MH Real Estate Investment Blog

Here is our June Newsletter. This is a great way to stay up on local trends plus get a sense for what is going on at the national level.

Let me start off by writing that I’m bullish on real estate as an investment. Especially in these uncertain times it is an excellent hedge against inflation. David Lereah, chief economist at the National Association of Realtors states, “In the past, investors bought gold as a hedge against inflation… now they buy real estate”.

Now it is time for the other shoe to drop. As a member of a number of real estate sites and publications, I’ve been seeing tons of headlines lately along the lines of “Real Estate Is Back” or “Now is the time to Buy.” These articles typically trot out statistics showing how cheap home prices are relative to the past decade and mention that interest rates are still at historic lows. Both statements are quite accurate; however they do not mean that real estate is good investment option.

Take the dotcom boom that occurred about a decade ago as an example. Investors were frothing at the mouth to buy and send prices to dizzying heights only to watch values plummet. There were plenty of opportunities to buy as stock prices plummeted and they would have technically been great buys relative to their prior valuations; however many of these companies simply ceased to exist and it would have been an investment mistake to dump more money into them. The same situation now applies to real estate. Sure the market as a whole has plummeted, but there are still only a few gems among the many real estate turds and it is up to the savvy investor to navigate this minefield.

We continually talk about supply vs. demand as a reason for pricing, but what has been forgotten is that there is another important matrix risk vs. reward. Prices and interest rates are low because they have to be. These are the main factors to induce would-be buyers to commit funds to a long-term investment decision.

Don’t get caught up in the hype of relative valuations, do your homework and buy quality properties in neighborhoods that have desirable demographics. These are the markets that are likely to rebound in short order as the economy stabilizes and consumer confidence improves.

With the U.S. deficit skyrocketing like a Saturn V launch vehicle, there has been quite a bit of talk about how to reduce the country’s debt. One option that seems to be considered is the mortgage interest tax deduction.

This tax deduction is extremely important, and is one of the primary reasons why Americans buy homes. When someone purchases a home, usually there is a home loan that goes along with it. The majority of the interest is paid in the initial years to the lender or bank, with very little being paid toward actual house. This reverses as one moves closer to the end date of say a 30 year mortgage. This schedule is called the mortgage interest amortization schedule.

If an individual, for example, has a mortgage payment of say $1,000 per month, the first years will likely show $800 being paid in interest to the lender / bank, while only $200 is paid toward the home. So at the end of the first year, an owner may have paid $12,000 in mortgage payments, but only owns $2,400 ($200 * 12 months) more in the actual house.

The upside to this payment is that the remaining $9,600 is all tax deductible. In addition, the tax deduction is an “above the line” tax deduction. Most deductions are “below the line” and are subject to many restrictions, not least of which being income. With below the line deductions, you may have had business expenses or other tax deductions that you may be unable to take because of your income level. Above the line deductions are taken with much higher levels of income, thus allowing a much larger percentage of the population to take advantage of this deduction.

So what is going to happen to this deduction? Is it really going away? Well, despite the threats looming from Washington it is unlikely that such deductions will go away simply due to the economic backlash that will ripple across the US economy. Representatives may attempt to tout this as something to attack the wealthy on, but keep in mind that this deduction only applies toward one’s primary residence. Of course, that doesn’t keep investors from forming a real estate business and writing off the interest as a business loan, so in the end, it would really only hurt middle class families and non-investors. I can’t imagine that this hasn’t been thought through by the current administration, so my bet is that it’s not even being seriously considered.

Bankruptcy has once again become an increasingly popular tool to reorganize or eliminate debt during this financial crisis. What you may not know is that while your first mortgage is protected if you plan to remain in the home, it may be possible for your second mortgage to be eliminated if (as is the case for many) the value of the home is less than what you owe on the first mortgage.

Bankruptcy law allows you to list the 2nd mortgage as an unsecured debt if there is no equity to cover it. This is helping many homeowners bring the debt load on the home back into line with the current valuation of the property.

A caveat, you must successfully complete the bankruptcy repayment plan to get the mortgage waived; however that is usually a much easier accomplishment once your debt load has been reduced.

Be careful though, this applies to a primary residence, investment homes have different guidelines which apply, so if you’re considering bankruptcy and have multiple properties make sure you talk to an attorney who is familiar with how real estate is treated in bankruptcy.

Just about everyone wants to upgrade to a larger home. Whether the reason is to “keep up with the Joneses”, house a larger family, or just the human desire for more space, it seems like no matter what we become accustom to we always want more. But at what cost (economic or otherwise) does the extra space come with? The most obvious expense is the increased mortgage, but if you live in a condo in Santa Monica, moving to a single family home in Riverside might actually save you money.

Other indirect costs come with any increase in size. Utility costs to both heat and cool your home can be a big one. When moving to a larger residence it pays to ensure that your home is properly sealed so that you’re not wasting energy. French doors are notorious for air leaks, even in newer homes, but can be alleviated with self-installed lining or even through professional contractors.

Water usage can creep up, but your usage base should also increase with the size of the house, so it’s not a killer. However, depending on the landscape you have, water usage might become a problem as well as general maintenance. People like their yards to look attractive and many HOA’s are very strict on these aesthetics. Hiring a gardener may be a cheap way to perform simply and timely maintenance on your yard. Depending on the complexity of the yard, this may be the best choice. There is usually plenty of work around a new house and the last thing you need is a letter from the HOA indicating weeds near your driveway.

Finally, it’s human nature to want to fill up space. When you move from say a 1500 sqft home to a 2500 sqft home, the need to fill the additional space with furniture becomes nigh irresistible. There is no set solution for this except to keep a level head and realize that you have a long time to fill up that space that will not be getting any larger over the next 10 years.

These are just a couple of the costs in moving to a larger home. While they generally won’t “break the bank”, if you are just barely getting by with the cost of your new home, it’s something to keep in mind.

Continuing our To Buy or Not To Buy theme with 3 questions to help you decide.

1. The very first question you have to ask yourself is how long you plan to stay in the area. What happens if your company relocates or a promotion comes your way? Real Estate purchases are generally breakeven after 5 years; however in today’s chaotic climate it could take 7-10 years to recoup your expenses. Be prepared, one great option if you need to move is to rent our your current home until the market rebounds enough so you can sell for a profit(Hint….We can help you with the property management)

2. How well do you know the area? I have seen families move for a job opportunity, immediately buy a new home only to find out they hate the area and now feel trapped. Even if you’re only moving across town, make sure you know the quality of the schools, neighborhood and local community ammenities prior to investing your hard earned cash.

3. Are you prepared for the economic and time commitment owning a home takes? When you rent a home you get to call the landlord when something breaks; however if you own the place when something breaks you either have to fix it yourself or call someone which can be very expensive. This is doubly important if you are buying a foreclosure or otherwise neglected property as they are sure to have deferred maintenance.

I subscribe to a wide variety of industry publications, blogs, online articles and the like and right now the common theme has come back around to the question of should you Rent or Buy in today’s housing market.

In my opinion this is the worst possible question to ask. The decision to rent or buy is actually the culmination of a dozen or more questions pertinent to your particular lifestyle and plan for the future.

In other words, just because the fundamentals of the market scream buy, buy, buy doesn’t mean that it is necesarily right for you to go buy something. And as an aside, yes they are screaming that right now. Prices are down, rates are low, lending isn’t quite the treacherous quagmire it has been over the last couple of years. We’ll save digging into this for a future article.

Real Estate is a long-term investment despite the growing number of amateur buy-and-flippers congregating at foreclosure sales. If you plan to buy a home, it typically only makes sense if you’re in the home for at least 5 years, optimally at least 10 years in a volatile market like we are currently experiencing.

So don’t ask whether now is the time to buy or rent, ask yourself questions about your current and future plans. What are those questions….stay tuned, we’ll share some of the best in the coming days or you can pay a financial planner to help you.

I want to give a quick shout out of thanks to everyone who took the time to vote for us. The results are in and we are currently ranked as the best property management company in the Long Beach area. Hopefully it is just a matter of time before we reach that status in more markets. We owe it all to you our loyal clients, so thanks for trusting us with your assets.

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I saw this article the other day and I can’t imagine how this is even considered a fight. It’s like comparing Oscar De La Hoya to Mike Tyson, both great fighters but only one is a heavyweight.

I don’t want to re-write the article but in a nutshell, Suze Orman is of the opinion that the dream of homeownership is dead for many Americans whereas Buffett believes this is a great time to become a homeowner.

The American Dream isn’t dead. What is dead(for now) is the ability for would-be homebuyers to vastly exaggerate their earnings to acquire something they can’t afford for the long-term. The housing market has survived past crashes and so have the people that endured them.

Our culture has bec0me increasingly fixated on instant-gratification, this housing correction is simply a really big reality slap to the head. It is a wake-up call that Dreams take time, energy and planning to fulfill not a negative amortization loan.

So, don’t believe the American Dream is dead, it is just going to take a little more work and time to bring to fruition.

There is an element of risk to owning investment properties. Problem tenants, leaky pipes are just a few of the challenges you can expect to face if you own rental properties long enough. There are a few practices you can follow though to help minimize your exposure.

Rule #1. Put everything in writing. Sure, technically oral contracts ARE binding; however unless that conversation is transcribed or both parties admit to the contents of the conversation, it is as if the conversation never took place in the eyes of the law. Maintain a log for each property and list dates and specifics of conversations with the tenant. Email is a great follow-up tool allowing you to put in writing your understanding of the conversation that doubles as hard evidence.

Rule #2. Do NOT give someone access to the property until they have paid all their monies and signed the lease agreement. Compassion and niceness is great, but when it comes to rental properties and the laws that govern possession, you are not doing yourself any favors by letting the tenant move-in ANYTHING prior to the execution of the lease.

Rule #3. Be strict about timely rental payments. When you manage as many properties as we do, you hear every story under the sun as to why the tenant is late. Some of them are sad, tearful affairs and it is easy to feel genuinely sorry for the tenant’s life situation; however you cannot let that get in the way of running your business. The more lenient you are, the more often and the later they will get. There will always be some problem that manifests itself and many of your tenants are living paycheck to paycheck so once they fall behind it is very difficult to get them caught up.

I’ll share some more of my tips over the next few days, but I’d love to hear some of your ideas on ways you manage your properties.