All Forum Posts by: Juan Diaz

Hi all, a long time ago when I was first getting into the housing business, I was really curious about what really drove the housing market. The maxim of investing seemed to be that housing prices would always rise, and you were dealing with a product that was necessary to live as a human being, so you were in a pretty stable environment. But all markets aren’t created the same. Even between two markets with thriving economies, you can have drastic price differences. So I went on a mission to search out the drivers of this price difference, and am publishing my findings from then in a series of posts.

This post will be dedicated to destroying some of the common misconceptions about the housing market. To begin with, the maxim is that housing costs in the long run will only increase. This is true to some degree, but only inasmuch as you examine nominal prices and ignore inflation. The real price of housing, at least in the American market, was actually fairly constant throughout the period from 1970 through 2000. In fact, if you go even further out, the United States has stayed near the same approximate level for about 110 years, from 1890 to 2000.

But if you look at that graph above of average national house prices (from Case-Shiller HPI), there’s a very obvious troubling matter. Why in the world has the average price of housing the USA risen so drastically over the past 15 years? If you’re familiar with the world of commodity investing, such a steep rise is a troubling long-term signal. If we have a 100 year history of commodity prices hovering within a certain level and a current price 70% above the historic baseline, it means that the market for this commodity is not rational in any way, shape or form.

So great, we’re all housing investors and I just said the ceiling was going to collapse on the housing market at some point in time. Go ahead, tar and feather me, right? Well, I’ve got fantastic news for you: in the same way that Goldman Sachs profited hand-over-fist from overpriced housing, you’ve got the opportunity to do the same in the years ahead. How so? By understanding the how’s and why’s behind this irrational market in housing and knowing to get out when they change.

Check back tomorrow for part 2 of the series: demographics & location!

The short answer is: not much. We’re in the housing market. The housing market has never been a leading indicator of the economy, so even if the housing market does feel some negative effects from the UK’s Brexit, those shocks will take a little while to make their way down to the housing market. Heck, these shocks might not even end up having any negative effect on the housing market. Let’s take a look to examine:

• On June 23, United Kingdom voters decided to leave the European Union by a slim but decisive margin. This vote is non-binding but it’s about 90% odds that the UK leaves the EU
• The UK leaving the EU is a big deal because the UK removes itself from the largest free-trade bloc in the world. That’s why the financial markets are spooked.
• The UK will likely face economic collateral damage because of this vote, but we don’t know whether these jobs/GDP will be completely lost or just transferred over to Europe
• The financial markets hate uncertainty, and they did not predict a Brexit, so they’ve lost a good chunk of value, something around 5-6% for the average US index fund.
• The US exports about $56 billion worth of goods to the UK every year, which is something like 3.8% of the total exports from the United States. The UK is a good trade partner, but not an essential one.

That’s it. Looking at those facts and that breakdown, if you’re investing in the United States, there’s not a lot that’s going to affect you. If you’re in the UK, it’s a different story. So how and why is it worth looking to for the USA?

For investors in the United States it’s worth keeping an eye on only as it affects the global economy. The fears here, as with the European debt crisis, are of global contagion spreading and Europe and then the world plunging into another global recession. Investors are a jittery bunch, who have a habit of not wanting to lose their money so they try and price this risk into the stock market, whether or not this price is accurate. Hence the sudden 5.6% drop in the S&P and the Dow.

So the market has priced in the risk. Now, how does this affect us going forward as real estate investors? It’ll hit us in a few ways, but I believe we’ll be largely unscathed.

• Wealthy home buyers are likely to be spooked. They’re much more exposed to global economic downturns than the average Joe Schmoe, so if you’re selling to an international upper-class clientele, especially those that work in finance, things might be a little slow until this crisis settles down.
• This could be another Greece. We’ll hear the news stories about how crappy things are in the UK, and then the financial markets will forget about it after a few months.
• On the other hand, if this does develop into that global recession people have been fearing, we do have a few leading indicators to watch out for.
• Keep your eye fixed on the Dow and the S&P. These are pretty good barometers for the future of housing. The S&P peaked around October of 2007, and at least in the Bay Area, housing peaked in the summer of 2008. Housing markets should lag at least a couple months behind the S&P.
• One of the silver linings to this is that feds won’t raise the interest rate any time soon. Keep those loans cheap and easy to inflate the housing market!

So there you go. Based on those reasons, I believe that we’re in safe waters for the moment, but leading indicators like the S&P and the Dow are definitely worth keeping an eye on.

Safe investing!

Juan

Sometimes you have a fabulous property that you love flipping. Sometimes you’ve got a project that drags on and on, but you know the return will be worth it in the end. And sometimes you’re faced with a choice: is it possible to cash out of an ongoing project and avoid that painful slog while still turning a profit?

It’s something that is less-talked about than going through the entire development process, but there are very legitimate methods of making a tidy profit without going through with the construction process and without being a wholesaler. In fact, there are a few specific moments throughout the flipping process that you can profitably cash out at.

The whole flipping or developing process is pretty simple. You buy a house, fix it up, and sell it. During this process, you have four opportunities for profit:

• 1.Wholesale the property immediately after purchase
• 2.Sell the property after entitlement
• 3.Pre-sell the property during the build process
• 4.Sell the property through traditional means after completion of work

Each of these methods have their plusses and minuses. The first, wholesaling, is only really an option if you purchased a property cheaply enough. However, it is a fantastic way to quickly realize profit for minimal investment. You can usually get a home in contract and sell the contract without putting any money down yourself, if you find a wholesale-able deal.

I’ll skip the second option for now, but the third option is also one that’s not super popular: pre-selling during construction. Most people like to buy already-constructed houses, but if you’re a developer or designer in enough demand, sometimes you can find a buyer willing to commit after seeing the plans that you’ve created. The key here is creating good enough marketing material and renderings so that someone can see the finished product in their mind. If you can do that, you’ll be able to pre-sell your house and skip some of the hassle of putting it on the market. The buyer wins too—they’ll be able to customize some of the finishes, and avoid any potential market increase between sale and the finishing of construction.

The fourth option is the tradition method of cashing in on your property, putting it on the market and selling it through normal means. No point in going into the details here, you’ll probably get your highest pure-dollar return if you go this route.

Let’s rewind back to the option that we skipped, option #2. This option can be a very lucrative option if you’re developing from the ground up. Especially in constrictive building environments, an entitlement is a very valuable thing. In the Bay, we estimate that an entitled property will sell for about one third of its final value, while an empty lot without entitlement is worth perhaps 20-25% of final value. This means that if you’re skilled at negotiating with building departments, you can cash out earlier in the process and sell your property once you get the full set of permits.

This option can be a very valuable one if you’re in a restrictive market like the Bay Area. Approval to construct a new property can take months, so while you’re waiting for the planning and building departments to review your proposal, the market can really go up. So you may find yourself holding plans in hand for a piece of property whose value has already increased significantly. If you don’t want to run through the hassle of construction, that’s a great point to cash out of the deal and turn a nice profit.

So if you’re going through a long and arduous development process, don’t be discouraged! With some creativity, you can probably find an exit strategy that will make you money. But word of advice: never try to sell a half-finished house.

Best of luck!

Juan

 I think our demographics are extremely different. You're renting (presumably) in a rural vacation location in the middle of the Appalachains, I'm renting in Oakland in the heart of the city. Different groups of people--you're dealing with the Benzes of the renting world at your location in people who can afford a vacation, I've got a lot more across the spectrum. 

I respect that your experience has been different, but I don't know that what works in western North Carolina would work very well in Oakland, and it's not very often that we get the type of perspective from Oakland, at least with what I could see looking around.

Interesting. Thanks for the reply Erica!

Hi All,

One of the things I’ve been trying to do these days is working with bird dogs who get a list of potential sellers, and go knock door-to-door in order to try and find someone who’s willing to sell. We offer something like 20-30K for a finder’s fee on a good deal.

I’ve had some decent-seeming people, and worked with probably ten people over the years, but have never really gotten anything concrete from them. I’ve gotten more leads just in my natural talking with people around my job sites than I have with these finders.

So I’m wondering, what’s your experience successfully working with birddogs to find houses?

@Erica Muller what has your experience been with a property manager/cleaner? I'm curious, because it didn't seem to me when I briefly looked into it that we would sufficiently be able to cover our costs if we did it that way. Would love to hear your insight into that

thanks!

Juan

Some areas definitely are easier to rent in than others. It can be hard to tell which is which, unless you live in the house yourself. For instance, we never had any problems at this one house, but people complained all the time about issues with a street person being around.

I decided to write a column about my own experience putting some of my investment properties on Airbnb, so that you too can learn from my mistakes, understand what a good rental requires, and learn some of the horrors of hosting on Airbnb.

Let me not mince words here. Airbnb can be a horror show. I think we can easily start off by saying that Airbnb will never take your side as a host if it can possibly avoid it. Its priorities lie with its guests, and if you’re OK with losing the benefit of the doubt in most situations, you can still find ways to turn a profit.

Airbnb guests as a whole can be a mixed bag. Putting your property on Instabook is the only way to generate a consistent revenue stream, as most people don’t want to deal with the hassle of the back-and-forth that leads up to a reservation. What this means is that you aren’t able to screen very well, so you get a wide variety of guests at the property.

We’ve had parties in our rentals. We’ve had dark stains all over. We’ve come back to the noxious, heavy smell of weed, which can never be removed. We’ve come back to broken windows. Airbnb guests can be quite the handful. And best of luck trying to get a refund from them through Airbnb – unless you’ve extensively documented condition of items before and condition of items afterward, you’re not seeing a dime. And you’ll never get anything back for something that can’t be captured on film like a horrible smell.

So add those replacement fees onto the maintenance fees that you’ll incur. Whenever someone stays at your property, you’ve got to clean the please until it shines, otherwise your guests will be unhappy. This regular cleaning expense can run you $25-50 a pop, and the deepest of cleans can still see customer complaints.

The other thing you’ll learn is that sometimes guests can cancel reservations with impunity, and no financial reimbursement to you, even if you have a strict cancellation policy. If the guest has anything that could possibly be construed as a safety complaint, they will get fully refunded and it’s on you to bear the costs of cleanup. Not only that, but you’ll have people who book up large swathes of time on the calendar, only to cancel after they get there, making you lost opportunity to have other people book in their spot.

And you know what counts as a safety concern? Next to nothing. You’ve got a lot of folks from the suburbs coming in, expecting a bleached-clean version of a city where everything’s clean and the streets are free of any loiterers. Seeing even one street person loitering on the street can shock their system, and qualify as a “safety concern”.

Add to this the normal humdrum stuff, like calls at 3 am because the tenants locked themselves out of the house, and you can be faced with some nightmare scenarios through Airbnb. Now, imagine that same guest having locked themselves out, getting you to send someone to change the locks for $50 because you don’t have more copies of the keys, the tenant then finding the key, and then refusing to pay the extra $50 when they’re presented with the bill. Yes, it’s all happened before.

So how do you avoid these hassles when you put your place on Airbnb? You can’t. But, if you’re willing to deal with these hassles and go far out of your way to work with some ridiculously-picky guests, you can probably find a way to make money. Part of it is probably the fact that the Bay Area cities that I work tend to fall on the dirtier side of American cities. It’s hard to compare the walled garden of a chain hotel with a house in Oakland, no matter where it is. So if you’ve got a house in a more suburban location, you might fare better. Either way, expect to go above and beyond to meet the needs of your Airbnb guests.

 From an investor standpoint, there's not much difference in west Oakland. Prices are pretty similar throughout. If there are blocks where houses aren't looking in great shape, it's because an investor hasn't had a chance to flip any of those houses yet.