To the current real estate investor or to those considering getting into the game, the question of how to play the current market is an interesting one.
The real estate market itself is a constant headline in today's media, with conversations on the bullish or bearish side.
For those that don't yet speak "investor", a bull is someone who thinks the market is going up, a bear thinks it's going down...
The bulls are pointing out that new home sales are on the uptick nationally and that the absorption rate of homes overall has increased.
Interest rates are still at an all-time low to those that qualify, and there are becoming more buyers each month looking for quality homes.
These factors along with reserved but growing confidence in the economy boost projections that the market will continue to stabilize and perhaps rise.
A bear can just as easily point out that the banks still have a glut of foreclosed properties to put onto the market - some banks have been purposely delaying the foreclosure process on the bulk of their inventory.
Prices are still down in many areas nationally, and any bear will point out that the real estate market is not a "national" animal.
It is subject to micro economies that are regional at best, depending on everything from school systems to local employment opportunities to proximity to other things some people want to live near like the beach and cities.
Additionally we still sit at an unemployment rate just south of 8% nationally, along with global instability, crank up the fear machine, etc...
These two points of view seem to contradict themselves and can seem to pull the real estate investor in two different directions, and into the worst place of all, that of no action and indecision! The beauty of the real estate market is that there is always a way to make money, the trick is knowing the strategies to play.
The good news is that for the most part the bears and the bulls are BOTH right.
The market is stabilizing and there are still lots of distressed property coming onto the market.
The investor that will capitalize the most on a market that we may never see again is one that is well researched and plays the right game for the current conditions.
Here are a few strategies our company is utilizing in 2013.
Big Money is Flowing to Big Multifamily What is interesting about the real estate market "crash" is that it did not have anything to do with the affordability of the real estate.
For the most part the fall out had to do with the financing that was being pushed, appraisers looking the other way, low interest rates, etc...
There are lots of reasons for the market bust but one you don't hear that often is this - Cost of Living.
That is to say that the cost of keeping a roof over your head became too high for those that made reasonable decisions.
That excludes those that decided it was a good idea to buy a $450,000 home on $30,000 worth of income, but that doesn't qualify as a reasonable decision...
The relative cost of living for an area stayed relatively the same before and after the bust and I base this on one factor - regional rental rates.
Although housing prices have been all over the last 10 years, rents in the same areas have not fluctuated to the same degree.
In most markets rents have even increased a bit while housing prices have fallen, simply because more people are renting.
Large institutional investors have driven up the market for large sized multifamily buildings (apartment buildings 100 units and up, let's say).
The supply and demand shift to rentals has made multifamily a safe bet for the big boys, and they are willing to pay a premium for that safe bet.
That has caused a price spike in this type of property, driving returns into the low single digits for stabilized property of this type.
Bare in mind I said stabilized property, meaning that the big financial institution doesn't want to deal with the vacant or underperforming building, they want the one they can step into, grab the reins, and make their cash flow.
And here lies the opportunity...
The savvy investor will step into a deal to buy the underperforming multifamily and turn it around.
At that point they can either sell off to the more conservative investor or refinance and enjoy the cash flow for themselves.
Bear in mind this tip is only for those that are comfortable in the mid to large sized multifamily arena.
I don't recommend that the brand new investor jump into this market place right out of the gate - although it can be a lucrative space it can also be an easy way to buy the wrong deal and be upside down very quickly.
The newbie that wants to play this game should reach out to the seasoned vet and help add value in exchange for learning the ropes.
Nobody wants the Ugly Duckling Enough about big apartment buildings, let's get a bit smaller and talk about single family homes.
When the market was booming, a seller could pretty much put a sign out in front of their house and be confident that they would have an offer within 30 days or so, regardless of the condition.
Not so today.
Only the pretty, nice houses are selling to the very picky end buyers out there, who know they can be picky simply because of the small amount of buyers out there.
This creates an opportunity for the investor to step in and buy up the "Ugly Duckling" houses.
Sometimes the home owner has become frustrated with selling the house and is now willing to get much more reasonable.
Many times they were able to refinance their house in the early 2000's and are now underwater on their mortgage which is adjusting to a higher payment.
Throw another curve ball out there like an unforeseen layoff or medical condition, and everything adds up to a possible short sale with their bank.
There are also times when the bank has gotten around to taking the property back from the owner and is marketing it as an REO (Real Estate Owned) sale, but more on this later.
The investor has options in the single family home market.
If the spreads are right they can buy and lease for great cash flow.
When I say the spreads I mean the spread between what a home would rent for versus your buy and rehab costs.
You have to cash flow on day one, the days of speculating on future appreciation and taking a monthly loss on cash flow are gone.
We have found the markets with the best spreads for cash flow are the areas that were rental markets before the real estate run up.
Prices remained lower than your high home ownership areas for a variety of reasons, and rents remained stable or moderately increased.
An alternative strategy is to buy the ugly duckling in the areas with high home ownership, knock some of the dust off them with some upgrades and investments, then put them back on to sell to the end buyer market.
Remember there are plenty of end buyers out there that want nice shiny houses, and most of what is for sale on the market are houses that HAVE to be sold, so their condition is sub par.
This is not a very competitive space on most markets regardless of what you see on reality TV these days.
The investor that has the courage to go in and turn some houses around can do very well in 2013.
Bulk REO's - help the banks out!! The bears that think that some banks are holding on to properties and trickling them out to the market are correct.
The banks will be unwinding the foreclosure mess for years to come, providing us investors with plenty of opportunities.
Once a bank takes ownership of a property through the foreclosure process, it becomes an REO or Real Estate Owned (by the bank).
Banks are in the business of lending money on real estate, not the business of owning it.
They don't have the resources to manage it effectively and the more cash they have tied up in distressed property the more their hands are tied on future loans they can write.
It benefits the banks in a multitude of ways to unload their real estate inventory as quickly as they can.
The smart investor realizes this, and with the right contacts can make an offer to buy a block of properties directly from the bank, which is called a Bulk REO Sale.
The banks benefit from this as they can sell multiple properties faster than they would be able to sell them individually, and at times can avoid some selling costs such as realtor fees.
The investor benefits, of course by getting access to properties at a deep discount.
That being said most of the time the investor does not get to cherry pick, they have to take what the bank is willing to sell.
Great deals can be gotten along with some of those "Ugly Ducklings" in the same package.
The successful Bulk REO investor will have a network in place to unload the properties that don't fit their portfolio quickly while focusing on those that they want to either optimize and sell or keep long term.
The real estate market itself is a constant headline in today's media, with conversations on the bullish or bearish side.
For those that don't yet speak "investor", a bull is someone who thinks the market is going up, a bear thinks it's going down...
The bulls are pointing out that new home sales are on the uptick nationally and that the absorption rate of homes overall has increased.
Interest rates are still at an all-time low to those that qualify, and there are becoming more buyers each month looking for quality homes.
These factors along with reserved but growing confidence in the economy boost projections that the market will continue to stabilize and perhaps rise.
A bear can just as easily point out that the banks still have a glut of foreclosed properties to put onto the market - some banks have been purposely delaying the foreclosure process on the bulk of their inventory.
Prices are still down in many areas nationally, and any bear will point out that the real estate market is not a "national" animal.
It is subject to micro economies that are regional at best, depending on everything from school systems to local employment opportunities to proximity to other things some people want to live near like the beach and cities.
Additionally we still sit at an unemployment rate just south of 8% nationally, along with global instability, crank up the fear machine, etc...
These two points of view seem to contradict themselves and can seem to pull the real estate investor in two different directions, and into the worst place of all, that of no action and indecision! The beauty of the real estate market is that there is always a way to make money, the trick is knowing the strategies to play.
The good news is that for the most part the bears and the bulls are BOTH right.
The market is stabilizing and there are still lots of distressed property coming onto the market.
The investor that will capitalize the most on a market that we may never see again is one that is well researched and plays the right game for the current conditions.
Here are a few strategies our company is utilizing in 2013.
Big Money is Flowing to Big Multifamily What is interesting about the real estate market "crash" is that it did not have anything to do with the affordability of the real estate.
For the most part the fall out had to do with the financing that was being pushed, appraisers looking the other way, low interest rates, etc...
There are lots of reasons for the market bust but one you don't hear that often is this - Cost of Living.
That is to say that the cost of keeping a roof over your head became too high for those that made reasonable decisions.
That excludes those that decided it was a good idea to buy a $450,000 home on $30,000 worth of income, but that doesn't qualify as a reasonable decision...
The relative cost of living for an area stayed relatively the same before and after the bust and I base this on one factor - regional rental rates.
Although housing prices have been all over the last 10 years, rents in the same areas have not fluctuated to the same degree.
In most markets rents have even increased a bit while housing prices have fallen, simply because more people are renting.
Large institutional investors have driven up the market for large sized multifamily buildings (apartment buildings 100 units and up, let's say).
The supply and demand shift to rentals has made multifamily a safe bet for the big boys, and they are willing to pay a premium for that safe bet.
That has caused a price spike in this type of property, driving returns into the low single digits for stabilized property of this type.
Bare in mind I said stabilized property, meaning that the big financial institution doesn't want to deal with the vacant or underperforming building, they want the one they can step into, grab the reins, and make their cash flow.
And here lies the opportunity...
The savvy investor will step into a deal to buy the underperforming multifamily and turn it around.
At that point they can either sell off to the more conservative investor or refinance and enjoy the cash flow for themselves.
Bear in mind this tip is only for those that are comfortable in the mid to large sized multifamily arena.
I don't recommend that the brand new investor jump into this market place right out of the gate - although it can be a lucrative space it can also be an easy way to buy the wrong deal and be upside down very quickly.
The newbie that wants to play this game should reach out to the seasoned vet and help add value in exchange for learning the ropes.
Nobody wants the Ugly Duckling Enough about big apartment buildings, let's get a bit smaller and talk about single family homes.
When the market was booming, a seller could pretty much put a sign out in front of their house and be confident that they would have an offer within 30 days or so, regardless of the condition.
Not so today.
Only the pretty, nice houses are selling to the very picky end buyers out there, who know they can be picky simply because of the small amount of buyers out there.
This creates an opportunity for the investor to step in and buy up the "Ugly Duckling" houses.
Sometimes the home owner has become frustrated with selling the house and is now willing to get much more reasonable.
Many times they were able to refinance their house in the early 2000's and are now underwater on their mortgage which is adjusting to a higher payment.
Throw another curve ball out there like an unforeseen layoff or medical condition, and everything adds up to a possible short sale with their bank.
There are also times when the bank has gotten around to taking the property back from the owner and is marketing it as an REO (Real Estate Owned) sale, but more on this later.
The investor has options in the single family home market.
If the spreads are right they can buy and lease for great cash flow.
When I say the spreads I mean the spread between what a home would rent for versus your buy and rehab costs.
You have to cash flow on day one, the days of speculating on future appreciation and taking a monthly loss on cash flow are gone.
We have found the markets with the best spreads for cash flow are the areas that were rental markets before the real estate run up.
Prices remained lower than your high home ownership areas for a variety of reasons, and rents remained stable or moderately increased.
An alternative strategy is to buy the ugly duckling in the areas with high home ownership, knock some of the dust off them with some upgrades and investments, then put them back on to sell to the end buyer market.
Remember there are plenty of end buyers out there that want nice shiny houses, and most of what is for sale on the market are houses that HAVE to be sold, so their condition is sub par.
This is not a very competitive space on most markets regardless of what you see on reality TV these days.
The investor that has the courage to go in and turn some houses around can do very well in 2013.
Bulk REO's - help the banks out!! The bears that think that some banks are holding on to properties and trickling them out to the market are correct.
The banks will be unwinding the foreclosure mess for years to come, providing us investors with plenty of opportunities.
Once a bank takes ownership of a property through the foreclosure process, it becomes an REO or Real Estate Owned (by the bank).
Banks are in the business of lending money on real estate, not the business of owning it.
They don't have the resources to manage it effectively and the more cash they have tied up in distressed property the more their hands are tied on future loans they can write.
It benefits the banks in a multitude of ways to unload their real estate inventory as quickly as they can.
The smart investor realizes this, and with the right contacts can make an offer to buy a block of properties directly from the bank, which is called a Bulk REO Sale.
The banks benefit from this as they can sell multiple properties faster than they would be able to sell them individually, and at times can avoid some selling costs such as realtor fees.
The investor benefits, of course by getting access to properties at a deep discount.
That being said most of the time the investor does not get to cherry pick, they have to take what the bank is willing to sell.
Great deals can be gotten along with some of those "Ugly Ducklings" in the same package.
The successful Bulk REO investor will have a network in place to unload the properties that don't fit their portfolio quickly while focusing on those that they want to either optimize and sell or keep long term.
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