All Forum Posts by: Leo R.

@Aubrie Caton in addition to the aforementioned banks, America First Credit Union was also doing HELOCs on rental properties as of about a year ago (I don't know if they're still offering them or not).

As you probably already know, HELOCs are usually variable rate, and rates are increasing (and will likely increase substantially in the future), so it's important to be clear about whether there is a maximum rate the HELOC can go to, and what that rate would be....Once you know the maximum rate, you'll want to run a "worst case scenario" financial model where your HELOC goes to its maximum rate. ...If an investor isn't basing their decisions on worst-case scenario financial models where adjustable rates max out, then they're risking a 2008-style disaster where their formerly affordable monthly payment balloons into an un-affordable payment as rates rise.

Good luck out there!

@Nancy Revill I think you're probably correct to assume that West Jordan is too far West and South to be a big attraction to most tourists...however, if you're near a hospital, then MTRs for traveling nurses could be feasible. I don't do MTRs, but I've always been interested in them--there seem to be a lot of advantages (higher cashflow than LTRs, but much less of a time investment than STRs, and sometimes very high-grade tenants like traveling nurses).

As others have mentioned, you'll want to do some market analyses for your neighborhood...

I'm not 100% sure, but I think that in Salt Lake City, STRs are illegal (but, that doesn't stop people from having STRs--as you can see if you look up SLC on the airbnb map)...I've heard that although there's a law against STRs, there's also another (rather weird) law that prevents police /municipality personnel, or other public officials from searching for STRs-- which would make it pretty difficult for them to enforce any laws against STRs...but again, I'm not 100% sure about all that; you'll want to do your own research on the topic.

Other things to consider: is the unit you're building in your basement permitted? It's very common for people to build un-permitted units in their basements, but please keep in mind that if you do this, you're taking on a risk and exposing yourself to more liability. For instance, if there was a fire and a person in your basement was injured or killed, and the inspectors determined that the basement unit was un-permitted and the ingress/egress points were not up to code, you could be facing a big lawsuit. If you ever sell the property, an un-permitted unit could lower the value (particularly in a softer market). Also, you do hear stories about people building un-permitted units, and then the city finds out and drops the hammer...sometimes the city finds out about the unit because a neighbor who is disgruntled by the STR traffic, or upset about some other issue, calls the city...the city inspectors show up, and require the owner to rip out all of their un-permitted work, or they fine the owner, or they require the owner to bring the unit up to code (how the city responds often varies from one municipality to the other, depending on various local and state laws and regulations)... ...There was a long thread on the forums not long ago about this very topic...

If you do pursue either the STR or the MTR approach, I'd be very interested to hear how it turns out.

Good luck out there!

@Linda Roberts it depends partly on the grade of the unit.  Is this an A+ luxury unit, a B, a fairly typical C, etc.?

Assuming it's not an A+ luxury unit in the most desirable part of town, then I'd usually recommend a plastic shower curtain instead of a glass door, because it costs much less and can be changed easily between tenants (whereas a glass door often accumulates water spots that can be difficult to fully clean after a few tenants...and, as you mentioned, if a tenant breaks a glass door, that could be a costly headache).

Also, assuming it's not an A+ luxury unit, I'd usually recommend going with a fiberglass unit (either tub or shower) instead of tile, because tile is usually more expensive, and it can be more likely to begin leaking, and it requires more upkeep. If a fiberglass unit does start leaking, it's often easier to identify the source of the leak and either repair it, or replace the entire unit. In a C or most B-grade units, a brand new fiberglass vs.tile unit won't make much difference to most tenants.

As for tub vs. shower--if the tenants have children, then they will want a tub.  If the tenants are young adults without children, then many of them will only use a shower (though, there might be a few occasional ones who are looking for a tub).  If the unit doesn't already have a tub, then I'd probably do the tub instead of a shower (all other things being equal), just because people who only shower usually don't mind showering in a tub (and may even prefer it), but people who want a tub are usually pretty adamant about it....(i.e.; I don't see much disadvantage of having a tub, but I do see some possible disadvantages of only having a shower).

Good luck out there!

@Denise Evans that's interesting. (admittedly, this is not my area of RE expertise).  I'd be interested to know: roughly what percentage of foreclosed properties are B or A?

@June Crile this sounds like a massive potential headache, and personally I'd only consider it if the cashflow and appreciation numbers were insanely good (and even then, it might not be worth the headaches at any price).

Keep in mind: the owner who's being foreclosed on is experiencing foreclosure at the end of one of the greatest real estate market upswings in history--where appreciation was astronomical, owners had more equity than at any point in recent history, debt was dirt, dirt cheap, and money was everywhere. A person who loses their home to foreclosure in that type of market either experienced some severe, severe unexpected hardships, or they are not particularly competent--in which case, do you want to have your money dependent on their actions in any way? (probably not).

You might be able to mitigate some of that risk if you could meet the owner and assess their circumstances before buying the property--but even then, your assessment is likely to be pretty hit-and-miss (although some people experience significant hardship through no fault of their own, it's not uncommon for people to create a fake sob story to cover up their own negligence/incompetence...even if you could talk to the owner, how would you be able to know the difference between legitimate hardship that was no fault of their own vs. a fake sob story?) 

Other things to consider: what grade is the property, and what grade is the neighborhood? (I'm guessing most of these types of properties are C or lower grade, which usually come with a lot of headaches and high liability).  ...there have been times where houses in some very hard-hit neighborhoods were free, but the burden of owning an F- property in an F- neighborhood completely overshadowed the potential returns of owning a property for free....

Good luck out there!

@Esteban Carrera a good lease will usually require that the property is constantly connected to utilities, with interior temps constantly maintained within a certain range. If your lease has these terms, then turning off power would be a lease violation, and would potentially justify retaining the security deposit.

Yes, pipes could freeze in the winter, but there are also other problems that could occur with no power.

Most areas of NC are highly humid, and not having AC and consistent air circulation in the summer could cause issues with humidity buildup inside the house, which could produce mold, rust, peeling paint, and/or wood rot. In general, most materials degrade more quickly with more extreme temperatures (either hot or cold), and they degrade more quickly when humidity is high or when there is a lot of water in the environment...by not having power and AC/ air circulation, you're subjecting the house to more extreme temperature swings, and more humidity; both of which can cause problems.

Also, as others mentioned, if the house appears vacant with no lights on, it will become a target for burglars, vandals, squatters, etc.

Was the refrigerator / freezer completely emptied and cleaned before power was turned off? (Hopefully it was, otherwise get ready for a stinky mess!).

Having the house sit vacant could also expose you to other risks--for instance, if a plumbing leak begins, there won't be anybody there to spot it and take quick action, and a prolonged leak could cause serious damage. ...on the other hand, there are some advantages to having the house be vacant (less tenant-caused wear and tear, less liability stemming from the tenant's presence)...

Some houses have critical safety systems that require power (for instance, sump pumps, hard-wired smoke detectors, security lighting, etc.)--so, you'll want to consider whether your house has any of these types of items...if there's a big storm that dumps a lot of rain, and the sump pump won't function because there's no power, that could cause a flood and major expenses...

Personally, I would also be concerned about the competence of a tenant who turns off the power to your property without first asking your permission. A responsible, considerate tenant would have at least wondered about whether cutting power could cause problems, which would have led them to first ask your permission before turning off power.

Good luck out there!

@Scott Trench great points!   ...this has turned into a pretty high-level discussion!

As for the age of the population and its interconnections to deflation/inflation, I believe that demographers estimated that the U.S. transitioned into a "primarily old" population sometime around 2015-2020 for the first time in the country's history. (In other words, up until recently, we always had a population comprised of more young people than old people, but now, we have a population of more old people than young people).  Obviously, this has big implications for everything from the solvency of Social Security, to the functioning of our healthcare system, to the environment (old people tend to have less environmental impact than young).

Bringing it back to real estate, I've recently noticed several podcasts and articles about buying and operating living facilities for older adults (which, presumably, are experiencing an increase in demand--though this is an area of real estate that I don't know much about).

As for inflation--the numbers that just came out this morning do not look good, and Powell will probably need to clamp down hard to get this runaway train under control.

The "soft landing" seems less and less likely every day, but with change comes opportunity...

Good luck out there!

Hey folks,

I'm interested to hear the BP community's thoughts on whether we could be on the brink of a wage / price spiral in the U.S.

A wage / price spiral occurs when wages increase (which is occurring), and those increased wages cause the prices of goods and services to increase (inflation, which is also occurring), and that increased inflation causes wages to increase more, and the cycle continues on and on until you're paying $100 for a loaf of bread.

A bit more specifically, the theory is: increases in wages creates more discretionary money that people use to buy more goods and services (demand goes up), and this increased demand causes prices to go up (inflation increases), that increased inflation increases demand for higher wages (workers will only work jobs that pay enough to afford the costs of the inflated goods and services), and those higher wages increase the cost of production of goods and services, which increases the price of those goods and services (more inflation).

I've seen a variety of opinions on this topic...

Some people think we're already in a wage / price spiral, or that we're on the brink of one (for instance, see this Marketplace article: https://www.marketplace.org/20... )   ...others seem to take the perspective that a wage / price spiral is a "dangerous myth" (for instance, see this article from the libertarian-leaning Cato Institute: https://www.cato.org/commentar... )

What we do know: the two main ingredients for a wage / price spiral (increasing wages and increasing inflation) are present.  Fed Chair Jerome Powell has mentioned that the current labor market is so tight that is "unhealthy" (i.e.; there are plenty of jobs and relatively few workers, which is helping to drive wages up), and we also currently have the highest inflation in over 40 years (caused by a perfect storm of a supply chain hampered by COVID and the Ukraine War, years of extremely cheap debt, significant amounts of cash entering the market, and pent up demand--among other factors).

The most often-cited solution to stop a wage/price spiral is to increase interest rates, which should cool off demand. It certainly looks like the rate increases we've already had are already slowing demand for real estate in many markets, as evidenced by more days on market, inventory increases, more price reductions, etc.

What do you think? 

Are we on the brink of a wage / price spiral, or already in one? Is a wage price spiral even a real phenomenon? If we do have a wage / price spiral, how quickly can it be stopped? How would a wage / price spiral impact various areas of real estate? How much higher will rates need to go before we stamp out inflation, and how long could that process take?

This is a nuanced topic, and I'm interested to hear what folks have to say!

@Cassandra Alessio not only can a condo HOA cost you money and cause you headaches, but in some cases, they may ban you entirely from renting your condo--in which case, your whole plan goes up in flames.

In my area, it's fairly common for condo HOAs to forbid leasing any of the condo units.

...So, you'll want to be very certain about the HOA's policies on renting, and also get a good sense about whether their policies could change. Perhaps ask HOA board members about the likelihood that their rent policies could change in the future, and the likelihood that they could ban renting in the future...man, now that I say it, that sounds like a lot of work on the due diligence side...it also seems like something that could easily go wrong (for instance, an HOA board member tells you "we'll always allow you to rent", you buy the property, and 6 months later you discover that that HOA board member was on their last term, has now left, and the rest of the HOA is comprised of folks who want to ban renting)...it may be easier just to buy a normal SFH.

...but, as others have mentioned, the decision ultimately comes down to numbers and risk vs. reward...for instance, if this condo would cashflow $2k/month, require minimal effort to manage, and had tons of the benefits, then maybe it would be worth taking the risk of the HOA issues...As usual, it all comes down to risk vs. reward.

Good luck out there!

@Trevor Riley this is an interesting question, because I think a lot of people (myself included) are experiencing challenges that they weren't experiencing prior to the rate hikes, and the subsequent significant shifts in the market.

For many investors, agents, mortgage brokers, etc., the last several years in real estate have been relatively predictable and relatively easy to navigate.  People who were at least somewhat competent got in a "rinse and repeat" rhythm:

-Mortgage brokers had tons of applications and refis to work on (and more came in every day). 

-Agents could easily sell houses with offers rolling in and bidding wars all around. 

-Investors were in a straightforward cycle of buying, watching appreciation grow, refi'ing to a lower rate, and buying again.

Rinse and repeat, rinse and repeat, on and on forever, amen.

Now, the market dynamic is so different that many folks' biggest challenge is figuring out the next step in a market--and a broader economy--that is very alien to most of us. 

-What does that mortgage broker do when they go from processing more loans than ever, to suddenly having nothing but tumbleweeds rollin' through their office? 

-What does that agent do when there's suddenly a noticeable decrease in demand? 

-What does that investor do when they can no longer refi to a lower rate, and 1031'ing won't pencil out because they'd be going from a 3.5% to a 6.5%? 

...it's like a pilot who proficiently flies 747s for twenty years back and forth, back and forth, back and forth across the country...until one day, they're told that they have to fly a rocket to outer space. Can that old dog learn a new trick?

The sad truth is: there will be people who find themselves a victim--sometimes through no fault of their own--of this quick and significant shift in the market. Some folks are losing their livelihoods as we speak. Others are about to find themselves in a very tough situation with insufficient resources to weather the storm. As Warren Buffet says: “Only when the tide goes out do you discover who's been swimming naked.”

On the bright side, as with any market shift, new opportunities are arising--and it's our role to identify those opportunities and pursue them in a professional, calculated, and conservative manner.

Personally, I'm still working on trying to figure out my own next step, but I think I'm closing in on a few prospects...As the Bear Grylls meme says: "Improvise. Adapt. Overcome."

Good luck out there!