Tag Archives: investing 101

Why the wealthy are heavily focused on real estate

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Real estate averages 27 per cent of the investments of the ultra wealthy.

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With markets roiling in 2016 and commodities lingering in low-price limbo, the holdings of high-net-worth investors can serve as indicators of where the rest of us might consider parking our nest eggs. It turns out that a good chunk of wealthy peoples’ investments is in real estate.

“Real estate is generally accepted as an alternative investment [by high-net-worth investors],” says Simon Jochlin, portfolio analytics associate at StennerZohny Investment Partners, part of Richardson GMP in Vancouver.

“It has the characteristics of an inflation hedge: yield, leverage and cap gains. It does well in upwardly trending markets, it pays you to wait during market corrections and typically it lags equities in market declines – it buys you time to assess the market.”

While the definition of high net worth can be flexible, in Canada and the United States it is generally considered to be someone who has at least $1-million in investable assets.

Thane Stenner, StennerZohny’s director of wealth management and portfolio manager, says a good way for determining what the wealthy do with their investments is to look at reports from Tiger 21, an ultra-high-net-worth peer-to-peer network for North American investors who have a minimum of $10-million to invest and want to manage their capital carefully.

Every quarter the network surveys its members, who number about 400 members across Canada and the United States. Some of the participants are billionaires, and most have a keen eye for business, Mr. Stenner says.

Though the Tiger 21’s Asset Allocation Report for the fourth quarter of 2015 found that its members were becoming cautious about Canadian real estate, they still on average put 27 per cent of their investment into real estate, the largest portion of their allocations. The next largest were public equities (23 per cent) and private equity (22 per cent) with smaller percentages going to hedge funds, fixed income, commodities, foreign currencies, cash and miscellaneous investments.

The real estate portion declined by 1 percentage point from the previous quarter. “While this is the lowest we have seen this year, it is at the same level observed in the fourth quarter of last year, which consequently was the high of 2014,” the report said.

“Real estate is very popular and one of the reasons, in my opinion, is that investors can actually see and touch their investment,” says Darren Coleman, senior vice-president and portfolio manager at Raymond James Ltd. in Toronto.

In his experience, real-estate investors, wealthy or otherwise, seem to behave with more logic than those who focus on markets. “For example, if you own a rental condo, and the one across the hall goes on sale for 30 per cent less than you think it’s worth, you wouldn’t automatically put yours on the market and sell, too, because you think there is a problem. Indeed, you may actually buy the other condo,” he says.

“And yet when a stock drops on the market, instead of thinking of buying more, most people automatically become fearful and think they should sell.”

Real estate also allows for considerable leverage, Mr. Coleman adds: “Banks love to lend against it. Over time, this lets you own a property with a much smaller investment than if you had to buy all of it at once.”

At the same time, Mr. Jochlin says there are disadvantages to real estate that investors should beware of. Property is not particularly liquid, so if you need to sell you could be stuck for a while.

“It’s also sensitive to interest rates and risks from project development,” he says. There are administrative and maintenance costs, and an investor who buys commercial rental property will be exposed to the ups and downs of the entire economy – look at Calgary’s glut of unleased office space, for example.

“Timing is key. You do not want to chase the performance of a hot real estate market,” Mr. Jochlin says.

“Buying at highs will significantly reduce your overall return on investment. You want to buy in very depressed markets at a discount. In other words, look toward relative multiples, as you would an equity.”

As to how one goes about investing in real estate, Mr. Jochlin says it depends. The factors to consider include determining whether your investment objective is short- or longer-term, your liquidity requirements, your targeted return and whether you have any experience as a real estate manager.

“Sophisticated high-net-worth investors have a family office, and thus a specialist to manage their real estate assets,” he says.

How the rich buy real estate

The wealthy don’t necessarily buy and sell real estate the same way ordinary investors do, says Mr. Stenner. Ordinary people buy something and hope that when they sell it they’ll get a better price. Meanwhile, they like to do things like live on the property or rent it out, whether it is residential or commercial. If it is vacant land they might build something. Not always so for high-net-worth (HNW) investors, Mr. Stenner says. While everyone who invests hopes their investment will rise, Mr. Stenner says that in real estate, HNW people tend to fall into four categories:

Developers

“The real estate developer is looking for substantial returns from individual/basket real estate projects, typically 30-50 per cent IRRs [internal rates of return],” Mr. Stenner says. Developers are highly experienced investors who often take big risks, looking at a raw, undeveloped property and envisioning what it could look like with, say, a shopping mall or office tower. This requires lots of access to capital and a strong stomach, as there can be huge delays and setbacks.

Income Investors

“These HNW investors typically look for a stable, secure yield, tax-preferred in nature and structure if possible, with modest capital growth potential,” Mr. Stenner says. They take the same businesslike approach to property as the developer-types, but they’re more conservative, focusing on cash flow and long-term profit as opposed to getting money out after a development is complete. Often they’re building a legacy that they hope to pass down through generations. Mr. Stenner says lower net worth people can emulate income investors, for example, through REITs that are based on apartment buildings.

Opportunists

These HNW investors tend to look for more short-term higher risk, higher return “asymmetric” payoffs. Income from the investment or project is secondary — they’re in it for the quick buck. Often they see real estate in contrarian terms – investments to look at when the market is low and to sell on the way up, rather than hold. After 2008, many HNW investors bought up depressed-price housing in the U.S. Sunbelt. The sizzling Vancouver and Toronto markets might be the opposite of what they’re looking for right now; commercial property in the stagnant Canadian economy that can be purchased for low-trading loonies right now might be more interesting.

Lenders

This refers to HNW investors who lend capital to developers or opportunistic investors, for a fixed return, plus as much asset coverage from the property as possible. They fund mortgages, invest in real estate financing pools or put money into companies involved in this type of investment. “Because wealthier investors tend to have more liquidity, this also creates more optionality to deploy capital in various ways, while using the real estate as collateral or protection,” Mr. Stenner says.

Being a lender is a way to diversify. In addition, money lent in this way puts the lender high up in the creditor line if something goes wrong. If things go right, it generates income as the mortgage is paid back to the HNW investors or the funds they buy into.

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The 8 Things You Need To Know To Avoid Losing Money In Real Estate

We all know those people who frequently lament their decision to invest in real estate. Constantly blaming the market, or real estate as an industry, they believe the entire process is predicated on luck and timing, an exercise in chance. For people who have lost money investing, it’s easy to sympathize with them-but are their beliefs regarding results being beyond their control actually accurate?

Many who bought property between 2001 and 2007 lost money. These were years where prices aggressively increased, largely due to loose lending practices that allowed people to buy homes they could not afford using loans that were only temporarily manageable. Prices continued to climb until these loans reset, at which point houses fell into foreclosure, prices continued to drop, and the overall housing market spiraled into chaos.

But was this truly unavoidable or impossible to predict? Is it justified to live in fear of something like this happening again?

If you believe the answer is “yes”, you’re not likely to get started investing in real estate. The constant fear of an anvil dropping on your head like a looney toons cartoon will prevent you from ever taking any serious type of action. This will also prevent you from having any serious chance of success. The consequences for incorrectly assuming real estate investing is a gamble are grave.

If you believe the answer is “no”, it begs the question-what are the factors that prevent someone from losing money in real estate? Is it just a matter of timing the market? Is it found in getting only great deals? Or are there more pieces to the puzzle?

If we can understand what causes folks to lose money in real estate, we can take preventive measures to ensure it doesn’t happen to us. While no investment is without risk, smart investors understand there are certainly precautions that can be taken to mitigate that risk. In my nearly ten years of investing in real estate I’ve found there are certain steps to take that have a big impact on avoiding the wrong deal. I’ve spent a considerable amount of time listening, interviewing, and speaking with real estate investors. I’ve found patterns in what went well, and I’ve also seen patterns in what led to things going horribly wrong.

The following is a list of the things I’ve noticed often lead to catastrophe. Avoiding these mistakes will greatly increase your odds of real estate investing success.

Negative Cash Flow

If you want to make money in real estate, you should plan on holding an asset for a long period of time. Good things happen when real estate is owned over the long haul. Loans are paid down, rents tend to increase, and the value eventually goes up. The number one problem preventing investors from winning the long game is buying a property that loses money every month.

Don’t buy real estate assuming the price will go up and you can sell it later (this is an issue I’ll cover a little later). Nobody knows what the market is going to do. This is why trying to time the market is a bad strategy to base your decisions on. Instead, only buy properties that generate more income each month than they cost to own. By avoiding “negative cash flow”, you are protected from market dips or stalling home prices. You only lose money in real estate if you sell in unfavorable conditions or lose the asset to foreclosure. Ensuring you earn positive cash flow each month will put the power for when you exit the deal back into your hands.

For more information on how to analyze a rental property, click here.

Lack Of Reserves

If lack of cash flow is the number one culprit for losing money in real estate, lack of reserves is number two. Too many variables are involved in owning rental property to be able to accurately determine when unexpected expenses will hit, and how much they’ll be. Whether it’s an HVAC unit going down, a roof leak, or a water heater busting, there will always be something you need to repair or replace.

None of this takes into consideration evictions, destroyed property, and more. While you’ll eventually end up positive if you hold a property long enough, there will be times when your bleeding cash. Having a sufficient amount of reserves during these times is crucial to your success. Conventional wisdom suggests keeping six months of expenses in reserves for each property. While this number can vary for individual people with unique financial situations, make sure you have enough set aside to comfortably weather the storm when Murphy’s law hits.

Following The Herd

As Warren Buffet stated, “Be fearful when others are greedy and greedy when others are fearful”. While many of us know this to be true, the fact remains too many people still follow the herd. Many bad decisions are made when they are based on what others are doing, rather than basing them on sound financial principles.

It may be tempting to follow the herd, but understand it is a false sense of security. Just because everyone else is buying doesn’t mean you should too. In fact, it may be the opposite. The best deals I ever bought were purchased when no one else was buying. The only reason they were for sale is because someone else lost them who originally bought them when everyone else was buying! Make decisions on fundamentals like cash flow, ROI, equity, and a solid long term plan-not on what you see everyone else doing.

Betting On Appreciation

This is the number one reason I’ve seen for those who lose properties to foreclosure. Amateurs buy a house assuming it will go up in value and they can sell it later. Professionals buy under-valued properties in solid locations that produce positive cash flow. This gives them the flexibility to exit the deal when it makes financial sense to do so. When someone bets on appreciation, doesn’t have positive cash flow, and doesn’t keep accurate reserves, they are gambling on the market continuing to rise to bail them out from a risky investment.

Buying in Bad Neighborhoods

While we all know the first rule of real estate (location, location, location), there is also still the temptation to buy a questionable property in an area that seems too good to be true. When it seems too good to be true, it usually is. While homes in undesirable locations can look great on paper (read, in a spreadsheet) the reality is they almost always look better in theory than they’ll be in practice.

When you buy in an area where good tenants won’t want to live, you’ll be forced to rent to less than desirable tenants with lower credit scores, less reliable income streams, and a worse rental histories. The cons just won’t justify the pros. Having to pay for multiple evictions, destroyed homes, and theft will cause even the most stalwart investors to lose their cool. Avoid the temptation and only buy in areas where reliable tenants want to live.

Underestimating Rehab Costs

Whether you’re a total newbie or a seasoned pro, everybody makes this mistake. Experienced investors assume their rehabs will go over budget and over schedule. They prepare for this by writing these overages into their budgets and planning for them accordingly.

There is no use in running out of money with 10% of your rehab left to go! You can’t rent out the property and can’t generate income unless 100% of the property is ready to be dwelled in. Don’t be the person who makes the mistake of buying a property then running out of money before it’s ready to be rented out. Don’t bet on contractors, don’t bet on estimates, and don’t bet on numbers in a spreadsheet. Make sure you bet on yourself and have enough money set aside to finish your rehab, even if you’re told that’s unnecessary.

Planning on Doing The Work Themselves

All too many people have assumed they would save on a deal by doing the rehab work themselves rather than paying someone else. While there are some people who can pull this off, it’s a mistake to assume you can pay too much for a property, or not have enough in reserves to pay for the work, simply because you plan on doing the work yourself.

It’s been said “The man who represents himself in a court of law has a fool for a client.” The same can be said of the person who assumes they’ll do the rehab work themselves to avoid budgeting correctly. You don’t know which direction your life will take, what time you’ll have later, or what unexpected problems will be uncovered once you start the rehab. If you’re able to do the work yourself, consider that icing on the cake-just don’t count on it.

Failing to Educate First

The final lesson I’ve learned from those who have lost money in real estate is that they didn’t understand what they were getting into until after they had committed to purchasing a property. Certain decisions like buying a property, starting a rehab, or putting money into a deal, can’t be taken back once they are made. The time to realize you’re not prepared, or it’s the wrong deal, is before you pass the point of no return.

If you want to invest in real estate, that’s great! Start by educating yourself now, before you’re committed, then use that information to help you make the best choice possible. I wrote the book “Long Distance Real Estate Investing: How to Buy, Rehab, and Manage Out of State Rental Property” to help save others money by learning from my mistakes. I document my systems, strategies, and the criteria I use to make my own decisions so others can avoid catastrophe. This is just one example of ways you can invest a very small amount of money to save yourself thousands of dollars in mistakes.

Reading articles like this show a propensity for avoiding mistakes and saving money. I encourage you to read as much as possible before jumping in. Other resources include websites like BiggerPockets.com, podcasts, and online blog sites where you can learn from the wisdom of others.

No investment is without risk, but that doesn’t mean we need to live in fear. Start by avoiding the eight mistakes I’ve outlined here and you should be well on your way to growing wealth through real estate.

Source; Forbes.com –Real Estate

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Mark Cuban Says the Best Investment Is Paying Off Your Debt — Is He Right?

Mark Cuban Says the Best Investment Is Paying Off Your Debt -- Is He Right?

Image credit: Invision/AP/REX/Shutterstock via GOBankingRates

Billionaire investor and Shark Tank star Mark Cuban said that the safest investment you can make right now is to pay off your debt, according to an interview with Kitco News earlier this year.

 

“The reason for that is whatever interest you have — it might be a student loan with a 7 percent interest rate — if you pay off that loan, you’re making 7 percent,” said Cuban. “And so that’s your immediate return, which is a lot safer than trying to pick a stock, or trying to pick real estate or whatever it may be.”

Cuban is mostly right: More often than not, paying down debt as fast as possible is going to provide the most value in the long run. And perhaps more importantly, it will do so without any real risk that comes with most investing. That said, each person’s financial situation is different, so it is worth a closer look at when it’s better to pay off debt or invest.

Debt is like investing but in reverse.

One important thing to note is that the same principals that make investing so important also make paying off your debt similarly crucial. As Cuban points out, the interest rate on your loan is essentially like the rate of return on your investments but backward. In fact, many investments are simply ways you’re letting your money get loaned out to others in exchange for them paying interest.

As such, it’s important to keep in mind that as satisfying as it might be to watch your money grow in investments, it’s doing just the opposite when you have debt.

Every loan is different.

Although debt chips away at your net worth through interest, it’s important to note that different types of borrowing do so in very different ways. Every loan is different, with some offering terms that are actually quite favorable and others that can be excessively costly.

An overdue payday loan can lay waste to your financial health in no time, but a 30-year fixed-rate mortgage with a competitive rate can be relatively easy to manage with good planning. Borrowers should be sure they understand what kind of debt they have and how it’s affecting their finances.

 

Focus on the interest rate.

The key factor to take note of when considering how to allocate funds is the interest rate — usually expressed as your APR. Debt with a high APR is almost always going to be better to pay down before you focus on any other financial priorities beyond the most basic necessities.

The average APR on credit cards as of August 2018 was 14.38 percent. That’s well in excess of what anyone can reasonably expect to sustain as a return on most investments, so it shouldn’t be hard to see that investing instead of paying down your credit card is almost always going to cost you money in the long run.

Does your interest compound?

Another crucial factor in understanding how your debts and your investments differ is whether or not your interest is compounding. Compounding interest — like that on most credit cards — means that the money you pay in interest is added to the amount due and you’ll then have to pay interest on it in the future. That can lead to debt snowballing and growing exponentially. So, not only do credit cards have high interest rates, but they also make for debt that’s growing faster and faster unless you take action to pay it down.

However, that same principle can work in reverse. Gains on something like stocks will also compound over time, so there’s a similar dynamic at work when comparing your investment returns to fixed interest costs.

Know your risk tolerance.

Another factor that plays a big part in the conversation is your level of risk tolerance. Note that the question Cuban was responding to earlier was about what the “safest” investment was. For most people, erring well on the side of caution when it comes to something like personal finance just makes sense, and in that case, focusing on paying off debt is pretty crucial.

However, others might decide that the long-term payoffs that are possible make it worth rolling the dice on their future. Borrowing money for investments is common despite the risks associated, with everyone from massive investment banks to investors with margin accounts opting to take a calculated risk that their returns will ultimately outpace the cost of borrowing.

 

Costs of debt are set, investment returns often are not.

One important aspect of understanding the risks involved is that the cost of your debt is usually set and predictable, but the returns on your investments are not. It might be easy to look at the historical returns of the S&P 500 at just under 10 percent a year and assume that it’s worth it to put off paying down debt for an S&P 500 ETF or index fund as long as your APR is under 10 percent.

However, that long-term average does not reflect just how chaotic the markets really are. Sure, it might average out to about 10 percent, but some years will be in the negative — sometimes over 30 percent into the red. Even with bonds — where your rate of return is fixed — there is always a chance that the borrower will default and leave you with nothing.

If you have a variable rate loan

Of course, if your loan has variable interest rates, the equation changes yet again. You could see your interest rate rise or fall depending on what the Federal Reserve does, adding another layer of uncertainty to the decision — especially when it’s impossible to say with certainty which direction interest rates are headed in for the long run.

So, although debt will typically have more certainty associated with its costs than investing, that’s not always the case and variable rate loans could change things for some borrowers.

Don’t forget taxes.

You should also remember that the tax code includes a number of provisions that promote investment, and those can boost the value of investing. In particular, contributions to a 401(k) or traditional IRA are made with before-tax income, meaning that you can invest much more of that money than you would have with your after-tax income that would be used to pay down debt.

That’s especially true when you have an employer who matches your 401(k) contributions. If your employer matches, you’re essentially getting a chance to not just avoid paying taxes on that income, but you’re doubling its value the moment you invest — before it’s even started to accrue returns.

 

Some opportunities are unique.

Another important factor to consider is what type of investments you can make. In some very specific cases, you might have access to an investment opportunity that brings with it huge potential returns that could tip the scale. Maybe a specific local real estate investment you’re particularly familiar with or a startup company run by a family member where you can get in on the ground floor.

Opportunities like this usually come with enormous risks, but they can also create transformational shifts in wealth when they pay off. Obviously, you have to gauge each opportunity very carefully and make some hard choices, but if you do feel like it’s a truly unique chance to get the sort of returns that just don’t exist with publicly-traded stocks or bonds, it might be worth putting off paying down debt — especially if those debts have fixed rates and a reasonable APR.

What really matters with debt and investments

At the end of the day, you certainly shouldn’t opt to invest money that could be used to pay down debt unless the expectation for your returns is greater than the interest rate on your debt. If your personal loan has an APR of 15 percent, investing in stocks is probably not going to return enough to make it worthwhile. If that rate is 5 percent, though, you could very well do better with certain investments, especially if that’s a fixed rate that doesn’t compound.

But, even in circumstances where you might have reasonable expectations for returns higher than your APR, you might still want to take the definite benefits of paying down debt instead of the uncertain benefits associated with investments. When a wrong move might mean having to delay retirement or delay buying a home, opting for the sure thing is hard to argue with.

Which decision is right for you?

Unfortunately, there’s no magic bullet for knowing whether your specific circumstances call for you to prioritize paying down debt over everything else. Although paying down debt is typically going to be the smartest use for your money, that doesn’t mean you should do so blindly.

Putting off paying down your credit card balance to try your hand at picking some winning stocks is a (really) bad idea, but failing to make regular 401(k) contributions in an effort to pay off your fixed-rate mortgage a couple of years early is probably going to cost you in the long run — especially if you’re missing out on matching funds from your employer by doing so.

So, in a certain sense, Mark Cuban is right: Paying down debt is very rarely going to be a bad idea, and it’s almost always the safest choice. But that said, it’s still worth taking the time to examine the circumstances of your specific situation to be sure you’re not the exception that proves the rule.

Source: Entrepreneur – Joel Anderson , 

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The Best Cities To Own Rental Property In Florida

 

Credit: Getty Royalty Free | Miami Beach. Florida. USA. The Miami metro area is a hotbed for investment property investing.

Florida is an intriguing state when it comes to buying and owning rental property. On one hand, demand for homes — especially single-family homes — has been consistently on the rise in Florida. Yet despite the demand, it doesn’t necessarily convert to more homebuyers. Instead, even though Florida boasts fairly low housing prices statewide, many people are still opting to rent instead of buy. As a result, rental rates are skyrocketing.

Now add into the mix low property taxes and insurance, as well as no state income tax. Great climate and top-of-the-line healthcare are bonuses that help make Florida one of, if not the best, states for America’s retiring Baby Boomer masses.

Here’s a look at the best places in Florida to own rental property and turn a solid profit.

Tampa

Although Tampa home prices have risen in recent years, the city still has plenty of neighborhoods and zip codes where investors can find properties at affordable prices, and rent them out for $1,405 to $1,527 a month on average.

Tampa’s economic prospects really boost the city’s appeal to rental property owners. Tampa’s year-over-year employment growth beat the U.S. average. According to Bureau of Labor Statistics data, U.S. nonfarm employment increased approximately 1.6% from 2017 to 2018, while Tampa managed a 2.3% increase.

Healthcare and social assistance is the dominant employment sector in Tampa. This isn’t a bad thing considering jobs such as home health aides, personal care aides, physician assistants and nurse practitioners all rank among the top-10 fastest growing occupations in the country, according to BLS Employment Projections.

Here’s a breakdown of some important figures to consider before buying property in Tampa:

  • Median list price – All Homes: $312,995
  • Median list price – Condo: $239,900
  • Rent list price: $1,527
  • Median rent: $1,405
  • 1-year job growth rate: 2.3%
  • 5-year population growth: 12%
  • Average 30-year fixed mortgage rate: 4.40%
  • Rental yieldSee rental yields for Tampa

The trajectory of Tampa’s population growth is very conducive to potential future property owners. Since 2013, Tampa’s population has risen by an impressive 12%, one of the highest rates in the country. With a local economy worth well over $130 billion, Tampa is easily one of Florida’s best markets to buy and own rental property. For a more in-depth look, or just to explore, take a look at this interactive map of the Tampa real estate market.

Jacksonville

Robust job and population growth as well as great affordability greet prospective investment property owners in Jacksonville. Florida’s largest city is also home to a first-rate healthcare system, and burgeoning biological sciences sector. The population in Jacksonville has grown about 8% from 2013 to 2018, and 24% since the year 2000. Plus, the median home price is $210,000 in Jacksonville, which is 33% cheaper than the national average, $278,900.

Jacksonville’s average rental yield is among the highest in the U.S. Rent growth is also healthy. The city’s 2.6% increase is better than the national year-over-year average of 0.5%. Specific markets within the Jacksonville metro area, such as Butler Beach, are displaying rent growth rates in excess of 10%.

Here’s a breakdown of some important figures to note before buying property in Jacksonville:

  • Median list price – All Homes: $210,000
  • Median list price – Condo: $134,950
  • Rent list price: $1,250
  • Median rent: $1,345
  • 1-year job growth rate: 3.2%
  • 5-year population growth: 8%
  • Average 30-year fixed mortgage rate: 4.40%
  • Rental yieldSee rental yields for Jacksonville

The reasons for all this growth and development are manifold. Jacksonville’s cost of living is below the national average. And to this is we can add the usual Florida amenities, like warm weather, conducive business climate and no state income tax.

See interactive map of Jacksonville real estate market >>

Orlando

In terms of both employment and population growth, Orlando really outshines. From summer 2017 to 2018, employment increased 4.3%, which is almost three times the U.S. average growth rate. Its population surged by 14% from 2013 to 2018.

The most common employment sectors for those who live in Orlando are accommodation and food service (12.3%), which includes workers of Orlando’s world-class resorts like Disney World and Universal Studios Orlando. Second most common sector is healthcare and social assistance (11.9%), followed by retail trade (11%).

Here’s a breakdown of some important figures to consider before you buy property in Orlando. Also, here’s an interactive map of Orlando’s real estate market to help out.

  • Median list price – All Homes: $285,000
  • Median list price – Condo:$140,000
  • Rent list price: $1,600
  • Median rent: $1,478
  • 1-year jogrowth rate: 4.3%
  • 5-year population growth: 14%
  • Average 30-year fixed mortgage rate: 4.40%
  • Rental yieldSee rental yields for Orlando

Rents grew 2.3% in the last year, which is well ahead of the U.S. overall growth rate. Rent yield in Orlando is markedly higher than in most other cities. Comparatively low home prices combine with relatively higher rent prices to create a city that is especially suitable to owning rental property.

Source: Forbes –
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Here’s how much money you have to make a year to afford an ‘average’ home in the hottest US cities

Business district area of downtown San Jose, California.

Mark Miller Photos | Getty Images
Business district area of downtown San Jose, California.

The median U.S. household now earns about $61,372 a year, up nearly 2 percent from 2016. Still, in order to afford to buy a home in one of the country’s hottest and most expensive cities, like San Jose, California, you’d need to make more than four times that amount.

That’s according to financial website How Much, which crunched numbers from the National Association of Realtors and mortgage-information website HSH.com to determine where it’s most expensive to buy an “average-sized home.”

Researchers found the median price of homes in the 50 most populated metro areas across the country and “calculated monthly principal, interest, property tax and insurance payments buyers have to pay for a 30-year fixed rate mortgage,” says How Much.

They then calculated what salary would be needed to afford each home, assuming a 20 percent down payment and that the total housing payment would not make up more than 28 percent of gross income.

How Much: Annual income needed to buy a home

Based on the data, here are the top 10 cities where you to earn the most money to buy a typical home:

1. San Jose, California

Annual income needed to afford a home: $274,623

2. San Francisco, California

Annual income needed to afford a home: $213,727

3. San Diego, California

Annual income needed to afford a home: $130,986

4. Los Angeles, California

Annual income needed to afford a home: $114,908

5. Boston, Massachusetts

Annual income needed to afford a home: $109,411

6. Seattle, Washington

Annual income needed to afford a home: $109,275

7. New York, New York

Annual income needed to afford a home: $103,235

8. Washington, D.C.

Annual income needed to afford a home: $96,144

9. Denver, Colorado

Annual income needed to afford a home: $93,263

10. Portland, Oregon

Annual income needed to afford a home: $85,369

“Median household income across the United States recently reached a record high, which is great news for workers,” says How Much. “The bad news is that isn’t enough to afford a typical home in 25 out of the 50 cities on our map.” That’s especially true on the West Coast.

“Our map reveals three tiers in annual income workers need to earn to afford a median home. First, the West Coast stands out as by far the most expensive market in the country,” the report says, “with four out of the top four markets in California alone.”

In Los Angeles, San Diego, San Francisco and San Jose, California, median homes range in value from $618,000 to more than $1.3 million, according to real-estate site Zillow. The U.S. national median home value, by comparison, is just above $216,000.

“Median household income across the United States recently reached a record high, which is great news for workers. The bad news is that isn’t enough to afford a typical home in 25 out of the 50 cities on our map.”-HowMuch.net

“The second tier of expensive locales is along the East Coast,” How Much reports, “led by the familiar hot spots of unaffordable housing like Boston, New York and Washington, D.C.

In Portland and Denver, meanwhile, homes aren’t as expensive as they are in California or New York, but workers would still need to make about $85,000 a year to afford to buy.

Some lower-profile American cities do still offer professional opportunities and good deals. In these three up-and-coming metro areas, for example, jobs are plentiful yet housing is affordable.

No matter where you fall on the map, though, living within your means and employing common-sense budgeting tactics can help you save in the long run. If you’re looking to buy a home, be sure you’re ready to transition from renting and if you’re going to continue to rent, check out these savings hacks and other ways to make your money stretch further.

 

Source: CNBC.com –  

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Flipping Houses for Profit – Tips for How to Flip a House

Several years ago, I became friends with a young woman who was just getting started in real estate. She became a real estate agent, learned about renovation, and made a ton of money flipping her first house. Thanks to some luck and some serious persistence on her part, she ended up on an HGTV show about flipping houses, where she appeared in several episodes as part of an Atlanta investor team.

The show made it look simple: find a cheap home for sale, put some money and sweat equity into fixing it up, then resell it for a huge profit. So I asked her if flipping houses was as easy as it looked on TV.

She laughed and shook her head. “We make it look easy,” she said. “But it’s risky, backbreaking work. It can be fun, but if you don’t know what you’re doing, you’re sunk.”

So how do you know if you’re up to the challenge?

What Is House Flipping?

House flipping is when real estate investors buy homes, usually at auction, and then resell them at a profit months down the road. Can you make money doing this? Yes. Can you make a lot of money doing this? Yes. But you can also lose everything you own if you make a bad decision.

Risk vs. Reward

Imagine buying a house for $150,000, investing another $25,000 in renovations, and then…nothing. No one wants to buy it. You now have to pay for your own rent or mortgage, plus the mortgage for your flip property, as well as utilities, home insurance, and property taxes. You might also have to pay for home staging and realtor fees when the house finally sells. All of this cuts into your potential profit.

According to CNBC, house flipping is the most popular it’s been in a decade, yet the average return for flippers is lower than in previous years. Thanks to a hot housing market that’s raising prices, low inventory, and soaring rents (which drive even more people into home buying), it’s getting harder to make huge profits.

The average gross profit on a house flip during the third quarter of 2017 was $66,448, according to ATTOM Data Solutions. That’s more than many people make in a year, and it lures plenty of newcomers who dream of quitting their day jobs and becoming full-time investors. However, the investors making this much money really know what they’re doing — and even they still go bust sometimes.

RealtyTrac found that in 2016, 12% of flipped homes sold for break-even or at a loss before all expenses. In 28% of flips, the gross profit was less than 20% of the purchase price. According to RealtyTrac senior vice president Daren Blomquist, 20% is the minimum profit you need to at least account for remodeling and other carrying costs.

House Flipping Requirements

If you’re still reading, it means you’re relatively unfazed by the high risks of house flipping. Here’s what you need to get started.

Great Credit

You can’t get into house flipping with lousy credit, end of story. Unless you have enough cash to pay for a home and all necessary renovations, you’ll need some kind of loan. And lending standards are tighter than they used to be, especially if you want a loan for a high-risk house flip.

Your first step is to check your credit report to find out your score. Federal law allows you a free credit report from each of the three national credit reporting companies every 12 months, so this won’t cost you anything. You can get your free credit report from AnnualCreditReport.com or by calling 1-877-322-8228.

If you don’t have great credit, it’s time to start building a good credit score now. Pay your bills on time, pay down your debt, and keep your credit card balances low. There are plenty of other ways to improve your credit score, so take the time to do everything you can. The higher your credit score, the better interest rate you’ll get on a home loan. This can save you thousands when you start house flipping, freeing up more of your money to invest in the house itself.

Last, make sure you know what hurts your credit score. For example, taking out too many credit cards at once lowers your score. You don’t want to do anything to hurt your score in the months before you apply for a loan.

Plenty of Cash

If you want to flip a house, you need cash. New investors get into financial trouble when they buy a home without a sizable down payment, then use credit cards to pay for home improvements and renovations. If the house doesn’t sell quickly, or if renovations cost more than expected, suddenly the investor is in way over their head.

Don’t be that guy. If you want to flip successfully, you need plenty of cash on hand. Most traditional lenders require a down payment of 25%, and traditional lenders are where you’ll get the best rate. When you have the cash to cover a down payment, you don’t have to pay private mortgage insurance, or PMI. Most PMI costs between 0.5% and 5% of the loan, so having to pay this each month can really cut into your profits.

Loans for flips also have higher interest rates. According to TIME, most investors take out an interest-only loan, and the average interest rate for this type of loan is 12% to 14%. In comparison, the interest rate for a conventional home loan is typically 4%. The more you can pay in cash, the less interest you’ll incur.

There are several ways to build cash in your savings account. Use an automatic savings plan to make saving money each month effortless. Or find ways to earn extra money on the side and then use this money to build your cash reserves for an investment.

If you’re buying a foreclosure from a bank or through a real estate auction, another option is to take out a home equity line of credit (HELOC), if you qualify. If you have enough in savings and manage to find a bargain-priced home, you can buy the home and then take out a small loan or line of credit to pay for the renovations and other costs.

What Makes a Good Real Estate Investment?

Not every house makes a good flip. Just because a home is selling for a rock-bottom price doesn’t mean you can put money in it and automatically make a fortune. Successful flippers are very discerning about the homes they choose to invest in. Here’s what should you look for in a potential house flip.

Great Location

Expert house flippers can’t stress this enough. Find a home in a desirable neighborhood or one that’s on its way up. You can improve a house all you want, but it’s next to impossible to improve the personality and safety of a neighborhood on your own.

Start by researching local cities and neighborhoods. Look for areas with rising real estate sales, employment growth, and other indications the town is thriving. Avoid neighborhoods with a high number of homes for sale; this could be a sign of a depressed local economy or a sign that neighbors are leaving due to crime or development.

Next, research the safety of each neighborhood you’re considering. Homes located in or near high-crime areas will be next to impossible to sell at a profit. Use crime mapping services like Crime Report and Spot Crime to find out what’s happening in the neighborhood. You’ll also want to check the National Sex Offender Public Website to see if any registered sex offenders live near the home.

According to Fortune, in 2016, flippers in the following cities saw gross profits of 80% or more of the price they paid for their homes:

  • East Stroudsburg, Pennsylvania (212.1%)
  • Reading, Pennsylvania (136.4%)
  • Pittsburgh, Pennsylvania (126.8%)
  • Flint, Michigan (105.8%)
  • New Haven, Connecticut (104.8%)
  • Philadelphia, Pennsylvania (103.7%)
  • New Orleans, Louisiana (97.6%)
  • Cincinnati, Ohio (88.5%)
  • Buffalo, New York (85.1%)
  • Cleveland, Ohio (83.8%)
  • Jacksonville, Florida (81.8%)
  • Baltimore, Maryland (80.8%)

That said, there are also some markets that show signs of over-investment. This means inventory is so low and demand is so high that flippers are paying above-market prices for homes, which can drastically reduce net profit. According to Fortune, these ultra-hot markets include:

  • San Antonio, Texas
  • Austin, Texas
  • Salt Lake City, Utah
  • Naples, Florida
  • Dallas, Texas
  • San Jose, California

If you’ve found an affordable home in a neighborhood that’s on its way up, your next step is to research the local schools. Homes in good school systems sell faster, and command higher prices, than homes in mediocre or poor school systems. Use websites like GreatSchoolsSchoolDigger, and Niche to see rankings and reviews of local schools.

When considering an investment home’s location, you also need to think about its proximity to your primary residence. Remember, you’ll be working on this house daily in the weeks and months to come. Don’t invest in a house too far away from where you live or work; you’ll spend more money on gas and it will take longer to fix up.

Sound Condition and the Right Renovations

If you’ve ever done a home renovation project, you know some nasty surprises can be lurking just below the surface. And nasty surprises like black mold or a cracked foundation can ruin you financially.

Look for structurally sound homes, especially if you’re considering buying an older home. You may not have the opportunity to have a home inspected, especially if you buy it at a real estate auction. So you need to learn what to look for or bring someone knowledgeable about building, electric, and plumbing to look at the home with you and determine if it’s a good buy.

Focus on homes that only need some quick updates to resell.  Refinishing kitchen cabinets, adding new hardware, fixing up the yard, and updating paint and carpeting are all relatively inexpensive projects that can transform a home.

What should you avoid? A house that has mold, needs a roof replacement, or needs rewiring will require some serious time and cash to update and sell. Make sure you know which updates and repairs you can afford to make, which repairs you can’t afford, and which home improvements will increase the selling price of the house. Bear in mind that some home improvement projects can decrease resale value.

When you estimate the cost of any job, experts advise adding 20% to the final total as it will always cost more than you think it will.

Last, when considering a home, don’t forget to factor in the cost of building permits. These can cost anywhere from a few hundred up to several thousand dollars, depending on the type of work involved and the city you’re in. Not accounting for permit costs is a rookie mistake that can quickly ruin your renovation budget.

Market Value

Make sure the price of the home is below its value on the local market. Try to buy the worst house in a great neighborhood, versus the best house in a lousy neighborhood. The worst house in a great neighborhood has nowhere to go but up in value, due to the value of the other homes in the area.

Although you can search the web and see millions of foreclosed homes for sale, never buy a home without seeing it in person. This is the biggest mistake new flippers make. Keep in mind that an online photo gallery only tells part of the story. Out-of-date photos, awful neighborhoods, and black mold are just a few of the horror stories of foreclosed homes found online. Always investigate a property yourself before you decide to buy.

When you buy a home to flip, it’s important not to over-value the home by investing too much in renovation. You want to improve it just enough to make a healthy profit and keep it on par with what’s selling in the neighborhood. If you put too much into the home, you won’t make your money back.

home made from wood with word written market value

How to Flip a House

If flipping were as easy as finding a cheap house online, buying it, and selling it for a profit, we’d all be real estate billionaires. You must educate yourself before you even start looking at homes. Here’s what you need to know.

1. Learn Your Market

First, research your local real estate market. Where do people want to live right now? What kind of house do people want to buy right now? Don’t speculate about up-and-coming neighborhoods. Remember, you want this house sold fast.

2. Understand Your Finance Options

Next, become an expert on home financing options. Will you buy a house with cash? Will you apply for a home mortgage loan or take out a HELOC? Make sure you understand the ins and outs of home financing before you apply for a loan or make an offer on a house. This will allow you to make the best decision for your circumstances.

3. Follow the 70% Rule

Analyze how much house you can afford and how much you can afford to lose on any deal. Experienced flippers follow the 70% rule when analyzing how much they’re willing to pay for a house. This rule states that investors should pay no more than 70% of the after repair value (ARV) of a property minus the cost of the repairs needed.

Let’s say a home’s ARV (or value after necessary repairs) is $200,000, and it needs $30,000 in repairs. The 70% rule states that you should pay no more than $110,000 for this home:

$200,000 (ARV) x 0.70 = $140,000 – $30,000 (repairs) = $110,000

This rule is a good guide to follow when you first get into house flipping as it can help you avoid overpaying for a home.

4. Learn to Negotiate

The less money you invest in a house, the more money you can earn during the flip. Good negotiation strategies will help you effectively haggle with contractors and other workers.

5. Learn How Much Average Projects Cost

Do you know how much it costs to recarpet a 1,000-square-foot home? Rewire a house? Build a deck? Landscape a yard?

Every project is different, but with some experience, you can learn how to estimate the costs of many home renovations and get an idea if a particular home is a good buy or not. One of the best ways to build your experience with this is to do some renovations on your own home. This can also give you a general idea of the type of projects you like to do and which projects you’re better off hiring out.

Know which home improvements increase a home’s value and focus on these projects first. These might include upgrading kitchen appliances, repainting the home’s exterior, installing additional closet storage space, upgrading the deck, and adding green energy technologies.

6. Network with Potential Buyers

Network extensively and talk to potential buyers before you even start looking for a house to flip. Do whatever you can to build relationships with future buyers. If you have a buyer lined up when you purchase an investment home, the home sells as soon as the updates are completed.

You can also save money long-term if you take the time to get your realtor’s license, which will enable you to broker your own deals and avoid paying another agent.

7. Find a Mentor

If you know a successful house flipper, ask if they’d be willing to mentor you. You might even want to consider offering this person an incentive to be your mentor.

For example, ask if they’ll mentor you in exchange for a small percentage of your first successful flip. This way the mentor is motivated to tutor you, and you’ll be sure to get a high-quality education. Offering a financial incentive also enables you to approach experts you don’t know personally since being compensated for their efforts will make them more receptive.

8. Research Listings and Foreclosures

Many websites provide foreclosure listings. Some of the most popular include:

You can also find foreclosure listings through real estate company websites like Re/Max. Under search filters, select the option for “foreclosures.”

Your local newspaper is another source of foreclosure listings. Legitimate auctioneers put notices in the legal section of local papers, and you can usually find their specific listings by visiting their websites.

Another way to find foreclosures is through a bank. Search for a particular bank along with the letters “REO,” which stand for “Real Estate Owned.” This simply means that the homeowner no longer owns the home; the bank does. This search will take you directly to each bank’s foreclosure listings.

Once you find a home you want to buy, check out its background with BuildFax. For $39, BuildFax provides a comprehensive background check on a home. You can review extensive details about the home’s history, including repairs, remodeling, and additions. This can help save you money.

For example, let’s say you want to buy a home whose listing indicates its furnace was replaced 10 years ago. When you run a report on BuildFax, you learn the furnace is closer to 20 years old. You can now go back to the seller and negotiate a much lower price.

9. Make an Offer

Once you find a home you like, it’s time to make an offer. If it’s a great house selling for a low price, you might have competition. For many flippers, flipping is a full-time job, and they will likely know about this house too. You can sneak by the competition by targeting a neighborhood and going door-to-door making offers.

Before you make an offer, make sure you know the highest price you can pay for a house and still make a profit. This includes your estimate for repairs, interest, and taxes. Remember to pad your estimate by 20%. If the homeowner or bank won’t sell to you for this price, walk away. It’s better to keep looking than risk going broke from a bad investment.

10. Find Good Contractors

If you have some solid DIY skills, you might opt to do some or most of the renovations yourself. This can save you a significant amount of money – if you know what you’re doing.

Knowing when to DIY and when to hire a contractor is crucial. You should only tackle projects you’re sure you can do well and on budget. For projects you can’t do on your own, you need to find a great contractor.

A general contractor, or GC, is a building professional who manages the whole renovation project and hires their own subcontractors to do the necessary work. Hiring a GC can be expensive; they’ll add 10% to 20% onto what their subcontractors charge when calculating your final bill. However, they can be worth their weight in gold if you find a great investment opportunity, can’t do the work yourself, and are willing to incur the extra expense.

A good contractor can help you avoid costly renovation mistakes and save you a significant amount of time on a project. This means you can get the house up for sale faster and make fewer mortgage payments. If you’re flipping a house while working a full-time job, hiring a GC is probably a necessity; someone has to be available at the house to oversee the work at least part-time, or the project will never get done.

A general contractor will also be in charge of obtaining the necessary building permits. This means their name will be on every permit, and they’re responsible for making sure the job is done right for every inspection. Make sure to apply for permits as soon as the sale is final to save time and get the process moving.

Start building a network of contractors you trust, including plumbers, electricians, and landscapers. Services like Angie’s ListPorch, and HomeAdvisor can help you find reliable professionals in your area. When you interview a contractor, ask yourself the following questions:

  • Did they arrive on time? Contractors who are habitually late will waste your time and slow up your renovation project.
  • Do they have quality references? Ask for references and call them. If a contractor doesn’t provide references, don’t waste your time dealing with them.
  • Did they reschedule your appointment multiple times? Again, if they have a problem with time management, it will affect your renovation.
  • Are they organized? Disorganization wastes time.
  • Can they supply a professional, accurate bid? Any bid they provide should be detailed and on paper. A verbal quote and a handshake won’t cut it with a flip, at least at the beginning of a relationship when you’re just learning whether you can trust this person.

It’s a smart idea to start building a network of quality contractors before you make an offer on a house. Remember, it can take a long time to find good help, and you don’t want to start this process after you invest in a home and are making two mortgage payments each month.

Keep in mind that most experienced flippers try to have a home bought, renovated, and relisted in 90 days. That’s a quick turnaround time, and for your first few flips, it might be out of reach. But the longer your home is tied up in projects, the less profit you stand to make; that’s why it’s so important to carefully weigh whether you should do the work yourself or hire help. Doing it yourself might save you money upfront, but if it takes you three times longer than a professional, it might not be worth it.

11. Relist and Sell

Many flippers end up listing their homes with a realtor. Realtors eat and sleep real estate, have access to buyers, and can list your house in the Multiple Listing Service (MLS) database. They also know the current market fluctuations and have the skills and network to get you the best price quickly.

You can also choose to sell your house yourself. You’ll save money in realtor fees, but in some markets, you might end up waiting a long time for the house to sell. In addition, listing and showing a house takes time. If you can’t be available every time someone wants to see the house and you don’t want to host open houses, working with a realtor might be the best choice for you.

Final Word

There’s no doubt that flipping houses is a risky business. If you make smart decisions, you can make a lot of money flipping. But you can also lose everything if you make a bad investment.

Before you get into the world of house flipping, do your research to make sure it’s right for you. Books like “The Flipping Blueprint: The Complete Plan for Flipping Houses and Creating Your Real Estate-Investing Business” by Luke Weber can tell you everything you need to know to get started and avoid some rookie mistakes.

Have you ever flipped a house? What was your experience like? What do you wish you’d done differently?

Source: Home Value Plus – By Heather Levin  May 23, 2018  –  

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How to keep your income property from taking over your life

How to keep your income property from taking over your life

For Terri Ronci, renting out her in-demand Toronto condo meant having the financial freedom to seek out a career change.

After years in advertising she wanted to go back to school to pursue other interests and return to her hometown of Montreal.

“I had a really great conversation with my dad who (said), imagine if you could rent that place for more than you’d have to pay out, it might give you that cushion and (be) a retirement nest egg,” she said.

“If you sell it, that money is available now, but in the long term, think about the steady income that this investment will bring in, along with the fact the selling price will go up. It’s the best way to maximize the return on your investment.”

Ronci, 40, decided to rent – and the decision paid off. She was able to cover her mortgage and expenses with the rent she got off her condo, and have enough money leftover to pursue the lifestyle changes she was after.

In Ronci’s case, having a well-situated apartment and trustworthy property managers made renting her condo on the side a lucrative and stress-free process.

But while an income property can be rewarding, would-be landlords need to think about what they’re buying and the kind of return they’ll get for their efforts, said Milton, Ont-based realtor Andrew Roach.

“When I talk to my investment clients, we sit down and we say, what are you willing to invest … and we’re not talking just about money,” said Roach, 38, who owns multiple properties on his own or through side ventures.

“When buying a property people are investing more than just their hard-earned money. They’re also investing their time and energy.”

A property manager and the careful screening of your tenants will go a long way toward safeguarding your free time, but it’s often the finances that can trip people up the most.

““You have to make sure the income being produced, the cash flow, can support the debt, said Brenda Burjaw, director of commercial services at Meridian Credit Union Limited.

Whether you’re renting out one condo to supplement your income or a slate of properties, she adds, the money side is the same.

You have to do your due diligence up front to make sure the property will give you the return you want, you should be clear on your risk tolerance (since that will guide your strategy) and you need to carefully budget to make sure you can cover off the operating cost of running the unit – both in terms of capital needs for big expenses and to service the debt outstanding on your mortgage.

Operating costs are the part of the equation that you can have some level of control over by budgeting for repairs and maintenance, said Burjaw.

“You need to be mindful of always having some sort of a reserve set aside for when you have to re-lease the unit – paint it, replace an appliance, fix a window,” she said.

“Each year a prudent property owner should look and budget what the coming year operating costs are going to look like, and find efficiencies where possible.”

A condo is a good option for anyone who is low risk or doesn’t want to spend much time worrying about their side property because condo fees take care of a lot of the maintenance. If your tenant agrees, you can also automate payments and appointment bookings by signing up with a company like Get Digs, which lets renters pay with their credit cards and make sure landlords get the rent on time.

That will keep you from having to chase tenants for their rent, since legislation brought in in places like Ontario means you’re no longer allowed to ask tenants for post-dated cheques to cover their rent for the year ahead.

Property managers can help ease the burden, for a fee, and so can having a go-to list of people to call in an emergency to replace a window or fix a leaky toilet.

If you choose to outsource that work, you’ll need to factor property management fees into your budget and consider how that will impact your cash flow.

You should also be thinking about whether your tenant will pay the hydro bills and whether you can charge extra for amenities like parking.

When you’re estimating your costs and possible return, it’s also important to be conservative, said Pauline Lierman, director of market research with Urbanation Inc., a firm that tracks the rental condo and new purpose build market in Toronto.

“You have to look at what the balance sheet of the condo is, what the maintenance fees are,” she said.

“Be aware of what the type of unit you have in your building is renting (at), be aware of who else around you may be adding new units going forward.”

But while careful math and planning is needed to make sure a rental side hustle pays off, for landlords like Ronci, the result is worth it.

“If you’re wanting to make a change in your life, an investment like this can give you the break or pause you need to breathe.”

Source: Financial Pipeline – ROMINA MAURINO
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