Unlocking Your Equity and Using It Wisely
Financing investment property right now can be difficult, especially if investors are trying to use stated income loans, or have a number of properties on their credit reports. Lately, several our investors have found they can take advantage of their home equity at a very low rate, 3.99 - 4.25% at the time of this writing.
Warning: Investors should be responsible with their equity, HELOCs should be used to increase your wealth, not advance your lifestyle. It is important to keep in mind that even though you are tapping into “your equity”, you are still borrowing money. As with all real estate investments, equity isn’t fully realized until you sell. So before borrowing, you should analyze the numbers and make sure you will be profitable. If you are paying 4% for your HELOC you should be getting at least a 7% cash-on-cash return on the new investment. Cash-on-cash return is the ratio between the property’s cash flow and the amount of the initial investment in the form of a percentage.
Annual Cash Flow / Cash Invested
For example:
Let’s say you borrowed $40,000 at 4%, your monthly payment would be approximately $133.
You then take the $40,000 and use it as a down-payment on a $200,000 duplex. The duplex has a cash flow of $400 per month. Your cash-on-cash return would be 12%.
Pretty sweet huh? We have a ton of great deals that offer a strong cash-on-cash return like the example. I just got back from an exciting market that offers a 40% cash-on-cash return your first year!
Investors that have money and are able to put down 20% - 30% on deals are going to get some great buys. Call me to find out more.
Skyler Moore
YAERD.org Investor Relations & Project Management
Skyler [at] yaerd.org
312-265-8417
Tip For Your Next Real Estate Investment Build
Have you ever seen somebody’s sprinkler system on while it was raining? I see it all the time in Florida and it’s kind of depressing since we are in a drought.
Intro Cyber-Rain and their phenomenal “smart” sprinkler system. Unlike most sprinkler systems that are on a human adjusted timer for their watering, the Cyber-Rain system is linked up to Weather.com to get real time updates on the current weather. This system saves a substantial amount of water with most users reporting approximately 30-70% saving on their bills.
With the cost of system coming in at $349, your return on investment could come pretty quick if you have agreed to pay the water bill on your rental property.
This is definitely something you may want to consider on your next real estate investment build. I’m sure Mother Nature will thank you also.
Jeremy Quinn
YAERD.org Advisory Board Member
jeremy[at]yaerd.org
561-210-5636
Gas Price Effect on Real Estate
During the real estate boom when gas was still affordable the effect on real estate was that developers would go to outlying suburban areas and the buyers followed. A common phrase real estate agents and their buyers used was “drive until you qualify”. Today though with escalating gas prices this phrase is beginning to be second guessed by buyers, the trade off of lower home prices in outlying areas is less attractive as each mile of the commute now becomes incrementally more expensive.
What does this mean for real estate investors? The trend will be a shift back to the down town and urban core. Developers will be looking at infill projects to take advantage of this trend. The buyers who bought homes in speculative outlying areas , which are also the areas that will take the longest to recover, are now feeling the squeeze of seemingly paying and arm and leg for their commutes.
When you look at the micro markets and the urban core vs outlying suburban areas the data shows that the urban core’s have been less effected than the outlying areas. The pressure on outlying areas with the over supplies will result in more foreclosures. These former home owners will also fuel rental demand in urban areas as they will be forced to rent closer to work in order to save money.
Based on the gas effect trend, one of the opportunities for real estate investors to take advantage of is to hold or acquire rental units near job centers, urban cores and public transportation, as we are already seeing an increased demand for quality rentals in these areas.
Robert Stec
YAERD.org Advisory Board Member
Emerging Real Estate Markets
Investing in emerging real estate markets has always been a major part of the business model of big national and global real estate funds. Analysts at these firms would study market data to understand exactly which part of the business cycle different markets are in and where the opportunities lie. After targeting these markets these funds then would go and analyze the specific investments, be it cash flow properties like apartment, office and retail or more speculative land deals. 
Small investors however have been influenced ( and many would argue incorrectly influenced) by what they think is a path of least resistance and possibly the Carleton Sheet late night infomercials that teach you must invest within 10 miles of where you live. Although I admit good opportunities can be found locally, but what if your local market is in in the tank and recovery is still a long way off? Do you still only invest locally?
When major corporate investors such as REITs (real estate investment trusts) invest their money, they don’t just buy real estate in one city. The directors and managers of the REIT will look around the country and around the globe ( more on that later) for the very best opportunities. When they find the best markets they spread their money across multiple markets.
We are starting to see a trend though where individual investors are learning a couple of things from the REITs 1) Small investors are being open minded ( and proactive) about NOT limiting themselves to investing only locally. This one is partially by necessity because their local market may be in a downward slide with way to much inventory. 2) Individual investors are also seeing what the REIT’s have always known and that is diversity of investment in multiple markets. Placing your bet across multiple markets can be a very good thing ( assuming you are in the right markets) and helps shield you against down turns. In other words you don’t want your all your real estate investment eggs in one (local) real estate basket.
Their are many factors that go into analyzing and finding emerging real estate markets and micro markets and in future posts we will go into more detail on those criteria and leading indicators. In the U.S. based on the news one might think that these markets don’t exist but they are out there and we hope to continue to identify both the broader markets as well as the emerging micro markets. One such market for small investors that has pockets of very strong fundamentals is the Gulf Coast where there are still shortages of certain housing types, but even in a known emerging market you need to be careful and have a good team around you.
Another trend that we are seeing due to the current U.S. subprime mortgage crisis, coupled with the ongoing liquidity and credit crisis has resulted in U.S. investors looking to gain exposure to other emerging real estate markets not just at home but around the world.
Cross-border property investment by U.S.-based buyers totaled over $70 billion in 2007 in over 50 countries. Much of the investment is by multinational corporations, real estate funds and REIT’s but we are also seeing more and more individual investors buying in their favorite international vacation spots where costs of living and their retirement dollar gets stretched further than at home. We will be examining some of these international emerging markets in future posts and newsletters.
Robert Stec
YAERD.org Advisory Board Member
Back To The Future?
While I believe history never exactly repeats itself because some of the variables change, a lot of what’s going on has happened before. To prove my point, let’s jump in the Delorean with Marty and Doc. Let’s set the date to August 17, 1981 so we can read this article that was in the New York Times (by Ben Stein).
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HOUSING BOOM GOES BUST IN LOS ANGELES
A word to the wise: The great Los Angeles housing boom is over. The real estate price explosion in southern California, which sparked a national boom still continuing elsewhere, has stopped. The bubble that everyone said could never burst has burst. All over Los Angeles and Orange County, home buyers can buy a property for less than it would have cost a year ago, although there are exceptions. Buyers who can pay cash can almost steal houses and real estate. The days when ordinary citizens got rich from buying houses are gone, at least for the time being and at least in southern California.
But what a bubble it was. In the 10 years from 1970 to 1980, the price of the average house in Beverly Hills went up by a factor of almost seven. The average house in West Los Angeles, a region of by no means opulent homes, rose by almost six times. Houses in Malibu routinely doubled in value every year in the late 70’s. By the end of the decade, newspapers advertisted ‘’starter houses,” for families who had never owned before, in remote desert suburbs starting at $200,000.
Any lucky person who got in on the boom in the early 70’s saw his paper profit reach about 30 times his down payment by 1980. People who had never earned more than $40,000 suddenly found that they were millionaires just from that little house with a pool in Pacific Palisades. Ronald Reagan is said to have paid $29,000 in the early 50’s for a house in Pacific Palisades that is now for sale for $1.7 million and cannot be sold, which is the whole story.
The boom went on for such a long time because the economics were right. All through the 70’s the cost of owning a house in the better neighborhoods of Los Angeles was negative. That is, the cost of servicing the mortgage plus taxes was less, usually far less, than the increase in the price of the house. Figure it out: mortgages were less than 10 percent for almost all of that decade, under 7 percent if you count the tax features, and houses were increasing in value all over the West Side of Los Angeles by a good 20 percent a year on a compounded basis. The banks, savings and loan institutions and and the economy generally were paying families to live in the better neighborhoods of Los Angeles. The economics of housing inflation were such that for a long period, lenders made mortgage loans at rates substantially below the appreciation of the houses they were loaned upon and in some years, noticeably below even the trend line for inflation. This cheap credit fueled the takeoff of the boom. As prices rose to stratospheric levels, the price history itself fed the boom. Real estate agents assured buyers that however high prices were, they would go even higher.
Wives went to work. Second mortgages were drawn up. People would do anything to get in on the boom, which looked as if it would never end. Even when prices got so high that ordinary citizens could no longer afford to get in, rich people came from all over the country and the world to get in on the one true never-ending bubble.
Even when mortgage interest rates shot up to 13 and 14 percent, the houses were still going up 20 percent a year, so who cared? The end came when Paul A. Volcker, the chairman of the Federal Reserve Board, decided he was going to fight inflation in a major way. By relentless pressure, the mortgage rates were driven up to 18 percent. Sounds came out of Washington that a new Administration meant business about keeping money tight for a long time and bringing down inflation. Little by little, the idea circulated that maybe if interest rates stayed high for a long time, housing would no longer be such a great buy. After all, if an investor can get 18 percent on his money with no risk, why should he take a chance on real estate, which is already very high, which costs money out of pocket and is historically not a very good investment when disinflation sets in?
Once it was admitted that it might just be possible that real estate would not go up forever, the essential spirit of prepetuity that every bubble needs was gone. Buyers became fewer and more choosy. Houses that once sold in a week stood unsold for a year. As demand fell, prices stopped rising, then began to fall. Although some surveys show a very slight price rise in the last few months, brokers say that any determined buyer can buy a house anywhere except the Malibu Beach Colony for less than it would have cost last year.
Once prices stopped zooming up, the spiral reinforced itself. A house with a stable price costs its buyer plenty with an 18 percent mortgage. Instead of making money for him, it is costing him almost a fifth of its price each year. Suddenly, certificates of deposit and bonds look awfully good and real estate looks awfully bad. Suddenly buyers decide to stay with their old houses and their rentals. Demand declines and prices slide a little more. Families who thought they were rich from their houses find that they simply cannot sell except at an immense discount. And the air goes out of the bubble.
Of course, Los Angeles is still a desirable place to live, the economy is still relatively strong and no one seriously contemplates a major crash. And, of course, all bubbles, in every commodity, whether it is land or stock or gold on tulips, always end some time. No matter how sure people are that their particular rocket will always go up and never come down, it always happens. A word to the wise.
Jeremy Quinn
YAERD.org Advisory Board Member
jeremy[at]yaerd.org
561-210-5636
America the Beautiful - July 4th 2008
Happy Independence Day from the YAERD.org team
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