Well, probably the biggest consideration is whether or not the state's Government considered "real estate" an essential service or not.
For example, I am licensed in California and in Arizona. I work the Sacramento and Phoenix metros primarily. In California where things got shut down, our broker instructed us to not to any open houses or any showings. In Arizona it's practically like nothing ever happened. Had one of my agents do a couple open houses this past weekend and had like 5-6 people through each day. So practically no change.
I predict that some buyers will drop out to uncertainty and false worries, and others will be pushed off the fence by the low interest rates and fill their shoes. So even if there is a temporary slowdown, once the overblown mass hysteria dies down things will likely return to normal with a bunch of pent up demand that's been shut in doors the previous few months.
After all, it's not like housing demand is suddenly going to go away. In the bread-and-butter price points in each market there shouldn't be as much long term effect, and it will quickly rebound. But the luxury market make take a wallop as many buyers and sellers are business owners with their wealth tied up in other asset classes that may be more affected by the Coronavirus outbreak.
I agree that some buyers will drop out or hold off due to the uncertainty and ridiculous mass hysteria surrounding the Coronavirus. But as you said, I've told some of my Phoenix area clients that just because the economy may take a hit in certain sectors, it doesn't mean that housing demand goes away.
I predict that after the overblown hysteria of it dies down and people realize they now have enough toilet paper to last them an entire year, everything will go back to normal.
Did an open house this past weekend in the mid $400's price range and had like 5-6 people through, so no signs of slowing down to me.
According to a Forbes article I recently read "5 Signs your real estate market is a bubble"... My conclusion is that many markets may currently be in a Bubble (and therefore it makes sense for me to wait it out for my first investment):
1. Shaky loans - Not sure about the status on this one... Personally My credit score is very high and I have no debt. Not sure if there are others out there being sold on mortgages they cannot afford based on their income, credit scores, ext.(Forbes take is that credit standards are still very tight)
2. Lots of Leverage - In my opinion when there are banks ready to give out conventional loans at 3.5 -4% its getting shaky. I have applied for a pre-approval on several loans and what the bank has approved me for is a very high mortgage that I would not be comfortable taking on with a conventional loan. Although I have heard of many instances in my current Phoenix market that homes are now being purchased with cash many times.
3. Home prices out pace wage growth. - This one is the most concerning to me. My parents live in rural town in Ohio and just sold their home $100k more than what they paid for, and wages are not growing at such a rate to sustain this rise in home prices. I think this will be the next major indicator that we are in a bubble.
4. Foreign demand slows - according to Forbes foreign real estate demand has diminished. I have no personal experience or knowledge of this though?
5. Interest rates rise - Although interest rates have been low I don't believe this will help the wage/home price dilemma.
Am I being caught up in analysis paralysis or is this a legitimate concern that I should not be buying at this time? I have been saving up for a DP and currently I have $16k saved but I would like to save up $25-30k when I buy. Im itching for a deal in the next 6 months but I don't wanna jump the gun either...
What do you think?
Even if we're at the top -- which people have been saying for years -- It's not like we're anywhere near having a repeat of 2008. Homes are suddenly about to be half-off and lose 50% of their value.
Yes, we've had a bull market for a long time, and a correct may be done that slows things down a bit for a year or two, but then it'll speed right back up. Right now under $250k we have like two weeks of inventory, homes are selling in a heart-beat, so I see no reason to be worried.
Phoenix is set to double it's population by 2050. Home values can't help but continue to rise. Huge job growth too. So I wouldn't be so worried.
Assuming you're paying $1,500/mo in rent, at the end of the next 5 years would you have rather paid down $90,000 on your own mortgage or someone else's? That's the true question to ask yourself.
So, there was a bit of stir way back when I wrote this post, but how it's played out is that the seller is simply required to disclose whether or not the plumbing fixtures are in compliance. Most of the time on older homes they are not.
Buyers don't generally ask for them to replaced either, as most buyers simply don't care. As long as the toilet flushes and the shower flows, they're ok with it not being a water-conserving fixture.
All sales by default are "as-is" -- It's just that after the home inspection the buyers may make a "Request for Repairs" which is only supposed to include repairs they request that will cause them to walk away if not fixed. But in reality it's just a second round of negotiations where the buyer requests some things to be fixed and the seller agrees to some and disagrees with others.
It's up to your agent to help you navigate this process and decide what you should agree to repair and what not to agree to. Here's some advice as a general guideline:
3 Types of Repairs
Broken -- Things that are broken and not in working order should generally be repaired or replaced, like a broken garbage disposal for example. If you're smart you'll fix these issues before you even list the house for sale.
Worn -- These are items that are near the useful end of their life, and whether or not they should be replaced depends on their condition. For example, if the roof only has 2 years of life left in it, it should probably be replaced as it's a $10k repair waiting to happen for the buyer, and they will take that into consideration with their offer price. But if the roof is only 10 years old, it's got plenty of life left and shouldn't be replaced.
Cosmetic -- Generally speaking, these are not agreed to. The buyer saw the house the way it was when they viewed it, so they should've addressed it up front with their offer. Sometimes if the carpet is really bad or the paint is really old, the seller will offer a credit to fix as a way to make up for it.
Hope this helps. I wouldn't worry about your plumbing fixtures, as it's highly unlikely the buyer will ask you to replace them, and a good listing agent should be able to help you overcome that request in a negotiation.
I am helping a buyer look at a condo unit in the Richmond / Oakland part of the Bay Area. As a part of the disclosures, the listing agent has included the Contra Costa County Purchase Agreement Addendum. The listing agent has marked it up to indicate that the Sanitary Sewer Lateral Compliance is the responsibility of the condo HOA.
The form also states that "C.PROPERTY DEFERRED: Condominiums are also required to comply with the private sewer lateral program. However, Homeowners' Associations ("HOA") for multi-unit structures served by a single lateral or shared laterals have until July 2021 to comply. EBMUD recommends that you contact your HOA for additional information."
Reading the HOA's minutes and in asking the listing agent, it seems that the HOA is not yet compliant but is taking steps to be by 2021. So at least it's being addressed and that's a good sign.
BUT -- my question is whether or not the HOA will levy an assessment on the condo owners in the community to pay for the cost make the sewer lateral compliant. This is obviously not a cost that would normally be covered by the monthly HOA dues.
Wanted to see if any buyers, investors or agents have experience specifically dealing with condominium complexes in the Bay Area dealing with the sewer lateral compliance and whether they're levying an assessment on the condo owners to pay for it. Don't want my buyer getting hit with a big surprise in a year if they do.
From: https://www.kcra.com/article/3-takeaways-from-sacramentos-population-jump/27338192
"3. Is Sacramento a hot market for new jobs?
Yes, without a doubt.
“Sacramento is the No. 1 location for people leaving the Bay Area," said Barry Broome, president and CEO of the Greater Sacramento Economic Council.
Centene, a health care company, has already announced a move to Sacramento and is building a new facility in North Natomas for an expected 5,000 new jobs.
Broome told KCRA 3 that Penumbra, another health care company, has also announced plans to build a facility in Roseville.
In addition, “EA Sports has brought a division to Sacramento over at the Ice Blocks,” Broome said.
“We’ve had a lot of growth in the small tech sector, and we are now about 22nd in the country in business growth, and small tech is healthy,” Broome added.
He predicted that “if the market continues in the next two years, we’re probably looking at (15,000) to 18,000 jobs.”
Those new jobs, he noted, “are higher paying jobs. So the jobs that are coming in here are paying in the 90, 91, 92 or 93-thousand dollar range.”
First things first, you got to figure out where you want to live. The first investment you should make should be in your own residence.
I recommend the Phoenix area over the others because you already have family here. That will make the move easier as you'll already have a local "tour guide" at your disposal and someone who can easily integrate you into their own social circle.
Plus the market here has a great long-term outlook, with lots of job and population growth. So it'd be a great place to get a hang of real estate investing and then you could venture out to other markets out of state later on and look for turn-key providers in lower price points.
Also, I would suggest visiting all the potential options in person before making the move. Try before you buy is the name of the game.
I'm writing this post to shed some light on a problem I keep encountering with aspiring investors who are new to real estate.
They read a book or two, hop on BiggerPockets and learn about a few ways to analyze a potential deal, and somewhere along the way they form a "Golden Number" that all future deals must have to be worth considering.
The 1% Rule is the biggest violator on here, but it could be any other metric that the investor has created an unrealistic standard for that they try to apply to every deal. No matter the property type, geographic location, or local averages for the metric.
The classic example of this is a new investor who calls me up and wants to find a great rental in a B class area with above market rents, low crime, great schools, etc. and expects to pay $100k less than those properties are going for on the market. Not going to happen.
In this article I'll take a look at a few other common examples and show how when they're dogmatically used to analyze real estate to the exclusion of all other factors, you're doing yourself a major disservice and are passing up on tons of potential deals.
CASH ON CASH RETURN
BiggerPockets already has an excellent article written on Cash on Cash Return that I will borrow from below:
"Calculating cash-on-cash return is simple. We simply divide the received net cash flow for the year by the amount of cash invested. It will produce a percentage rate that measures the received pre-tax cash flow relative to the amount of money invested to acquire the asset.
The cash-on-cash return is a great metric and is widely used throughout the real estate industry both investors and real estate agents. The primary reason for this is due to the metric’s simplicity in calculating the percentage return.
The cash-on-cash return specifically drills down in the return on the capital invested. It does so by only considering returns that are driven by the property’s net cash flow.
Because the cash-on-cash return is only looking at the net cash flow and comparing it to the actual amount of cash invested, it’s a great indicator for the effect of leverage. Using leverage will decrease your cash-on-cash return, which makes the metric a good way to measure different levels of financing."
But the big problem with cash-on-cash return is that it doesn't account for taxes, loan paydown, or appreciation, which are all a huge part of your actual returns on investment.
When you take those things into consideration, you can get a way different evaluation of the same property or market using different metrics.
For a real world example of this, consider this article here about the Best Cities to be a Mom-and-Pop Landlord:
"Oklahoma City is the best city to be a small-time landlord in the short term, which is when comparing rental income versus assumed monthly mortgage payment, according to a new research released Friday by real estate website Zillow. In that city, short-term profit amounts to $536 a month.
However, the greatest returns are actually in markets like San Jose and San Francisco where there are short-term monthly losses, but the long-term earned equity makes them the best markets to invest in.
Including home equity gains, tax benefits, property and income taxes, and maintenance, in addition to the difference between monthly rental income and mortgage payments after holding the property for six years, San Jose, Calif., with $8,927 in long-term profit, is the best city to be a small-time landlord."
So while the Bay Area might of had negative cash on cash return, it made FAR greater profits over time than the high CoC markets did. And buy-and-hold real estate is a long term game, which is why CoC isn't the best metric to use as a single filter.
I see this happening a lot on the west coast in markets like California and Arizona, and investors expecting to get 12% cash-on-cash returns like we're in some high cash flow market like Cincinnati or Oklahoma (it might even be rare there, not my market).
If you know of a way to get this kind of first year return in the current market where you're at, please do share.
More on this "geographic metric swapping" below...
IMPOSSIBLE METRICS LIKE THE 1% RULE
The big problem with a 12% cash-on-cash return or the 1% Rule where the gross monthly rents should be 1% of the purchase price is that in some markets they are next to impossible to find and therefore completely useless.
Let's use both of them to analyze the purchase of a $250,000 property in Anytown, USA. We won't even account for other expenses to keep it simple, and will just use the PITI as the base expense.
Purchase Price: $250,000
25% Down: $62,500
PITI @ 5% INT: $1,340/mo
Rent for 12% CoC: $2,000/mo
Rent for 1% Rule: $2,500/mo
Now, take a look at what your tenant could buy that property for themselves:
Purchase Price: $250,000
5% Down: $12,500
PITI @ 4.5% INT: $1,710/mo
Difference from 12% CoC: -$290/mo
Difference from 1% Rule: -$790/mo
So why on earth would your tenant agree to pay you $300-800 more per month for rent when they could purchase the property with only 5% down and pay way less? Unless you've mastered the Mind Control Powers of Dracula this is simply never going to happen.
The simple fact is these metrics are completely broken beyond a specific price point, to the point of being almost useless.
The only way you're going to get close to the 1% Rule on residential properties in west coast markets like Sacramento or Phoenix is with a fourplex. And it'll be rare at that. And probably in a neighborhood you don't want to invest in, or in a condition that's going to require tons of additional capital in maintenance and repairs.
What good is a 1% Rule property if it's full of bullet holes and you can't collect the rents?
Obviously there's more to the picture than just a single ROI metric. Here's how you can use them to analyze a property.
COMPARE AGAINST THE AVERAGES FOR YOUR MARKET
If you're going to use ANY metric, you should compare each potential property's scores for the metric against the average for that geographic market. And I would even consider narrowing it down further to neighborhood, price point, and property type.
For example, I recently did an analysis of all 2-4 unit properties in Sacramento priced between $400k and $600k. The average 1% Rule score was 0.58%. Not too glamorous when you compare it to that "gold standard" of 1%.
But there were three properties that scored above 0.75%, WAY above the average. So these properties could be considered "great deals" even though they are still below the 1% mark because they perform so much better than average for the area.
The problem occurs when new investors bring cashflow figures from Oklahoma and expect to find them in San Jose, or take appreciation figures from California and try to apply them to any flyover state. You're going to be looking for a deal for a LOOOONG time if you do.
All in all, real estate is complex investment that should be analyzed using many different metrics in tandem to analyze the potential long term returns on a given property.
If you abandon all other metrics for some "golden number" or something, no matter what that golden number is to you, you're doing yourself quite the disservice and will pass up on many great deals because of it.
OTHER THINGS TO CONSIDER WHEN ANALYZING DEALS
Think of all the other things that must be considered when analyzing a potential deal:
For example, more than 2 years ago I made a massive post about the coming "Millennial Migration" from the Bay Area to Sacramento, and have seen how much that migration pattern has changed the local real estate market there.
I bought a owner-occupied short sale in October 2016 for $260k with only 5% down. Nearly three years later it's worth $350k and generating over $500/mo in positive cash flow.
If I had been stuck on getting a certain metric like the 1% Rule or 12% cash-on-cash return, I would've totally missed this opportunity. Don't let that happen to you. Look at the bigger picture and think long-term.
Want another migration pattern years ahead of time? Here you go. Thank me later.
MIGRATION PATTERNS AND TRENDS
According to a new survey by Edelman Intelligence, 53% of Californians are considering moving out of state due to the high cost of living. Millennials are even more likely to flee the Golden State — 63% of them said they want to.
And it's not just people who are leaving -- businesses are too.
In fact, some other states are actively targeting California companies. Arizona launched one such effort in 2013, after Californians approved a tax hike. Texas, too, has tried to seduce companies away from California.
The difference in cost of living and taxes and close proximity make Arizona a nice alternative for these migrating Californians, particularly if they're from Southern California. SoCal has more than 5x as many people as the Phoenix Metro Area, so it's simply an issue of supply and demand... and traffic hahahah.
How many SoCal millennials do you think are willing to finally give up the beach for affordable housing? The median home price in Phoenix is HALF what it is in Los Angeles and hundreds of thousands cheaper.
P.S. If you're a millennial in SoCal reading this, realize that Puerto Peñasco AKA Rocky Point in Mexico is less than four hours away from Phoenix if you really must see the ocean on a regular basis.
How many of the 10,000+ Baby Boomers turning 65 every day and retiring are sick and tired of snow and cold weather in northern states and are deciding to come to Arizona and wear shorts on Christmas in warmer weather?
Enough to make AZ the #2 retirement destination in the US, second only to Florida.
Perhaps these two migration factors are why the Phoenix Metro Area is set to DOUBLE in population by the year 2050. Tucson will play a huge part of it two as the cities grow closer and closer together, filled up with millennials moving from expensive California and Baby Boomers moving from colder northern states.
Don't believe me? Then why is Phoenix already the #1 market in the country for population growth?
Those businesses are coming to... Phoenix was #2 for job growth in 2018 and Arizona expects to add 165,000 jobs by 2020.
To some, this may sound like a sales pitch for a market that I just so happen to be a licensed real estate agent in.
To them, I would say "Why do you think I moved here in the first place? The heat?" LOL :-P
But those aren't the only migration patterns affecting real estate values. Consider the following:
2018 Top Inbound States for Population Growth
2018 Top Outbound States for Population Decline
Are there migration patterns and other trends affecting your local real estate market? Is tech bringing new jobs to your city? Are high taxes and cost of living pushing people out? Are there "Secondary Markets" nearby that could receive a massive surge in demand?
Because that's exactly what's happening with Sacramento and the Bay Area, and Los Angeles and Phoenix. And it could be happening in your market too.
TOO LONG, DIDN'T READ
In summary, my advice to you is to consider ALL aspects of a potential investment, regardless of how complicated that puzzle might be to put together. You can't just rely on one single piece (like a single metric or standard you adhere to).
I know, I know... you don't have time to do all that research or even read all of this post. Which is why there are licensed professionals like me to do a lot of that work for you. I still advise you do your own due diligence, but networking and the sharing of knowledge is what Bigger Pockets is all about.
If you're dead set on achieving some certain ROI figure, ask in the forums where you can find markets that offer it. If you're looking for it in a certain area, ask in the forums if your expectations are realistic and what kinds of returns others are finding instead.
Well, I don't know all the details of your exact situation, but you could start with a single family home to get your feet wet and keep it under $250k.
You won't have as much ROI as a fourplex priced much higher, but you won't have as many headaches with tenants, termites and toilets either.
If this is your first go at investing in real estate, you should probably keep it under 5 units, as 1-4 units still qualifies as residential for lending purposes. 5+ is considering commercial and not where you should start.
Neigborhood type / class is going to depend on your personal tastes. Maybe it's an area of Phoenix you're already familiar with, maybe you want the highest returns possible no matter the neighborhood quality, maybe you'll take lower returns for a nicer neighborhood so you have less risk to worry about. To each his own.
I would consider talking with a real estate professional for 20-30 minutes to kind of flesh out your goals and the next steps to take. That's the only real way to do it effectively and get all your questions answered. Feel free to reach out if you need help or have more questions.
Throw the 1% figure out the window. All real estate metrics are relative. As the other members have mentioned, the average around the Phoenix area is much lower. A "deal" could be considered anything that performs better than average, so 0.85% could be the metric moreso to shoot for.
But then again, this is going to be your primary residence, so you and your husband so discuss what's more important to you, the ROI or the quality of life/neighborhood/property. They're kind of at ends with each other, so make sure you're both on the same page and looking for the same thing.
You could go the duplex route for a little more ROI, but a casita probably gets you the best of both worlds with the home you want in the neighborhood you want with a little added income from renting the casita.
And yes, it is more expensive. I would contrast the added cost for a casita vs. a home in the same neighborhood that doesn't have one and what difference the income will make to you for the time you plan to live there. Only way to know if it's "worth it."