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Seven Secrets To Successful Single-Family Rental Real Estate Investing

Real estate investing in general, and single-family real estate investing in particular, is very different from buying stocks, commodities or most other investments. Real estate is a leveraged investment that has the potential for delivering excellent returns because the cash down payment is a fraction of the retail value, yet it is also a hands-on venture where you make more decisions that affect your returns.

On the other hand, stocks and other investments increase or decrease in value solely based on market conditions, and the only decision you make that affects your returns is when to buy or sell. While tax law treats real estate as a passive investment, it is really more of a business venture. Both short and long-term returns on your real estate assets are directly affected by your knowledge and the choices you make.

Consequently, it is critical that you approach single-family real estate investments with a clear understanding of what it takes to be successful. You must evaluate your purchase options and make a selection based on criteria that have proven through the years to increase the odds of success.

Key Considerations As You Plan Your Purchase

When considering your first (or next) single-family real estate investment, keep these seven pointers in mind:

1. Don’t let emotion cloud your decision making.

If most or all of your real estate experience to date has been buying and selling your personal residences, keep in mind that you were purchasing for a different purpose with a different set of criteria in those instances. Buying a home for yourself and your family is an inherently emotional endeavor. You “love” the large kitchen, your spouse is “wild about” the main floor master bedroom, the kids are “so excited” about the pool.

With investment real estate, it’s all about the numbers. If the combination of the purchase price, estimated renovation costs, expected rental income and market conditions support a purchase decision, you can feel comfortable moving forward.

2. Buy based on current returns, not future appreciation.

Will the property have a positive cash flow the day the renters move in? That’s the evaluation criteria you must use. Trusting that area rents and home values will increase over time and that that is where you’ll get your return is a recipe for disappointment, if not disaster. Optimism is an excellent personality trait, but in single-family real estate investment, it can lead to big losses. The best deals make money from day one, and long-term appreciation is a bonus.

3. Budget realistically.

As a property owner and landlord, there are expenses you will incur in order to maintain the value of your asset, so you must plan accordingly. The most obvious of these expenses is the upkeep on the property. However, there are other costs you should budget for. One that is often overlooked is vacancy expense.

In a perfect world, your property would be rented continuously with no gaps. However, the reality is that you may lose a tenant on short notice and have to pay the mortgage for a month or two before a new tenant has moved in. If you have not budgeted for vacancy expense, this interruption in your cash flow can come as an unwelcome surprise and a hit to your financial planning.

4. Know your sub-markets/neighborhoods.

Choosing to make a single-family rental investment in a particular metropolitan area simply because a national article states the market, in general, is positive can backfire if you don’t get the details on the specific sub-market or neighborhood where you intend to buy. While the key financial indicators for a city such as job growth, population growth and others may be on the rise overall, that doesn’t guarantee that the specific community you are interested in is enjoying the same kind of upswing. In fact, one sub-market may be growing because businesses are moving there from the area you have in mind. Be sure you have an in-depth understanding of all the forces at work. The key to success in real estate has always been location, location, location.

5. Learn about local regulations and federal laws.

All forms of investing are governed by regulations. However, with stocks and commodities, understanding those regulations is your broker’s job. In real estate investing, the responsibility for understanding everything from local annual registration and inspection requirements to federal fair housing laws falls to you. The time to learn about these legal issues is before you make your purchase. Failing to understand your obligations until after you’ve missed a deadline or violated an ordinance can be very costly.

6. Build a relationship with a local handyman or contractor.

Every rental property will need repairs and maintenance — if not immediately, then certainly over time. Before you complete your purchase, you should invest some effort in researching and connecting with experts in the area that you can call on as needed. Waiting until a pipe bursts to find a plumber can increase both your stress level and your repair costs.

7. Set aside funds for capital expenses.

As a property owner, you will have a variety of smaller, ongoing operating expenses, everything from fixing dripping faucets to making minor repairs. But items such as rooves, HVAC units and driveways eventually wear out. These things have longer lives and higher price tags and are known as capital expenditures or “capex.” These kinds of expenses can run from thousands to tens of thousands of dollars, so it is important to budget and set money aside on a regular basis to cover them.

Preparation: The Key To Investing With Confidence

Investing in single-family rental properties can be intimidating, especially if you are new to the process. The key to forging ahead confidently as you identify, vet, purchase, update and operate a rental is having done all your homework in advance. The considerations above are a great start.

Source: forbes.com

Position Realty
Office: 480-213-5251

US Housing Flipper Make 50% Gross Returns

Property investors were bullish on the U.S. housing market in 2017, flipping more homes than in any year since 2006, when the real estate bubble that helped upend the global economy was still inflating.

Investors flipped more than 207,000 single-family houses and condos in the U.S. last year, Attom Data Solutions said in a report, which defines flips as sales that occur within 12 months of the last time the property changed hands. More than 138,000 investors flipped a home last year, the most since 2007.

“The long up-cycle that we’re in is giving more and more people confidence to try their hand at home-flipping,” said Daren Blomquist, senior vice president at Attom. Rising home prices are “pulling more people onto the bandwagon.”

Buy, Sell
Investors flipped more than 207,000 homes in the U.S. last year, the most since 2006.


Source: Attom Data Solutions

Today’s home flippers appear to be more conservative than bubble-era investors. The average flip generated gross returns of 50 percent in 2017, compared to 28 percent in 2006. Thirty-five percent of flippers financed their acquisitions last year, the highest share since 2008 but far lower than the 63 percent who used loans in 2006.

Still, red flags show up in local markets. Flippers in Austin, Texas; Santa Barbara, California; and Boulder, Colorado, earned gross returns of less than 25 percent (which don’t include the cost of renovating the homes), suggesting that investors in some markets are depending on slim margins. Flips represented almost 13 percent of home sales in Memphis, Tennessee, in 2017, more than twice the national average, a sign that some flippers are becoming overconfident, Blomquist said.

Source: bloomberg.com

Position Realty
Office: 480-213-5251

Should You Buy A Home For Your College Kid?

If you’re about to send your child to college, you’re undoubtedly suffering from sticker shock. And it’s not just from the cost of tuition and mandatory fees and books and a meal plan and parking, but also from housing. Maybe, especially, from housing. The mouse – hole your dorm – bound child will live in for at least the next year come August or so might as well be the Taj Mahal for what it costs to shelter them in much less extravagant environs.

The high cost of student housing – not just in the first year when they are typically living in on – campus housing – is just one of the reasons people are increasingly looking to purchase property for their college kids to live in. Is this a consideration for your family? We’re breaking down the particulars.

Financial savings

Yes, it may be that buying a property for your college kid to live in is a smart financial decision. “Average prices per year for housing are more than $9,000 in college towns,” said U.S. News & World Report. “In highly desirable college towns outside major cities, housing costs can be much higher. Monthly housing prices in Berkeley, California, home of the flagship of the University of California system, can reach more than $3,000, making the price tag for the academic year more than $27,000. In Cambridge, Massachusetts, outside of university – rich Boston, the four – year price for housing can exceed $100,000 as well.”

If that has you getting ready to search for homes for sale RIGHT THIS SECOND, “Don’t forget to factor in the additional costs of homeownership besides the mortgage, like maintenance expenses, homeowners’ association fees, insurance and taxes,” they said. You may find that buying a home doesn’t make as much financial sense as you think.”

Tax savings

You can enjoy a tax write – off on a second home, which could make a college town purchase much more affordable in the long run, but you have to be careful about how the property is used and the way it is reported on your taxes. “Many homeowners look forward to purchasing a second home that can be used for vacations, rental income, investment purposes or as a primary residence during retirement. Current tax laws offer several tax breaks that can help make second – home ownership more affordable,” said Investopedia. “If you already own, or are thinking about purchasing a second home, it will be in your best interest to understand the tax breaks and how they work. Different tax rules apply depending on how you use the property, for either personal or rental use, or a combination of the two.

As long as you use the property as a second home – and not as a rental – you can deduct mortgage interest the same way you would for your primary home. You can deduct up to 100% of the interest you pay on up to $1.1 million of debt that is secured by your first and second homes (that’s the total amount – – it’s not $1.1 million for each home).”

That would mean adding rent – paying tenants/roommates to the mix would be off the table. Keep in mind also that you can deduct property taxes on a second home. You will want to talk to your tax advisor about the tax situation in the state in which you are considering making a purchase.

Appreciation

Is your child attending college in an area that is appreciating nicely? It might be a good investment to purchase a property that you can sell after graduation for a nice profit, or hold onto for passive income by turning it into a rental for future college students.

Depreciation

Then again, there is the chance that entrusting your child, and your child’s future roommates and friends, with a property you own could spell financial disaster if the home is not maintained. Worried about college parties that trash the place and/or illegal activities like drug – taking in the home, which could endanger your child’s future? If you’re thinking about buying a property for your child (and possibly other people’s children as well) to live in, you need to have an honest conversation with him or her, and with yourself, about the responsibilities involved. Is your offspring responsible enough to make smart decisions and properly care for a home?

To roommate or not to roommate

There are additional questions and potential concerns around the roommate issue. Yes, allowing your child to live with friends will provide companionship that is important for college students and will cut down on your monthly costs – and perhaps even provide some monthly income. But consider these questions from Bader Martin:

“If your child will have roommates, how much do you plan to charge them and can they be depended upon to pay their share of the rent on time each month? What will you do if a roommate – renter moves out and how long are you willing to carry the mortgage without replacing the roommate? And will your child and roommates occupy the property all twelve months of the year or only during the school year? What are your potential liabilities if a roommate is hurt on the property or loses personal possessions in a robbery or fire? Are you adequately insured?”

Retirement strategies

Individual real estate markets differ widely, and what seems like a good investment in one city may be totally undoable in another. Having an alternate or future use for the property in question can tip the scales. In some cases, parents purchase a condo or townhome in the city for their college student child to live in, with the intention of keeping it in the family for the child post – graduation, for another child intending to attend the same college, or even as a place for themselves. Another growing real estate trend has parents following their child to the city in question as part of their retirement plan.

“Increasingly, parents are also considering the move as part of a long – term plan in which they also participate,” said U.S. News & World Report. “If your child goes to school in a city whose lifestyle and cultural offerings are pleasant to you as well, why not retire there? Schools from Berkeley and Cambridge to Chapel Hill, North Carolina, and Bellingham, Washington, can be pleasant places to retire. The property you purchase could thus be part of your long – term retirement strategy.”

Stability

Having to find a new place and move every year, find storage, and put down new deposits is a drag for anyone. Buying a home that your child can live in for his or her entire college experience provides stability as well as a fixed expense they (and you!) can count on.

In – state tuition

If your child is attending college out of state, you’re being hit with even higher expenses. “About 17 percent of students attend college out – of – state, and they pay dearly for it,” said Parenting. “The typical out – of – state tuition rate at a four – year public university is three to four times more than the in – state rate.”

For this reason, parents often explore options for in – state tuition, like purchasing a property – but with varying success. “Most states have established residency requirements designed to prevent out – of – state students who become residents incidental to their education from qualifying,” said FinAid. Buying a home in the state is a good start, but likely won’t be the only commitment that needs to be made in order to get that elusive in – state tuition. It’s a good idea to learn all you can about the requirements for the school and state in question before making a purchase for this sole reason.

Position Realty
Office: 480-213-5251

What You Should Know About Home Inspections

For many first-time buyers, buying a home can be a scary experience. They know they’ll be maintaining or improving a home with little to no maintenance experience, so the solution is to buy a home in perfect condition. So they hire a home inspector to point out all the flaws.

The problem is — no perfect home exists. Air conditioners break, plumbing pipes leak, and roof tiles blow off in the wind.

If you’re buying a home, start with a reasonable expectation of what home inspectors can do. Their job is to inform you about the integrity and condition of what you’re buying, good and bad.

A home inspection should take several hours, long enough to cover all built-in appliances, all mechanical, electrical, gas and plumbing systems, the roof, foundation, gutters, exterior skins, windows and doors.

An inspector doesn’t test for pests or sample the septic tank. For those, you need industry-specific inspectors.

Here’s what else you need to do.

1. Make sure the inspector you hire is licensed. The responsibilities of home inspectors vary according to state law and their areas of expertise.

2. Ask what the inspection covers. Some inspection companies have extensive divisions that can provide environmental for radon and lead paint. Be prepared to hire and schedule several inspectors according to your lender’s requirements and to pay several hundred dollars for each type of inspection.

3. Some inspection reports only cover the main house, not other buildings on the property. For specialty inspections such as termites, make sure the inspection covers all buildings on the property including guest houses, detached garages, storage buildings, etc.

4. Attend the inspection and follow along with the inspectors. Seeing problems for yourself will help you understand what’s serious, what needs replacement now or later, and what’s not important.

5. Don’t expect the seller to repair or replace every negative found on the report. If you’re getting a VA or FHA-guaranteed loan, some items aren’t negotiable. The seller must address them, but otherwise, pick your battles with the seller carefully.

A home inspection points out problems, they also point out what’s working well. It can help you make your final decision about the home – to ask the seller to make repairs or to offer a little less, to buy as is or not to buy at all.

Position Realty
Office: 480-213-5251

Phoenix Real Estate Market Report ~ February 2018

Back in February 2017 (same time last year), the number of new listings on the market was 10,016 listing as compared to 9,940 listing in February 2018 which is a decrease of only 76 listings or -0.8%. More concerning is the number of active listings was 22,307 listing in February 2017 as compared to 19,278 listings in February 2018 which is a decrease of 3,029 listings or -13.6%. In February 2016 there were 24,916 listing, in February 2015 there were 26,174 listings and in February 2014 there were 28,778 listing. Every year since February 2014 the number of active listings has decreased approximately 2,500 listings. As for the number of sold transactions, we had a record high of 7,073 sold transactions in February 2018 as compared to 5,519 transactions in February 2014. As more new listing come on the market the number of sold transactions also increases but if the number of new listings decreases in 2018 there will be fewer transactions which will increase the appreciation rate for the Phoenix market.

The Phoenix Housing Market ended 2017 with an overall annual appreciation rate of approximately +9.0%. If inventory remain low throughout 2018 and a strong demand for housing continues we can expect the market to continue to appreciation above the national average. From December 2017 to January 2018, the average sold price increased from $309,327 to $315,070 but we saw a decrease from January 2018 to February 2018 to $308,715 which is a -2.0% decrease. Historically, the real estate prices don’t start to increase until February or March as the buying season begins and with the low inventory of homes we can expect to continue to see the market appreciate. Another sign we are in a healthy market is the current percentage of foreclosures and short sales sold remains at only 1% of the total market. Since March 2017 (12 months ago), the average days on market has decreased approximately -2.6% (down from last month) and the number of sold transaction has decreased approximately -24.5% (up from last month).

Since March 2017 (12 months ago), the number of homes for sale on the market have decrease approximately -13.3% or 22,246 homes for sale on the market to a gradual decrease of 19,278 homes (Down 2,968 homes). Historically, 19,278 homes for sale represent the lowest number of homes this market has seen for over a decade. Property owners are not putting their homes on the market because the overall macro economy remains strong and they are holding off to accumulate additional appreciation from the market. This low number of homes for sale indicates we are in a seller’s market (low supply and increased demand).

Real estate prices will continue to increase and interest rates are planned to increase in 2018 so if you are thinking about buyer a home this year will be the time to buy before you get priced out of the market. Give us a call to discuss your best buying or selling strategy, TODAY!!

Position Realty
Office: 480-213-5251

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