Jill Liu All Side Realty held its third seminar of this year on June 15th, 2019. About 15 agents attended the seminar and we briefly talked about recent business trends like ibuyers. We have also talked about how to better serve our clients by providing various service packages. Below are a few pictures of our seminar.
According to the Primary Mortgage Market Survey published by Freddie Mac on 5/23/2019, mortgage rates have stayed low for the fourth consecutive week and are expected to stay low. This drop in rates is causing purchase demand to rise.
Here we talk about residential real estate investment. Rather than saying it’s investing, it’s more like doing a business. The owner/landlord is the boss. Take me myself as an example. Since I always want the largest return, I do not just invest money like investing into mutual funds, I run it as a business, following all applicable laws and regulations. Since I don’t have a lot of money, this is a relatively small business.
First of all, to start a business, we need to find a business-friendly place. There is no best place, only better ones, which are the ones that are far away from political issues or unpredictable risks. I personally think the suburban areas of big cities in Texas are such places. In the business of real estate, customer is people, so we need to find places with consistent population growth and that are friendly to small businesses.
Secondly, when your business starts to growth, you need to hire professionals to help. A good realtor, property manager, accountant, attorney and a few nice contractors are all my team members. I don’t think I have the time, energy or knowledge to complete all tasks of the business. I define myself as a general manager and I need to learn skills of people management. Even though most of my “employees” are independent contractors, I still have a very good relationship with each of them, just in case I’ll need them some day.
Then we need to follow local laws and regulations. Each state or city has its own rules and regulations on rental properties, in addition to Federal regulations. Being familiar with those rules is the very basis for business success. We also need to keep learning and sharpening our skills. As time goes by, rules and regulations will change and we need to keep up with them, or we need to find new technology to help us work more efficiently and keep us away from risks.
Running a business is time consuming and requires experience. Now I assign most of jobs to professionals while I manage them. In this way, I don’t need to spend too much time and those professionals can do a better job than me.
Last but not least, sometimes we need to cut expenses. I will do my own homework and research on various service providers and vendors, and choose one that charges reasonable price with nice quality work. When it comes to repair, doing it in the right way is very important. You can’t always think about paying the least money to have the job done. That might cause the job to be done very poorly. I don’t usually work with someone who provides the “lowest price”. The lowest price always comes with problems. Of course I don’t go with the most expensive ones either.
A recent case was for a rental property managed by my real estate team. The landlord declined my team’s repair proposal because she thinks the price was too high, and she found a “cheap” one. After the repair, she called me and complained of being too tired, and I told her that by taking her time spent into the consideration, the work was not cheap at all. She is a high-income tech person and her time worth money. If her company fires everyone and hire some low-pay people instead, they probably can save a lot on salary, but might be closed for business in a very short time.
This is a business, so do it as a business.
(Shared from Freddie Mac’s weekly Primary Mortgage Market Survey)
Modestly weaker consumer spending and manufacturing data, along with continued jitters around trade policy, caused interest rates to decline throughout the yield curve. While signals from the financial markets are flashing caution signs, the real economy remains on solid ground with steady job growth and five-decade low unemployment rates, which will drive up home sales this summer.
Every investor has a different goal. Some focuses on cash flow, i.e. how much to get every year, but me? I think appreciation is one goal of investment, and the main goal for long-term investment.
During the initial stage of investment, I had other stable incomes like employment income, so my target at that time was to pay less tax and gain more capital. There’s no income tax when you don’t actually get money into your pocket, and you don’t need to pay tax on capital gain until you sell the property, so at that time, the appreciation of the house is your gain and you don’t need to pay tax for it.
In order to achieve the goal of utmost capital gain and least tax, we need to take great advantage of using leverage, which means borrow as much money as possible. However, high leverage comes with high risk and excessive negative cash flow may bring you financial pressure, thus the recommended down payment for investment real estate purchase is 25%, with loan-to-value ratio of 75%. This ratio keeps the risk and cash flow both at a balance. When down payment is less than 25%, banks think risk gets higher, so it costs more to get a loan. If you can afford a relatively higher risk, you could find mortgage products with only 15% or 20% down payment.
It is actually Fannie Mae and Freddie Mac that recommend investors to put 25% down. With this down payment, rate is very competitive. Most real estate properties with 25% down payment can still have a little bit positive cash flow nowadays. When I started to purchase investment properties in more than a decade ago, that number was 20%, so most of my investment properties were purchased with 20% down payments. When the value of the real estate increased by 5%, my equity increased by 25% (5 *5%). This is how leverage works. Of course when real estate’s price goes down, the equity decreases by five times as well. For example, I purchased a property with $20,000 down payment and loaned $80,000. When this house’ value increase 5% after a year, which is $5,000, the principal balance is a little bit less than $80,000, and the equity turns from $20,000 to $25,000, the increase is $5000/$20,000 = $25%.
For the past several years, the average real estate appreciation is 5% per year for Austin and most cities of United States.
A few decades later, when we need cash flow income to support daily life (usually it’s when we retired), the loan-to-value ratio needs to stay relatively low. Let’s say now we pay 25% to purchase a property, in 15 or 20 years, house value should be increased by 2 to 4 times, mortgage principal balance becomes low and rent amount increases. In today’s Texas’ market, if you use cash to purchase, the cash flow should be between 4% and 10%, which is much better than investing money into stock market. Besides cash flow, the annual average appreciation is about 5%, based on past 30-year’s statistics. The appreciation part can be regarded as saving, and its increase rate should follow the changes of inflation, because essentially the property is about land, labor, steel, wood and etc.
A general principle is since we plan to keep the investment for 15 to 20 years, even the initial cash flow is low or negative with 25% or 20% of down payment, in a few years, it should become positive and eventually a nice source of income.
We will talk about how to reduce risk in following articles.
Reference: http://www.multpl.com/s-p-500-dividend-yield/table
According to the weekly Primary Mortgage Market Survey posted on Freddie Mac on May 9th, mortgage rates have been low, due to the ongoing trade disputes. This should spur homebuyer’s interest and will also become an incentive for homeowners looking to refinance.
Many articles have mentioned that unless the ROI (Return on Investment) is more than 10%, or the rent rate is at least 1% of the house price, the investment is not worth doing. However, is that really the case? Let’s take a look at a typical rental property in Austin suburb which is around $200,000 in value.
Total: $1379/month
In order to have a 10% ROI, the annual net profit has to be at least $5550, which equals $462.5 profit per month, so the rent amount has to be at least $1841.5. Then if we take repair and vacancy into consideration, the rent needs to be above $2000; however, in reality, the average rent for this kind of rental in the Austin suburb area is around $1600. As a result, investors usually set their eyes on properties with poorer conditions in order to have a “high return”. Those properties require frequent maintenance and unless investors spend a lot of time and money to fix them, the return will be even less. Sometimes we do find properties with high return, but we need to personally invest time and money on it in order to see those returns. I have a friend who is a new immigrant and doesn’t speak very much English. He sold his house in his hometown and purchased a few properties when he came to U.S. Those properties are all around $100,000 in value, with monthly rent above 1% of house price. The houses require much attention, but my friend is very handy. He hired people who didn’t speak English (only Spanish) to work with him on fixing those properties, and managed to have his investment pay off. However, those properties are difficult to find now and I don’t think this model fits everyone as it requires too much energy and time to be invested alongside the initial financial investment. So someone who still wants to have time for their own life, business and family may not find this type of investing plausible.
From my experience, there’s actually no need to have at least 10% ROI at the very beginning. Like I said, if you could break even at the time you completely own this property, which usually means in a period of 15 to 20 years, your rental income will cover all your expenses such as mortgage, tax, insurance, HOA, repair and etc. The return would be, in fact, pretty good in this case. Even with negative cash flow in the first few years, you will have positive cash flow in the next few years because the rental rate will increase due to inflation.
Of course, I am not saying that you should avoid or ignore high return investments. The problem is a lot of these kind of investors are trapped in on-going repairs and end up losing money because the repairs are expensive and they can’t do it themselves.
Many friends of mine regret not purchasing more properties 10 to 20 years ago. The returns on any properties that were purchased 10 to 20 years ago are good, even for those which were purchased in 2007 or 2008 (when the house price was at a high point). Unfortunately, we do not have a time machine to go back and make those investments, but I do believe that if you invest right now, you will see good returns in 10 to 20 years. The thought of not able to find a property with good ROI or cash flow is incorrect. There are lots of properties on the market that can bring an average of 20% return annually in 10 to 20 years, in my opinion, and their risks are relatively low. My calculation is based on an assumption that housing inflation will continue. The common calculation method that our government uses doesn’t apply to real estate. When we say the annual inflation is about 3%, do you know how much the real estates in Texas have increased? This is why we need to study the history of inflation.
Below is the Home Sales and Average Price history chart (Texas) found on the website of Texas A&M University Real Estate Research Center.
The average house price of Texas in 2008 was $190,280 and $284,033 in 2018, an almost 50% increase.
Next is the chart for Austin area.
The average price of a property was $278,897 in 2011 and $442,244 in 2018, a nearly 60% increase.
We all know that house price will be up and down, however, if you look at the long term, you will see the price actually keeps increasing. In the next chapters, I’ll talk about why you should invest in Texas and when to buy.
Nowadays, it’s not difficult to become a landlord, but how to keep ourselves away from lawsuit or litigation is not that easy. We often hear cases that landlord being sued for rejecting applicants with rent assistance or with support animals, and cases like these are reminders for landlords that neglecting to follow anti-discrimination rules can end up with serious consequences. The fundamentals of fair housing law that we know are we shouldn’t ask any questions or base any housing-related decisions on an applicant’s race, color, religion, sex, national origin, disability or familial status, but knowing the law and complying with it are two different things, so it’s highly recommended to follow certain screening process to avoid any troubles.
DO apply your tenant requirements uniformly. If you have some tenant requirements like credit score no less than 680 and combined income no less than three times of monthly rent, make sure to disclose that upfront and use these requirements on every application. Be consistent is very important.
DON’T get too personal. You can ask about jobs, rental history, income and references, but stay away from questions about family situations, as well as other protected characteristics under the Fair Housing law. Based your decisions only on income, credit score and rental history. Don’t get too personal or emotional.
DO keep all related documents for up to 10 years. That includes but not limited to application forms, tenant screening reports, tenant’s IDs, leases and other related documents during the process, even if you don’t rent to that applicant or the deal fall through. Those information may be very important if a denied applicant decides to question your decision. Also, all communication records should be kept as well, and that’s why we recommend using written communications like email or text messages.
DO send a denial letter when rejecting an application. The Denial Letter should specify the reason or reasons that you rely on for rejecting an applicant, such as insufficient income, or credit history, but like we stated previously, if you do have certain requirements, disclose them upfront to save time and potential tenant’s money.
DON’T automatically deny an applicant with a criminal record or with housing vouchers. If your rental property is within Austin city limit, you even can’t refuse to accept housing voucher as a source of applicant’s income.
DO contact your attorney when you are not sure about something. Using a realtor to list your property for rent and screen potential tenants will help keep you away from trouble, but realtors are not attorneys and can’t provide legal advice, so make sure to ask an attorney or look for legal advice when you are in doubt.
The key to my investment strategy is utilizing mortgages, especially low rate mortgages, to purchase real estate. After the economic recession in 2000, the Fed has started to “print money” and also began to offer low rate mortgages to the public. Currently, the best rate for investment properties is still below 5% (with certain conditions), which is much lower than commercial interest rate (usually 7%). When the Fed starts to issue more currency, inflation happens; this makes it so that if you just deposit your money in a bank, its capability of buying will become weaker and weaker, even with the interest earned. My investment method is much more competitive than investing in apartment buildings or some other large-scale investments.
There have been a lot of media reports about how “printing money” helped Wall-Streeters earn money, and taking advantage of low rate mortgages is how we, as the middle-class, can also get a share.
Then what is the “Best Investment”? Many friends have asked me about my opinion concerning tips from the internet or advice they heard from other friends. My answer will always be the same: “You should have your own answer! This is your money. No one can manage it better than you do.” Even though there are some people you may trust a lot, such as a financial adviser or salesperson, they still need to earn money for themselves and you can’t blame them for that. Sometimes, you do need to buy what they sell, but before you buy it, you need to understand what exactly it is that you want and how it works. If you don’t know the answer, study it first. Spending some time on reading related books or joining seminars will help you learn.
To learn to invest, you need to think from a long-term perspective.
When studying investment, you need to understand how it works, which basically boils down to how to earn money. Do not simply look at the numbers for the most recent two or three years, but historical statistics, which are at least 15 years in numbers. An economy cycle is usually an average of 8 years, so it’s meaningless to only study a half cycle. If a real estate developer tells you that the average appreciation of houses in many areas of Texas exceeds 12% per year, that’s true; however, it doesn’t mean you will get the same annual return in the next few years. When you study statistics of at least two economy cycles, you will have more reliable numbers. I don’t think that I’m the smartest person, so I’ve never expected my return to be so much higher than average, but I do think if the average returns are good, my investments should be at least average or a little bit higher or lower.
To be clear, I don’t spend too much time on real estate investment and my returns are considered lower than the average. However, when the method is right, the investment will still bring me good returns, even though it’s lower than average.
There’s no single way or method that can guarantee success that we can copy from. Studying other successful people’s experiences is very important, but the more important thing to do is to think on your own. By integrating other people’s experience and lessons, you will find the right way for yourself.
Investing in real estate at different times or locations results in the method needing to be different as well. My method is relatively easy to use, but it doesn’t mean you don’t need to do some thinking on your own. I’ll share my experience, but I also want to introduce a few books that changed my mindset on investment many years ago.
1. The series of Rich Dad, Poor Dad, by Robert T. Kiyosaki
2. Why We Want You to Be Rich: Two Men, One Message, by Donald J. Trump and Robert T. Kiyosaki
I have no business or personal relationships with the authors of these two books and this is not for advertisement. They are just two books that changed my life.
About 15 years ago, I discovered an investment method in real estate, and I’ve been using this method ever since then. I also observed other investors gaining high returns by using this method. However, most people are unwilling to share their method, while I’d like to share my experience with you along with my method that could lead middle-class people to success.
First of all, let me tell you my own story. In 2002, I quit my job as a successful software engineer and became a self-employed real estate agent and mortgage broker. These businesses have brought me enough income, but have also taken up plenty of my time. However, I still managed to squeeze some time in to do my own real estate investments.
A few years later, my real estate and mortgage businesses were stable so I decided to invest more. I already purchased three properties at that time and found out buying real estate was a good way to save money. So in the next few years, I used my $200,000 in savings to purchase a few residential properties that were worth about $1 million at that time with a down payment of 20% ($200,000), and loaned about $800,000 from bank. At the very beginning, those properties didn’t bring me any cash flow and after paying mortgages, tax, insurance and other costs, there were actually causing negative cash flow instead. Luckily, the loss was very minimal and my income was still able to support my investment.
In about 10 years later in 2014, those properties were worth about $1,700,000 and the mortgage balance was about $700,000. Since all mortgages I had were 30-year fixed rate, most of the payments were towards interest so only a very small portion of the principle balance was paid. Fortunately, thanks to appreciation, the real estate value went from $1,000,000 to $1,700,000 and my equity increased from $200,000 to $1,000,000. Every return was about 5% annually, which is also the average appreciation rate of the city I’m living in (Austin) and most other areas of Texas.
What’s my ROI (Return on Investment)? If only based on appreciation, then it’s about 16% every year, and that is without including rent income. Like I mentioned previously, my investment even started out with a little negative cash flow at the beginning, which turned into a positive flow in the next 3 to 4 years. The average rent income can easily go up to 10% of the purchase price, and that’s how the total return ends up being about 20% to 25%.
Those numbers mentioned above are not entirely accurate and my calculation doesn’t take closing costs into consideration, so this is just to give you a rough idea that this method can give you a return of more than 20% on cash flow and appreciation. In my following articles, I’ll give you more details.