Hi, I thought I'd try something a little different today.
Homebuyers discover FinestExpert.com helps them make good financial decisions when buying a home using FinestExpert's FREE property report detailing value and costs. Rent vs buy has never been easier. Homebuyers can use FinestExpert's financial search criteria to find discounted property for a good buy and cashflow property for good long term investment potential.
The following article was published in Property Wire, Economists warn of severe shortage of property in US as construction dives, indicating we are soon to be in dire straights because we are not building enough new housing.
I DISAGREE !
The article claims, “Several leading economists are warning that not enough new properties are being built to keep up with expected population growth.”
- Brian Wesbury, chief economist at First Trust Advisors, says the US needs “1.6 million or more per year. Right now we’re down to about six and a half, seven months’ inventory.”
- “William Strauss, senior economist at the Federal Reserve Bank of Chicago, said that though he sees a growth in housing production, he foresees a potential shortage in housing units.”
- MIT economist William Wheaton has come up with similar figures. ‘If we conservatively add 200,000 demolitions per year, the US economy will need at least 1.25 million new units yearly in the near future.
What is the real number? Is it 1.25m or 28% larger than that at 1.6+ million homes?
Government figures show we net one person growth every 11 seconds (about 1% annually against a population of 3.07m) and an average of 2.59 people per household, we need 1,106,915 more homes this year.
I am inclined to go with the estimate by Wheaton at 1.25m. Now, working back to 2000 using housing permits, we get the following chart:
Housing Permits vs Population Need
* Charts show permits vs actual units built. I don’t have the completion counts or ratio, but even if only 80% reach completion, there is a problem.
We have been over producing for many years. I have to assume for at least several years prior to the beginning of this chart in 2000, we were also over producing homes.
If you only look at the current year, it could look like we are going to have a shortage very quickly as Wesbury claims. However, when you look at the cumulative effects, you can see that years of over production have left us with:
If these calculations are right then we have approximately three years (not six months) of excess housing. But, remember, there is still new construction occurring. If we can keep the new housing construction at about half the growth need would indicate, then in about six years we'll be on track with the right amount of total housing.
6 years – not 6 months
Now, surely not as many units were built as there were permits. So, it is probably something less than 6-years, but I seriously doubt it could possibly be as short at 6 months.
Of course, housing needs are not uniform as job and economic growth and population migration vary.
Welcome to the next installment of how to get the most out of FinestExpert.com – How to Use FinestExpert HeatMaps. Previously, we had:
- Getting Started with FinestExpert.com
- Financial Search Criteria for Real Estate Investors
- How to Get the Most Out of FinestExpert.com Property Search Criteria
Perhaps it is best to take a moment to describe the various characteristics of the map.
Map - although the map speaks for itself, there is actually a lot more going on in the scene that can give you important information about your markets of interest at various levels of detail. We refer to these as the heatmaps, because the color coding follows the typical “heat” coloring, where a “hotter” color represents a higher value.
Each time you zoom in, the system recalculates the heatmap appropriate to the area displayed, whether you are viewing at the granularity of entire states or down to the census tract level.
Because a “high” priced area is generally considered high relative to the areas around it, the values of the legend vary dynamically. Following are a few snapshots of a heatmap legend at various zoom levels.
Whether you are using the heatmaps for regional analysis or to find the right neighborhood for your home they are the right tool to provide a ton of data that is easy for your brain to synthesize.
On the left side of the map, about halfway up, there are five icons that allow you to control search and display characteristics. The fourth one, the flame, is where you go to control the heatmap settings, allowing you to choose from any of the following options.
| None (turn it off) | Price Asking | Rent Asking | CAP Rate |
| FE-Score | SQFT (Square Feet) | Rent Ratio | Net Operating Income |
| Price Discount | Price per Sq Ft | Rent per Sq Ft | Gross Rent Multiplier |
| Cashflow | Cash-on-Cash Return |
When you see the term "price discount", you can think about there being equity in the property. Because you never really know until you see a property whether and how much equity is built in, we have chosen to use the term discount.
Once you refresh the map, the bottom right legend will be updated as well, so that you know the value ranges and can refer back any time to remember which search term is displayed.
Before you go, can you do two small favors for me?
Have you found a specific way of using the FinestExpert.com that makes your life a whole lot easier? Or, is there some, “how do I …” question you’d like answered, please comment and we’ll keep answering until the questions stop.
Last week we started a series on how to get the most out of FinestExpert.com:
- Thursday: Getting Started with FinestExpert.com (two most commonly used components of the financial criteria search – by discount and by cash-on-cash return).
- Monday: Financial Search Criteria for Real Estate Investors (our users report that the financial search saves over an hour per property being considering).
Today we are going to consider the common property criteria options. From the main search, the property type list is immediately available letting you select only the specific property types of interest – e.g., look only for single family homes and ignore all condos.
When you want to control additional property criteria in your search, click the “+ More” button which expands the available criteria to look like this:
The checks and values shown are the ones I typically use as a starting point.
In the current environment, a single family home (i.e., detached) is more desirable for both renters and owners. These properties move the fastest; and, when prices are as depressed as they are today, this is usually a better buy because you get more home for the same amount and you get to avoid home owner association dues. These homes also have more potential for appreciation.
A three bedroom, two bath home is the most popular type of home. I usually allow my search to increase to a four bedroom, three bath, but seldom larger as they become more difficult to find good comps and the larger size typically reduces the future buyer pool. Only when I cannot find a 3br / 2ba in the right price range will I consider a 3br / 1ba (unless I happen to have a client looking to do serious rehab willing to add a bathroom).
The modern homeowner (and renter for that matter) expects a larger home than 20+ years ago. I typically set my minimum to 1,150 sqft. Only when I need to look in a specific area of smaller homes will I reduce or eliminate this criteria. When I see a 3-bedroom home that lists above 1,600 sqft (in my area), I am immediately suspect of room-additions which are, as often as not, not beneficial. The ones that seem to make a positive difference, when the construction is good, are the extension of the primary living area and usually include a kitchen remodel. Bedroom additions are theoretically good, but I’ve seen too many additions where these are little more than a thoroughfare to another part of the home.
“Newer is better,” is a common mantra for both investors and new homeowners as it typically implies less deferred maintenance. Out west, a 30-year old home is a good baseline. Again, in certain areas (or price ranges), this has to be eliminated.
The checkboxes provide the ability to search for either active “for rent” or “for sale” properties. Under the “for sale” category, there are four stages of foreclosure of which I check only the first and last options.
I usually only check #1 and #4 because these are listed with what I call, true asking prices – the property can be bought for the amount shown (plus or minus a little). Sometimes the REOs are even a better choice than the short sales found under “no foreclosure” because the lender has already “accepted the loss” on an REO and can readily move through the sale process, but this is not the case for the short sale where the homeowner, lender(s), and mortgage insurance companies are all pointing fingers at each other to determine who will have to eat the loss.
Hopefully you can begin to really see the power available to you when you combine these property criteria with the financial criteria.
Finally, after you have selected your property criteria, click on the “- Close” button and then press “Search”. This will then take you to a map (or list) of potential properties satisfying your search criteria.
Before you go, can you do two small favors for me?
Thursday we started a series on how to get the most out of FinestExpert.com, Getting Started with FinestExpert.com. Rather than go into information overload, we just discussed the two most commonly used components of the financial criteria search – by discount (aka equity in the property) and by cash-on-cash return.
If you are new to this, the power of the financial search criteria was summed up by one of our users who reported that using the financial search saved him over an hour per property he had been considering.
When you want to control additional financial criteria in your search, click the “+ More” button which expands the available criteria to look like this:
Rent ratio (RR) – this is the gross monthly rent divided by the property price. A good rule-of-thumb minimum value here is 0.8%. This is similar to asking for a specific gross rent multiplier (GRM = Market Value / Annual Gross Income). RR * 12 = 1 / GRM.
Price discount – calculates the difference between the asking price and the estimated value of the property. I like to use the range 15-50%. This is equivalent to asking how much equity is in the property.
Price range – provides for the typical limit on a property price. This is often unnecessary when you are looking for cashflow positive investment property unless you have a limited budget. Depending on your market, it is often useful to set the upper limit to about 10% above what you / your client can afford, with the expectation that with a soft market you can get down into the desired price range. In a hot market, you may want to set it 5 to 10% below your desired range.
$ / Sq Ft (price per square foot) – is only useful if you are looking in a very specific micro-market where such a comparison really has meaning.
Cap rate (capitalization rate) – is a term more commonly associated with commercial real estate. The cap rate = net operating income / price. It is considered to be far superior to gross rent multiplier, rent ratio, or most of the other mechanisms because it accounts for the operating expenses of the property.
Cash flow / year – is only useful when combined with other search terms, such as a specific price range or a rate of return. For example, a $100/yr cash flow on a $1m property isn't nearly as powerful as $100/yr cash flow on a $100K property.
Cash-on-cash return (CCR) – tells you, after all expected expenses (including vacancies), what kind of return on your money you would be making in the first year. If you are new to real estate investing, you can think of this as a way of comparing how much interest a bank would be paying you on the same amount of money that you are investing in the property. I like to use an 8% minimum for the cash-on-cash return as it provides a nice risk adjusted return as well as some extra cushion in case unexpected expenses might occur. You may find the need to adjust the rate up or down if you have too many or too few opportunities to choose from.
Cash flow (after taxes) – considers your tax bracket per your user profile. If you do not have a user profile, the system assumes a default of 28%. If you are in the alternative minimum tax bracket (AMT), you should probably ignore this option entirely - unless you are highly keyed into your tax situation. The main value in considering your returns after taxes is that it accounts for the tax benefits associated with real estate. For example, a property may have a positive cash flow, but in the eyes of the IRS, be considered to be negative due to depreciation, hence an extra bonus to you. Or, in the case of a strong positive cash flow, after taxes, you may not be making as much as you thought you might be.
Cash-on-cash return (after taxes) – also considers your tax bracket, but this time the after tax cash flow is considered relative to the cash invested.
Finally, after you have selected your financial criteria, click on the “- Close” button and then press “Search”. This will then take you to a map (or list) of potential properties satisfying your financial search criteria (on paper). As always, the search can only tell you about the property "on paper"; when you see a property in person, there are likely to be additional physical factors to the property we are not able to capture (e.g., is it in mint condition or a beater).
Before you go, can you do two small favors for me?
Several of our new users have written, “FinestExpert.com looks like a great tool, but how do I use it?” Related comments were, “I can see it does a lot of great things, but where do I start?” I guess I have to apologize, it is not as obvious as we thought it was.
Let’s take a little time and share ways that we find work well - a "How to use FinestExpert.com". The most natural way for me to think about FinestExpert.com is in three stages: Searching, Mapping, Analyzing. Naturally these overlap, but this is a good starting point for discussion. Today, we’ll just hit searching. Next Tuesday we will discuss how to get the most out of the mapping system. And then next Thursday we’ll discuss the expanded property analysis.
Searching – FinestExpert was designed to save you, the investor / homebuyer, from hours of the drudgery of number crunching by pre-analyzing all properties for you. FinestExpert allows you to search by the financial criteria of the property at the outset (instead of starting in a limited geographic region using only a specific price range, and then grunting through the analysis manually, cut-and-paste into Excel, or via some other non-integrated system).
The search options as shown on the home page show the three primary components of your property search, by the financial, property, and location (i.e. geographic) characteristics.
The most common financial search criteria are by price discount and cash-on-cash return. Consequently, these are provided directly without requiring you to use the “+ More” button which expands the available criteria.
The price discount is equivalent to the question, “How much equity is in the property?” FinestExpert uses the prices of all properties to determine a property’s estimated value and then compares the actual asking value to the estimated value to determine discount. We realize there are several significant assumptions (which have to be made by every automated system). We have to assume all properties are in equally average shape. When you inspect a property, you may find anything from a beater foreclosure to a model perfect home. You will have to make some mental adjustments for properties in such cases. It is a fair guess that if you find a home listed substantially below market that it likely needs more TLC.
I like to use a 15 – 50% range for price discount. At the low end, you know that it is most likely a well priced home (even if it needs more repairs). At the high end, you eliminate some of the false deals are improperly reported (or that people put out as teasers to sucker you in).
The cash-on-cash return tells you, after all expected expenses (including vacancies), what kind of return on your money you would be making in the first year. If you are new to real estate investing, you can think of this as a way of comparing how much interest a bank would be paying you on the same amount of money that you are investing in the property.. Again, there are certain assumptions the system must make. In the current credit environment, investors are expected to put 25% down on the property (as well as usually paying higher points on their loan). This and all the other factors will be visible in the property report page (to be discussed next Thursday).
I like to use an 8% minimum for the cash-on-cash return as it provides a nice risk adjusted return as well as some extra cushion in case unexpected expenses might occur. You may find the need to adjust the rate up or down if you have too many or too few opportunities to choose from.
THAT IS IT – That is all you really need to get started.
In fact, rather than information overload and detailing every last possibility, let’s leave the discussion here for now. But, before you go, can you do two small favors for me?
Looking forward to helping everyone get the most out of their real estate investing.
Investors face a different tax landscape than your average, underwater, homeowner. While it is politically popular to support owner occupants (between tax credits and no tax on debt forgiveness), investors are left to fend for themselves. As such, investors must be much more conscious of the consequences of short sales and foreclosures.
It doesn’t matter if you are a reluctant landlord or intentional investor, you will most likely be treated the same – as a highly sophisticated, high net-worth individual, with a ready team of attorneys and accountants to help you navigate the tax code minefields. However, most real estate investors for single-family residential property don't have LA Law working on their side. So, here are a few thoughts to ponder.
Debt “forgiveness” is simply the bank’s way of saying that they are writing off your loan as a loss (short sale or foreclosure) and going to claim that to their advantage for tax purposes. You will receive a 1099-C (Cancellation of Debt) with a declaration of the difference between what you owed and what the bank actually collected. This debt cancellation is essentially considered as income to you and normally taxed as such.
You need to be concerned with both federal tax laws and your state tax laws. Naturally, tax laws, especially with respect to debt “forgiveness”, vary by state and the states do not necessarily match federal.
Under the Emergency Economic Stabilization Act, for federal tax purposes, an owner occupant (i.e., of your principal residence) can exclude the cancelled debt from their taxable income (to certain limits) providing it occurs prior to the end of 2012. In states such as California, you are still liable for state income taxes.
However, if you are dealing with income property, then these benefits do not apply and now you have not only your state income taxes, but also federal income taxes to consider.
As an example, a client came in the other day for consulting. Her real estate agent was going to help her get out from under an excess $500 / month loss on one of several investment properties. The client is looking at a short sale wherein the property is $310,000 upside-down. Although technically it is not the agent's responsibility, the agent didn’t think she needed to worry about the tax consequences – she would have all year to figure it out.
He seemed to think it inconsequential. But instead it is a rather substantial amount. Taken in isolation and ignoring all additional expenses of selling, debt cancellation of $310,000 will cost her $26,525 in California taxes and $87,443 in federal taxes, for a total of $113,968 or 36.76% of the cancelled debt. That tax obligation seems rather onerous, especially considering the client cannot afford the $500 / mo. In fact, it she could pay the taxes at a $500/mo rate, it is equivalent to a 19-year mortgage.
The only possible out is not a pretty picture. One IRS article states, “Normally, you are not required to include forgiven debts in income to the extent that you are insolvent. You are insolvent when your total liabilities exceed your total assets.”
As an investor, be sure you are fully aware of the tax consequences for your properties, and / or be sure you consult your accountant, first.
Nothing in this post should be considered tax advice. Consult your tax professional for your situation.
The annual real estate cycle for single family homes for sale is predictable for any given area. Traditionally price increases for the year start in late January as the early-bird buyers jump-start the year, leading to a spike in closed sales in March.
Sales tend to increase from January through May, remain somewhat level until August, and then drop back down through the end of the year. A notable September down-spike opposite the March up-spike creates an interesting symmetry.
Data presented in the chart represents the median sales volume of single family detached homes in San Diego over the last 16 years. The error bars represent the typical range for the number of sales during any given month.
When you look at “sold” reports, you need to pay attention to the fact that prices are negotiated 45-60 days prior to closing (or longer with short sales). Hence, if the market is moving quickly – either up or down – then recent sold prices are a lagging indicator and need to be taken with the appropriate grain of salt.
What will happen in your area depends on your local economy and job market. In several California areas, prices for entry level homes are expected to increase 10-15 percent by June. However, interest rate increases or massive foreclosure inventory hitting the market will likely halt the increases. The termination of the first-time homebuyer tax credit will likely also halt the increases. Together, the three could well send prices heading south again.
Now is a great time to use FinestExpert.com to find some great deals in advance of coming price increases. Nearly thirty-percent of all listed properties are discounted. Pay close attention to the FinestExpert trend charts for your investment properties as local markets will vary. Astute real estate investors, stay tuned as this will likely be a volatile year with near-term bank and government decisions determining market direction.
Twice in the last week I looked at rehabbed property for sale with a client and twice I found asking values completely out of line with the market. These properties were each priced 20 to 25 percent above market. Apparently these rehabbers have been in a time warp; it IS NOT 2004. By the time you read this, it is already 2010. It is a fragile real estate market where buyers as well as lenders and appraisers are concerned with value more than ever.
The rehab work was well done and the properties showed very nicely. But, that is not going to command an extra 20-percent. The best you might hope for is 10-percent extra for the excellent condition of the property. Even that will require the luck of the buyer getting an appraiser who will appreciate the difference.
If you want to rehab a property, use a fine-grained data analysis tool like FinestExpert.com that provides the comps to support their property value estimate. Then use the trend charts, also broken down to the bedroom count, to make sure the values in the neighborhood are not still in decline.
Hold time makes all the difference in your annual revenues because you can’t get on to the next project if you’re anchored with funds tied up in an over-priced listing.
Knowing the true ARV (after repair value) is as critical as being able to estimate and control your costs. Do not expect inflation or the extended and expanded first-time homebuyer tax credit to bail you out of a troubled asset. This is not a forgiving real estate market for over-estimating.
