For years, it’s been widely accepted that owning a home resides at the core of the American Dream, yet studies conducted by the Urban Institute report that 53% of millennials today cannot afford a home as they can’t even afford a standard 20% down payment. Between escalating healthcare costs and burdensome student loans, the average millennial would take up to two decades to save up for a down payment. The dream of owning a home may seem to be crumbling, yet based on these startling numbers, it is clear that the desire for financial stability is as crucial as ever.
While roughly 80% of millennials don’t expect to receive benefits from current Social Security policies, the pursuit of financial security and growth is still very much attainable through home ownership and rentals. Thanks to the magical 30-year fixed loan rate, maximizing savings’ funds can be done through remote control retirement, one of the many innovative strategies to be presented at the ICG Real Estate 1-Day Expo in San Francisco, U.S.
Dealing with the Unstable Concept of Financial Stability for the American Dream
As inflation and increased cost-of-living may pose as threats to buying a home, single-family home rentals revive the financial success “dream” as the most liquid type of real-estate on the market. Join us this September 7th, 2019 at South San Francisco Conference Center to learn how to leverage single-family rentals to your financial benefit while:
- Getting experts’ strategies and opinions
- Navigating taxes, loans, new markets, and more
- Networking with like-minded investors
- Exploring new market trends
- Participating in collaborative Q & A.
Just as technology advances year after year, it’s only natural that real-estate markets evolve with each generation, yet the result of a sound investment is a constant: financial success. Despite the negativity surrounding real-estate, there is still much to be discovered. Luckily, we are devoted to doing just that.
Whether it be through podcasts or interactive conferences, ICG is can help you invest in single-family rentals and guide you through a minimum-risk process designed to fit even the most inexperienced and/or busy rental owner. No matter your age, it’s not too late to start investing in your future. Register today before space runs out and build your own future on your own dream. Learn more with our podcasts and webinars in our Membership area where we outline strategies in more depth.
A few times a week I talk to investors planning on putting a large down payment on the purchase of a single-family rental home. The goal is to have a better “cash flow”. It may sound logical – the greater the down payment, the smaller the loan, and hence the monthly payments. However, the foundational piece of buying rental homes in the United States is the “gift” called “the 30-year fixed rate loan”. This loan sounds like a miracle to most foreigners, since neither the monthly payment nor the mortgage balance EVER keeps up with the cost of living around the world, while everything else does.
The magical 30-year fixed rate loan
The 30-year fixed-rate loan is at the heart of life transformation for investors when the homes are held for 10 years or more (preferably over 15). The loan keeps getting eroded by inflation (or CPI– the cost of living), while the home, rent, and everything else keeps requiring more dollars to buy (hence in dollars, their value goes up – even without intrinsic appreciation). The 30-year fixed rate loan starts looking quite puny after 12, 14, 16 years. It may be years before it is paid off, but since it never keeps up with the cost of living, inflation hammers the real value of the loan.
These loans are a great financial gift, with future-changing potential. Why, then, would you want to make the gift smaller? Especially at today’s low rates? The answer is, you don’t. A larger down payment will mean the magical loan will be smaller.
May be wise not to exceed 20% down payment
This is not fully utilizing the power of the fixed-rate loan, and it means the borrower has expended more of their scarcest resource: cash! Even very wealthy people, who can afford to put down a large down payment or buy for cash, choose to put down less money. They do this to leverage their cash with the 30-year fixed-rate loan.
I think that in normal cases, a 20% down payment should not be exceeded. The small additional cash flow due to having a smaller loan is insignificant at the present time. Right now, your main “cash flow” should come from your own earnings (salary). It is later in life during retirement that the rental homes can replace your income.
In cases of big 1031 exchanges, with not enough properties to identify, or in cases of not being able to get the FNMA loan anymore, then larger down payments are merited and that is a different blog post. I still think the down payments should be less, rather than more, in any circumstance. Currently, in our Membership area on our website, we have podcasts and a webinar that discuss loans and cash flow in depth. You can learn more about it at icgre.com/members
In a Fortune Magazine article by Chris Morris, published in February, it is reported that in January 2019, there was more inventory available and houses sat on the market about a week longer than in January 2018.
As of January, there was an available inventory of 1.59 million homes overall, versus 1.53 million in December 2018. Of course, the article is lacking by treating the entire country as one monolithic real estate market. Needless to say, there are hundreds of markets, and they don’t always perform in lockstep.
Nevertheless, there is a subtle shift, even in mentality, that is more favorable to buyers as opposed to sellers, who until recently reigned supreme. Since we are primarily buyers (and then we hold for the long term), a buyer’s market is a positive for us.
It is interesting to note, and one of the reasons I am posting this blog based on an article several weeks old is that while in January 2019 sales were flat, in February 2019 sales surged up, but then dropped only slightly. This is likely to continue to lower rates and sellers having to adjust expectations. Overall, we can see that while there is a shift towards buyers in many markets, the market is still hovering near a relatively stable point. With the low-interest rates and more friendly sellers, this becomes a positive for the investor.
We like to buy brand-new homes. Clearly, the sellers for us are builders. Some builders don’t want to sell to investors. Our market teams successfully convince the builders that it pays to work with our investors, as they get good volume from us. As the mood changes, these very builders may become more receptive to working with buyers, and perhaps even offer more incentives.
As we head into spring, there is a saying, “…spring is in the air.” And that is not the only thing being felt in the air. There seems to be a persistent notion that the “real estate market” has been going up for too long and is due for a correction. People also point out that the last big recession started in 2008, and perhaps the “cycle” is indicating that the new one may be upon us.
Of course, there really is no “real estate market” in the United States. There is the Phoenix market, the Dallas market, the Kansas City market, and the markets in every other metro area, such as Los Angeles, San Francisco, and so on. Not every local real estate market behaves in the same way others.
All markets do not experience a boom
Even during the major boom of 2004 to 2006, not all markets went through the boom. Some entire states “sat out” that of that one. Similarly during the big recession, between 2008 and 2011, not all markets tanked. In fact, most of the markets that tanked were the ones which had boomed before.
Some states did not move down very much, even during the recession. This is an important point. If the San Francisco Bay Area (for example) does go down and corrects for its fast rise over the past few years, it is not “an automatic” that affordable markets like the Sun Belt states, (like the markets in which we invest) will do the same.
During past recessions, the rentals actually were better than usual. The reason is likely that if a tenant had been saving up to buy their own home, during a recession they are likely to shelve those plans till better times. Thus, even more, people rent than during stable conditions. Even if a downturn hits, the investor would likely benefit by just sitting and doing nothing, letting the loan balance pay down and get eroded by inflation, while enjoying lower vacancies.
How the Dodd-Frank bill helps
In addition, measures taken by congress after the last recession, like the Dodd-Frank bill, have mitigated the unbridled risk in lending that existed prior to the 2008 recession. My belief is if and when a downturn occurs, its magnitude is likely to be lesser than the last time.
One of the riskiest things, ironically, is that people delay buying solid investment homes, especially with today’s fantastic interest rates. I have met people from my past who never got started because there was always a recession around the corner, or a boom, or some other news item. Some of these people can be quite regretful 14 years later, realizing they could have changed their financial future but didn’t.
We will discuss this and many other issues at our 1-Day Expo on May 18th. I will also address this topic during our first webinar tomorrow–our official launch of the Members area on our website! Learn all about it and get on board at icgre.com/MEMBERS. Join us and stay informed!
A classic question I get when talking to a would-be real estate investor is: “Shouldn’t we buy a home to live in first before buying investment homes?”
The answer is – it depends on where you live.
When considering owning your own residence, there are various layers of reasoning. Some are logic and numbers-based. Some are emotional, traditional and familial.
Owning your own home can be associated with safety, security, having “arrived”, satisfying family members’ aspirations, the stability of having a (hopefully) permanent place to live, and so on.
Of course, everyone has a different set of emotional considerations when it comes to owning a home. These vary from person to person and, needless to say, are hard to quantify.
In this post, I will address the logical, numbers-based approach to the question of whether to buy your own home as your first real estate move, or rent and buy investment homes instead.
The numbers tell the story when considering buying a home
If you are considering buying your own home, the price of the home matters, the rent required to rent that same home matters, the local property taxes matter, the mortgage interest rates matter, dwelling insurance rates matter, and even the new 2018 tax law weighs in.
If you live in a market where property taxes are relatively low (say, between 1 and 1.7 percent of the home price per year), and insurance rates are reasonable, then if you are considering buying a home under about $400,000, that should be a “no-brainer” as your first step. Between $400,000 and $500,000 would still be a reasonable range to consider buying the home. In such a market, once you step up to the $500,000 range and above, the math may well start to turn as you climb higher in price, in favor of renting a home in the area in which you live. Following that, owning rental homes in more optimal markets makes sense.
Watch out for high property tax and high insurance rates
In markets where the property taxes are high (like in Texas and Oregon), and insurance rates are high (Texas again, for example), the “no-brainer” number may shrink to $300,000 or so, while the range above which you may consider renting your own home while buying affordable investment homes in other markets, will likely be $400,000 or above. This is because with high expenses for property tax and insurance, (which as a homeowner you would be paying) the overall numbers and logic “turn the corner” faster.
Certainly, in expensive areas like the San Francisco Bay Area, Los Angeles, San Diego, New York City and others such markets, it is usually far more logical to be a renter, while owning rental properties in affordable markets, where rents are actually quite high as a percentage of the home purchase prices.
Our next quarterly expo is December 1st near San Francisco Airport. Email us at email@example.com and add “Read your blog post” in the subject line and come as my guest. We will get back to you with registration information. Learn more about the event at icgre.com/events.
Some of the markets that had gone down significantly have registered great price improvements, especially between Q1 2012 to Q3 2013. Phoenix led the pack followed closely by Las Vegas and many California cities. Florida has provided steady appreciation but did not go crazy (most likely due to the slow judicial foreclosure process which modulates home supply into the market and helps avoid spikes).
We are excited! ICG Real Estate Investments (International Capital Group) are going up to Seattle to put on a mini-version of our quarterly Real Estate 1-Day Expo that is usually held near SFO in South San Francisco. As most of you know, we have been doing these expos for 20 years and there is always so much information. I personally return home more knowledgeable every time, as everything in real estate and real estate investing changes weekly, if not daily it seems. I am putting information about his event in a blog, as I want to share it with many new people as possible, and I know I will be connecting with many new folks on LinkedIn as well.
I have not spoken in the area for about six years, and it is going to be great to re-connect with so many that I used to connect with on a continual basis. Building relationships is what we are about and the excitement is mounting! It will be like a family reunion. (Hopefully, that is a pleasant thought to most of you!) Based on demand we are looking forward to two evenings, which will allow folks to attend twice or pick a day that works best for their schedule.
These two evenings will not be easily forgotten, and we are available to talk before or after and even during the events, as well as meeting over the phone, well after the event. The Mini Real Estate Expo (s) is a great way to start out the new year with hard-hitting information you can use to be a better investor. This action-packed event will be held from 6-9:30 pm on two nights, Wednesday, February 5th and Thursday, February 6th. This way, busy Seattleites have two options to work the event into their schedule. Many of you requested that I have the event in two different locations for added convenience, so we have provided that. You can also come to both nights if you desire!
Patricia Wangsness and Adiel Gorel will be the expert presenters, and you will hear from expert loan sources and learn from market teams across the country that will be flying in to tell you about the hottest markets and the proven methods to use for success. Here is a taste of what you can expect:
- How to identify the best markets for investments
- How to invest when you are “too busy to invest” (step-by-step)
- Learn how your properties can be rented and managed well from afar
- Pay for your children’s college education using real estate (or for your own education)
- Secure a powerful retirement using real estate
- How to benefit from recession prices in 2014, and where to do it
- Learn how to acquire loans you did not know you could get
- How to benefit from special market situations few people know about and how to use it to your advantage
- There are ways to successfully own multiple properties and manage them–we will show you how
There will be extensive Q & A time. There will also be teams there in person to meet with you one-on-one; they will also be speaking about the hottest markets in the U.S.
This will be one of the premier networking events in 2014 so far!
Date and location of the mini expos:
- Wednesday, February 5, 2014 – Redmond Marriott Town Center – 7401 164th Ave. NE, Redmond
Phone: (425) 498-4000
- Thursday, February 6, 2014 – Verity Credit Union in Northgate – 11027 Meridian Ave. N Suite 102
Seattle, Phone: (206) 440-9000
Any additional questions about the venues or if you have trouble on the day of the event, please call our public relations pro, Lynette Hoy on her cell (415) 694-3004 or at her office in the Seattle area (206) 455-9366. Lynette will be at both events, so please call her cell phone between 4-9: 30 pm on those nights if you need assistance.
Look forward to seeing you there. I can’t wait!
Mr. Timiraos says:
Prices have risen largely because of shortages of homes for sale. While there is growing evidence that inventories hit bottom last year and that some markets are moving back in favor of buyers, the number of homes for sale remains relatively tight still. Foreclosure-related listings have plunged, and traditional buyers haven’t flocked to list homes—at least not yet. New construction, meanwhile, won’t be back to normal historical levels for years. The consensus view is that price growth continues at a somewhat slower pace, but that consensus view could be wrong—for the third year in a row—if there aren’t more homes for sale.
2. WHERE IS THE HOME-CONSTRUCTION RECOVERY?
While home prices have recovered strongly, new construction activity hasn’t. Part of this may have to do with the fact that home prices are still too low to justify construction, particularly given land, labor, and materials costs. For smaller builders, credit may also be harder to come by. Some economists say new-home demand could remain muted because many move-up buyers don’t have enough equity to “trade up” to that new home. Key issues to watch here: What happens to household formation, and do builders begin to throttle back price gains in favor of selling more homes in 2014?
3. WHAT HAPPENS TO MORTGAGE CREDIT?
Lenders could begin to ease certain “overlays”—or additional credit and documentation checks—that have been imposed over the past few years. Mortgage insurance companies are getting more comfortable insuring loans with down payments of just 5%. So don’t be surprised if, at the margins, it gets a little easier to get a mortgage—especially if you have lots of money in the bank.
Even if it gets easier to get a loan—by no means a given—borrowing costs and fees could rise. Banks also face new mortgage regulations that could keep most of them cautious. Borrowers with more volatile or harder-to-document incomes, including the self-employed or those who make a lot of money on commissions, bonuses, or tips, could continue to face tough sledding.
4. WHAT WILL INVESTORS DO WITH THEIR HOMES?
A handful of institutional investors have purchased tens of thousands of homes that are being rented out. These homes tend to be concentrated in a few of the regions that have been hardest-hit by foreclosures over the past five years. Investor purchases played key roles in stabilizing prices, especially because investors were wolfing up homes at a time when supplies were already dwindling. A key question now is what happens after the initial rush to invest subsides. More lenders and investors are extending debt financing to some of these property owners, which should help boost returns. Can owners perfect the expense management associated with maintaining and leasing tens of thousands of individual homes?
Can owners perfect the expense management associated with maintaining and leasing tens of thousands of individual homes?
5. WHEN DOES HOUSING HIT A TIPPING POINT ON AFFORDABILITY?
Rising home prices are a double-edged sword, especially in pricier coastal markets such as San Francisco and Los Angeles. On the one hand, rising prices are giving many homeowners equity in their homes again—an extremely positive development to the extent it means these borrowers are less at risk of foreclosure.
But price inflation is making housing less affordable. This will be a bigger problem if cash buyers retreat from the market in 2014 and/or if interest rates rise in a meaningful way. Consider: In Los Angeles, prices have jumped by nearly 30% in the past two years, to a median of $448,900 in the third quarter. Assuming a 20% down payment, the monthly payment of principal and interest on the median-priced home has jumped from $1,255 in the third quarter of 2011 to $1,823 in 2013—a 45% increase.