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Archive for May 2016

Affordable Homes with New Construction Getting Scarce

In an article in the Wall Street Journal from May 7th, 2016 by Chris Kirkham, we learn how builders of new homes have to focus more on the second-tier and higher product. The reason is that land costs (including local fees) have increased, as well as building costs. Builders have a harder time squeezing a profit from the lower-priced new homes.

This is becoming an issue with families seeking to buy new affordable homes.

As investors, this points to a certain window in time in which we can get brand new homes at reasonable prices.  We are still buying new homes for $130K-$170K, mostly in the middle of this range. Rentals are strong (partly because some would-be-owners become tenant due to lack of affordable homes to buy), and needless to say, if the more affordable homes will become scarce, it is likely to bode well for their appreciation, as the higher priced home in a subdivision will provide comparable values which will help the appreciation of the more affordable homes. This is how it happened historically.
The ability we still have as investors to buy the more affordable (yet quality) product, coupled with the still-low mortgage interest rates, creates a sweet spot in time to add to our real estate investment portfolio.
The WSJ article by Chris Kirkham can be found here.
We will discuss this, as well as a host of other relevant and important issues, at our quarterly ICG 1-Day Expo near the San Francisco Airport THIS SATURDAY – May 21st. For details, see www.icgre.com/events. Anyone mentioning this blog can attend free – just email us at info@icgre.com and write in the subject line, “Read your blog on construction homes getting scarce.” We will have experts about complete insurance and umbrella coverage nationwide, 1031 exchanges, property management, and lending, among others. Looking forward.
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The Incredible Power of the 30-year Fixed-Rate Loan

The 30-year fixed-rate loan does not usually get its due as an amazing financial tool that should be utilized by any savvy investor who can get it. For many foreigners, it’s incomprehensible that in the U.S. we can get a loan that will never keep up with the cost of living for 30 years. During that period, essentially everything else DOES keep up with the cost of living, including rents. Only the mortgage payment and balance (which also gets chipped down by amortization) do not keep up with inflation. 

You can talk to many borrowers who have taken 30-year fixed-rate loans and after, say, 16 years, realized that although there are 14 years remaining to pay off the loan, the loan balance AND the payment seem very low relative to the marketplace rents and prices. The remaining 14 years is almost meaningless since in many cases (statistically and historically) the loan balance will be a small fraction of the home price and not very “meaningful.” Just to get some perspective, most other countries on earth have loans that constantly adjust based on inflation. Both the payment and the balance track inflation all the time, usually with no yearly and lifetime caps as adjustable loans have in the U.S.
 
The power and positive effect on one’s financial future get magnified when you consider that in 2016 we are still in a period in which interest rates are very low.  While investors cannot get the same favorable loans as homeowners, it is nevertheless quite common nowadays to see investors getting a rate of between 4.25% and 4.75% on Single Family Homes (SFHs) investment properties. 

From a historical perspective, these are extremely low rates. Most experts think that in the future, mortgage rates will rise; from a historical perspective, even 7% is considered a low rate. Thus, these days, you can “turbo boost” the great power of the never-changing-30-year fixed-rate loan by also locking in these amazing rates which will never change. If in the following year’s interest rates indeed go up, you will feel quite good about having locked under-5% rates forever.

Once you secure your fixed-rate loans, two inexorable forces start operating incessantly: inflation erodes your loan (both the payment and the remaining balance), and the tenant occupying your SFH pays rent which goes in part towards paying down the loan principal every month. These two forces create a powerful financial future for you.
 
Many investors think that if a 30-year fixed-rate loan is good, then a 15-year loan must be better. I actually beg to differ. You can always pay a 30-year loan in 15 years (or 14 or 20 or 10 or 8) if you wish – just add some extra to the principal payment. However, you cannot pay a 15-year loan off in 30-years. Thus the 15-year loan FORCES you to make the higher payment while the 30-year loan gives you the important flexibility of keeping your payments low OR making them high based on your financial situation and other considerations. 

Some would say that the 15-year loan is also better since it has a better rate. True, the 15-year rate maybe 0.25% or even 0.5% better than the 30-year rate. However, in my opinion, this is not enough to justify the enormous loss in flexibility. In addition, having the loan for a longer time allows inflation to “erode” the loan even further. This last consideration greatly minimizes the argument some investors make that “…with a 30-year loan I pay hundreds of thousands of dollars more over the life of the loan.” 

One factor missing here is that they neglect the TIME VALUE OF MONEY! These extra dollars paid in year 20, 22, 28, etc., are in fact extremely “cheap” dollars in the sense that their buying power is greatly lowered over time. If the value of these future dollars were to be calculated based on the PRESENT buying power of the dollar, some of the later payments may be worth mere pennies on the dollar. 

In summary, I recommend getting a 30-year loan and then choose how long to take to pay it (anywhere between zero and thirty years – you choose!).
 
While interest rates are low, it would behoove the smart investor to buy SFHs and get 30-year fixed-rate loans on them while this “window” is open. Investors can finance up to 10 residential properties using conventional 30-year fixed-rate loans (if their credit permits).  With some maneuvering, married couples may be able to stretch it to 20. If you are under that 10  (or 20, as the case may be) property barrier, it would be quite a smart move to buy SFHs and utilize the incredible loans you can get. You may wish to pay the loan off in 16 years to pay for your kid’s college education (SFHs are effective at this – especially if they don’t go through a crazy 10-year cycle as we had from 2004-2014). You could aim for the properties to be paid off at your retirement date (or the savvier move is just realizing how low they have become and let inflation keep eroding them as equity grows into your retirement years, providing financial growth well into the future in the face of ever-increasing lifespans, and the need for our finances to keep up with our life expectancy).
 
Thirty-year fixed-rate loans are available on 1-4 residential units, which mostly means Single Family Homes – the ideal investment for most individual real estate investors, as we have covered in a previous blog.
 
We will discuss this topic, as well as many other crucial topics for investors, at our Quarterly 1-Day Expo on Saturday, May 21st near SFO. We will have market teams present, including a new exciting market… We have also invited top-notch experts to lecture. We will have experts on Property Management, 1031 Exchanges and Proper Insurance – the first and most important barrier in protecting your assets, including nationwide umbrellas. 

Everyone mentioning this blog is invited to attend for free, with associates. Just email us at info@icgre.com to register, and in the subject line write, ‘Read your blog!’ Then give us your contact information. We will respond with a confirmation for your free entry. AND that is all. We hate spam as much as you do. See you there.
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The Ideal Properties for Real Estate Investment for The Busy Professional

As a busy professional, it is likely that your income will be sufficient to qualify for loans on investment properties – especially Single Family Homes – in most of the U.S. markets.  A high percentage of busy professionals also have good credit scores, which bodes well for getting good financing.

I maintain that the ideal property for real estate investment for the busy professional is the Single Family Home (SFH). SFHs are almost a perfect property for the individual investor who also has a regular job or business. SFHs are still the “American Dream” for most people. They are also a relatively attainable dream in many large metropolitan areas in the U.S. where prices are quite affordable, even in 2016.

SFHs are essentially the “liquid” real estate since when it is time to sell your potential buyer pool is the largest – effectively all home-buyers in the marketplace.  These homes are the real estate investment on which you can get the most powerful loan in the real estate universe – the magical fixed-rate, 30-year loan. 

Technically this loan is available on 1 to 4 residential units so duplexes, triplexes, and four-plexes also qualify. However, SFHs are usually superior to 2-4 unit properties. In good areas, you will usually find only SFHs, while you may have to travel to another part of town to see the “plexes” and they will usually be surrounded by many other “plexes.”  The “plexes” are more likely to present management challenges, have more short-term tenants (statistically) and to top it off, may not necessarily provide as good an appreciation over the long term. 

One exception is new duplexes in white-collar areas, but overall the SFHs are superior. I have been buying homes for well over 30 years and helped people buy nearly 10,000 homes in dozens of markets. During these decades, I have witnessed many “plexes” and their performance as well as many thousands of SFHs. My experience and the experiences of thousands of investors leads me to favor the SFHs over the “plexes.”

Buying larger residential properties – apartment complexes – can be a good investment, but there are areas where the investor needs to be an expert. The optimal apartment complex size, based on the experience of most apartment complex investors, is between 100 and 300 (many say 150-300) units, so economies of scale can be utilized to improve cash flow. 

For example, you may need one full-time on-site manager and one full-time maintenance person for a 110-unit complex, but if you have a 60-unit complex, you may STILL need to use one full-time on-site manager and one full-time on-site maintenance person – but with 50 fewer rents coming in! That is NOT using economies of scale very well.  There is a lot to discuss on the subject of large apartment complexes, but for the scope of this article, they require deep expertise to run properly.  
They may take up much more time than a busy professional has available; they are NOT financed with the magical 30-year fixed rate loans, and they usually call for a large investment up front. For the busy professional, Single Family Homes presents a simple, effective, and very powerful investment, with outstanding financing that cannot be found anywhere else and a time commitment, which is relatively low. 
We will discuss this topic, as well as many other crucial topics for investors, at our Quarterly 1-Day Expo on Saturday, May 21st near SFO. We will have market teams present, including a new exciting market. We have also invited top-notch experts to speak on Property Management, 1031 Exchanges and Proper Insurance – the first and most important barrier in protecting your assets, including nationwide umbrellas. Everyone mentioning this blog is invited to attend free, with associates. Just email us at info@icgre.com to register, and in the subject line write: Saw your blog! See you there.
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