Thoughts for the New Investor

Before you say anything I know that I am a little of my rocker but hear me out.  Over the last two weeks I have started to hear the first couple of cracks in the media around this suckers rally we have had in the market (Real Estate and Stock Market).  For about 4 or 5 months now I have been hearing nothing but good news and not really understanding where it was all coming from.

But over the last 2 weeks I am starting to see more and more people realize we are not out of the woods yet and we will have a lot more pain.  Don’t get me wrong I don’t see the Armageddon option on the table again.  We survived that near miss but just because we survived it doesn’t make everything better.

So I suspect over the next 6 months we will finally put in a bottom and then it will take 2-3 years to get out of this mess as we have a lot of idle capacity we have to chew through.

Signs that a bottom is in place will be some of the following:

Another Stimulus is approved by Congress (After all TARP will be mostly paid back so they will sell the public on the idea that they are just reusing capital, (Our Capital)). 

People will stop talking about the Fed raising rates in 2010.  It is not going to happen people.  In fact I think it is 50/50 that they raise rates in 2011 (If they do raise them it won’t be over 1%)

Government will pass a $5,000 stimulus for anyone to buy a foreclosure, that should chew up excess capacity quickly

FHA or other Government entity will increase investor loans from 10 properties to 30 or 50 properties

Bank of America will be majority owned by the government with the next bailout, they have to regret buying Countrywide

Public Builders will start to buy each other out for their cash positions and to reduce future building capacity

Taxes will go up (If we keep spending we will have to raise taxes)

Keep in mind I made my best deals of 2009 in Jan-March just as the financial panic was hitting TILT.  So we should all have a chance to ring the register again.

Buy Cash Flow properties and hold for the long term

Good Investing

I suspect over the next 30-60 days it will become ever clearer that we are still in the throws of painful real estate correction.  Over the next several months I expect several things to happen:

1)      Delinquencies to continue higher (Currently 9.6% this likely goes to over 12% and maybe as high as 15%). 

2)      Prime mortgages will continue to fall behind in increasing numbers

3)      Building new homes should continue to stay low

In addition, the more I look at the additional tax credit available to move up buyers ($6,500) I am struck by who this will and won’t help.  Because unless you sold years ago and been sitting as a renter (if so good for you) who would want to sell a home and buy another one?  I am guessing most people feel the home they have is good enough given the loss they have felt or seen in the last several years.  Maybe if you bought back in the 80’s you could have the equity to think about trading up but it has to be a small pool of people available for the new credit.

As for the 8k tax credit they did such a good job of being non committal on extending it that almost everyone and their brother who could qualify did purchase a house already.  And as we know they can’t buy another primary residence so the additional pool of buyers is lower than say in the summer.

I don’t know how to get around my fear of a tidal wave of supply coming just as demand dries up causing prices to reverse coarse and fall again.  Simple supply and demand means prices will have to fall to clear the market.

But as a buy and hold investor you should be ready to pounce because I suspect we are in or about to be in the best buyers market of our investment lifetime.

Good Investing

As a real estate investor who aims to own cash flow properties one of the first choices you will have to answer for yourself is do you want to rent to Section 8 tenants?  In my investment area the lower end of the rental market is dominated by Section 8 tenants.

First I should be honest I support this program and see a lot more good than bad from the program. The two main reasons I like the program are first and for most a portion of the rent shows up on time.  In addition I come to appreciate the yearly inspections they perform on the rentals to insure the unit is in good condition.  I want my tenants to have safe and sound homes and the inspections insure this to a greater degree.

The downside is these inspections frequently come up with miscellaneous items that were actually tenant damaged or never reported by the tenant.  This can cause a large repair bill around inspection time but I see these repairs as small investments aimed at stopping bigger problems.

Another issue some landlords discuss is the limits on rental rates, rent increase and required notification periods.  If you are buying cash flow properties with the intent to hold long term this will not be a problem but if you hope to flip the house inside a year you might want to look for a non Section 8 tenant to give yourself greater flexibility.

Another question I hear from new investors is don’t you have a bunch more problems with these tenants?  The simple answer is No.  Now I do have problems but I see these as more people problems and when I look back over the years most of my tenant issues and evictions have been with no Section 8 tenants.  As a landlord you are in the people business and everyone deserves a safe and secure place to live.

My final thought on this subject is I get some personal satisfaction out of supplying safe, sound and secure housing for families.  I grew up very poor so I see this as one simple way to give back.

Good Investing

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In the stock market there is a general understanding that investors or the market should never bet against the Fed (Federal Reserve).  As a small time property investor I think we should tweak this message to never bet against Obama!!!

I am a very simple man who is only interested in supporting my family and having the security of a comfy retirement so this article will have nothing to do with politics (we can save that for the talking heads on TV).

The premise for this post is you need to watch where the government is focused and see if you can place yourself in the path of the money.  Because if you can take your small bits of capital and invest it in markets the government is focused on fixing you could get an artificial pop in value. 

If you chose this strategy know that you will need to pay very close attention because as the government’s focus changes and it will, you will need to recycle your dollars via a sale, 1031 exchange or be willing to hold for quite some time.  Because as the government changes focus demand will fall and prices will stay flat or head lower.

At this point the government is very focused on the first time buyer market via tax credits and liberal FHA lending. Recently they have expanded their coverage to include the move up market via their own short term tax credit. 

The government is not done with housing and they will continue to be a market force so find away to profit from all the money they are throwing around.

Good Investing

As an investor who has been in the game for a while and built up a nice little collection of properties I did something this week I should have done a long time ago. 

At first I was ok making excuses and just paying someone else to turn my properties and perform basic repairs. As my list of properties grew I freely admit I grew an ego and thought hey, I could let someone else execute the work and I can keep focused on buying more properties. 

Well I was reviewing my current goals with my mentor and reviewing the past when it came up that I had never turned one of my rental apartments are done some of the light repairs on my purchases.  My mentor was very disappointed and challenged me to give it a shot for 6 months as my properties needed work or I closed on a new fixer houses.

Keep in mind I am not handy and my skill set ends at the computer as I am an accountant by training that had never picked up a paint brush. 

I am happy to report that I just got back from a day trip to Fresno where I turned one of my just vacated apartments.  I cleaned the bathroom, kitchen, painted the interior, washed the cupboards, cleaned the stove and frig, etc.  I had planned to clean the carpets but it appears they need to be replaced (I will pay some to do this as it is beyond my skill level).

In the end even if you have never picked up a hammer you should take a shot at doing some of the manual labor with your investment properties (the sooner the better).  By doing this you have a much greater appreciation for the work of others, you can save a few bucks and best of all have a better idea when someone is trying to run a game on you.

I am confident that over the years I could have saved 30K+ of work by spending some weekends in Fresno cranking out simple activities.  That 30K could have turned into several additional properties if had leveraged it correctly.

Please learn from my mistake and go get your hands dirty!!!

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The market that I focus on has seen a tremendous change in the last 6 months and more specifically in the last 60 days as things have gotten really strange.  I suspect we are seeing a collection of events collide.  What bothers me is I can’t tell if these events are going to be something we can build on and call a foundation/bottom or if it is going to cause a large and painful event.  The following is what I see:

The market or what normally is called the market is being manipulated by several external factors.  These factors are not a normal part of the investment cycle and thus cause an inspired response.  The factors in the current market are affecting both supply and demand which leads me to believe we are entering a dangerous time.

Items Affecting Supply:

Foreclosure Moratoriums (anyone think we will have another one around Christmas)

Banks refusing to foreclose to insure they don’t have to take the large negative hit to their books/ratio’s

Pretend and Extend being deployed in the commercial market

American’s taking to strategic non payment like a national pastime

Loan Workouts that delay problems for the future as default rates are high

FHA becoming landlords, don’t pay your mortgage but become a renter and never move

Items Affecting Demand:

Loans are hard to get, except if you’re a new investor and most likely to over pay given lack of track record

Tax incentives that are focused on first time buyers which in most cases will buy the cheap house in the bottom third of the market (Good for Them)

City programs trying to buy foreclosed homes to keep homes affordable

Given the items above I am struck by a couple of things.  First all the items holding back supply is bound to loosen up by March – June next year, causing pent up supply of homes to hit the market.  In addition all the artificial demand items (except the loans) are set to expire around the same time.  So let me ask you this, what would happen if the restriction on supply is lifted at the same time the artificial demand is capped off?  My guess big price drops, much longer days on market and an inventory/supply number approaching 12-15 months.  For an investor this could mean the best time to buy is just over the horizon.

Something else I am struck by is all the demand is focused on the low end of the market often characterized by the sub prime market which was so 2008.  Most of our additional pain is going to be felt in the move up or high end market.  My fear is that we are going to get caught looking at a problem that for the most part solves itself because investors can buy these older homes and turn them in to rentals and miss the tsunami coming are direction.  The problem in the move-up and high end markets can’t be solved with little $8k credits and these homes at least currently can not be bought as safe and secure rentals.  If we are not careful this could be the tipping point next summer that sends us back into the financial abyss. 

In fairness I see another outcome that is possible and one that the government is going to push with all its might.

The factors listed above have caused an interesting thing to happen and one I have seen first hand in my investment area.  In my market for example the price of a vacant, bank own, 3bd 1 bath home requiring 10K or more in repairs has gone up 50% in 6 months.  Yes 50% in 6 months for an annualized return of 100%!!!  In January you could buy a solid property for 45-55K today it would take 65-75K if you could beat out the other 10 buyers.  See what I mean about artificial, this is not healthy!!!

But guess what has happened over the last 3 months?  Surprise prices have increased in this section of the market!!! This has caused the press to report that real estate metrics have turned and gone positive on a month to month basis.  I don’t know why anyone is shocked by the fact that if you restrict supply and add gasoline to demand you get a price jump. Shocking!!! 

But guess what happens when real estate goes up on average even if it is fake and caused by forces not common to a healthy/functioning market? Two things:  First the animal spirits can be rekindled as the average American can not stand missing out on a sale. What is a greater deal than real estate (Buy low – Sell high)?  Second the higher the average price may cause some banks or financial institutions to actually write up their loan portfolios.  If this happens it will cause banks profits and stocks to go up dramatically.  This goodness will cause the financial networks to talk about the next bull market and we are off to the races.

I see a couple of problems with this scenario.  First all this financial engineering does nothing to create jobs.  It may cause some banks and hedge funds to higher a few more MBA’s and pay big bonus but it doesn’t help Main Street.  Second it does nothing to change the behavior around strategic defaults that will become the story of 2010. 

Let me know what you think. Are you seeing the same artificial restrictions on supply and artificial sweetener around demand?  Am I over thinking this and I should just realize that the government has engineered the bottom and we are all good to go from here?

Good Investing

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