Disconnect

What happens when property prices on investment property are not supported by rental rates? You’d think it would mean one (or more) of several things:

Rents would be forced up to provide a decent return on property prices;
Property prices would decrease so that market rents provide a decent return;
Properties that are overpriced will not sell.

Well, welcome to the boom. As you might have guess, there’s more here than meets the eye because none of the above seems to be happening in Fredericksburg, TX. Logic has taken a back seat to speculation and greed. This is dangerous territory we’re getting in to.

A boom market is a little like a game of musical chairs. Someone is going to be left standing when the music stops. If you are eying an investment property (i.e. one you’re going to buy and not live in) you look for several things; potential rental income, potential out of pocket costs (repairs upkeep, taxes, etc.), mortgage rates (unless you can pay cash—more about this later), appreciation and location, location, location. The idea is to generate a cash-on-cash return that is greater than another investment alternative (i.e. stocks, etc.). If you can’t, you shouldn’t be buying. In this market, the only thing that makes people take the plunge is the potential for appreciation.

Appreciation is the great unknown. Again, it’s like musical chairs. Do you really want to be the one left standing? People are growing accustom to carrying a negative cash flow (i.e. rents don’t pay the mortgage, insurance and taxes) with the assumption that the property will net them enough money when they sell it to make a substantial return, despite the negative carry.

Here’s the part that may cause a stir. Rents have got to increase. All you landlords out there need to realize that there is a serious disconnect between property values, rents and returns. There is also a growing shortage of quality rental product. Put this all together and it spells RENT INCREASES! The alternative is for sellers to lower their prices…that isn’t going to happen with mortgage rates hovering near historic lows.

Real estate can still generate serious returns (as compared to other investments), especially if you have the ability to pay cash. Do away with the 6% of interest you have to pay on a mortgage and suddenly your negative cash flow becomes positive. Compare an 8% (before tax) return on a “safe” investment like real estate to you other investments and it might give you pause.

Paying cash is counter-intuitive to the notion of leverage, but we live in strange times.

Discount Fees

Are you one who believes that “cheaper is better” or on who believes that “you get what you pay for”? With the proliferation of discount real estate brokerage it’s a question that deserves some thought when deciding to buy or sell a home.

Before I get too into this and start to rant, let me be perfectly clear about my position. I strongly agree that you get what you pay for. There. Now, on to my points.

Discount brokers offer “lower commission” or “fee for service” options that traditional brokerages don’t. The hook is that you, as the buyer or seller, make/save money in the transaction. Don’t assume for a minute that they are making less money. It’s the bait and switch of making “less” and trying to make it up in volume. Anyone who has any experience knows that real estate is not a volume business. Selling Coke or Dr. Pepper is a volume business. Do you really want the largest purchase you will ever make treated as if you were buying a pack of gum? Liken it to the cost of a Mercedes vs. the cost of a Kia.

The single biggest asset that an agent brings to a real estate transaction is advice and experience. Do you shop a doctor or lawyer by price or do you find the very best that’s available. Do you quibble with doctors over their fees, do you negotiate at the checkout line at the grocery store? Unless you’ve experienced all the curves that a real estate deal can throw you, they are best left (for your own protection) to someone who has.

Of the people that have the experience, would you be happier with someone who will earn a full 6% commission or someone who will negotiate their time, effort and experience down to, say 4%? If they will so easily give in on their worth, how well will they serve you in your negotiations?

Trust me, good realtors earn every penny of the fees they are paid. If you’d like, I can e-mail you a list of at least 200 things we typically do that most of the public doesn’t know about. Also note a previous post where I break down what a realtor really makes.

Does It Matter?

Do knowledge and experience count for anything when making the largest single investment that most of us make? Sounds like a loaded question right? Well, you’d be surprised how many people turn their trust over to inexperienced or ill-informed real estate agents. Perhaps my opinions on this issue are closed due to the fact that real estate is all I have ever done. Sometimes I’m mystified that people just don’t “get it”.

All real estate is about making money. If you don’t treat it as such, you’re making a big mistake. When purchasing a home, the biggest mistake people make is concentrating on the things they think they need to enjoy the place. While these are important considerations, the should not take precedent over the most important question…will this place be worth more later?

Let’s say you find the perfect house for you. It has that dream kitchen and the master bedroom that you’d be content to die in. It’s also on a busy street that will eventually be upgraded to a four-lane thoroughfare. Sidebar: how do you know that the road will be upgraded…a good agent knows these things!

While this perfect home may suit your needs, what happens to the value of it over time? It’s likely to go down. Perhaps that’s not important to you (it is you’re dream home after all) but what about subsequent owners, your heirs, etc.

The average number of times Americans move during their lifetime has increase since 1950 from an average of 3.2 times to the current 7.8 times. Translation, we move a lot more than we used to. Real estate has become more liquid and our society has become more transient.

Think before you choose a guide to the largest investment you’re ever likely to make. Do you want experience and knowledge or do you want the guy who last week was the local golf pro? Don’t get me wrong, I’m all for new agents, but I also believe that you as a buyer/investor deserve experience and knowledge on your side.

Stinky Bubbles...?

Previous blogs discussed why I believe there is no “housing bubble” in our fair community of Fredericksburg, Texas. I am also a small minority that believes there is no national housing bubble (with the possible exceptions of California and NYC). Well, lo and behold, another voice in the wilderness eloquently waxes upon what I feel “in my gut”… http://moneycentral.msn.com/content/Experts/jim_jubak.asp?msn .

If you are at all interested in this topic (it does, by the way, directly affect us all) check out the previous posts “We Ain’t Got No Stinking Bubble” and “We Still Ain’t Got No Stinking Bubble” and the link above.

I know, I know, it can be a tedious topic but this issue touches all of us. Would you agree that housing prices are a key economic indicator? I assume most agree that they are. Even if you are a renter, housing prices affect you. It’s simple supply and demand. The fewer people that can afford homes means higher demand for rentals. Higher demand equals higher prices.

All of this is a sure sign that the economy is humming along and that tax cuts work as an economic stimulus. Now if we can convince those boneheads in Washington to cut spending (not on anything that you benefit from, of course), we’d really be on to something.

How many of you out there (show of hands please) can say they directly benefit from some government program or other? They sure spend a lot, yet I rarely come across anyone who is a beneficiary of that spending…hmm.

Helpful Hints, Part 2

If you ever decide to build a home, plan on visiting the building site at least once per day. It’s important to check on the contractor and subs to make sure they are doing what is expected to the best of their ability. Simple mistakes can cost you a bundle later.

Be there when they pour the slab. It’s an interesting process and one that, if properly planned and executed, can save your skin. Helpful Hint #3…have the guys pour the slab with an ever-so-slight grade change that will allow water to flow towards a point that is away from important areas of the home (i.e. the living room, den, etc.). This is not hard to do, will not cost a thing and will not be noticeable. Helpful Hint #4…design and create a utility/laundry room that is slightly recessed from the surrounding slab and make sure they lay piping in the slab to place a drain in the utility/laundry room floor that ties into your wastewater system.

Hopefully you’ll see where I’m going with all this. Water leaks, pipe breaks, washer, sink, dishwasher malfunctions, etc. cost homeowners and insurance companies millions of dollars a year. If you’ve ever had to live through it, you know what I mean. All of the above advice, if implemented, will force water to drain to a central point and minimize damage. If you’re buying an existing home, look for one that has a drain in the utility/laundry room floor.

For those of you who think having a utility/laundry room upstairs is a good idea (i.e. convenience), consider that this is the room most likely to spring a leak. Leaking from upstairs to downstairs is always going to be worse than what is outlined above.

There is a contraption you can put into your plumbing system that will automatically shut off the water if you gallons per minute (gpm) flow exceeds a certain amount over a certain amount of time. This could be especially helpful for pipes that decide to break when you’re out of town (isn’t that the only time they break?)

Helpful Hints, Part 1

This is the first in what I hope will be a series of “advice” posts on what to look for when buying a home, building a home or renting a home. These posts will mostly be from a homeowner’s perspective and focus on maintenance issues as they relate to how a home is built.

Have you ever seen homes with high vaulted ceilings and dramatic accent lighting? Ever try changing that dramatic lighting? It’s a huge pain in the *&^*&%. Architects and builders are notorious for creating features that are difficult to maintain on an everyday basis. They look great and function well, but when they go on the fritz…watch out!

We have a vaulted ceiling in our living room. At its peak, it’s probably 18 feet off the slab. There are four recessed can lights and a ceiling fan. The problem is that the lights are fixed in the ceiling at a 35 degree angle and the fan is 12’ above the floor. To change the bulbs in the cans, you have to stand on a 12’ ladder with a 15’ pole and go at the lights straight on with one of those bulb-changing-thingys to get the burned bulb out. You almost always end up dropping the bulb and create quite a mess to clean up. Then you have to replace it through the same process. Helpful Hint #1-even if only one bulb is out, replace all of them while you have your stuff out.

Do you know where the condensation drip pans are on your air conditioning systems? If not, find out. We’re in the prime usage season for A/C and they produce a condensation that needs to be drained off of the system. If your lines or pan is clogged with algae (the result of water, minerals and attic heat) the pan overflows and oops, you have a leak in your ceiling when it’s not raining. Helpful Hint #2-add a capful of Clorox to any water standing in your drain pan. It will inhibit/kill any growth and prevent back-ups.

Stay tuned for more as they occur to me…