home ownership, renting, double dip, good for whom?

[Rich Weese]

My day started with getting ready for a trip tomorrow to Cancun. Fun, excitement and grand kids.... Then, I made the mistake of reading news reports and picking up the USA Today.
Front Page headline article "Cities see rise in rental homes". Shouldn't have read it. Opening paragraph states that over 500 large and mid size cities have seen homeownership drop and increase in renters. Good or bad?
The 4 million foreclosed homes in last 5 years will cause long lasting changes, reduction in neighborhood stability, and eliminate the # 1 method folks have created wealth over the last 50 years-their home equity.

Irvine increased from 40-50% renters in last 10 years
25 cities now have more renters than owners
Since 206,rental households have grown 692,000 a year
Since 2006, owner-homes have dropped 201,000 a year.

Then I read some more articles that talk about a DOUBLE DIGIT drop (11.6%) in RE values currently.

Then I read some more articles that seem to say the dream of home ownership might not be so good any more. Concern about more drops in values. Continued foreclosures. Potential cuts to home owner subsidies. Possible elimination of interest deduction on taxes.

It seems to me, when I start to think deeply about this, maybe there is a move afoot to turn U.S into renters. Who does this benefit? Why would someone not want to be positive about real estate ownership. Isn't this where the majority of estates have been created? What if we can't see benefit in owning real estate? What does that do to values? Why would lenders want to loan on a bad future?

There is definitely a positive in renting currently. In many cities you can rent the same home than what you would pay in mortgage pmts. If you didn't believe in value increases, or were constantly being told that is no longer the best route, why would you do it? Even with the low interest rates, govt assistance programs, mortgage re-dos etc, the prognosis is not good. We've been told we're on the mend, yet the facts tell a different story.

Why would govt want this? Could it be beneficial to them? Take away that dream and create more dependence on Big Brother? Higher inflation wouldn't matter as much or would it? Would this help create a more "level playing field for all" if the # 1 wealth creator was taken away? Would this be helpful? Would this lead to more "socialistic" approach and need of Big Brother involvement?
I told you this messed up my day!! I don't have the answers. The increased demand for renters is good for my rentals, but if the buying public doesn't believe owning real estate is a good thing, aren't we screwed? Feel free to disagree or tell me I'm nuts. In this instance, I hope I am. Rich

[Bill Gulley]

Values will return as more confidence in the market increases. RE ownership has been seen for decades as the basis for accumulating wealth and a rock solid investment. The public perception has been damaged and people now see RE as a financial risk rather than a savings plan or investment. As they look to the real costs of housing, rent vs. buy, renting a roof may be the better choice after taking out the preceived value of appreciation. When the perception is changed and the return exceeds the preceived risks, buyers will come.

[Mitch Kronowit]

The problem with waiting for the "bottom" is nobody will know exactly when it occurred until we're well above it and, by then, it'll be too late to buy "at the bottom".

We're buying now simply because it makes sense. If values drop a little more, big fat hairy deal, we're in this for the long haul. If after 10 or 20 years, California values return to their 2006 range, are we going to give a squirt we paid 10% too much?

I'm certain there are many on the sidelines saying, "Wait for it... wait for it...", who'll be saying in the future, "Oh darn, too late, I shoulda bought last year!"

[Kevin Yeats]

One of my (very bright) college professors used to say "You can go broke waiting for the highs or lows of a market."

[Max Drizin]

I'd say its a great time to get into investment, especially if you are looking for turnkey properties.

There are a lot of people that I've seen, good friends and competitors alike, who got in over their heads while the market was good, and are now struggling when it's south. For instance, I know a guy who has several quality, cashflowing multi-unit and mixed-use properties (including a high-end bar, which is kind of cool), which are keeping him afloat right now.

The problem is that he is burning through this cash to pay the mortgages on six or seven other properties he was trying to flip, and he doesn't have the money to finish the job. So, he's got mortgages for $60,000+ on properties that are maybe worth $10,000, if he finds tenants and puts in the work to make them livable, and that's a large if.

These are the places that package deals come in. Maybe I buy one of his good properties, listed at $500,000, for $400,000, and then buy two of the distressed properties for their mortgage values, something around $80,000 for both. That way, I'm getting a price that I want, he's getting two bad properties out of his portfolio.

I'd turn around and sell the properties at a loss if they are bad enough, or maybe rehab them a little to get them up to where they should be. Either way, I've already gotten my discount on the property that I really wanted, so it no longer matters what I get out of the other two bad ones.

I end up $20,000 under the purchase price he had for the one property I wanted, and I ended up with three properties.

With the double-dip, it's going to be harder for people like this, who have had multiple deals go bad, to get out of their rut. With some creative deal structuring and a little bit of patience and persistence, you can usually get them to see the bright side of what you are doing and you can make a win-win situation out of it all.

[Mike McKinzie]

I agree with Mitch and J Scott. If I bought a house last year for $120,000 and it rents for $1,200 a month, so what if it drops clear down to $50,000 in value! My rents do not drop like that. This drop does affect "flippers" and I would be scared if that was my business right now. Even wholesalers are finding it harder to unload properties. Small, local niches may still be good, but overall, "buy and hold" investors will come out smelling like a rose come 2020, or there abouts.

Japan had it's lost decade, the US may have it's lost decade, from 2007 to 2017. When there is blood in the streets, buy property!

[Michael Zuber]

I know this is not a good idea as I type this because Rich Weese is The Man as far as I am concerned.

But I wanted to take a stab at his triple whammy and see if I can turn a negative into a positive. Rich please be gentle with the response

1) Real Estate not finding a bottom yet. When you look at the overall market no one can argue with that fact. But lets step back just one step and look at the market that fell first. The Subprime market. I have been buying properties for 2 years now that I am sure had sub prime Neg Am loans on them and I can tell you I am not seeing prices going lower. In fact I just paid 38K for a house I bought for 35K (twice) last year (I own 3 on same street now). Same street, same condition, etc. Now 3K isn't a lot but it is almost a 10% rise in price over last 18 months. Also note my rents are '995-1,025 so I don;t really care if it goes lower, but it is note going lower (I tried to get for 32K but no dice). Another point is 2 years ago I was the only buyer now I am seeing 10-12 offers on properties I am going after. So while the move up market has A LOT more Pain and the High End has A Lot more pain and thus the overall numbers will look terrible for years to come it is ok. My point is look at the part of the market that fell first for the first sign of recovery and you can see clear signs of a bottom, more competition, etc in the market that fell first.

2) Inflation, hard to argue again with this especially as we go into QE3 later in the year. But again last time I checked I am getting fixed rate loans and raising my rental rates so I am not all that concerned about more cash flow every month. Now I know I can buy less with it but I take my chances with fixed rate debt.

3) Unemployment this is tricky as near 10% unemployment sucks no matter how you slice it. But that still means 90% of us are working. Another point that goes unsaid is the low savings return and this is where the magic could come in. Eventually people will start looking for higher returns as inflation decreases the savings return (lets be honest if you have a savings account today you are losing money with inflation). This happens because people are scared and they should be. The debt ceiling, the EU, greece, the latest soft patch, etc. But again the money is being made when other are scared or frozen.

We have at least 5 years of fun ahead with the next 2 years being REALLY dicey in my opinion. The next election cycle should be interesting and could be a catalyst for change or more of the same.

Lets see.

Just to be clear Rich Weese is my Hero!!!

[Rich Weese]

Hi Michael- Mom wants you to call her. Just kidding. Thanks for the nice compliment. I don't have much in your reply to argue with. But, I'll try.

1. I'm surprised there aren't 100 buyers trying to get those 38K homes that rent for a grand! Are these in Fresno? I owned property there decades ago and that seems like a great value. Can't go wrong.

2. Are you still getting fixed rate, 30 year, investor loans? That is a great deal. You'll eventually hit a max, I would suppose. For now, also a great deal, imo.

3. There is a current trend in the govt circles to downplay the "dream " of owning a home and planting seeds that "maybe renting is best" If this gains traction, your rents may stay high, but your re-sale values will be very stagnant, due to the new trend. You had a lot of items mentioned in this paragraph that could turn into a keg of dynamite. Possible.

Epitaph paragraph- agree completely. That was pretty gentle.... Rich

[Michael Zuber]

Hi Rich,

1) yes properties are in Fresno

2) I own way too much property to get a bank loan. I swear I walk by a bank and alarms go off. Kind of funny I can't get loans with deals like this but I make do with Private Money

3) Don't care much about resale. I want to stop working someday and thus I won't kill the golden goose. I agree lots of scary things on the horizon but you can either take your shots or just wait. I like the deals I am getting and will take my shots.

Enjoy Cancun

[Rich Weese]

# 2. Tell me about your fixed rate, private loans. Balloon? Rates? payment terms? I've seen LOTS of folks get hurt when the rainy days came that they said never would... Be careful. Rich

[Cheryl C.]

Rich, I'll jump in here while you are waiting to hear from Michael.. I, too, have too many properties for conventional investor financing. I use a small local bank and get "commercial" loans. 5.75% with 1/2 pt, fixed for 5 yrs and then adjusts. I'll have to look at the notes to see the adjustment terms. I wish I could get the 30yr money, but this is far better than any hard money I've heard of. I'm blitzing these off, while sticking with the 30yr AM on my "good" refi's obtained in 2003 or 2004 in the mid-lower 5's. An added bonus is there is no application or appraisal because I've had a long-term (25yr) relationship with this bank. They can close in a week.

[Rich Weese]

Hi Cheryl- I know those are workable #'s at the present. The only concern I would have is the 5 years question. Bank still in business? Rates up to 10%? (I've lived long enough to see them higher that that). Govt makes investor loans even tougher to obtain? Like Fannie going from 10 loans to 4). Our economy being further in debt/the tank?
I know the 5 yr is what is out there. If that had come due 18 months ago, what would you have done? You are holding on to a keg of dynamite- only the length of the fuse is in question. Along the line, someone will be holding the keg when fuse goes off and no one will re-write your loan for any of the possibilites listed above.

Rich

[Cheryl C.]

Hi Rich. These are not balloons, but will adjust. I was around in the early 80's as well. This bank will be around. In fact, they were all over the news being interviewed (about their strength) back in 09 when others were going under. Many of my properties are paid off and others close to it. I'm sitting on plenty of cash should the need arise to pay these off. The payments I am making on these put them on about an 8yr am schedule. No worries here even if vacancy rates shot up (doubtful).

[Rich Weese]

Looks like you have it under control. Others on BP might be able to learn and copy you. Rich

[Michael Zuber]

Rich

My most common loan has following framework.

I have to put down 50% of purchase price and then I get 9% fully amortized 15 year loans. Payments usually around $200 and I own the property free and clear in 15 years

No Balloon, no prepay, etc (but about 2,500 in upfront fees, points, etc)

So I don't get great leverage but it is better than nothing

Mike

[Wes S.]

Lovin this thread. Couple comments:
- When the sheep are all running one direction, I'm running the opposite. I believe the time to create substantial wealth is now but you gotta still buy according to your risk tolerance, expected returns, margin of safety and future exit strategies.
- Cheryl, I too have several SFR loans with a local bank. I'm paying ~6%, 15-20 am, no closing costs or appraisals and it adjusts every 3 yrs with a 2% increase cap, so max it could go up 3 yrs from now is 8% and soforth. I've really been torn about this b/c I'd like to lock in some of my gem properties with these low rates but on the flip side, I can close within days, good relationship, biweekly pmts and can leverage a little equity with this bank.
- I'm very curious about a private $ setup b/c I feel I'm at a tipping point where I may have to look elsewhere on future deals which are coming down the pike.
- I'm also curious on thoughts, might be a dumb question but, when is the # of rentals owned 'too many' in a specific market based on size/population. Could there be a teeter totter effect when rental demand slows years from now? I guess thats why I feel comfy with SFR b/c of the exit strategy to retail.

[Cheryl C.]

Wes, I don't know about limitations based on market demographics. I am wondering whether the bank I use has some internal limit on loans to one borrower. I think I'm done buying at this point anyway. I have been kicking around the idea of re-fiing my pers residence and paying off a number of adjustables. Then I would refi a valuable rental and pay-off any other adjustables or higher-rate loans. I talked to the small bank I use about consolidating a bunch and putting them on my house or one rental, etc. I, too, would like to take advantage of these low rates.

[Wes S.]

We will see if they have a 'Limiter' on me on the next deal...haha. I know they are 70% LTV 'in house' when it comes down to the formal process of getting appraisals, ect.

FHA 30 yr Prim Res with US Bank is at 4.25% = Crazy Good! Prob worth taking a look at to soak up other rental debt but their might be other opinions on this.