Mon, 4 November 2019
Get a market update. Next, I answer your listener questions:
1: How do I start if I know nothing about real estate?
2: What’s better: existing or new construction property?
3: How do I identify an “up-and-coming” neighborhood?
4: How do I raise the rent without losing the tenant?
5: What if there’s a recession?
I bring you today’s show from Anchorage, AK.
Next week, we discuss four-plexes. The following week, declining interest rates and more Fed money-printing.
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Welcome to Get Rich Education, I’m your host Keith Weinhold.
It’s YOUR listener questions today; What’s The Best Guidance For Beginners, Comparing New Construction vs. Existing Construction Property, How To Identify An Up-And-Coming Neighborhood, How To Raise The Rent Without Losing Your Tenant, and How To Position Yourself In The Event Of A Recession.
All today, on Get Rich Education.
Welcome to Get Rich Education! I’m your host, Keith Weinhold with Episode 265 and I’m answering your listener questions today.
First, let’s get you up-to-speed with our asset Class Whiparound.
The Fed lowered rates last Wednesday by a quarter-point again.
It IS their third quarter-point rate cut this year, bringing the upper bound of the Federal Funds rate down to 1.75%
Just before air time here:
Year-to-date, real estate is up 3.5% per the Freddie Mac Housing Price Index. The Case-Shiller National Home Price Index is at right about that same 3.5% appreciation rate.
Next, the Freddie Mac numbers show us 30-year and 15-year mortgage interest rates are just a touch more than 1% lower than they were one year ago.
Yes, your COST of money is cheaper now than it was either one year ago OR two years ago.
The stock market has been thriving. The S&P 500 Index is up more than 21% YTD. It’s flirting with all-time highs, as its over 3,000 points now.
Oil prices have not done so well, Down 17% year-over-year
Oppositely, Gold has thrived as it’s up 17% just since the beginning of the year.
Last week, the Commerce Department told us that GDP expanded at an annual rate of 1.9% through the 3rd quarter, falling slightly from 2% a quarter earlier.
The rate of dollar inflation is currently 1.7% YOY as measured by the Consumer Price Index, which is tracked and published by the government’s Bureau Of Labor Statistics.
With the way that they calculate inflation, I think it’s a little hard to believe that the true, diminished purchasing power of the dollar is only 1.7% per annum.
I think that makes about as much sense as turning back the clocks back an hour like we all did the other night, personally.
That’s our Asset Class Whiparound like we do here just once in a while.
Let’s start with the first listener question … and I usually start off with a more beginner-type question - like this first one - and advance from there.
This question comes from Jackie in Esko, Minnesota.
Keith, I love your show. I’m 25 years old, just a year out of college with $22,000 in student loan debt, and I just began listening to you three weeks ago.
Now I’m going back to listen from the very beginning, Episode 1.
What is the best way for me to begin if I know absolutely nothing about RE?
Thanks for the question, Jackie.
Well, you’re on the right track with your learning by starting with Episode 1 of the Get Rich Education podcast.
Bigger Pockets has some very well-populated FORUM that’s good for your learning.
I’d also say, work on your credit score WHILE you’re learning about real estate investing. That’s important in a credit-based asset like real estate.
Learn about what it takes to improve your FICO score at myfico.com
Now, for a beginner, yes, it’s probably not the long-term answer that you want.
But it can be helpful to have a W-2 job … at least in the short-term … before you go onto to dominate your own real estate empire.
I mean … I had a day job for years. Not only does this income help you qualify for loans, but let’s look at some ideal day jobs that can help you advance your real estate CAREER at the same time.
Now Jackie, I don’t know what your college degree was in … but if you’re a true devotee to real estate, consider that, even if you have to accept less income ... there are day jobs that can actually align with your path toward being a real estate investor.
You could become a Property Manager for a management company. Now, that is a tough job but you will learn remarkable things about how real estate works from the inside.
Property Management is perhaps the LEAST-RESPECTED job in all of real estate, but it’s perhaps the most important … at the same time and the manager is probably the investor’s #1 team member.
Other day jobs that can help a real estate investor are:
Being an Asset Manager, Financial Analyst, Real Estate Agent (of course), or a Mortgage Loan Officer.
With any of those related jobs, you’re going to learn about things like sales, marketing, pricing, maintenance & repair, capital improvements, and bookkeeping.
There are other benefits to making your day job … real estate-related.
So, that’s just one course to consider for a beginning real estate investor. If you’ve got to work a day job before you build your empire anyway, it might as well align with what you’re truly MORE interested in long-term … yes, perhaps … even if you need to take a short-term pay hit.
It’s just another angle for you to consider, Jackie.
If you want one all-encompassing podcast episode that tells a beginner like you as much as you need to know as possible … all in less than one hour - check out GRE Episode 249, published just a few months ago.
That episode is titled, “The Beginner’s Real Estate Investing Audio Guide” and it’s our most popular episode that I’ve done ALL year. Again, it’s Episode 249.
Thanks for the question, Jackie.
The next question comes from Tate in Providence, Rhode Island.
Tate says, “Keith, I notice that today, more providers offer new construction investment property, but it usually doesn’t cash flow like existing properties do.
Is it worth buying new construction for the lower maintenance costs involved?” Thanks, Tate.
Alright Tate, let’s compare the pros & cons of buying Brand New Construction Rental Property vs. Existing Construction.
And, this is a top-of-mind subject for me because I just wrote about this in Get Rich Education’s e-mail newsletter two weeks ago.
What’s better: existing or new construction rental property?
Like with most real estate answers: “It depends.”
But because a “2-word answer” like “It depents” is really dissatisfying, let’s expand on this.
There are at least 8 different criteria for each type.
Before we look at your trade-offs with each type, understand that new construction turnkey property was almost non-existent until recently.
That’s because during the housing crisis of 2007 – 2010, home prices fell far below replacement cost.
Therefore, builders couldn’t make new developments feasible until existing property prices rose in this decade that we’ve had since the Great Recession.
There was also an oversupply of housing back then. Absorption of existing housing took time before new construction made sense again.
And supply has definitely been absorbed.
In SO MANY markets today, the housing that makes the best rentals is undersupplied.
That’s why new construction makes sense again - and why you’ve gradually seen more new construction income property be offered by providers these past few years.
Let’s look at the advantages of both existing and new construction … and these are certainly broad generalizations ...
First, with EXISTING Construction property - we’re talking seasoned properties here:
Now, why would you care if your neighbors next to your income property hold higher equity positions?
If there’s a recession, this means that residents are less likely to walk away from their home. This hedges against foreclosures and a valuation downdrain - and this domino effect like we saw in the housing crisis 10 years ago.
Now that we’ve looked at what tilts in the favor of existing property - and it is a lot … let’s look at the advantages of Brand New Construction property.
So, there they are - the advantages of existing property vs. new construction rental property.
Of course, this is general guidance.
Based on regional and other factors, you can surely find some “exceptions” to these criteria.
But these trade-offs can help you decide what’s more important to you as a real estate investor.
Excellent question from you there, Tate.
The next question comes from Alex in Lyndhurst, New Jersey.
Alex asks, “What’s the best resource for determining if a property that I want is in an up-and-coming neighborhood?”
“The market is more important than the property - and a thriving metro doesn’t necessarily mean that every property is in the right neighborhood.
Where do you do your own research?”
Well, thanks for the question, Alex.
In short, NeighborhoodScout.com is my favorite paid resource …
… and City-Data is my favorite free resource. It’s spelled “City-hyphen-Data”.com
Now, what makes Neighborhood Scout potentially worth paying for is that they’ve got investor-grade analytics and tools.
Where the free resource, CityData is more for a “general public” user.
But both resources tell you about things like crime rate, per capita income, vacancy rates, and virtually everything else for cities, zip codes, and even subdivisions.
Of course, there are countless other resources in addition to those two.
Be mindful that you aren’t just looking for neighborhoods that are safe, you’re looking for neighborhoods that are IMPROVING and both of these resources have backward-looking data so that you can track trends.
Remember, in income property, you don’t really want to seek out “beautiful” because beautiful often doesn’t correlate with profitable for cash flow.
But, of course, boarded-up, burnt-out buildings aren’t what you want to see either.
So, as you’ll remember, it’s clean, safe, affordable, and functional. Are people out walking their pets at night? That might be a sign of neighborhood safety.
The things that you can see through Google Street view are things like: are the streets relatively clean, are people mowing their lawns.
If the neighborhood - at least looks - respectable … then tenants are likely respecting your property too.
Too many “For Rent” or “For Sale” signs on a block might be bad sign.
Of course, seeing a lot of signals of remodeling or new construction in a neighborhood - is one of the best signs that could possibly see for an improving neighbhorhood.
The problem there - is that you’ve got to get in before a neighborhood is TOO improved. Otherwise, you’re going to be paying more for the property and the numbers won’t work.
So, there you go, Alex - both some hard data resources for research - and softer signals for what might make for an up-and-coming neighborhood and a safe neighborhood.
If you’ve got a question for me, go ahead and write in at firstname.lastname@example.org
How do you raise the rent without losing your tenant, and then, what happens if there’s a real estate recession?
That’s after this. I’m Keith Weinhold. You’re listening to Get Rich Education.
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Ben from Osnabrook, Germany asks:
“When it comes to raising the rent on a tenant, isn’t it better to just keep the rent the same & just … not raise it?
Because the cost of losing that tenant with its greater vacancy time is usually more of a loss than if I’m not receiving that potentially higher rent amount each month.”
And then Ben goes into a number of calculations that show his point.
Yeah, thanks for this great question, Ben.
This is the classic landlord’s conundrum.
Do I raise the rent to “market rent” & risk losing the tenant - or do I forgo that greater rent amount and just remain complacent with occupancy at a BELOW-market rent amount?
Let’s use an example here. Say you are renting a unit for $1,000. The tenant signs a one year lease for $1,000 … and after a year, when renewal time comes, you give notice that rent will be increasing from $1,000 to $1,040.
A couple days later, your resident responds and tells you that they aren’t willing to pay more than $1,000, and if they must, they will go find another place to live. So you risk losing them.
Yes, some tenants really will leave over just a $40 a month rent increase.
Now you have a dilemma. You think that you CAN rent the unit to someone ELSE for $1,040.
But on the other hand, you realize that it’ll take a month to turnover and re-rent the unit. You’ll also need to see that the carpets are cleaned, the blinds are replaced, and perhaps do some wall texturing and painting.
So RE-renting this unit will cost you something … plus while this work is done & a new tenant would have to be sought … it might be one month of vacancy that you’d endure.
The question you’re now asking yourself is, will it cost me MORE to turn this unit over & EVENTUALLY get $1,040 than it would to keep this tenant’s rent at $1,000 … and just keep them in place - ?
Yes, it usually would.
Numbers-wise, short-term, it’s better to just keep that existing tenant in-place and give them their way and keep the rent at $1,000.
In this case, a LOST month of rent while you try to find a new tenant then … effectively costs you ... $1,040.
Plus repairs, you might lose $1,600 on the turnover.
On the other hand, NOT raising rents by this $40/month will only cost $480 for the year.
Which loss would your rather take — $1,600 by turning the unit over - or $480 by keeping the same tenant there?
You’d rather keep the tenant in there & only lose that $40 a month or $480 a year … rather than the $1,600 for the turnover & month of vacancy.
Well, there’s a solution to this classic conundrum - and it won’t work every time, but the best thing that you can probably do - the way that you can have your cake and eat it too - which means both increase the rent and keep your tenant … is to make an improvement to your resident’s unit a month or two BEFORE you raise the rent.
For example, if they don’t have a dishwasher, you can add a dishwasher or add a ceiling fan in the master bedroom if they don’t have one. Or make a minor remodel that makes that tenant’s life better - before the notice of rent increase.
That makes the tenant more likely to stay because you’ve just improved their quality of life - and you’ve also shown them that you care - and they’re more likely to pay the rent increase.
Not only have you then kept the tenant and now receive a greater rent amount, often times, you can get a tax deduction for the repair or improvement - and above that, even if they do decide to vacate, you just improved your unit that you own.
So … that’s the best solution to the dilemma, Ben from Germany. Again the short answer is to make an improvement to the unit, optimally a month or two before the rent increase.
Craig from San Diego, California writes, “Keith, you are the first person that ever opened me up to the world of cash flow.
I’ve bought two single-family properties from one of your providers about 8 months ago and I’ve had a good experience so far, other than one tenant that paid the rent about 20 days late month.”
OK, so far, so f-a-i-r-l-y good there, Craig from San Diego.
Craig goes on to ask, “There are a lot of warning signs about a recession and I’m considering putting a freeze on new purchases until I at least have some certainly in this uncertain environment. What are your thoughts about a recession?”
OK, that’s certainly a valid question, Craig.
You bring up “uncertainty”. I’d say that markets are always, just always, uncertain … and prognosticators and forecasters have been calling for a downturn for 3 years, 4 years, including a prominent economist or two right here on this very show.
And that’s alright. That’s alright if there’s someone that’s wrong. A prominent economist’s decision is just one point of many that you have to take into consideration …
… whether it’s an inverted yield curve or slowing GDP growth or inflated stock market price-to-earnings ratios that might point to a recession.
Well, especially as it relates to real estate - let’s just talk about how a recession might look as it relates to real estate and what the probabilities are of a recession taking place soon.
First of all, a recession is broadly defined as having two or more quarters in a row of contracting Gross Domestic Product - said another way, a declining GDP for at least six months. That’s what a recession is.
Let’s relate a recession to real estate - broadly.
10 years ago, we were mired in the worst recession in a few generations.
Real estate was:
#1 - Overbuilt & oversupplied.
#2 - Real estate was being bought with irresponsible lending practices where borrowers didn’t have the capacity to pay their mortgages if anything went wrong. Everyone was qualifying for a loan.
And #3 - Ten years ago in the Great Recession, we saw ridiculously unsustainable appreciation rates. 20%, 40%, 50%, 60% per year in some markets on this speculative appreciation since anyone could qualify for a loan.
Today, I don’t think we’re in position for a real estate recession & if we do have one, it would be substantially milder than what we saw 10 years ago.
Why is that? Because today, we’re in EXACTLY the opposite condition than we were 10 years ago.
Today, we have an UNDERsupply of housing, lending practices ARE responsible, and appreciation rates are sustainable.
I talked at the top of the show that real estate has appreciated nationally at about 3-and-a-half percent.
So, we’re in the opposite place that we were 10 years ago for three main reasons: supply, lending responsibility, and sustainable appreciation rates.
In fact, if you’re buying for cash flow in good markets - like you should be - the question I’d ask you - uh, Craig from San Diego - is - do you WANT there to be a mild recession?
Yeah, if housing values began trending down for a little while, people are discouraged from buying and then there’s more rental demand.
This is what I experienced when I owned property for cash flow, like I did 10 years ago - when rental demand increased - my cash flow increased greater than the rate of inflation.
So, you might WANT there to be a mild recession when you’re a cash flow buyer.
In fact, this - kind of - workforce housing that we talk about buying here - long-term rentals that are just below the median purchase price for an area (but not too far below) - is some of the most recession-resilient housing type that you can find.
Now, other housing types - take the SHORT-term rental market - like AirBnB properties, HomeAway, VRBOs - they aren’t nearly as recession-resistant as these long-term rentals are.
Now, that doesn’t mean that you can’t own a few STRs - but they probably should be the bread-and-butter mainstay of your portfolio like these long-term rentals are.
AirBnB properties cater to two primary types of people - businesspeople and vacationers.
Now, it seems that most AirBnB owners prefer businesspeople to vacationers … because businesspeople tend to be more quiet, they don’t have parties, and businesspeople are more likely to have REPEAT stays than vacationers.
But in a recession, both business travel and vacation travel gets cut. You saw that happen in the Great Recession - and business travel is one of the first places that businesses cut when they had to get lean.
So … this doesn’t always mean that short-term rentals are dreadful. But long-term rentals are what are recession-resistant.
Again, in long-term rentals, you might actually WANT a recession depending on how you’re positioned.
So, thanks for the question there, Craig.
Next week on the show, we’re going to focus on four-plexes - four-unit buildings and what makes them so special.
The week after that, speaking of a recession, the incomparable Economist Richard Duncan is going to join us and tell us about this QE4-type of activity that the Fed has initiated …
… where the Fed is printing all kinds of money and pumping it into the system … and what that means for the economy.
Richard can make complex concepts sound devastatingly simple sometimes.
In fact, when he was here with us, about a year-and-a-half-ago, just listen into part of that, my question and his answer:
Yeah, could anyone else possibly describe the relationship between inflation and interest rates that succinctly … that concisely?
In fact, when he’s back with us soon, I think that Richard will tell you that nearly the entire globe is ALREADY in a substantial economic slowdown.
Well, what’s one way that I’m acting - and this is something that I regularly do whether I think that a recession is on the way or not - is that I just bought two more properties this past week myself.
Yes, they’re these cash-flowing, long-term rentals like we talk about here … eating my own cooking.
When I was almost ready to buy, I qualified for two more single-family income property loans with Ridge Lending Group.
And then to find the 2 new properties, I did just what you do.
I went to GREturnkey.com, downloaded reports on a couple markets that I was interested in, connected with the provider, and decided to buy two properties in the same day.
Really, walking the walk here. So, if you’re looking for cash-flowing income property in investor-advantaged markets - usually in the Midwest and South, you’ve got to act.
That starts at GREturnkey.com
Until next week, when I’ll be back to help you build your wealth, I’m Keith Weinhold.
Don’t Quit Your Daydream!