed.
My overriding emotion is to be eternally grateful that I: 1) disclosed EVERYTHING to this buyer--over and over and over again. She knew the truth about this building, 2) She paid what it was worth and not a penny more (probably a bit less), and, most of all . . . . drum roll, please . . . . 3) I no longer own this property!!! If you could see me, I am doing flips right now. I even have to pause in my writing in order to accommodate my acrobatics.
Anyone else know how I feel right now?
Friday, November 2, 2007
Once we had a sales contract, it was time to visit the sucker--, I mean, showrooms. The first home we bought was on a Z-lot in a gated community in the heart of Temecula (as I explained before, the eves of one side overlap with the house next door--average lot size 2,500-3,000 square feet). The sale price was $185,000 for 1,985 square feet of living space. On this house we spent over $7,000 in upgrades, which by today's standards, isn't much, but as a percent of the sale price, it was expensive.
We upgraded the carpet, pad, and put laminate wood floors in the high traffic areas. It was beautiful--unfortunately, we wouldn't be living there. We spent money, which could have been used toward another rental, on depreciable assets instead, like flooring and window blinds (even though we bought the cheapest we could find). The next home we bought was in the same neighborhood and we knew a little better. We switched out the laminate wood for cheap tile, which left white marks when the coating was chipped off.
We were determined that the next new house we bought, we would only upgrade the carpet pad in order to make the carpet last longer (I wouldn't even do that today). Unfortunately, it was a KB (previously known as Kaufman Broad) home. They have levels of homes. Something like A, B, and C. When we sat down to sign the contract, we didn't know that the development was considered an A, which we found meant that nothing extra was included in the sales price. By extra, I mean little things like the fireplace and microwave, which, in California, are usually included in the price of the home.
We always thought of resale when purchasing a rental. Do you know of many homes these days that sell without a fireplace? I don't. So we had to add the fireplace. It also needed a built-in microwave. The stair rails were metal, so we needed the wood. Since it was phase one, that upgrade was free. But for the exact same home we bought in phase twelve, we had to pay for it. Also, the master bath has to have a double vanity (but the hall bath does not). The home would be more valuable with a gas hook-up for the dryer. And you can't have a garage without a utility door (the door that goes from the inside of the garage to the side yard). This utility door issue became relevant when we bought a resale home without it. We really wanted to sell the home to the last tenant we had, and he wanted to buy it---except for the fact that it didn't have a side door. Bummer!
Anyway, I digress. By the time we added in the three-quarter inch carpet pad upgrade and window coverings, we paid an extra $18,000 for the home. It ended up costing us $217,000 (this does not include the landscaping on a 9,200 square foot lot--we were thinking "resale"). Today the house is worth just under $375,000 in this market, so I guess it doesn't matter now. We plan to hold until the prices rise again. Comps for the area were over $450,000 at one time.
By the way, within a year after we bought, the same model went up for sale across the street. The owners had failed to put out the dough for a fireplace and the house languished on the MLS for what seemed like a year--in the height of the market, no less. Meanwhile, as the market hinted at a slowdown in 2005, we sold our phase twelve in weeks for $405,000. Everyone laughed at us for buying the same house on a smaller lot for for $41,000 more ($258,000). We laughed, too--all the way to the bank. (Actually, we traded it for an apartment--and they laughed at us again. Rightly so that time.)
Thursday, November 1, 2007
These only make sense if you can break even or cash flow as rentals. I would not buy one to flip (I don't mean the contract. I use the looser definition of buying and selling it after it's fixed up.) I say this because it's darn near impossible to sell anything right now unless the price is low enough. If you can get something under current market (or even what you predict the market will be in six months), fix it up, and then sell it for a profit, it would make sense. But it's a gamble, unless you've been doing it for years, so you'd need plenty of reserves.
I firmly believe, as I'm sure most of you do, that this is the buy and hold market. So for that foreclosure to make sense, you need to rent it out for a long period of time and, hopefully, cover your expenses. That still eliminates most of Southern California (even the high desert). This may change by the time the "market correction" is over. You may want to look in other states. Remember, for all those seemingly inexpensive investments in the $100K's, the rents are relative to the area and value of the home.
Also, I haven't tried to obtain a loan lately, but I could imagine that for investors who rely on stated income and have many properties in their name, it may prove to be more difficult and expensive than it used to be. Even when they were handing out loans like candy, when we had 10 properties, most lenders wouldn't touch us--and our credit rating was always in the mid 700's.
I don't need to say anything about apartments--just read some of my prior posts.
I would look carefully at some retail NNN (known at triple nets) because the tenants pay a surcharge per square foot for insurance, taxes, and, maybe exterior upkeep. It varies per lease. I like the thought of NNN's because there are no recurring expenses (except maybe some large structural, like roof, etc.) for the landlord. I have never owned a retail strip mall, so I can't speak from experience. If any of you have, let me know what you think.
There are a variety of other NNN and commercial properties, like restaurants with 30-year leases, regional malls, day care centers, and many more types (just go to LoopNet.com and check it out--remember most of the numbers on these listings are bogus). Not all retail malls are NNN, so you need to be thorough in your due diligence.
Tenant-In-Common is one way to hold title on a property. There are a ton of stock brokers who sell these. They get a bunch of different investors together to buy properties worth millions or tens of millions or hundreds of millions of dollars. Each investor forms their own LLC, and then they all buy the investment as tenants-in-common. Holding title this way protects each party from being impacted by the other. So, if one investor on title gets sued or dies or sells their share of the property, it shouldn't effect the others. Also, most of these qualify as 1031 exchanges.
This is supposed to be a completely passive investment that has been analyzed up the ying yang by the brokerage firm. Cash flow is estimated. On the site that I use, they have current offerings of between 5-7% return on your investments--with one at 8%. Last year, the assisted living facilities were popular, offering a 10% return. Plus, you share in the appreciation, if any, once it's sold.
With the profits that we thought we'd get from our apartments, we were almost certain that we would get into a TIC. I even called references who gave their properties and returns good reviews. Let me know if you've been involved in a TIC.
The one thing that has always bothered me, though, are the costs. Yes, you're total investment is one stated amount, like $250,000, and that's what your percent of return is based upon. However, some of that money is used at expenses to pay the stock broker, offering company, attorneys, you name it. The rumor is that these properties are sold OVER market and recouping the costs at the time of sale (the hold time is estimated during the purchase---usually 5-7 years, but can vary greatly) may not happen, so you can end up losing a part of your investment. I never quite came to terms with this. It doesn't matter now that I don't have this option.
Pay off the mortgage on a rental
Doing this would not qualify as a 1031 exchange, so, if you're selling something, you may want to check how much the taxes will hurt. However, if you have a solid property that has been performing well for a number of years, the cash flow from paying off your mortgage may be an easy way to make money.
My experience, from working on the numbers of my own properties, is that the cash on cash is relatively low compared to a TIC. Also, you lose the tax advantage of claiming mortgage interest as a deduction. Plus, you tie up all your money in a property or two, find a great investment, and then have to take out a loan again. Costly. After being burned on apartments, having a secure investment like this is attractive, though. If you do this in California, you want to remember to buy some good earthquake insurance.
Pay off the mortgage on my primary residence
The disadvantages of this are the same as paying off a rental, plus you lose the tax advantages to owning non-owner occupied properties.
Buying rentals in cash
This may glean you a higher rate of return than paying off your mortgage. It's all in the numbers. Plus, you would have more tax advantages owning rentals free and clear than your primary residence. The disadvantage would be finding a property manager in one or more locations, if you do not own property there already. And you all know how much I like property managers.
Maybe I should conduct a poll to see which option you would vote for. Until then, please feel free to post comments on your choice(s). My only request (besides not being offensive) is that you write it in English, so that I can read it before I post it (don't ask!).