Kathy’s 2019 Housing Forecast

By Kathy Fettke, Co-CEO of the Real Wealth Network

Welcome to my 2019 Housing Forecast! I’ve been doing these predictions for many years starting well before the housing crisis, when loans were easy and home prices only went “up.”

I was a mortgage broker back then, and knew something was very wrong in the lending world. I couldn’t understand how it made sense that I was able to give a loan to just about anyone… and I got my answer in2008 when the housing market crashed.

Since then, it’s become my passion to understand the politics behind economics, so that I’m never caught off guard again. Please note:these thoughts are my opinions only. and not to be construed as financial advice.

My theory on the housing market boils down to these three factors:

Real estate values are tied to jobs.

Jobs are tied to the economy.

The economy is tied to Federal Reserve policy and government regulations.

That’s a very simplified version of the housing market machine, but decisions by the Federal Reserve and the government can have a torpedo-like impact on real estate. So if you take a  close look at what’s happening with the central bank and government policy, you might get a clue as to what is coming.

The Federal Reserve

The Federal Reserve attempts to regulate the economy by controlling the money supply. When there’s more money flowing, prices tend to increase. When there’s less liquidity, less money circulating, prices tend to decline. One of the ways the Fed controls the circulation of money is by raising or lowering the overnight lending rates –basically what it costs banks to borrow money and lend it out.

The Fed lowered these short-term interest rates to near zero levels after the Great Recession, in an attempt to jumpstart a flat-lined economy. It also bought bonds to keep interest rates low, and launched quantitative easing programs that essentially created money “out of thin air” for circulation.

It worked! With trillions of new, freshly minted dollars circulating, the economy came back to life, and a decade later, is booming.

But, a boom can also lead to a bubble, and bubbles burst. So the Fed regulates booms by lowering interest rates. One sign of an overheated economy is runaway inflation, so the Federal Reserve set 2% inflation as a benchmark for raising rates. Inflation hit that 2% mark in 2015, so the Fed began to reverse it’s easy money policies by raising rates.  Since then, the Fed has raised rates nine times, including four rate hikes in 2018 alone.

This attempt to slow things down also worked!

It’s not surprising. Higher rates make everything more expensive, which can curb borrowing and spending. This effectively pulls the throttle on the economy and slows down inflation.

Plus, there may be another reason why the Fed has been steadily raising rates. The economy has been booming for a decade now, and many economists believe it’s now near its peak. Some are predicting a recession by 2020. One of the Federal Reserve’s arsenals for turning around a recession is to lower interest rates. But if rates are already low, the Fed has nowhere to go. It has to go up first so it can go down again in the future. Therefore, some say the Fed has been raising rates so that they can lower rates again next year.

Mortgage Rates

Higher short-term interest rates makes it more expensive to buy cars,take out equity loans, and use credit cards. They also make variable-rate mortgages higher, but they do not have a direct influence on long-term mortgage rates. In fact, in December when the Fed raised rates for the 4th time, long-term mortgage rates actually went down. Why?

Long-term rates follow the bond market more closely than the Fed Fund rate. When investors are confident, they invest in the stock market. When they are fearful, they seek the safety of bonds — specifically the 10-year Treasury note. Those same investors tend to flock to the safety of mortgage-backed securities. When more investors are buying, prices decline. So when there’s more fear in the market, long-term interest rates tend to soften.

The Fed’s December rate hike rattled the stock market, sending anxious investors to the safety of bonds. As a result, stocks took a sharp nose dive in December. More purchasers of bonds and mortgage-backed securities effectively lowered long-term mortgage rates. This could help boosts home sales in the Spring.

The Federal Government

When it comes to the federal government, we’ve seen major policy changes that are influencing the housing market. Several are contained in the massive tax reform package that cut taxes and changed the rules for deductions. By lowering the corporate tax rate to 21%, businesses have more money to reinvest and expand their workforce, which puts more people back to work.

One of the biggest benefits for real estate investors is the new pass-through rule that allows people with LLCs and similar business operations to take a 20% deduction. So there are big benefits for all those Mom and Pop landlords who operate as LLCs. The new rules also preserve the highly-prized 1031 exchange, which was at risk of being eliminated. The new Opportunity Zone tax break program is also part of that tax package.

Homeowners didn’t make out as well. They lost deductions for things like vacation homes and large mortgage payments, making homeownership, for some people, more expensive.

Low Unemployment

As I mentioned, those tax cuts were designed to lower the unemployment rate, which is now so low that it’s actually unhealthy for the economy. The data shows that we have more open positions than people looking for jobs. When there’s a shortage of workers, employers have to pay more. That extra expense is then passed on to consumers in the form of higher prices which contribute to inflation. If we start seeing higher prices, the Fed will be inclined to raise those short-term interest rates, which can also trigger other repercussions, like that stock market volatility.

What we need is workforce growth right now — not job growth. And this is a critical element for today’s economy because our workforce is actually shrinking. The U.S. birthrate has dropped to a 30-year low and continues to fall. Baby Boomers will be retiring in massive numbers, leaving more open positions in their wake. And there’s the debate over immigration, and the value of immigrants for jobs like farming and construction.

Economic and Housing Repercussions

So here are some of my predictions for 2019:

The GDP will slow down to around 2% from 3%, as the effects of those tax cuts wear off. High housing prices and interest rates could also help slow growth, along with trade tensions, domestic politics, and the current pullback by China. But, I don’t think we’ll see a recession, this year.

Unemployment will rise slightly due to a changing workforce that includes less corporate dollars for new jobs. An unemployment rate of4 to 6% is considered healthy, so a slightly higher jobless rate could be good for our economy.

Mortgage rates will remain relatively low. The Fed is expected to hold off on rate hikes during the first half of the year as it reassesses the economy. If we see another rate hike or two, it probably won’t take place until later this year.

Consumer debt will increase because it’s now more expensive to borrow money.

Demand for rentals will remain strong because homeownership has gotten more expensive.

Return to Normal Gains

We’ve been so spoiled over the last 10 years by double-digit gains. Investors need to start expecting more normal returns. Syndications will go back to 6% preferred returns, with an equity kicker on the back end that would bring the IRR to just over 10%. Unless you find that home run — like our development in Costa Rica, where we got the land cheap and received entitlements quickly such that we were able to get our glamping resort up and running, effectively lowering holding costs. We are expecting investors to receive an 18% return on that one. But these types of deals will be fewer and further between.

If you’re expecting another 2008 housing meltdown where you can pick up properties for pennies on the dollar, you may be waiting a long time.

There is No “One” Housing Market

We also have to remember that the national housing market isn’t just “one” housing market. Instead, it’s made up of thousands of diverse housing markets. The key to higher returns is finding emerging markets — those with job and population growth, but with real estate values still below their peak. These types of areas give investors both cash flow today and a strong chance of appreciation in the future — a win/win, whether a recession is coming or not.

What happens when we do get hit by another housing recession?

We have to remember, today’s housing scenario is very different than in 2008. Back then, loan underwriting was loose. Today, it’s still very tight. This time, most homeowners have equity in their home. Back then, they did not. Today, homeowners are locked into historically low interest rates. It would be much more expensive to sell or to rent, so they will hold onto their homes. Plus, Airbnb wasn’t prominent in 2008. Today, people can rent out rooms in order to make house payments.  That brings me to my 7th and final prediction:

The housing market will remain on solid ground although price growth will be slower.

The recent slide in mortgage rates is corresponding to more activity from home buyers. That’s an indication that by keeping interest rates about where they are now, the housing market will thrive. We may see some turmoil at the high end of the housing market due to things like the tax law and stock market gyrations, but the housing market as a whole will likely see growth in more affordable markets.

The trick is to find the right markets. Real estate investors want to be in growth markets. And there are several good markets where that makes sense. The Real Wealth Network has identified 15 markets that can provide a good return on your investment. Some are better for appreciation. Others are better for cash flow. We have more information about those markets at our website www.realwealthnetwork.com

 

Kathy Fettke

Kathy Fettke is Co-CEO of Real Wealth Network and best selling author of Retire Rich with Rentals. She is an active real estate investor, licensed real estate agent, and former mortgage broker, specializing in helping people build multi-million dollar real estate portfolios that generate passive monthly cash flow for life.

With a passion for researching real estate market cycles, Kathy is a frequent guest expert on CNN, CNBC, Fox, Bloomberg, NPR, CBS MarketWatch and the Wall Street Journal. She was also named among the “Top 100 Most Intriguing Entrepreneurs” by Goldman Sachs two years in a row.

Kathy hosts two podcasts, The Real Wealth Show and Real Estate News for Investors — both top ten podcasts on iTunes with listeners in 27 different countries. Her company, Real Wealth Network, offers free resources and cutting edge education for beginning and experienced real estate investors. Kathy is passionate about teaching others how to create “real wealth,” which she defines as having both the time and the money to live life on your terms.

 

 

TERICA KINDRED: This Girl is ON FIRE!

By Karen A. Walker

For Terica Kindred it’s not about real estate. It’s not even about money.  For her, it’s all about freedom. Real freedom—the kind you can own…. and share.

Girl On Fire

She bought her first property, a four-plex, at age 20. By age 23, Terica Kindred owned 10 rental properties. By 24 she was a millionaire.

But it wasn’t smooth sailing from there.

At age 30, Terica lost 1.2 million, thanks to what she pithily refers to as “big drama.” Misplaced trust in a construction manager whom she realized, too late, was over his head in his responsibilities, triggered a serious loss of her own funds.

Yes, that was devastating.

But, ultimately, no worries. She’s got this. Terica has a broad view of living, and it includes ongoing learning, serving, growing and always improving.

For Terica, when you hit the wall, it’s a learning opportunity. Dust off your feet, learn from your mistakes, head in a new direction, and move on.

In a nutshell, Terica and Nike share the same motto: JUST DO IT.

Start

Born and raised in south central Los Angeles, Terica earned a computer science degree from the University of California, Irvine.

Entrepreneurial to the core, while in college she and more than 20 student colleagues developed an early computer game for mobile phones. They were going gangbusters, things were starting to take off and eventually the project needed Venture Capital (VC) funds to grow. It was an exhilarating journey… and then, suddenly, it died.  VC funders at the time just couldn’t imagine anyone playing games on their mobile phones. Yes, really!

The short-sightedness of deep-pocket investors was a significant learning moment for Terica. Lack of funding was a limitation.  Depending on someone else for funding could destabilize the trajectory of a project, or even of a life, her life.

 No Limits

Terica wanted no part of funding limitations in the future, so when the opportunity to work for Deloitte in Orange County, California, opened up, she took it. It was a good company and a good job in the field of tech solutions. But her dream was bigger than any corporation could hold.

That’s when real estate became a passion.

“I’m a landlord’s daughter,” says Kindred when asked what sparked her interest in real estate.

“I love freedom, and real estate was an easy way to get that. I quit my job before I turned 30 and earned enough residual income to cover my life using real estate. I love that!”

Although she grew up around real estate, she admits her father has a different approach from hers.  She focuses on flipping, and she’s become an expert at thoroughly having done and understanding every aspect of the business, including construction, managing costs and delivering what buyers want. Her father sighs. As she explains, “my father is a buy and hold guy. He thinks what I do is crazy!”

Most people, however, wouldn’t agree with her father. Instead, they might say she’s a positive force to be respected. No stopping her. Full steam ahead, getting wiser and better every day.

Her mother would agree on this last point, calling her daughter “unstoppable” and even becoming her first investor, with ongoing investing as she sees fit. The pursuit of freedom, it seems, is contagious.

Proof is in results

Terica’s acquired-by-doing expertise in identifying and flipping properties in more affordable locations than her native California, has paid off.  Big Time.

She first focused on building a strong passive income to replace and exceed her corporate income.  Flipping properties prudentially enabled her to cull profits to purchase rental properties that paid a monthly, residual income and provided significant tax breaks.

Terica also employed her computer science and internet marketing savvy to grow her business in ways most real estate entrepreneurs never consider, let alone master.

Moonlighting in real estate while holding down a steady job, Kindred was able to quit her job as soon as she was earning more in passive real estate income than in her corporate paycheck. It’s a strategy she advises to others.

No slowing down

In 2010 she relocated to Atlanta and hasn’t looked back since. Nor has she slowed down.

Amid increasing real estate deals and new ventures, Terica managed to convince her then-boyfriend, Jasen, who had lost his job at the time, to stop looking for a new job and to instead join her on the freedom path. He was stunned…at first. Then he took a deeper look and decided to test it out.

Turned out, Jasen liked the adventure and the profitable results. He became an integral part of the business, and of Terica’s life. They were married more than a year ago and welcomed their first child the end of last year.  Talk about adventures!

Full Circle, Giving Back

Now less than 10 years after quitting her corporate job, Terica’s third book, My Freedom Blueprint, is hot off the press.  She considers the book, and her system, a gift she’d like to share with others.

Not surprisingly, Terica penned the book while pregnant. For her it was fairly easy writing since she continues to follow and live what she advises to others.

MyFreedomBlueprint.com conveys the gist of Terica’s real estate investing strategy and options.  It includes strategies for buying, fixing and flipping properties, investing in high-yield, low-taxed income properties, lending funds to other investors for double-digit returns, wholesaling properties for quick cash and much more.

None of it evokes cheesy gimmicks or impossible promises.  Quite the opposite.

Terica’s newest venture – My Freedom Blueprint – aims to build a mutually profitable community of vetted, trusted investors who can and will help each other achieve their own freedom dreams.

For Terica, ultimately, it’s still all about freedom!

To learn more or to reach Terica, go to MyFreedomBlueprint.com.

 

Karen A. Walker is a seasoned, award-nominated journalist with a passion for real estate.

Communicating with the Executor: Tips for Working Your Probate Leads

By Kristine Gentry, Ph.D.

While many real estate investors say probate leads are one of their best lead sources, there are still many real estate investors who are reluctant to get started in this business. One of the common concerns we hear from potential probate investors is that they are unsure of how to communicate with the executor or personal representative. As a refresher, probate leads are potential seller clients who inherit properties. They are often highly motivated to sell the inherited property for a variety of reasons.

If concern regarding how to communicate with the executor is holding you back, read on for some tips compiled from the experience of expert probate investors.

The first step is to determine your contact strategy.

We recommend mailing a formal letter as your initial point of contact, followed by similar letters or postcards every other month. The letter should be sympathetic. The reader has most likely recently lost a loved one and is in the middle of a very difficult time in his/her life. We recommend acknowledging the loss and the stress of being an executor. The letter should be reflective of you and your style but focused on the recipient. That is, if you are very formal, your letter should reflect that. However, if your style is more casual and laidback, it is alright to reflect that too. You do not want to present something that you are not in your mailings. Your message should reflect that you are here to help during this difficult time. Highlight that you can make the selling of a house easy, fast, and relatively painless.

The second step is to have a conversation with the executor.

Ideally, the executor will initiate the phone call after receiving your mailer. However, if you are not getting return calls, you may want to make phone calls yourself. They key to these calls is to be prepared to listen. You will want to let the executor do most of the talking and only guide the conversation with your questions. Many executors are in a particularly tough time in their life, and they need someone to talk to. If you can listen, you are providing something the executor needs, and you are on your way to developing the rapport that will be necessary to move this potential transaction forward.

The third step is to continue to build that relationship with the executor.

Understand the unique situation of the executor and determine if you are able to offer assistance in any way. Often times the executor does not live near the house. Offering to run by and check on the house, pick up the newspaper, or even mow the yard can be a huge help to the executor.

Once you have built a rapport with the Executor, you are well on your way to determining if this property is of interest to you, and you can proceed as you would with any other opportunity.

Persistence is Key

In the scenario outlined above, you have contacted the executor and have the opportunity to build a relationship. It takes time and persistence to actually be in this position. You will not receive a call from many of your leads. They simply are not interested in your help for a variety of reasons. However, if you continue to work the leads and are continually adding new leads to your pipeline, you will have success.

Having access to leads on a regular basis means that you will be able to find success in probate real estate investing.  With time, patience and a carefully thought out business plan, you can be sure that having these leads will make an enormous difference in your ability to purchase homes and other properties at a favorable price. The key to success in probate is making sure you buy leads from a high-quality and trusted provider. Then, you must reach out to the executors and continue to do so for a minimum of six months. This allows you time to truly work probates and to patiently await those executors who do not want to sell immediately.

Simplify Your Business

Are you looking for a reliable lead source for all of your probate investment needs?  The experts at US Probate Leads offer the highest quality leads available on the market today.  Our certified lead specialists visit nearly every courthouse in the United States, constantly evaluating new probate filings and making those available to our investors.  In addition to our premium lead service, we also offer services that can keep you informed on the newest trends in the market. We can also assist you with your mailers to help you easily reach out to executors. Contact our office today to learn more about our lead service, mailing service, and e-books.

Kristine Gentry, Ph.D.

VP of Innovation

US Probate Leads

Web Site: www.usprobateleads.com

 

 

Interest Rate and Home Price Swings

By Rick Tobin

Historically, the #1 reason why home prices generally rise, remain flat, or fall is directly related to the latest 30-year fixed mortgage rates. This is true because the vast majority of home buyers need third-party funds from banks, credit unions, or mortgage professionals to purchase and sell their homes to new buyers who also usually need bank financing to cash the seller out.

Over the past 10 years, a very high percentage of mortgage loans used to acquire residential (one-to-four unit) properties have originated, directly or indirectly, from some form of government-owned, -backed, or -insured money, such as FHA (Federal Housing Administration), VA (U.S. Department of Veterans Affairs), USDA (U.S. Department of Agriculture for more rural properties), Fannie Mae, Ginnie Mac, and Freddie Mac in both the primary and secondary markets. Most of these same government-assisted mortgage programs allow buyers to purchase properties with as little as no money down to just 3.5% down payments. Many times, the seller and family members can credit the most or all of the closing costs or down payment requirements so that the buyer really has no money invested in the property.

To the buyer, the most important part of the purchase deal is related to qualifying for a very low 30-year fixed mortgage rate and an affordable monthly payment. When the interest rates are too high, then fewer buyers can qualify for properties. During these higher rate time periods, home prices typically stay neutral or fall in price as seen during past periods of deflation like back in the mid-1970s. As such, almost all “boom” (positive) or “bust” (negative) housing cycles are directly related to low or high rates of interest, so they tend to correlate or go hand-in-hand with one another.

Interest Rate History: 1971 – 2018

Between 1971 and 2018, 30-year fixed-rate mortgages have ranged between a low of 3.31% in 2012 to a high of 18.63% in 1981. Fixed-rate mortgages are still hovering near historical lows at present and in recent years. An estimated 60%+ of mortgage holders are paying fixed-rates on their residential owner-occupied properties somewhere within the 3.00% and 4.90% rate ranges as of 2015, per data released by Freddie Mac.

During this same 47-year timespan (1971 – 2018), the average 30-year fixed-rate mortgage was near 8.08%. This rate is almost double the average 30-year fixed-rate mortgage loan between 2010 and 2019. Because the ease of qualification and the affordability of mortgage loans is typically the most important factor behind a booming or busting housing market, the more recent 3% to 5% rate ranges over the past 10 years has helped fuel a stronger housing market with rapid appreciation rates as well.

Most often, owner-occupants are using some type of a government-backed or insured mortgage loan and / or secondary market investor to purchase their properties. These loans include FHA, VA, Fannie Mae, and Freddie Mac. The typical down payment ranges used to purchase these properties are very likely to average somewhere within the 0% to 3.5% down payment range. Many times, the seller provides a credit towards most of the closing costs and / or another family member assists with the down payment as a gift of some sort.

If so, a very high percentage of owner-occupied home buyers have purchased their homes with little to no money down out of their own pocket prior to qualifying for tax-deductible mortgage payments that were less than a nearby apartment to lease. Additionally, these same homeowners have boosted their overall net worth after the vast majority of residential properties have appreciated at significant annual percentage rates. In some cases, homes have double in value in less than five to seven years due to the combination of affordable mortgage loans, easier mortgage underwriting approval processes, and increasing demand for properties to purchase.

Source: Freddie Mac’s Primary Mortgage Market Survey (PMMS)

The Consumer Debt Anchor

With home mortgages, the primary collateral for the loan balance is the home itself. In the event of a future default, the lender can file a foreclosure notice and take the property back several months later. With automobile loans, the car dealership or current lender servicing the loan can repossess the car.

Homeowners often refinance their non-deductible consumer debt that generally have shorter terms, much higher interest rates, and no tax benefits most often into newer cash-out refinance mortgage loans that reduce their monthly debt obligations. While this can be wise for many property owners, it may be a bit risky for other property owners if they leverage their homes too much.

With credit cards, lenders don’t have any real collateral to protect their financial interests, which is why the interest rates can easily be double-digits about 10%, 20%, or 30% in annual rates and fees, regardless of any national usury laws that were meant to protect borrowers from being charged “unnecessarily and unfairly high rates and fees” as usury laws were originally designed to do when first drafted.

Zero Hedge has reported that 50% of Americans don’t have access to even $400 cash for an emergency situation. Some tenants pay upwards of 50% to 60% of their income on rent. A past 2017 study by Northwestern Mutual noted the following details in regard to the lack of cash and high credit card balances for upwards of 50% of young and older Americans today:

* 50% of Baby Boomers have basically no retirement savings.

* 50% of Americans (excluding mortgage balances) have outstanding debt balances (credit cards, etc.) of more than $25,000.

* The average American with debt has credit card balances of $37,000, and an annual income of just $30,000.

* Over 45% of consumers spend up to 50% of their monthly income on debt repayments that are typically near minimum monthly payments.

Rising Global Debt

According to a report released by IIF (Institute of International Finance) Global Debt Monitor, debt rose to a whopping $246 trillion in the 1st quarter of 2019. In just the first three months of 2019, global debt increased by a staggering $3 trillion dollar amount. The rate of global debt far outpaced the rate of economic growth in the same first quarter of 2019 as the total debt/GDP (Gross Domestic Product) ratio rose to 320%.

The same IIF Global Debt Monitor report for Q1 2019 noted that the debt by sector as a percentage of GDP as follows:

  • Households: 59.8%
  • Non-financial corporates: 91.4%
  • Government: 87.2%
  • Financial corporates: 80.8%

Rate Cuts and Negative Yields

As of 2019, there’s reportedly an estimated $13.64 trillion dollars worldwide that generates negative yields or returns for the investors who hold government or corporate bonds. This same $13.64 trillion dollar number represents approximately 25% of all sovereign or corporate bond debt worldwide.

On July 31, 2019, the Federal Reserve announced that they cut short-term rates 0.25% (a quarter point). Their new target range for its overnight lending rate is now somewhere within the 2% to 2.25% rate range. This is 25 basis points lower than their last Fed meeting decision reached on June 19th. This was the first rate cut since the start of the financial recession (or depression) in almost 11 years ago dating back to December 2008.

There are three additional Federal Reserve two-day meeting dates scheduled for 2019 that include:

  • September 17-18
  • October 29-30
  • December 10-11

It’s fairly likely that the Fed will cut rates one or more times at these remaining 2019 meeting dates. If so, short and long-term borrowing costs may move downward and become more affordable for consumers and homeowners. If this happens, then it may be a boost to the housing and financial markets for so long as the economy stabilizes in other sectors as well such as international trade, consumer spending and the retail sector, government deficit spending levels, and other economic factors or trends.

We shall see what happens between now and year-end in 2019 and beyond.

 

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Is It Honest to Use A Land Trust?

By Randy Hughes, Mr. Land Trust

I have been using Land Trusts for over 40 years in my real estate business, but every now and then someone will challenge me as to the purpose and “honesty” in using a Land Trust to hold title to real estate investments. Let’s clear the air.

Recently I was talking to a real estate investment club owner about speaking to his club regarding land trusts. He said, “We do not believe in using Land Trusts because they are dishonest.” He then went on to explain how someone had come to his club and spoke about Land Trusts and that led him to believe that the use of a Land Trust was for deception and taking advantage of people.

I told him that I was sorry that he had been misinformed about Land Trusts and that he should reconsider their use and benefits. I went on to review with the club owner why it is important to NOT have your name in the public records as owner of real property:

1. A group of investors may be purchasing several properties for a special purpose and it may be that the desired result can be best accomplished if the objective is not made public.

2. Co-owners might desire that the interest of each beneficiary must be kept private.

3. An individual owner might not want to be hassled with inquiries regarding the property.

4. A real estate investor might not want his competitors to copy his acquisition techniques.

5. Real estate investors do not want their tenants to know they are the “owner” of the property (helps with day-to-day management and lease renewal negotiations).

6. Co-beneficiaries want to know that a lien or judgment or divorce of one beneficiary will not affect the title to the property.

7. Successor Beneficiaries avoid probate and out of state Beneficiaries can avoid probate in multiple states and other legal issues upon death of the Primary Beneficiary. This creates a smooth transition of succession.

8. A group of heirs can inherit a property held in a land trust with ease of management (by a Director) and no need for a partnership agreement or a partnership tax return

9. Co-operative housing corporations may elect to hold title to their land and buildings in a land trust. They could then issue beneficial shares to their residents in place of stock certificates-simplifying control and record keeping.

10. When a Trustee of a Land Trust signs the mortgage (that gets recorded in the county court house records) the debt will not show on the borrower’s (the Beneficiary) credit report.

Land Trusts have been used by American citizens for over 100 years for good reasons. There are many legitimate reasons to use a Land Trust for privacy and asset protection. No one will protect your assets like YOU will. Learn all you can now because “old and cold” matters. Ever since 9/11 it gets harder every year to be private and protect your assets. Do it now! Don’t delay!

I encourage you to learn more by going to my FREE online training at: www.landtrustwebinar.com/411  and text “reasons” to 206-203-2005 for my free booklet, “Reasons to Use a Land Trust.” You can also reach me the old fashion way by calling me at 866-696-7347 (I actually answer my own phone unlike most other businesses in America today).

 

A Hidden Wealth-Building Tool Every Investor Should Know About

If you already have a million dollars set aside for your retirement years – a figure most experts recommend as a goal – you’re not the norm.

According to 2013 data from the Economic Policy Institute (EPI),  individuals living on the cusp of retirement age (in their 50s and 60s) are well behind $1 million in savings. As of five years ago, soon to be retirees are coming in at $124,831 and $163,577 respectively.

A retirement savings crisis

More recently, an annual survey conducted by insurer Northwestern Mutual, found that one in three Americans has less than $5,000 set aside for retirement!

And while the data in Northwestern’s report is impacted by other age groups, the fact is that many Americans are well behind the one million dollar goal for their retirement portfolios.

In fact, a 2017 report from the Government Accountability Office (GAO) discovered that “about half of households age 55 and older have no retirement savings – and up to two-thirds of workers may not have saved enough to maintain their standard of living in retirement.”

Whether or not you’re behind in your retirement savings goals, as a savvy investor, you know why it’s smart to always be on the lookout for a great opportunity to grow your portfolio.

A self-directed IRA (SDIRA) is one such opportunity. And while it’s an investment tool that’s been around a while – since the 70s, actually – the truth is that it’s often “hidden” in plain sight.

Why?

Because banks and brokerage firms are, by and large, the custodians who offer traditional IRAs, which invest in stocks, bonds, mutual funds, etc.

Alternative investments, then, aren’t on their radar so of course, they’re not going to advertise SDIRAs.

Investment choices

While there are many things you can choose to invest in, the following investment choices are among the most common.:

Stock market

Many individuals – perhaps even you – have made a lot of money on the stock market. But not everyone wants to invest in stocks, bonds, futures, commodities, etc.

Fortunately, for these individuals, there are always alternative investment options such as property investing.

Real estate investing

As you know, investing in real estate can be a very satisfying way to build wealth. It’s easy to understand and much of it is entirely within your control.

But, even if you choose to diversify your real estate holdings among a variety of real estate types; commercial, residential, multi-tenant, etc., at the end of the day you’re still investing in one asset class.

Pensions, 401k

Most employers offer some type of retirement funding option…and if it suits your retirement strategy these can be useful ways to build your nest egg.

However, you’re limited on how much you can contribute and you’re not in full control of the investments your plan makes.

Traditional and Roth IRAs, Self-Directed IRAs

With a self-directed IRA, you are in complete control of the investments you choose.  In fact, one of the best things about a self-directed IRA is that you can invest according to what you know and like.

Wine connoisseur?  Great! Your SDIRA can invest in a winery.

Want to lend money to a family member?

You may be able to do that (assuming they’re not a disqualified individual)

And then, of course, there’s real estate.

Following are just some of the types of real estate an IRA can invest in:

  • Raw land
  • Rental income properties
  • Manufactured homes
  • Public storage units
    Trust deeds
  • Secured notes
  • Parking lots, etc.
  • Timber rights
  • Mineral rights
  • Tree farms

Bottom line, with an SDIRA you have TOTAL CONTROL over your investment choices.

A quick overview of prohibited and acceptable transactions and parties when using a self-directed IRA:

  • You can’t buy from yourself or another prohibited person. (think “up and down” your family tree; parents, kids, spouses)
    • You can, however, go “left to right”, so siblings, uncles, aunts, cousins, etc. are not disqualified parties.
  • You can’t use your IRA as collateral for a personal loan.
  • Co-mingling is prohibited (e.g. if your IRA is the owner of record and you start paying for the roof leak, etc. with taxable dollars, the IRS considers it to be commingling your taxable money with your qualified money)
  • As you’re probably aware, expenses and cash flows would have to go through the IRA. Because it’s the owner, all the rent and income flow back into the IRA.
  • Obviously then, the same thing would apply if you had an expense in connection with the property (or other assets).

Self-directed IRA changes for 2019

If you already invest in an SDIRA or plan to, the following changes for self-directed IRAs will happen next year.:

New contribution limits for 2019

  • 2018 – $5,500
  • 2019 – $6,000

Individuals over 50

  • 2018 – $6,500
  • 2019 – $7,000

401(k) employee contributions

2018

  • under 50 – $18,500
  • 50+ – $24,500

2019

  • under 50 – $19,000
  • 50+ – $25,000

SEP IRAs

2018 – $55,000 Max Considered Compensation – $275,000

2019 – $56,000 Max Considered Compensation – $280,000

SIMPLE IRAs

2015-2018

  • Under 50 – $12,500
  • 50+ – $15,500

2019

  • Under 50 – $13,000
  • 50+ – $16,000

As of October 2018, the ability to recharacterize a Roth conversion has ended.

As of March, 2018, there was a reported $9.2 Trillion in IRAs in the U.S. (up from $8.7 trillion).

If you’re looking for an investment option outside of Wall Street, a self-directed IRA is a great investment choice.

Creating your SDIRA

Opening up your own self-directed IRA is easy, but it will require setting it up with a custodian who can handle the administrative work for you to make sure you get the tax breaks you’re eligible for and that the IRS requirements are met.

  1. Open and fund your IRA (using new deposit or move money from an existing IRA or another retirement vehicle)
    1. Fill out an application
    2. Provide proof of your identity (eg. Drivers’ license)
    3. Provide a method of payment
  2. Choose your investment
  3. Purchase the investment through your IRA (note: the asset will not be in your personal name, but will be held in the name of the IRA, for your benefit (your custodian will send the funds from your IRA to purchase the investment)
  4. Manage your investment
  5. Sell the investment – proceeds return to IRA tax-deferred or tax-free and can be used for future investments

Remember…the custodian you use is passive – they don’t give you advice, they’re just a holding entity, that’s all.

When you’re looking for a home for your SDIRA, go with an experienced company like UDirectIRA.

UDirectIRA provides administrative services for investors.

“We help people invest outside the stock market to improve their financial future,” said Kaaren Hall, CEO of UDirectIRA. Investors should know that self-directed IRAs are a great way to invest in asset classes that they understand.

“There is a retirement crisis in America. Ten thousand people are turning 65 every day. In fact, I read one article that said there are more older people than there are children in the world, which is a first time ever, so our population, on the whole, is aging, but people aren’t prepared to retire.

“Even if you have, for example, $100,000 in an IRA account. It seems like a lot of money, but I did the math one time and figured out that if you’re 59 1/2 and you’ve got $100,000, assuming no gain or loss, that means only $396.83 a month if you live till 86.5.  We have to get busy and build our nest eggs so we can have a quality retirement.  $400 a month is not going to cut it for anyone.”

“Know that if you take even, monthly distributions, that’s only going to give you just under $400 dollars a month!

“Everybody needs to retire at some point in time, and most people don’t have enough money saved. It’s a real crisis and we’re trying to help people avoid that through the use of Self-Directed IRAs.  A Self-Directed IRA, invested in asset classes our account holders understand,  means more control over their financial future”.

 

Kaaren Hall

Kaaren has helped hundreds of people self­direct their retirement savings. A native of California, she has a 17­year background in Real Estate, Property Management and Mortgage Lending. She has worked at such companies as Bank of America, Centex Homes, Pulte Homes and Indymac Bank. She’s held a real estate license in Washington, T exas and California and a Life & Health license in California.

Her company , uDirect IRA Services, LLC, offers self­directed education and services to investors, providing excellent customer service. Kaaren is a public speaker and master networker . A mother of two, she lives in Orange County.

 

Are Investments in Temporary Rentals a Good Investment?

By Edward Brown

With the popularity in Air BNB [for discussion purposes, we are using Air BNB, but there are other similar companies that could be substituted in] gaining traction in the market place, many real estate investors have been looking at purchasing residential real estate for the specific purpose of renting the real estate on a short term basis similar to the hotel model.

Rather than attempting to garner a month to month tenant or a longer term lessee, some real estate investors have been looking at a model wherein they forgo the security of known monthly rent in exchange for the hope of higher income per month by renting to vacationers on a short term basis. This type of rental is especially the case in popular vacation destinations such as San Francisco and the Napa Valley as well as the outlining areas.

There are pros and cons to this model. From a pro standpoint, many times, renting to vacationers for less than half a month can earn more than a full month under a typical month to month tenant. In the Bay Area, monthly rental may be $3,000 on average, but the nightly rental of an Air BNB for the same house may average $300 per night. Also, eviction is not usually a factor in the vacation model. Most vacationers are not squatters by nature, and lessee evictions [especially in tenant friendly states such as California] can be expensive in time, aggravation, and money. Although there will always be the horror stories of the vacationer who does a fair amount of damage to the house, these instances are much less than the usual monthly renter.

On the con side of renting via Air BNB, there is no security of rental income surety. One never knows how many days the house will be rented. Also, some months may be more seasonal than others. For instance, attempting to rent your Napa Valley place out in February may rent for far fewer days than in August when the vineyards are more in bloom. Other cons include the movement by cities to either tax the income via a “transient” tax or to not allow rentals for shorter than 30 days. This has recently been a big issue as neighbors complain about noise, constant flow of traffic, and so many different renters coming and going as well as the belief that property values go down when living next to this type of rental. Since the number of renters using Air BNB for more than 30 days is much smaller, the odds of getting a renter for more than 30 days to make up for the lack of days being rented in totality as compared to the desired occupancy of the Air BNB rental are very slim. In addition, someone desiring to rent under these circumstances is usually not willing to pay the typical nightly rent for the whole 30 days. Either the “landlord” will advertise a bargain rate for 30 days, or the prospective renter will negotiate a lower rent. A typical $300 per night rental using Air BNB might go for $150 per night for a 30 day rental.

Security deposits are normal for both Air BNB and typical rental situations, but Air BNB will most likely have an additional cleaning fee that may or may not match the actual cost of cleanup. In addition, the Air BNB rental will need to be furnished including bedding, towels, and other necessities whereas most typical rentals usually come unfurnished. This adds to the cost of the set up and continuing maintenance of the Air BNB as well as having someone keep an eye on the rental to make sure the unit is in the same condition from tenant to tenant.

As with Uber, Air BNB has gained traction. With Uber, it took some time for the general public to see that this was similar to taking a taxi and, once people got the hang of it, it became the norm. With Air BNB many vacationers feel comfortable staying in someone’s house that they know has been prepared for them in the same way a hotel makes up a room. There is no room service with Air BNB, nor are the sheets changed on a daily basis, but the costs can be quite attractive to the renter as well as the usually much larger space they get by staying in a house versus a hotel room.

From a lending standpoint, most lenders will severely discount the anticipated rent expected from the borrower who wants to buy a house to place in the Air BNB system. In fact, many traditional lenders will not look at lending in these circumstances with unknown income. Traditional lenders may impute income if the rental is a typical leased situation [although usually discounted somewhat], but Air BNB income is not like a hotel that has many rooms. Either the Air BNB unit is 100% rented or 100% vacant. Hotels have the luxury [from a lenders point of view] that the hotel’s experience may show 60-80% occupancy.  Especially if the Air BNB owner is a first timer, most banks will be very wary of lending to borrowers looking to buy a house for Air BNB income. How does the new owner know how much to charge? These and other questions will make banks turn down more often than approve these types of loans.

If the buyer of an Air BNB house has experience and other rentals in their portfolio, the bank may be more inclined to take a closer look. Otherwise, the buyer of the Air BNB house will have to look for alternative lenders. If the buyer/borrower puts a significant down payment, the alternative lender may be able to be convinced to make the loan since this type of loan would be considered a non-owner occupied [no consumer] loan and not have as many restrictions in its lending practices due to Dodd Frank, TRID, ATR, and other regulations. The alternative lender is more willing to look at what can be done with the house upon a foreclosure. Can the property be sold easily to an owner/user? Can it be rented to a normal tenant lease? Most likely, the alternative lender will not look at keeping the house [upon foreclosure] as an Air BNB; that is a business rather than a rental and in need of more management.

The prospective buyer of an Air BNB should look at what a typical lease would look like should the Air BNB model not work for any number of reasons previously mentioned. If the typical lease income is too far below what is prudent from the standpoint of NOI, the buyer may decide to choose a different property to Air BNB if that model is so desired.

Edward Brown

Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company. Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns

 

Using The Right Mailing Lists to Locate Motivated Sellers (Part 1)

By Kathy Kennebrook “The Marketing Magic Lady”

Implementing the right list and using the right letter when creating your direct mail campaigns to locate motivated sellers is crucial to your success as a Real Estate Investor. There are lots of different ways to find these lists and lots of different types of lists to choose from.

The easiest way I suggest to locate a list to use for mailings is to simply go to your property appraiser’s office or auditor’s office and have them create it for you. There are many different parameters you can use to create these lists.

Some of the lists you could create might be directed at out of town owners, deed transfers, zip codes ranges, sale dates, estates, evictions, delinquent taxes or pre-foreclosures. These can all be good lead sources for you to use to find motivated sellers and these are lists that I use in my business on a daily basis in addition to several others.

Sometimes these records are available on CD and sometimes they are available as a paper copy. Every county differs in how they distribute this information. I suggest going down to the property appraiser’s office and speaking with someone there directly. Do not call. You may get someone on the phone who doesn’t understand what it is you need and you will not get the lists you need. Since you will be using this list for several months to do repeat mailings, it would behoove you to get the right list the first time.

There are also mailing list services that provide this service for you and usually you can locate them online by searching mailing lists or mailing services. Just be sure that whatever list source you are using has a list that has current information. Otherwise you are wasting your time and money on list that will net you zero results. I suggest getting a small list of around 100 pieces to send a sample mailing in order to test the list before spending a lot of money on this resource.

There are a lot of good internet resources to use to find excellent lists for finding motivated sellers using specific parameters. Once again, make sure you check the age of the list and the reliability of the company before making a long-term commitment.

Another way to find lists of motivated sellers is to go to the courthouse and check property records. One of the lists you can create is notices of default or lis pendens. These are people who are in pre-foreclosure. There are also probate and bankruptcy filings you can find at the courthouse that will provide a resource for leads.

When you invest in my Marketing Magic System I provide the letters for you to use along with resources for all the mailing lists you will ever need to create successful direct mail campaigns.

For more information on mailing lists to use in you Real Estate Investing Business check out part 2 of this article. In the meantime, check out my website at Marketingmagiclady.com for all the tools you need for you Real Estate Investing business including all the resources and letters you need to create successful direct mail campaigns for your real estate investing business.

Kathy Kennebrook

Kathy Kennebrook is the ultimate success story. She spent over 20 years in the banking industry before discovering the world of real estate. After attending some real estate seminars this 4 foot 11 mother of two got really excited and before you know it she’d bought and sold hundreds of properties using none of her own money or credit.

Kathy holds a degree in finance and has co-authored the books- The Venus Approach to Real Estate Investing, Walking With the Wise Real Estate Investor, and Walking With the Wise Entrepreneur which also includes real estate experts Suze Orman, Robert Kiyosaki, and Dr. Wayne Dyer.

She is the nation’s leading expert at finding highly qualified, motivated sellers, buyers and lenders using many types of direct mail marketing. She is known throughout the United States and Canada as the Marketing Magic Lady. She has put together a simple step-by-step system that anyone can follow to duplicate her success.

Kathy has been speaking throughout the country and across Canada for over 14 years and has shared the stage with Ron LeGrand, Dr. Phil, Dan Kennedy, Mark Victor Hansen, Ted Thomas and Suze Orman to name a few.

Kathy is going to share with you how she generates a seven figure income by mailing a handful of letters throughout the year to highly selected targets by knowing exactly what to send them, who to send them to and exactly how to deliver her message. She will teach you the secrets of pre-screening and automating your marketing and follow up systems to put your entire Real Estate business on auto-pilot.

 

The Rise of Private Capital Lenders and Why It Matters for Fix and Flip Investing

By Ryan Roberts

Things have changed dramatically since the crisis of 2008. Spurred by a collapse of the housing market, the most financially tumultuous time in recent history drove large-scale, well-known banks to pull the e-brake on real estate lending. While the jury is still out, there’s no denying that the crash of the late-2000s was exacerbated by banks handing out mortgages to risky borrowers who, frankly, couldn’t afford them.

So, suffice to say that, even to this day, those latter-mentioned banks are still quite hesitant to give out speculative loans. It’s like selling the same jug of milk within the same financial bounding box. You either fit within the parameters of that box, or not. However, it’s this exact hole in the market that’s allowed private lenders to enjoy a massive second wind of popularity.

Lending from Non-bank Intermediaries

Private lending has turned the tables on the traditional banking industry’s foremost product: Loans. Ten years since our nation’s most recent economic downfall, investors, from all industries and niches, having poured literally billions into companies and business that have been deemed by “Big Banks” to be too trivial or volatile to lend against.

Well, it’s turning out that this is an incredibly lucrative, healthy, growing market. Money flowing in is feeding the ten-year-long trend of private lending. In fact, its valued at $500 billion, according to figures recently published by Bloomberg. The numbers are only growing, quarter after quarter; by 2020, it’s estimated that private lending could top $1 trillion. Much of which is within a completely unregulated financial market.

Tech-savvy Entrepreneurs are jumping on the proverbial train to, quite literally, capitalize on this boom, all while making it easier for small-scale borrowers to find applicable lenders. Jordan Selleck, for example, created DebtMaven, which is like a financial Tinder of sorts, is matching borrowers with lenders. These types of tools are yet to exist at scale in the real estate investment sphere.

Now after just two years, almost 500 lenders are signed up on the platform, ready to match with a growing amount of private lenders on the hunt for lending opportunities. “They’re hooked on deal flow and willing to pay,” Selleck told Bloomberg in regards to his lenders. “It’s grown at a crazy pace.” It’s not the same type of lending were used to, but a great analogy of the overall market trend.

What this Means for Fix and Flip

Since the financial crisis of ‘08, non-bank intermediaries—i.e private equity firms, hedge funds, and other private capital lenders—are continuing to flourish, making up a greater proportion of all global real estate assets. For private real estate lenders, this surge of private capital is amazing news.

So, just why is private credit so intriguing to the lenders? Well, it all boils down to yield and regulation (or lack thereof). Ten years ago when the central bank, essentially, came to a standstill, profits from loans all but disappeared. To this day, those large-scale banks are still struggling to pull yields from those same-era loans.

To the contrary, those who are in the business of private lending can see incredibly lucrative returns. All-in yields of around 8 percent are normal with these loans, sometimes accruing even higher profit percentage rates (spread, interest, junk fees). When you compare that to the dismal 4 percent regularly touted by investment-grade firms and corporate bonds, it’s no wonder why private collateralized lending is enjoying its current hay day.

For outsiders, e.g. borrowers who are looking for loans collateralized by real estate assets, the benefits of these private lenders are nearly endless. For one, credit ratings are often not nearly as important in underwriting, due to the collateral and high-security nature of those loans. It’s obviously not the borrower that’s anchored to the loan. It’s the asset. Rates are also typically higher on these financial products. A caveat to the risk vs. reward profile.

Also, unlike bonds, private loans aren’t generally traded in the open market, meaning their interest rates and financial fragility will stay intact over the duration of that loan. These loans, too, aren’t commonly held on the books of a private lender. It’s common to see heavy paper trading of these debt instruments between private financial institutions the second they are funded. It’s a capability that lenders with lower capital costs can enjoy the luxury of profiting from.

Why is this important? Well, in a very compact nutshell, it means this: Your loan (or loans) aren’t bunched together with other financial assets associated with a said private lender. So, heaven forbid that private entity goes under, your loan is associated with company quotas, revenues, etc. when they do inevitably file and fold — the assets still stand.

It just so happens the larger banks are also noticing a favorable risk vs. reward profile — and investing heavily. Prior Blackstone, KKR and Goldman Sachs employees have created young startups and are amongst industry veterans that have amassed $9.5 billion in private assets over the past few years.

The Future of Fix & Flip Collateralized Lending
is ripe for the picking

Private lending is booming and likely on the cusp of a major market shift. The unregulated nature of our industry probably won’t last, however it’s favorable to lenders and even real estate investors who don’t check the normal financial product (QM) lending boxes. Big financial institutions rarely touch these funding scenarios or our financial products, but are clearly interested in the upside.

There are ~1.3m realtors in the US. The profound industry question is, how do you find those individuals sourcing investment opportunities in the real estate market? They self identify as investors, yet in most cases have little to no capital.

Upwards of 60% of these “real estate investors” (purchase decision makers) are realtors themselves, or hold a real estate license. They defer to private lenders to save deals falling out of escrow or even to poach an investment opportunity with their advantageous position in finding that property first.

Deal flow isn’t about the borrower. Given that private lending is anchored to a physical asset makes lending an entirely different game. It’s no longer about the credentials, income, credit or liquidity of an individual – but their aptitude and ability to hunt and gather strong investment opportunities on behalf of a private lender. Contrary to industry standards these individuals are your sales team. In the coming months or even years, keep your eyes peeled and stay fully focused on this market opportunity.

 

 

Ryan Roberts

Ryan Roberts is the Sr. Director of Marketing @ Triumph Capital Partners, Triumph recently formed a Joint Venture with Brixton Capital, a San Diego based real estate investor and operator. The firm’s principals have a combined 40+ years experience in property development and real estate finance. Brixton’s portfolio totals 10M+ square feet and is valued in excess of $1.4 billion. Reach Roberts at (616) 635-9732 or [email protected]

 

Enhanced Diligence for Turnkey Investing

By Bruce Kellogg

What About Enhanced Diligence?

In the beginning, commercial real estate brokers invented the term “due diligence”. Lacking a specific definition, it basically means, “Check it out”, when making a real estate purchase. Nowadays, the term has received wider use in home purchasing, turnkeys, syndications, and more, but its application still has no formula. This article aims to correct that for turnkey investing with what can be called Enhanced Diligence.

Initial Philosophy

When an investor purchases a turnkey property in a distant location from a rehabber who installs a tenant and arranges for property management, the investor is buying a property. The rehabber might move on, or go bust. The manager might prove ineffective. The tenant might move out. What is surely left is the property. The investor owns it. This is why Enhanced Diligence is so important. It has got to be done!

Exterior Issues

Common sense suggests purchasing a property with a hardy exterior, especially in areas with harsh winters or hot, dry temperatures. Basically, this means the less wood, the better. Think of tile or concrete roofs, brick/block/stone/vinyl exterior walls, and vinyl windows. Arrange these for your purchase as best you can.

Repairs “Done With Permits”

Most turnkey projects with substantial rehab work will involve the need for building permits. Common examples include roof replacement, gas line routing, electrical wiring and service upgrades, and moving “load-bearing” walls. So what? Turnkey operators will say that their repairs were “done with permits”, but this doesn’t say everything. A turnkey operator might “pull permits” for some repairs, but not others, usually in order to save costs. Or, they might purchase permits at the Building Department, but not call for the required inspections, and not have the permit “finaled” (i.e., all signed off). For example, paying a $22.00/hour “handyman” to reroute a gas line is much cheaper than paying a $60.00+/hour licensed plumber to do the job. This matters because people could get hurt by improper work, and insurance claims will be justifiably denied if this is discovered.

Enhanced Diligence by investors involves obtaining copies of all permits from the turnkey operator, then comparing them to the Building Department file for the property. Most departments have this online now or, if not, permits can be requested by mail and enclosing the required fee. This is public information.

If any of this does not go smoothly, or check out, take a hike.

Obtaining Inspections

In principle, the author recommends obtaining a “property inspection” report by a licensed contractor even if the turnkey operator discourages the idea. In fact, that might be even more reason to order one! The cost is usually $450-600, depending upon the size and complexity of the property being inspected. Look especially for two kinds of findings: 1) building code violations and, 2) health and safety hazards found. An example would be exposed electrical wiring. It is important to negotiate corrections to all of these and, if not satisfied, again, take a hike.

Now, some cities do inspections before rehab properties can be transferred. The investor needs to decide whether this is sufficient. One of the author’s consulting clients purchased a turnkey house where four city inspections were to be done. So, on a $62,000 house, the client felt he saved $450. It’s a business decision.

Property Manager

If the turnkey operator arranges for property management, or is providing it themselves, it is important to interview the manager. The “Property Management Interview” questionnaire in Attachment #1 can be used. It can also be used to hire a new manager in the event the present manager needs to be replaced. Enhanced Diligence also includes obtaining and checking licenses, professional certifications, and references for the property manager. Three references is probably enough.

Tenant Estoppel Certificate

If the property comes with a tenant, or several, rents will be pro-rated, and security deposits will be transferred in escrow. Just the same, the investor should insist that each tenant fill out and sign (all tenants) the Estoppel Certificate in Attachment #2. This avoids any possible disputes with the new owner over terms of the tenancy.

Evaluating the Numbers

Attachment #3 is a typical turnkey offering circular. How does an investor analyze it?

Start with “List Price”. Ask the turnkey operator for at least three closed sales in the past 3-4 months within ½ to one mile. See what you get. If this information is insufficient, order an outside “fee” appraisal. This will help if you are paying cash, but it might not be necessary if you have a lender who will be ordering an appraisal of their own. Then make the seller an offer! Why pay list price?

“Gross Rent”? Ask the property manager for “comparable” rents if the property is vacant and about to be rented for you. If there exists a tenant, then the rent amount is probably realistic.

Expenses is where dishonest turnkey operators are apt to take advantage. They underestimate expenses intentionally, or omit some altogether. This is how they jack up the cash flow, “cap rate”, and “ROI “ numbers. (More on these shortly.) Attachment#4 is a list of common expenses. Working with the turnkey operator and property manager, the investor needs to get an amount for each expense, or a reason why it is not applicable (e.g., no snow removal in San Diego.) Then compute your own cash flow. Don’t take the promoter’s numbers!

“Operating Expenses” per Attachment #4 often run 45-55% of gross rents, even on new or rehabbed properties. If you are given a lower number, dig in and find out why. It could be legitimate, or not, but you need to get the answer.

“Vacancy Factor” is a prime area for falsification. The example in Attachment #3 shows 8%, which equates to a bit less than one month. But what if the turnover crews are busy, or the market is slow, or the code inspector is in training for a week? The author’s experience is that 12% is more realistic, if not 15%!!!

“IRR”, Internal Rate of Return is a calculated figure used to compare alternative investments like bonds, rentals, annuities, and others. So is “ROI”, Return on Investment. Describing these exceeds the scope of this article, but the investor is warned that unscrupulous turnkey operators use expense and rent manipulations to enhance these figures to attract investors seeking an unrealistically high “yield” on their investment. Any IRR or ROI above 12% should be dissected to see how it was obtained. A real estate investment expert should be consulted, if necessary.

“Annual Appreciation” assumptions are often made and used by turnkey operators to project high future returns. A conservative investor would not assume anything. Or, even take into account the possibility of a decline in rents, or property values. We’ve seen these before, haven’t we?

Additional Diligence

Obtain and check at least three references of clients from the turnkey operator. Check any real estate and contractor licenses for current standing, bonding, insurance, any disciplinary actions, and complaints. If not satisfactory, take a hike. Go see the property, if possible!

Conclusion

Among other things, the author consults for prospective turnkey purchasers. Some have already lost five-, and six-figure sums investing with dishonest and/or incompetent turnkey operators. Please, please adopt Enhanced Diligence as presented here.

Investors are invited to hire the author to help them evaluate turnkey, syndication, joint-venture, and other investment opportunities.

 

Bruce Kellogg

Bruce Kellogg has been a Realtor® and investor for 36 years. He has transacted about 800 properties in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches.

Mr. Kellogg is a contributor and copy editor for two national real estate wealth-building magazines: Realty411, and REI Wealth Mag.

He is available for listing, selling, consulting, mentoring, and partnering. Reach him at [email protected], or (408) 489-0131.