PREI Sept2015

INSIDE

WHY ATLANTA? More jobs means more people and more need for housing.

LENDING Area is ripe for private money, on both sides of the equation.

REBIRTH A profitable new life for formerly distressed historic homes.

SEPT OCT

2015

Growing Along With Atlanta EpiCity has been in TOM STOKES’ family—and serving Atlanta real estate investors—for 80 years.

www.communityinvestormedia.com

JEFF BALL AND HIS TEAM THRIVE ON INNOVATION P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

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TABLE OF CONTENTS

INSIDE THIS ISSUE

THE BIG PICTURE 12 Boomers a Boon to Bottom Line Savvy investors are jumping in to meet the demand from Baby Boomers looking to downsize, ditch mortgage payments.

by Teresa Bitler.

14 Looking Beyond REITs Single tenant net leases of commercial property are another option for investors who want to diversify their portfolios with real estate.

by Bob McMahon.

16 Great Performance Expected Yes, investors, you can still buy nonperforming notes at a deep discount. And there’s no better time than now to do it.

by Eddie Speed and Kevin Shortle.

UP CLOSE & PERSONAL 28 Afraid to Buy Your First Rental?

Seven ways to overcome the fear factor and move to on build a profitable portfolio of rental properties.

18

by Kevin Guz.

32 Big Opportunities in Florida Foreclosures Chris Underwood and Joe Scurlock of HomeStream LLC have already surpassed their goal to buy, rehab and sell 100 foreclosure properties by year’s end.

by James Hart.

36 Raise the Rent, or Keep Your Tenants?

It doesn’t have to be an either-or situation, as our panelists in this issue’s Street-Smart forum explain.

INSIDE

WHY ATLANTA? More jobs means more people and more need for housing.

LENDING Area is ripe for private money, on both sides of the equation.

REBIRTH A profitable new life for formerly distressed historic homes.

ON THE COVER

VISIO-NARY 38

54

HARD MONEY’S CHANGING LANDSCAPE

IS SMALL THE NEXT BIG THING?

We talk one-to-one with Jack BeVier of The Dominion Group.

Smaller dwellings present big possibilities for investors.

COMMUNITY INVESTOR

SEPT OCT

2015

C1 Growing With and For Atlanta EpiCity, one of the area’s leading Growing Along With Atlanta EpiCity has been in TOM STOKES’ family—and serving Atlanta real estate investors—for 80 years.

www.communityinvestormedia.com

real estate businesses, is celebrating 80 years of family ownership and service to Atlanta.

4 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

24

INSURANCE FOR AND BY INVESTORS In less than five years, the National Real Estate Insurance Group has become one of the leading choices for coverage.

NUTS & BOLTS WIDE-RANGING EXPERIENCE and interests, plus a penchant for innovation, propel Visio’s and Econohomes’

60 Buy-and-Flippers Beware If the IRS categorizes you as “dealer” rather than “investor,” you face stringent tax requirements.

by Carter Froelich.

chief Jeff Ball to pinnacle of success.

70 It’s a Great Time to be a Landlord Appreciation isn’t the only perk for a buy-and-hold investor. Here are seven reasons why this is a great time to own rental property.

by Susan Thomas Springer

by Teresa Bitler.

76

84

BY THE NUMBERS 86 Altos Research July numbers reflect lower seller expectations.

EVICTION NIGHTMARES

RECOGNITION FOR SFD RENTAL SECTOR

In love or in real estate, breaking up can be hard to do.

Builders, developers respond to demand for new-builds.

by The Editors.

88 Local Market Monitor’s Top 10 List Markets with a growing health care industry are good bets as real estate investment hot spots.

by Ingo Winzer.

P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

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6 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

FROM THE EDITOR-IN-CHIEF

New Look, Same Commitment: A Magazine Focused on Your Success rumroll, please…

We hope you find Personal Real Estate Investor Magazine’s new design and structure as valuable and useful as we have created it to be. Such redesigns are common in the publishing business, and like other magazines that refresh their look and typography, we undertook ours to ensure that PREI is well organized, flows logically from section to section and satisfies you as a reader and real estate investor.

Longtime readers will notice immediately the new-look flag, or nameplate, as well as our focus now on an individual—a real estate investing professional like you—as the cover subject. It’s the people who are moving this niche of the real estate industry from an afterthought to its rightful place in the mainstream, and we want to recognize and celebrate them. We’re happy to feature as our inaugural subject Jeff Ball, president and CEO of Visio Financial Services.

Proudly debuting in this issue is the incorporation of Community Investor magazine in a new format befitting its mission of spotlighting communities where innovation and development are happening by and for real estate investors and the businesses that support them.

Community Investor will be filled with information in a multi-page special report focusing on an area

D

worth your consideration for its ability to deliver long-term, sustainable investment growth. This issue, we’re taking an in-depth look at the 29-county Atlanta, Georgia, MSA. It’s called “Hotlanta” for good reason, as it offers opportunities for investing success in all directions from the core city. The metro region is home to 18 Fortune 500 headquarters and is growing in both jobs and population. And that means more need for homes for the people who naturally follow, many of whom are part of today’s increasing ranks of renters.

What we want you to know without a doubt is that we remain committed to providing you a top-quality magazine with useful, interesting and relevant information that will contribute to your success and also raise the standards and stature of the industry. As we have done for the past 10-plus years of this magazine’s existence, we’ll bring you profiles, industry overviews, trend pieces, how-tos and other articles with a take-away—information and insight into successful strategies that you can apply to your own investing or business pursuits.

So please read on, enjoy and give us your feedback.

I and the rest of the staff look forward to hearing what you think and using that information to continue meeting our commitment of excellence to you.

LINDA WIENANDT, EDITOR-IN-CHIEF,

P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

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NEWS BRIEFS

NATIONAL UPDATES

REALTYTRAC DATA SHOWS DECLINE IN BUY-TO-RENT POTENTIAL RETURNS

Nationwide, returns for owners of residential rental properties declined during the first five months of this year when compared with the same period in 2014, according to analysis by real estate data company RealtyTrac.

Nationally, RealtyTrac’s analysis found that potential returns from buy-to-rent purchases of three-bedroom properties decreased from the same period a year ago in 169 of the 285 counties analyzed, or 59 percent.

Renting is more affordable than buying in 97 of the 285 counties analyzed (34 percent). Major counties where it is cheaper to rent than to buy include Los Angeles, California (69 percent of median household income needed to buy); San Diego, California (56 percent); Orange, California (57 percent); Riverside County, California, in Inland Southern California (43 percent); King County, Washington, in the 10.07% Seattle metro area (45 per9.81% cent); and Denver County, 9.74% Colorado (51 percent).

9.07% Across all 285 counties 8.94% analyzed, the average potential annual gross rental yield was 8.94 percent for three-bedroom residential properties purchased in the first five months of 2015, down from a 9.07 percent average potential rental return for three-bedroom residential properties purchased in the same time 2011 2012 2013 2014 2015 period a year ago in those Average Buy-to-Rent same counties.

Returns in 285 Major U.S. Counties “As home price appreciSource :: RealtyTrac ation moderates and aligns more closely with trends in rental rates, the returns in the buy-to-rent market are stabilizing and becoming more predictable—if not as lucrative as they were for investors who purchased a few years ago near the bottom of the market,” explains Daren Blomquist, RealtyTrac vice president. “Buying rentals continues to be a brilliant strategy that allows investors to hedge their bets in a real estate market shifting away from homeownership and toward a sharing economy.”

8 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

Rental rates are outpacing the U.S. inflation rate, according to 2nd Quarter 2015 rental housing statistics from Real Property Management and RentRange.

The report, which focused on three-bedroom single-family homes, found average monthly rent for those properties exceeds $1,320— up 3.3 percent since last

quarter, and up 6.1 percent year-over-year.

“The changes in the rental market are consistent with other reports that point to a dwindling number of Americans who are choosing to own homes,” according to Don Lawby, president of Property Management Solutions, the franchisor of RPM. “We have already witnessed significant

$ 1,579 % 03.89

PACIFIC

% 27.87

$ 1,245 MOUNTAIN

$ 1,956 CALIFORNIA

% 04.3 % 27.72

% 04.52 % 24.93

$ 996 SOUTHWEST

% 04.43 % 31.59

$

RENTAL RATE The median rental rate for three-bedroom homes rented during June 2015

% VACANCY RATE

The average percent of homes considered unoccupied as of June 30, 2015

increases in rental rates through the first half of this year, and we expect those numbers to continue to climb during the second half.”

For purposes of polling, RPM/RentRange divided the country into 10 regions, all of which showed rising rental rates.

Highest increases were in the Pacific (11.8 percent) and Northeast (11 percent) regions. While the MidAtlantic region was lowest, at a 3.1 percent increase, its average rental rate of

$1,642 is still well above the national average.

The report also measured rental saturation rates— the estimated percentage of rented single-family homes as a share of all single-family homes—and vacancy rates.

Rental saturation nationwide is now at 25.4 percent, compared to 23.9 percent last year. The national vacancy rate fell to 5.46 percent through June, down .12 percent from a year ago.

WEB www.realpropertymgt.com :: www.rentrange.com

$

1,763

%

05.25

%

19.77

NORTHEAST

$ 1,642 MIDATLANTIC

$ 1,023 MIDWEST

% 19.03

% 22.68

$ 1,257 % 06.66 % 28.42

$ 1,294 TEXAS

% 03.43 % 22.99

$ 985 SOUTHEAST

% 05.07 % 27.91

% SATURATION RATE

Percentage of rented single-family homes as a share of all single-family homes Arrows indicate up or down compared to the previous year

SOURCE RealtyTrac.com and Housing News Report :: WEB www.RealtyTrac.com

% 05.26

% 06.88

SOUTH ATLANTIC

Potential buy-to-rent returns still increased in 116 of the 285 counties analyzed (41 percent) thanks to rental rate growth outpacing home price growth in those counties. Major counties where potential buy-torent returns increased from a year ago included Orange County, California, in the Los Angeles metro area; King County, Washington, in the Seattle metro area; Santa Clara County, California, in the San Jose metro area; Philadelphia County, Pennsylvania; and Suffolk County, New York, on Long Island.

Other major markets with yearover-year increases in potential buyto-rent returns included counties in Cincinnati, Cleveland and Columbus in Ohio; Charlotte and Raleigh in North Carolina; Atlanta; Milwaukee; Jacksonville, Florida; Seattle and Denver.

Average rental rates on three-bedroom properties increased 3 percent from a year ago across all 285 counties analyzed, while average home prices on three-bedroom properties increased 4 percent across those same counties.

PHOENIX COMPANY COMPLETES CONVERSION TO AMERICAN HOUSING INCOME TRUST

Privately held, Phoenix-based real estate investment company AMERICAN REALTY PARTNERS has completed its conversion to a publicly traded company incorporated in Maryland.

The conversion to AMERICAN HOUSING INCOME TRUST INC. is the latest step in the company’s strategy for growth, according to CEO Sean Zarinegar.

As American Realty Partners, the company worked with investors to build sustainable portfolios of quality singlefamily rentals, primarily in the Phoenix area, as well as engaging in fix-and-flips of distressed properties.

Going public gives investors greater liquidity and also allows AHIT to position itself for larger institutional investors, Zarinegar says.

“We are seeing many neighborhoods appreciate nicely in value. Our business model is based on collecting cash flow from rents while our properties continue to appreciate,” he says. “It’s a winning combination.”

The company plans to expand to other markets throughout the U.S., Zarinegar says.

PHONE 623-551-5808 :: WEB www.ahitrust.com P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

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NEWS BRIEFS

NATIONAL UPDATES

INDUSTRY MOVES

Online real estate marketplace AUCTION.COM has named

ANTHONY SELF vice president of industry relations. In his

new role, the real estate industry veteran will focus on strengthening the company’s relationships within the real estate community and developing programs that foster longterm partnerships with agents and brokers.

ROB BARBER, former CEO at Environmental Data Resources, is REALTYTRAC’S new CEO. JAMIE MOYLE moves to chair of the innovation committee of the board of directors. Barber is a veteran of the real estate information services industry. During his tenure at EDR, he was responsible for doubling the company’s share in the OCT. 9-10 Fall REI Expo engineering market, expandWashington, D.C. :: Baltimore, MD ing successfully into mul:: www.reiexpo.com tiple high growth adjacent markets and innovating new OCT. 14–16 NARPM platform solutions that deliver Annual Conference both content and workflow Atlanta, GA :: value to the property due www.narpmconvention.com diligence industry.

Also at REALTYTRAC, real NOV. 8-10 American Association of Private estate data licensing veteran Lenders Annual Conference RICHARD LOMBARDI has been Las Vegas, NV :: hired as executive vice preswww.aaplonline.com ident and general manager to leading the company’s NOV. 12 Fall 2015 rapidly expanding data and Global Real Estate file licensing business. In the Crowdfunding Conference newly created role, Lombardi New York, NY :: will be responsible for develwww.eventbrite.com oping and executing strategies for using the company’s MARCH 6-10, 2016 data assets to expand on the Think Realty Conference exponential growth its data The Big Island of Hawaii :: and file licensing business www.thinkrealty.com has experienced over the last 18 months. Lombardi, the former vice president of data solutions at CoreLogic, has more than 25 years of experience in data solutions, information services, data analytics and related businesses.

10 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

THINK REALTY CONFERENCE COMBINES REAL ESTATE EDUCATION, HAWAIIAN EXPERIENCE

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Attendees and sponsors can grow their circle of influence by leveraging access to Think Realty’s network of more than 20,000 investors and lenders. The conference will also offer cutting-edge educational sessions structured to optimize competitive advantage.

Session topics will span lending, funding, investment strategies, insurance and property management. After soaking up the latest information on global trends and the impact on local markets, guests can network poolside or talk business while setting out on tropical excursions—closing deals while enjoying the splendor of Hawaii.

Featured keynote speakers include Kevin O’Leary of O’Leary Funds and ABC’s “Shark Tank;” Erik Wahl, world-renowned graffiti artist, No. 1 best-selling author and entrepreneur; and Rob Van Winkle, aka Vanilla Ice—rapper, actor, producer, highly successful real estate investor and star of DIY Network’s “Vanilla Ice Project” real estate show.

Guests will be inspired by the speakers’ stories of success and how that translates to taking their own real estate businesses to the next level.

One-of-a-kind, targeted sponsorship opportunities are available. All-access Think Realty Conference passes are $1,195 through Oct. 31 (increasing to $1,295 Nov. 1). Travel and resort packages, as well as payment plans, are available (minimum $250 down payment required).

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THE BIG PICTURE

TRENDS & ISSUES

WITH RETIREMENT AND EMPTY NESTS IN THEIR FUTURE, BABY BOOMERS LOOK FOR FREEDOM FROM OVERSIZED RESIDENCES AND MORTGAGE PAYMENTS.

Rentals Designed for Boomers a Boon To Investors’ Bottom Line A

n increasing number of Baby Boomers are becoming renters—some as a result of the economic downtown and housing crisis, others because they want the freedom to relocate, and still others because they want someone else to deal with repairs and maintenance. How do you meet their needs? And is this a market you should be investing in?

A LOOK AT THE BOOMERS

Born between the 1946 and 1964, the Baby Boomer Generation today ranges in age from 51 to 69. Younger Boomers are likely still working and may be able to afford nicer amenities than older generations living on a fixed income. On the other hand, many seem to want a simpler lifestyle, says Kevin Saba, manager partner with The Development and Marketing Group Companies.

Saba, who builds microlofts in the Boston area for Millennials, finds his units

are increasingly popular with Boomers who, as empty nesters, want to downsize. But he believes there’s more to it than Boomers needing less space because the kids have moved finally moved out.

“There’s a movement toward acquiring fewer things and having a smaller space,” he explains. “Millennials understand the importance of mindful acquiring, and Boomers

and other local attractions.

In some ways, the lives many Boomers see themselves living parallels the lifestyle Millennials currently enjoy.

LOCATION, LOCATION, LOCATION

Michael Costa with Highridge Costa Housing Partners, a company that designs affordable apartments

MILLENNIALS UNDERSTAND THE IMPORTANCE OF MINDFUL ACQUIRING, AND THE BOOMERS ARE PICKING UP ON THAT.

are picking up on that. They want to be free of their stuff.”

As Boomers shed their stuff, they need less space, so smaller rentals appeal to them.

They also want to stay active.

Hiking and biking trails appeal to them, and they enjoy walking to nearby museums, restaurants

12 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

for active, older adults, says that location is the most important feature when it comes to building for this demographic.

“We’ve found that as people get older, car ownership decreases,” he says.

Boomers may still have cars, but they may foresee a

time when they won’t drive as much. They want properties that have a walkability factor, properties that are near public transportation, shopping and entertainment. If you are investing in properties for Boomers, you want to make sure that they can safely walk to local services.

BUILDING FOR BOOMERS

It’s difficult to rehab an existing house that will attract Boomers, according to Manny Gonzalez with KTGY Group in Los Angeles, because so many want a sense of community. Even if they are still working, they are looking ahead to when they will have more leisure time and will want to interact with the local community or with other people their own age.

For this reason, if you want to invest in properties for this demographic, consider building an apartment complex that incorporates spaces for interaction, such as bocce ball courts, wine bars, fire pits and lending libraries. Costa’s properties

even include a common area “man cave” with a roll-up metal door, checkerboard floor, pool table and big screen TV. Gonzalez recommends hiring a management group that caters to the Boomer demographic and can help foster a sense of community. You may even want to create a Pinterest page where tenants can post their interests. If you see there are several interested in Italian cooking, for example, hire a chef to give a cooking lesson, or in hiking, organize a hike on a local trail.

“Social activity is key,” he says.

He adds that you definitely want to have a swimming pool and an exercise area with equipment that focuses on cardio and nonstrenuous movements (versus heavy weights). Offer yoga and other flexibility-based classes.

“The Boomer Generation is more concerned about fitness

than any other generation out there,” Gonzalez says. “They want to stay healthy.”

Pets are another opportunity for social activity. With the kids gone, Boomers often turn to pets, so amenities that cater to pets, such as a dog park either onsite or nearby, are a must.

A LOOK INSIDE

Whether you are renovating a single family home or building a multi-unit complex, Boomers look for certain features within the living space.

“Entertaining is huge,” Gonzalez says. “Boomers love to entertain. They don’t just invite one couple over; they invite three or four couples, six to eight people.”

As such, they look for properties with a big kitchen, island and great room.

They also look for adequate storage. Even though they are

downsizing and simplifying, they’ve still accumulated a lot over the years and fitting everything into a 500-squarefoot space will be a challenge.

Clever storage ideas will have added appeal.

Universal design also comes into play. Boomers still lead independent, active lives but want a property that will allow them to stay put as they get older. One of the first things they look for is a living space on one level (no stairs to a second floor or basement) and elevators in multi-level apartment complexes.

Other universal design elements include handles on the doors instead of knobs for easier opening, higher outlets so they don’t have to bend as far, and walk-in showers. Costa points out that Boomers aren’t quite ready for grab bars or other elements that look like they belong in a hospital room, but they do

want reinforced walls so they can easily add a grab bar when they eventually do need it.

INVESTING IN BOOMER PROPERTIES

Costa, Gonzalez and Saba see a demand for Boomer housing, especially smaller living spaces in great locations, and feel that your best bet as an investor is to develop a multiunit complex managed by company that has experience with this particular demographic.

Or you may be able to find a real estate investment trust (REIT) that offers an investment opportunity focused on Boomers.

Either way, there’s opportunity with this demographic.

BY TERESA BITLER Teresa Bitler is a regular freelance contributor to Personal Real Estate Investor Magazine. Contact her at teresa@teresabitler.com.

P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

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THE BIG PICTURE

COMMERCIAL PROPERTIES

FOR HIGH-NET-WORTH INVESTORS LOOKING TO REAL ESTATE FOR DIVERSIFICATION, A GOOD STARTING PLACE IS PRIVATE PARTNERSHIPS IN SINGLE-TENANT NET LEASES.

Looking Beyond REITs For Real Estate Exposure M

any wealth managers are encouraging their clients to invest a portion of their portfolios into real estate for income diversification in this historically low bond and stock dividend yield environment, with the added benefit of serving as an inflation hedge.

But where do you do you start with the complex world of real estate investments?

REIT stocks are viable investment options to diversify a portfolio and are typically the default recommendation of advisers. However, among the many options in commercial real estate available to sophisticated investors, private partnerships can give investors a superior riskadjusted yield over time.

Many high-net-worth investors are turning to investing in private partnerships with experienced sponsors who invest in a specific piece of real estate, backed by long-term leases to high-quality, often investment-grade, companies. These “single-tenant net

leases” typically include lease terms of 10 years or more, whereby companies including Wal-Mart, Home Depot and Walgreens pay all property expenses, including taxes, maintenance and insurance in addition to agreeing to pay rent throughout the lease term.

The partnership typically has no property management responsibilities whatsoever; therefore, these investments are more akin to purchasing bonds of the underlying tenant, albeit at yields much greater than the sub-5 percent offered in the investment-grade bond market today, and also include potential upside on appreciation of the underlying real estate.

ADVANTAGES OF THESE PARTNERSHIPS

Unlike public and private REIT investments, the sponsors’ interests are aligned with those of the investors, because the sponsors invest alongside as a general partner, typically 10 percent or more, and often

14 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

provide personal guarantees on mortgage loans to buy or build the property.

Sponsors often offer a preferred return to investors, typically in the 6 to 10 percent range prior to getting a return on their invested capital. Cashon-cash returns can exceed 10 percent per annum, with internal rates of return (IRRs) over the life of the investment exceeding 15 percent.

Because the landlord entity has little to no management responsibilities, management fees are low, often 1 percent.

Unlike public REIT stocks, there is also no “corporate overhead” that is paid for with investor dollars.

Transparency, provided through the operating agreement, lays out investor roles in any major decision for the partnership, including capital event.

Like REIT investments, investments can be made through tax-deferred selfdirected IRAs. The investor receives monthly dividends. Preferred

and excess returns (those shared with sponsor) are typically paid monthly.

RISKS AND CONSIDERATIONS

As private partnerships, these are nonregulated investments; therefore, an investor should develop a relationship with the sponsor prior to considering an investment.

A high minimum investment threshold is required. Because sponsors offer very low management fees, they want to limit the number of limited partners in any partnership; therefore, minimum investments in a partnership are often $100,000 or more, and are typically for high-net-worth, accredited investors only.

The investor must be comfortable with the credit of the underlying tenant and do his or her own due diligence on the ability of the tenant to make lease payments over the lease term.

Commercial real estate investing is on an upward trend and as this type of investing continues to be more popular, it is a viable and smart option in diversifying a portfolio.

BY BOB MCMAHON Bob McMahon is the co-founder of Stonemont Financial, a national real estate investment firm specializing in structuring and sponsoring single-tenant net leases for sale-leasebacks and new development build-tosuits, and student housing investments.

A 20-year veteran in the commercial real estate investment industry, McMahon seeks to educate investors about the different investment options available to them as they pursue the possibilities of investing in commercial real estate.

THE BIG PICTURE

NOTES & LIENS

YES, INVESTORS, YOU CAN STILL BUY NOTES AT A DEEP DISCOUNT. AND THERE’S NO BETTER TIME THAN NOW TO DO IT.

Record Year Foreseen For Nonperforming-Note Business A

t one of our recent presentations, we were asked, “Can individual investors still buy notes at a deep discount?” The question arose because that person had read that the large institutional buyers, like hedge funds, were paying “premiums” for nonperforming notes today.

We immediately dispelled that myth for this individual, but it got us thinking: “How many other people are being held back by this myth?”

If you’re one of those, allow us to dispel this myth for you

as well and show you why 2015 is shaping up to be a record year for the nonperforming note business.

INVENTORY

We all know that when an asset is in demand, the supply of that asset affects prices.

Assets such as real property and real estate notes have been and will continue to be in high demand by investors.

Anybody who has been in the real estate market for the past 10 years has seen dynamic changes in both supply and

PROFIT??

SHORT SALE INVESTOR PAID

$85,000

REO FORECLOSURE INVESTOR PAID

$83,000

COST OF PROPERTY PROPERTY VALUED AT $100,000

16 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

demand on real estate and real estate-backed assets. In 2009, for example, REO sales had reached their peak supply and accounted for more than 25 percent of market sales. Short sales were less than .5 percent of market sales in 2006 and grew to 9 percent of sales in 2013.

Many investors, both large and small, capitalized on the discounted prices that the large inventories provided. Since 2009, new government rules forced the real estate and real estate financing industries to adjust their actions and therefore made changes to the inventory of all real estate assets.

Today, according to the National Association of Realtors, REO foreclosure sales account for less than 9 percent of market sales, while short sales account for less than 3 percent.

Since the demand for both REOs and short sales remains high, investors are paying premiums to acquire these assets.

In fact, according to the same NAR report, REO investors are getting about a 17 percent discount, while short sale investors are getting a 15 per-

cent discount. Those discounts lower profits and raise risk.

To put that into proper perspective, see the example below.

Now, we are not saying that there are not certain markets where investors are getting better discounts than NAR’s national number, nor are we saying that some investors may be getting better deals than these. We are saying that the market conditions have raised prices for these because the demand is strong but the inventory is low.

A UNIQUE OPPORTUNITY

The Dodd-Frank Act has pressured banks and government-sponsored enterprises to get non-performing assets off their books quicker. This can’t be accomplished through a foreclosure or short sale, so it’s no surprise that they are selling large pools of nonperforming loans.

In fact, in the first quarter of this year several large banks, along with Fannie Mae and Freddie Mac, have sold more than $7 billion in nonperforming notes! When these entities sell off large volumes

of notes, they package them into large pools and hold an auction.

The hedge funds that buy these assets all have certain profit margin expectations, geographic target areas, fixed costs and an eye for portfolio performance over individual note performance. In other words, the big funds have their own agenda and therefore their own goals with inventory.

Since these are sold in pre-packaged pools, the buyers

are forced to buy pools of mixed assets. Inevitably, when they buy pools like this, there are certain assets that meet the investment criteria for that equity firm and others that do not. The assets that are not within the investment criteria are resold at a discount.

For example, let’s say that ABC Company is looking to purchase non-performing notes on high-end properties in the western states. This company ends up buying a large pool

that contains high-dollar notes in western states but also has hundreds of notes on lowerend homes in the Midwest and Southeast. This investment company will carve out the assets it doesn’t want and sell them off at a discount.

The carved-out assets are what presents a unique opportunity. Unlike the large investment firms, small investors can apply special servicing, workouts and solutions. The larger companies simply don’t have a tolerance for these assets and will liquidate this “dead weight” as quickly as possible at discounted prices. What’s dead

weight to that large firm is gold for a small investor.

The fact that more than $7 billion in nonperforming assets has already been sold signals a large volume of assets that will be carved off and re-sold to small investors.

There has never been a better time to buy these assets.

BY EDDIE SPEED & KEVIN SHORTLE Eddie Speed is the founder of NoteSchool and a leading educator on the note industry. Kevin Shortle is the director of research and curriculum for NoteSchool. To learn about attending a NoteSchool presentation near you, visit www.noteschool.com.

Insurance for Real Estate Investors

RENOVATION

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OCCUPIED

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National Real Estate Insurance Group, LLC is the insurance agency for this Program. Designed for the unique insurance needs of the residential real estate investor industry, it has been serviced and administered by Affinity Group Management, LLC since 2006. Fully insured, this Program offers coverages that are underwritten by insurers such as Lloyds of London, Allianz, and others. The underwriting insurers adjudicate all claims according to the policy terms and conditions. For additional information visit www.nreinsurance.com.

P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

| 17

COVER STORY

Master Investor

VISIO-NARY Jeff Ball’s education and career prepared him to be successful in just about any sector. In college, Ball studied economics and theology and earned a law degree and an MBA. Add that to a position in banking and tech, as global head of semiconductor investment banking at JP Morgan, and you have a professional equipped to take real estate investing in fresh directions.

BY SUSAN THOMAS SPRINGER PHOTOGRAPHS BY MARK MATSON

18 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

COVER STORY

Master Investor

TODAY BALL IS PRESIDENT and

CEO of Visio Financial Services, an assetbased lender offering mortgage loans to investors purchasing single-family residences, and president of Econohomes, a leading reseller of mortgage foreclosure properties in the U.S. Both are based in Austin, Texas.

Ball credits patience and long-term vision with running two successful companies. He’s also motivated by the individual success stories his companies make possible, such as a borrower who is a single mother.

“She buys investment properties and turns them into rentals for single mothers—that’s cool,” says Ball. “She’s building her own net worth, and she’s also accomplishing something else that she has a passion about. She’s got a longer-term view of what she’s trying to accomplish.”

PAST PAVES WAY FOR FUTURE

Ball’s past experience comes in handy in his two ventures. For example, legal experience is key in an industry so document- and legal-intensive.

“It’s been helpful to be able to interact with regulatory attorneys, real estate attorneys, title companies, to understand contract issues and how to potentially structure lending instruments,” says Ball.

Since he has two sets of customers— those to whom he loans and capital partners from whom he borrows—his finance background is helpful, too. Ball says most of the larger private lenders are financed primarily through highnet-worth individuals. The advantage to that model is flexible capital; however, “it’s not very scalable.” So Ball’s organization has created another model, thanks to company executives’ finance backgrounds.

“We’ve been able to access institutional capital, which provides the ability for us to grow our business,” says Ball. “Also 20 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

over time, we have access to less expensive capital, which makes us more competitive in the market.”

Ball says because the semiconductor device market is one of the older segments of the tech world, it gave him an interesting look at how the market evolved over time.

“What I’m really interested in, in real estate, is how the market for buying, selling and financing properties is changing, and how might it change over the next 20, 30, 50 years. So, that experience of being in a market that’s very large and has gone through a lot of change gave me an interesting perspective when I now look at real estate,” says Ball.

Ball left JP Morgan to take a different career path, moving to Austin hoping to be an entrepreneur. He was one of the first investors in what became Econohomes.

He was intrigued with the first business model that brought a for-profit model to affordable homes, a space historically served by not-for-profit or government-sponsored programs.

“I thought there was going to be a growing need for affordable housing solutions in the country,” says Ball.

He was interested in bringing distressed properties back to productive use, in a business model that was effective, scalable and for-profit.

ECONOHOMES MODEL

In the beginning, Econohomes sold homes to owner-occupants. Then, in the midst of the financial crisis, the SAFE (Secure and Fair Enforcement of Mortgage Licensing) Act was signed into law in 2008. SAFE required mortgage loan originators to be licensed and registered.

The intention was to create uniform licensing standards nationwide, where previously they had differed by state.

However, it made it “incredibly cumbersome” to become licensed in a multi-

jurisdiction basis. So Econohomes stopped selling to owner-occupants.

The company shifted, focusing instead on selling properties to small investors. Its executives saw an “interesting opportunity” to finance small investors who buy distressed properties, renovate them and then either sell them to an owner-occupant or rent them. To date, Econohomes has bought and sold about 11,000 single-family properties around the country, the vast majority of those for less than $100,000.

“We felt like we had ‘a better mousetrap’ around understanding the wholesale value of property,” says Ball. “Also,

we had a disposition platform that if we made a loan, and the borrower failed to pay us and we had to foreclose, we had a ready-built distribution platform to re-sell that property.”

That’s an advantage over other lenders who would be stuck if they ended up owning the collateral. The company is differentiated as a private lender by offering “speed, simplicity and certainty.”

The lending criteria are clearly identified on Visio’s website so investors can quickly determine if they meet the requirements and can get their loan.

The company only asks for a handful of

items, including two forms of ID, insurance, title policy, property address and 35 percent down. They don’t bother with pay stubs, tax returns, bank statements, investment history or even a business plan. Interest rates are based on FICO credit scores.

“There’s essentially no funding risk, meaning we never fail to fund a loan, because we’re fully capitalized to fund loans,” says Ball, adding that’s in contrast to many private lenders who fail to fund loans because they become overextended.

Ball predicts private lending is heading to a more automated underwriting process. In the ideal world, he envisions a day when investors drive by a good property and park for a moment to check out his app, fill in information about purchase price and credit score (or better yet, already have a Visio account). Then the system works in the background to pull information about that property.

The investor learns—in real time—what kind of financing he or she can get and clicks a button to apply.

FUTURE OF PRIVATE LENDING

ROLE OF TECH

Historically, Ball says, obtaining private loans was an opaque process. Investors needed to know the right people. And lenders tended to be “capital-limited” so one month loans might be paid off and they had capital but another month they might lack funds.

Also, private lenders typically require a ton of paperwork. They ask investors to describe their project, answer questions about their background, experience, the property and future plans for that property. Then they get the property appraised, examine the business plan and assess the cost, timeline and exit strategy. Also, they like to see the last five deals an investor has done so that they can check city records.

After reviewing all that information, the private lender tells the investor what loan it will make, how much down is required, what the rate and points will be and what the construction advance will be.

“That introduces a tremendous amount of uncertainty,” says Ball, “because investors are spending all that time working up the project, and they don’t even know if they’re going to get the financing, or on what terms.”

Early this year, Visio raised $6.7 million in a Series B round of funding to advance its technology platform and increase the number of short- and long-term loan options available to residential real estate investors building small businesses. In the company’s announcement, Ball said the goal was “to quickly and efficiently connect investors with capital providers by offering loan products tailored to real estate investors’ needs.” To date, the company has raised more than $100 million in debt and equity capital to provide real estate loans to investors in 34 states.

Ball says technology can enhance customer engagement. For example, typical mortgage applicants don’t apply online.

“I think there is a growing desire for people to transact in commerce at all times—and most real estate investors are part-time,” says Ball.

So technology and an automated underwriting engine are attractive to them.

“We now have the advantage of having made nearly 3,000 loans, and more than half of those have already paid off. So we actually have a lot of performance data as to how loans have performed. So, we’re using data science to learn from that data P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

| 21

COVER STORY

Master Investor

set and help us more quickly and more accurately underwrite future loans.”

Ball adds they’re approaching a little over $80 million in originations.

LESSONS TO THE WISE

“I think one of the most clarifying questions that somebody can ask,” says Ball, “is, ‘Knowing what I know right now, would I make the same decision that I have been making?’ Too often investors fall into the mode of just doing what they have been doing. They look at the time, effort and money they’ve invested and stay the course— when instead, they need to assess if they should make adjustments since the real estate market is cyclical.

“To be successful, they have to look and really measure over an entire real estate cycle. So you need to have a little bit longer-term horizon, and you also have to develop a multifaceted strategy,” says Ball.

A fix-and-flip investor may do well until the market changes and he or she is forced to pay more to buy a property—the result being gross margins compress on the resale of the property. Ball says that “early indicator of trouble” should signal the need to consider another strategy.

“It sounds like a cliché, but wealth is built over time,” says Ball.

Ball says surveys of his database show most people are income-oriented. Other people are wealth-oriented—yet that requires patience over time when it comes to real estate investing.

“There are no get-rich-quick schemes that really work. So, what that really translates into is going into transactions with reasonable expectations,” says Ball.

“It’s rare in our economy because it’s something that’s very well-developed. It’s 22 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

rare that you just have these abnormally large returns on things.”

BUILD A SOLID TEAM

Universally, Ball and team look for employees and partners who are continual learners, rather than people who just want to do what they’ve always done. He seeks good communicators, specifically those with well-developed listening skills.

At the senior level, they look for “athletes,” or those with demonstrated ability and versatility to take on different challenges. For example, the CFO by title also has an extensive operations background, is experienced in capital market transactions and can play a variety of roles.

COMMUNITY WORK

Econohomes and Visio have a history of community work, especially with nonprofits that help the homeless. Employees have been active for five years in Austin’s Mobile Loaves & Fishes, which provides food, clothing and other necessities to the homeless. Also, the nonprofit is providing affordable housing through its Community First! Village, a 27-acre master-planned community of sustainable housing for the disabled and chronically homeless in Central Texas.

“It’s really the first of its kind in the country, built around the premise of the chronically homeless and those who really need an alternative community to live in with like-minded individuals,” says Ball.

Whether it’s high-quality tent structures, refurbished trailers or tiny houses, they’re “awesome, permanent” structures that break new ground for the homeless— fitting volunteer work for Ball and Visio and Econohomes employees who are accustomed to breaking new ground.

BY SUSAN THOMAS SPRINGER Susan Thomas Springer is a regular freelance contributor to Personal Real Estate Investor Magazine.

Contact her at susan@susantspringer.com.

UP CLOSE & PERSONAL

CASE STUDY

THE NATIONAL REAL ESTATE INSURANCE GROUP OFFERS SERVICE TAILORED TO AN OVERLOOKED PART OF THE INDUSTRY.

Insurance Designed For Investors, By Investors I

n less than five years, the National Real Estate Insurance Group has become one of the industry’s leading choices for coverage—just by simplifying the process of insuring investment properties.

The Kansas City-based company provides coverage to residential real estate investors in all 50 states, whether their properties are occupied, vacant or undergoing rehab. And customers are responding: Since late 2010, NREIG’s total insured value has climbed to $2.7 billion.

The type of coverage that NREIG offers isn’t radically different from that of other providers, president Tim Norris said.

“The ‘what’ we do isn’t really any different from what State Farm or what an independent company does,” Norris said.

“It’s how we do it.”

That means delivering coverage that’s tailored to each client’s portfolio, on a monthto-month basis with minimal

down payment. Customer service is fast and focused on the unique needs of small to midsize real estate investors.

24 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

NREIG’S PROGRAM IN ACTION

Let’s say an investor owns 15 properties. Ten are occupied

by tenants, three are vacant and two are being rehabbed.

That investor might need to buy three different policies because the different phases of occupancy represent different levels of risk.

Even more frustrating, the investor might have to deal with an additional insurance company because his regular insurer doesn’t offer coverage for vacant or rehab properties.

For someone with a larger portfolio—especially one with fix-and-flips or regular tenant turnover—the process of updating insurance can be a time-consuming chore.

i “The time, energy and effort it takes to manage renewals, endorsements and policy changes with a standard carrier is cumbersome.

If you don’t keep current, it just snowballs,” said Juli Vaupell, vice president at Affinity Group Management.

AGM is an affiliated company that handles billing, reporting, client service and all other administrative support for NREIG’s program. In a nutshell, NREIG sells coverage, while AGM services it. “The administrative ease of our monthly reporting takes insurance policy tracking down to a minimum,” Vaupell said.

NREIG offer its customers a single point of contact. It provides coverage for all stages of the occupancy cycle. And if an investor sells a property or a rental home becomes vacant, it’s easy to update coverage to reflect that.

“With us, we can insure all those month-to-month,” Norris said, “and if they change, you just have to pay a rate appropriate to what you have at risk that month.”

The convenience is the single biggest draw for NREIG’s customers, said Shawn Woedl, the company’s vice president of sales. If a client is going to a closing and needs a certificate of coverage ASAP, NREIG can make it happen.

Plus, there’s no longterm commitment.

Many traditional insurance companies refuse to offer coverage for less than six months and insist on payment up front. If the property is flipped before then, the rehabber might be able to cancel the policy, but won’t get a refund in many cases.

That’s not how it works with NREIG. “You truly only have to pay for the coverage you need,” Woedl said.

HIT ‘EM WHERE THEY AIN’T

National Real Estate Insurance Group is the result of a merger between Norris’ and business partner Mike Wrenn’s operations. Each offered cover-

age for the residential real estate market, but with a different emphasis. Wrenn focused on short-term coverage targeted to rehabbers, while Norris primarily served landlords with an ongoing need for insurance.

“I wanted to deal with the landlords, I wanted to talk to the folks who had 40 houses that needed insurance,” Norris said. “Mike had a program that focused on the unique insurance needs of renovators and rehabbers.”

Through his work, Norris encountered several investors who needed short-term policies like the ones that Wrenn specialized in.

At a trade show, Norris approached Wrenn about referring those clients to Wrenn’s program. They realized that combining operations could allow them to serve a part of the market that most insurers were overlooking.

“If you’ve got 10 rental houses and they’re always rented, they’re in Smalltown USA and you’ve been with State Farm for 15 years, they love you,” Norris said. “If you’ve got two or three rental houses, and your home, your car and your boat—State Farm, Allstate, they love you.

“You get 40 rental houses, and State Farm doesn’t really want to deal with you.”

And large insurers don’t care much about midsize investors, either.

The NREIG executive team, back row from left: Rick Abell, Tim Norris, Tom Rubadue and Eddie Wilson. Front: Shawn Woedl and Juli Vaupell.

ABOUT THE COMPANY NATIONAL REAL ESTATE INSURANCE GROUP, LLC is the

insurance agency for the program described here. Designed for the unique insurance needs of the residential real estate investor industry, it has been serviced and administered by Affinity Group Management, LLC since 2006. Fully insured, this program offers coverages that are underwritten by insurers such as Lloyds of London, Allianz and others. The underwriting insurers adjudicate all claims according to the policy terms and conditions.

PHONE 888-741-8454 WEB www.nreinsurance.com

“To them, you’re small potatoes,” Norris said. “If you’re not generating a quartermillion dollars of premium, they’re not messing with you.

“So there’s this space out there where it’s like the saying goes: ‘Hit’ em where they ain’t.’”

THE HITS KEEP COMING

While business is booming, NREIG is determined not to coast on its success. The company continues working to make its service even more convenient for clients.

For example, Affinity Group Management is developing a soon-to-debut online portal where clients can easily update the state of their portfolios, download documents and more. That should make it even faster and simpler to manage coverage.

P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

| 25

The AGM team. Photos courtesy of CHB Photography and Danielle Marie Photography.

To enhance the client experience, NREIG has partnered with two companies: Affinity Claims Management (ACM) and Affinity Loss Prevention Services (ALPS).

Although NREIG’s program does not adjudicate claims in

any manner, ACM provides assistance to participants who experience a loss. ACM’s primary purpose is to help clients navigate the oftenconfusing claims process.

ALPS is committed to helping clients reduce the frequency

and severity of avoidable losses. Its educational message is delivered through monthly newsletters, print materials and social media and covers items ranging from preventing frozen pipes to deterring theft.

The company also is rolling out a new Tenant Protector Plan for landlords, in lieu of individual tenants buying their own renters insurance, Vaupell said.

And it’s continuing to grow its year-old retail program.

NREIG is partnering with select insurance agencies that might have solid home and auto insurance programs, but don’t really possess the products or experience that

some of their investmentproperty-owning clients require. Those agencies can refer clients to NREIG to offer coverage.

The ultimate goal is to deliver a product and a service that truly meet investors’ needs. After all, NREIG’s owners are real estate investors themselves. They know exactly what kinds of challenges their clients are facing.

“I think we’ve built the most investor-friendly insurance program,” Woedl said.

BY JAMES HART James Hart is senior staff writer at Personal Real Estate Investor Magazine.

Contact him at jhart@ithinkbigger.com.

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UP CLOSE & PERSONAL

WEEKEND INVESTOR

TO A BEGINNING INVESTOR, THE IDEA OF TAKING THAT FIRST STEP CAN BE PARALYZING. HOW DO YOU MOVE?

7 Ways to Overcome the Fear of Buying Your First Rental Property

W

hen I was still in the corporate world and just beginning my career as a part-time real estate investor, I started by purchasing a single rental property. It was a very simple, lowrisk approach.

Like many would-be investors, I was fearful of taking that first step—buying that first investment property.

Here are the seven ways I overcame the fear factor, bought my first investment property and then moved on to build a profitable portfolio of rental properties.

N0. 1

I CHOSE TO STAY

WITH WHAT WAS FAMILIAR

I started in markets I knew and understood, and I stayed close to my home with my first purchase. I didn’t venture out to unknown markets where I didn’t know the property values, the rent values or the

good and bad parts of the neighborhoods. I stayed where I was comfortable.

I BOUGHT RIGHT OFF THE MLS N0. 2

To most real estate investors, it may sound shocking—or at least very untraditional—to hear that I bought right off the Multiple Listing Service. But I am here to tell you that for first-time investors, that may be the only option or place you know to go, or can go. I contacted a Realtor and told him what I wanted, where I wanted the property, and why I wanted it—for investment purposes. That Realtor went to work immediately, and I bought a property directly off the MLS. Yes, you can get great deals that way, and investors—both new and tenured ones—do it every day. You may have to be a little more patient, negotiate

a little harder, and you may have to move a little quicker.

But those deals are out there and attainable, especially if you are looking for rental properties.

N0. 3 I BOUGHT AN AFFORDABLE PROPERTY

I did not have to be the hero and buy the fancy house. I resisted the temptation to buy a house that I wanted to live in.

A lot of times I see new investors or young investors think they can only buy the familiar—what they are used to or what they themselves would live in. Quite often those would not be the best investment properties or they may be too expensive for an investment.

You should not be afraid to buy a house that does not appeal to your needs or your

immediate lifestyle, but instead will appeal to a larger market of tenants.

I KNEW MY NUMBERS GOING IN N0. 4

Don’t think that your very first investment property purchase has to be one that is tremendously below market value. Yes, that would be great.

And yes, that will happen with time and experience. But you can find good rental properties that will cash-flow just fine, and the numbers will be perfect, and they don’t have to be 20 percent, 30 percent or 40 percent below market value in order for those numbers to work.

If you—as a novice investor with limited resources, limited time or a limited network—are focused on finding that “home run” of a deal, you may never

EDITOR’S NOTE Kevin Guz began his real estate investing career the way many others start—an hour here, another there … in other words, as a “weekend investor.”

Some want to develop their passion into a full-time career; others prefer to maintain their current jobs while pursuing investing part-time. But all know the value of real estate investing and want to hone their expertise. Kevin Guz can show you how. In addition to this regular magazine column, he shares his tips each week on our website, www.PersonalRealEstateInvestorMag.com.

28 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

take that first step and buy a property. You may not have the visibility or accessibility to get to those below-marketvalue properties initially. That will come with time as you build your network. You do not need to be there on your first property.

Buy a property that cashflows. You are just looking for a property where your monthly expenses are less than the monthly rental rates. If you know your rental rates and your monthly expenses—principal, interest, taxes, insurance and maintenance—you are going to get a cash-flowing property I RESISTED BUYING AT EXTREMELY N0. 5

BELOW-MARKET VALUE

Buying below market value is great if you have the skills, resources, time or the money.

But don’t let that be the thing that keeps you from buying your first investment property.

There are plenty of turnkey rentals out there for sale, and they are literally ready for rent. Don’t forgo taking your first step because you are not handy, or because you don’t know how to fix or repair a property and you think that is the only type of property you can buy. That’s not true. There are plenty of turnkey rental properties out there you can buy and rent immediately.

I KNEW I HAD OPTIONS IN MANAGING A RENTAL PROPERTY N0. 6

There are two options there: For one property, you can probably manage it yourself, and it will probably be a real good learning experience.

That’s what I have done and continue to do.

However, if that’s just not your bag of tricks, there are plenty of excellent property managers out there. So don’t let the fact that you don’t know how to manage a property be the obstacle to your taking that first step and purchasing one. You can learn. Or you can pay somebody to do it. There are plenty of people who will do it for you at a nominal fee and still allow you to have a profitable investment.

I WAS NOT AFRAID OF REPAIRS N0. 7

Making repairs (maintenance) is similar to property management. You can do them yourself, and when I had one property, my first property, I did.

Or you can find contractors to do those repairs for you.

But don’t let the fact that you are not handy with a hammer or a paintbrush scare you away from taking that first step.

There are plenty of people out there to do the work for you, quickly and affordably with quality. Or you may be able to do it yourself on nights and weekends. You will be surprised what you are capable of doing and how little time it takes and how little cost you incur.

BEYOND THE ‘BUY’

Maybe you don’t fear buying the first property, so much as you fear marketing it. Sometimes the proverbial “next step” after buying the property is where the fear lies, and that is what stops the investor from buying in the first place.

30 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

You may know exactly what you want to do first: for instance, “I want to buy a three-bedroom, two-bath brick house in this particular neighborhood, five miles from my house, and I want to spend ‘this much,’ and I am

there, you will see farther. That is exactly what I have experienced as I have built my rental portfolio over the past 15 years from one property to many.

I still have that first property that I bought 15 years ago. It’s fully paid for, by my tenants.

TO OVERCOME THE FEAR OF AN ACTION, GO AS FAR AS YOU CAN SEE, AND WHEN YOU GET THERE, YOU WILL SEE FARTHER.

going to rent it for ‘this much.’”

Perfect. You know what you want to do, but you don’t take that step because you have a fear of the unknown, which lies in being afraid of marketing the property.

“How will I ever find a renter?” you may ask. Or, “I don’t have the time or patience,” or “I don’t want to run the risk the property will be vacant.”

I have been able to market properties very simply by placing a sign in the yard. And I will venture to say you will have just as much success as I have had, whether you use a sign, Craigslist, or list them with a Realtor for rent.

Those are three great options that will create quick and profitable results for you.

You can do it. You just have to get to that step in the process.

I was once told that to overcome the fear of an action, you need to go as far as you can see, and when you get

And it continues to generate a healthy profit—month in and month out. It’s been a wonderful investment, but it also was my most inexpert and uninformed investment. But I kept to the principles I have mentioned here. I kept things simple, and I was able to find success in that first investment and many beyond.

So can you, as a new or novice investor.

BY KEVIN GUZ Kevin Guz is a HomeVestors franchisee in Dallas and a real estate entrepreneur involved in all aspects of business venture startup and expansion, real estate investment, asset procurement, wholesaling, repurposing, retailing, financing and property management. He is a licensed real estate agent in the state of Texas and uses his business education, corporate experience and a broad real estate background to assist individuals with buying, selling and investing in residential real estate.

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COMPANY PROFILE

JOE SCURLOCK AND CHRIS UNDERWOOD ARE STILL FINDING BIG OPPORTUNITIES IN FLORIDA FORECLOSURE PROPERTIES.

Sunny Conditions in Florida W

hen Chris Underwood and Joe Scurlock of Florida’s HomeStream LLC started the year, they set a goal of buying, rehabbing and selling at least 100 foreclosure properties before Dec. 31.

They passed that milestone in June. Now, Scurlock and Underwood are on pace to complete between 200 and 250 deals by year’s end.

Nationally, the number of flipped homes acquired through foreclosure dropped in the second quarter of this year—in fact, they were at their lowest level since late 2007, RealtyTrac reported. Florida cities, however, continue to rank among the nation’s leaders for this kind of deal.

“The Florida foreclosure market has been strong,” said Scurlock, whose experience includes more than 16 years in the mortgage industry. “It’s been consistent. I know in other markets it’s tapered off, but in Florida, it’s really strong.”

The two investors have been in business together for a little over a year, but they had been acquainted for a few years before that. Scurlock was an investor who was working as

a bank representative at several foreclosure sales, while Underwood was flipping about 50 to 70 houses per year.

“Chris and I were just two individual investors who had been working in the same county for five years,” Scurlock said.

By teaming up as HomeStream—and partnering with Gorilla Capital, an Oregon-based firm that offers funding and technical support to fix-and-flip operations—

32 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

they’ve been able to quickly scale up their business.

“We don’t see any dry-up,” Underwood said. “We don’t see any slowdown.”

THESE COUNTIES ARE JUST COMFORTABLE FOR US

HomeStream focuses on five counties in central Florida. The area includes a mix of rural and midsize communities, Scurlock said. Tourism is a major indus-

try, and the overall region is popular with retirees.

“Our counties are a lot of retirement, seasonal, golf course communities,” Underwood said.

Because their families live in these counties, Underwood and Scurlock have an advantage when it comes to investing.

“These counties are just comfortable for us,” Scurlock said. “We didn’t have to do a bunch of research about whether these counties would be productive for us.”

HomeStream’s five-county coverage area lies outside Orlando-Kissimmee, a major population center, but Underwood and Scurlock decided to stick with the outer areas because there’s less competition.

“We intentionally stay out of the Orlando-Kissimmee area because there are so many investors, and there’s a huge number of hedge funds operating in that county,” Scurlock said.

Each partner brings a different strength to HomeStream.

“Chris is really strong on doing rehabs and research on the marketplace,” Scurlock

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said. “I think I do a great job on the marketing side and selling the product.”

Working with an outside firm like Gorilla, which specializes in scaling up fix-and-flip operations, was key, too. “They’ve

has title or lien issues. The night before an auction, they run comparables on all the properties that will be up for sale. That lets them know how much each home could bring once it has been rehabbed.

THE NO. 1 WAY TO AVOID LOSING YOUR SHIRT? RESEARCH, RESEARCH, RESEARCH.

let us scale up faster than most people,” Underwood said.

3 KEYS FOR SUCCESS

There are great opportunities in foreclosure properties, but it’s very easy for inexperienced investors to walk into a bad deal, Scurlock and Underwood said. The No. 1 way to avoid losing your shirt?

“I’ll tell you right now: research, research, research,” Scurlock said. “You can’t overemphasize that. You really need to do your due diligence prior to a sale.”

Underwood and Scurlock have a team of four scouts who visit the properties about a week before a sale. They take photos, look in windows and gather as much information as possible for a written report on each house’s condition.

“If a house needs a roof,” Scurlock said, “we’re going to know a week before the sale.”

The team also will research whether a potential purchase

“Here’s what the retail value of that asset is, and we know it needs X amount of dollars in rehab,” Scurlock said. “Then we determine our price.”

The second key is building a team of hard-working, reliable contractors, Underwood said.

“We’ve got a fantastic group in place, but we had to go through a lot of people.”

And finally, thanks to hardearned experience, they possess a very clear idea of how much it will cost to fix up each property. They don’t underestimate costs that could end up erasing their margin on a deal.

“At first, we would look at pictures and say, ‘Oh, that’s a $10,000 rehab,’” Scurlock said. “And it turned out to be a $20,000 rehab.”

FINDING THE RIGHT FIT

While Scurlock and Underwood have been very successful, they also have had a few learning experiences along the way.

34 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

“When we first started buying,” Scurlock said, “we would buy anything that was a deal.”

As long as a property had the potential for a nice margin, they were game. That led to buying some $300,000 houses, which were profitable, but also required three times as much rehab work as a $100,000 house. The high-dollar homes took longer to sell, too, tying up capital.

They decided to focus on properties that sell for $80,000 to $150,000—very close to the fair median prices for those counties, while still creating an attractive product. That means installing new flooring and new appliances.

Scurlock and Underwood post houses on their website as soon as they’ve acquired the property because real estate agents, impressed with the quality of the rehabs, closely watch what they have for sale.

Several will reach out and ask when a particular home will be available, Scurlock said.

More than a few properties have been sold before they’ve been fully rehabbed.

“I don’t want to sit on a house,” Scurlock said. “When we list a house, we want it in a contract in a week.”

The good news is that demand is strong. Even though recent banking regulations make it harder for some buyers to get financing, “there are buyers out there,” Underwood said. “There’s a lot of money moving through the real estate market right now.”

While most of HomeStream’s properties are sold to people who will live in the homes,

another 10 percent are purchased by property investors.

Some properties perform so strongly as rentals that Underwood and Scurlock are thinking about holding onto more of the houses they rehab.

“That really expands our business model,” Scurlock said.

THIS IS GOING TO BE A GREAT ASSET

Working with foreclosure properties has been profitable, but Underwood and Scurlock also are proud of their work’s impact on the community.

They take houses that, in most cases, are dilapidated and sitting empty, and they turn them back into beautiful homes.

Neighboring property owners will call whenever they find out HomeStream has bought a house on their street.

“I get these phone calls constantly,” Scurlock said. “And I say, ‘We just acquired the asset. I’m going to have someone come out there this week and cut the grass, and when all is said and done, this is going to be a great asset.’”

HomeStream wants to do a great job because this is their community, too, Scurlock said.

“We take something that was really ugly in the neighborhood, and we turn it around and make it beautiful,” he said.

PHONE 541-280-6777 :: WEB www.homestream.com

BY JAMES HART James Hart is senior staff writer at Personal Real Estate Investor Magazine.

Contact him at jhart@ithinkbigger.com.

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UP CLOSE & PERSONAL

STREET SMART

WHAT IS THE KEY TO INCREASING YOUR RATES WITHOUT LOSING EXISTING TENANTS?

Raising the Rent I find this month’s topic pretty fascinating. Many years ago I was a poor young man with no extra money. My family was able to move out of an apartment and into a two-bedroom house. The rent was $200, and it never changed the entire time we lived there. We paid the owner promptly each and every month. We actually installed carpeting without telling him or asking to be reimbursed. Over the next three years we were able to save enough money to buy a home. I have never forgotten that experience.

During the downturn I acquired rentals. We chose to fix them up just like our resale rehabs. That meant granite PRESIDENT in the bathrooms! When someone moved into one of THE NORRIS GROUP my houses, it was the nicest place they had ever lived.

The typical rent was $1,200 in 2009, so that’s what we charged. My understanding is that over time rent has escalated to about $1,400 for the same house. I never bothered to check; I had no intention of raising the rents. Perhaps one of the reasons was I expected most of my gain to come from an increase in the value of the house.

BRUCE NORRIS

I often bought the typical rental for under $100,000, including rehab cost. I have one of them pending right now for $242,500. The home needed only $6,000 of work to be put in perfect, resale condition after four years with the same renters. In other words, these renters took care of my asset!

We never discussed it, but I think they must have appreciated three things during their stay. Number one was the condition of the property when they moved in. Number two was the speed of which we dealt with anything that was ever wrong with the property (not very often). Number three, they never received a rent raise.

Yes, I could have extracted another $1,000 a year or even $2,000 a year from the properties if I had been diligent in raising rents. But because of an experience many years ago, I chose to return the favor.

You have to know the area you manage—this is key! Relying solely on rental comps is only a portion of this.

Having years of experience and AIMEE BAHK knowledge of AGENT the area where FLORIDA WEST my rentals are COAST PROPERTY located allows MANAGEMENT me to decipher when the time is right for a rental increase. For example, a specific community might offer various in-demand amenities like shopping, dining or a good school district that would merit higher rental rates.

When prospective tenants are looking for a new home, I normally see them look at price first, then amenities and who is managing the unit (this is recent). Pricing a unit correctly is part science (i.e., comps) and part art (i.e., aesthetics).

At the renewal time, reach out to the tenant and open the line of communication to discuss the benefits of staying in the area. If the tenants are planning to renew, do your homework! Don’t ramble off a rental price increase without reevaluating the science and art I mentioned earlier.

When you know the proposed rent increase, set up a time with the tenants and treat them with respect and explain the “why.” If you have done your homework, they will know that they are still getting a good rate and will not shop around.

PHONE :: 800-625-4794

PHONE :: 951-780-5856 WEB :: www.thenorrisgroup.com

36 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

WEB :: www.floridawestcoastpropertymanagement.com

I believe rental properties are a business like any other and therefore, topline revenue and bottom-line profit must be managed accordingly.

When it comes DAN HAYES to raising rents, I PRESIDENT consistently look REAL PROPERTY for the opporMANAGEMENT SOLUTIONS tunity to raise rents to drive better top-line revenue performance while being mindful of the negative profit impact a vacancy can create. Typically, this opportunity presents itself during a lease renewal or when a lease ends.

Without exception, I will conduct a market analysis no less than once per year for each property I own or manage for others.

When deciding how much to raise rents, I look at three primary factors: 1 What is the market doing? I have a 1

few tools I use to understand what rents are doing, down to the ZIP code level, in the markets I serve. Are they going up or down and for what geography? If the market moves, we move our rents with it.

2 What is happening with costs that

my competitors are likely also experiencing? If the cost of doing business is going up, so should rents.

3 How likely are the tenants to

vacate because of the proposed rent increase? Typically, if the cost to move is greater than the cost of the rent increase, we are successful in keeping the tenant.

We look at a number of factors in deciding whether to raise our rental rate. We own and operate a wide range of residential SEAN WALTERS properties from multifamOWNER ily apartment W GROUP HOLDINGS, LLC properties to luxury single-family homes and townhomes, so we always look at it on a property-by-property, tenant-by-tenant basis.

While as a company, we are always looking for ways to increase our revenue, we are careful to not at the same time force turnover in our properties as a result. We always look at a number of factors, such as where current market rents for the immediate area are for similar units as well as the behavior of the particular tenant during his or her time living in our unit.

We are always focused on minimizing turnover. Therefore, if a tenant is well behaved and takes care of the property, we may only look for a very small increase in the rent unless market rents in the immediate area have experienced large increases.

We also normally will give an initial phone call to them to explain why it is being increased (i.e., due to our operational costs increasing, etc.). Ideally, it is always best to make a courtesy call to the tenant before he or she receives the notice via mail regarding the increase.

In Memphis, we have a strong rental market, and demand right now is high, while inventory is in short supply.

As long as your single-family property is nice, JASON ARMS clean and in livable condition, LEASING AND SALES CONSULTANT it rents quickly.

MEMPHIS If it’s in a good AREA RENTALS area and a little nicer than surrounding homes, you can ask for and get a premium rent, within reason.

Since our goal in property management is to keep the cash coming in and limit the expenses going out, it might seem logical to raise the rent from time to time. But the value of a great tenant may well be worth keeping the rent the same.

If you do want to ask for more rent, find additional ways to create more value for the tenant, such as with easy property upgrades. Ceiling fans, kitchen back splashes and upgraded bathroom vanities are just a few examples that will add that “wow!” factor to make your property stand out and be in more demand.

Most tenants just want to know that you care about them as much as you care about the home. If your property management company gives you that “warm and fuzzy” feeling, it will most likely do the same with the tenant.

Tenant satisfaction and maintaining quality home condition are the two most important factors toward ensuring a steady income stream.

PHONE :: 724-940-9119

PHONE :: 503-224-3002

PHONE :: 901-591-7368

WEB :: www.wgroupholdings.com

WEB :: www.realpmsolutions.com

WEB :: www.memphisarearentals.com

P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

| 37

UP CLOSE & PERSONAL

ONE-TO-ONE

A CONVERSATION WITH JACK BEVIER OF THE DOMINION GROUP.

The Changing Landscape of Hard Money Lending S

ince its founding in 2002, The Dominion Group has seen its share of ups and downs in the personal real estate investing world and is one of only a few companies to survive the latest downturn and recession. In this Q&A with Personal Real Estate Investor Magazine Editor-in-Chief Linda Wienandt, Dominion Group partner Jack BeVier discusses how the private money lending arena has changed.

LINDA WIENANDT

The real estate investment lending space has undergone quite a transformation since Dominion Financial Services first started. In fact, the landscape has shifted dramatically even in the last couple years. How are things looking now?

JACK BEVIER Over the last 18 months or so, we’ve seen a lot more competition into the market in the hard money side, which is great, from a flipper’s point of view.

There’s a lot more access to hard money loans today than

there ever has been before. So while it’s really hard for a real estate investor to find a great deal, because of the immense amount of competition in the market, it’s also easier today than it ever has been before to get your deal funded when you do find a good one.

The number of hard money lenders really had dwindled after the downturn and start of the recession. What changed, to cause such an abundance of them in the space now?

Going back to 2011, that’s when the larger, institutional investors started to get comfortable with the single-family product and started buying houses themselves. Real estate prices have been going up since then, and this institutional money can’t find the same yields that it used to be able to.

Meanwhile, as they’ve gotten comfortable with the single-family asset class, they’ve really demystified the whole hard money space. They’re thinking, “Yeah, we know how to buy houses; we should certainly be able to lend on

38 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

houses…” and so some of those same pools of institutional money have actually moved into the hard money business. That came to fruition toward the middle of last year, when a lot more entrants came into the market, and now the situation is shaking out in a couple different ways.

There are lots of different companies out there now that can get your deal funded, and they’ve all got their nuances to them.

Crowdfunding platforms certainly are becoming more prominent.

Yes, there’s the emergence of crowdfunding as a big source of financing for deals. Those companies’ model is the technology track, and they see this basically as an underserved market where a lender can get attractive yields.

Their idea is, “We’ll create an online platform and make it easy for an investor to input the details of his deal, and then we’ll use crowdfunding as the way to get that deal funded.”

It really kind of democratizes hard money lending so that an

investor can put $5,000 into a deal rather than having to fund the whole deal himself.

In a sense, anyone can be a hard money lender now.

These crowdfunding groups are all brand new to the hard money space over the past 18 months.

And aside from the crowdfunding platforms?

The other main approach has basically been taking somebody with some hard money experience and giving them a lot of money and saying, “Hey, what you’re doing is working; scale it up, and become a national hard money lender.”

There are maybe five or 10 companies that are jockeying for position in that space right now who have all, over the past 18 months, secured institutional financing and now they’re out there trying to grow their platforms … increase their origination volume, set their platform up all over the country, really.

Some of these platforms for institutional money have been around longer than others.

downturn, so they’ve never There are some guys who just seen a down cycle, they don’t got into the market a year or have workout groups, two ago, and some have been around since they’ve never had to deal with more the market turned, than a handful back in 2007of defaulted 2008, but there loans. They’ve also are some never had to platforms like go through a ours that have borrower declarbeen around for a Jack BeVier ing bankruptcy. couple cycles now.

And from their The market seems to be investors’ point of view, I think becoming pretty saturated. those platforms certainly Is there a downside to so have some weakness if many players? and when—when—we see That’s definitely a concern. another downturn, so yes, With increased competition, from an investor’s point of there is pressure to be more view I think that’s a concernflexible in underwriting staning thing to get with a new dards. I’d say over the past company and you think you’re 18 months, for the first time developing a relationship in a long time, we’re actually with a lender and then three seeing some 100 percent deals years from now, that lender is get done, where the hard no longer in business. You’ve money lenders are funding wasted three years of relation100 percent of the acquisition ship-building opportunity. for their borrowers.

That’s disturbing from a macro point of view, but no one’s lost money in the hard money business since 2009.

The market’s been stable-togood, and in a stable-to-up environment, hard money is a good business. In a down environment, you can fall on your face really quickly.

Is the inexperience of so many of these companies worrisome to you?

Well, we certainly are seeing some companies pop up who have not been through multiple cycles.

I think most of the hard money lenders out there right now were formed after the

to be around for the next cycle as well. Keep in mind that if your lender is giving you 100 percent financing, he’s giving other investors 100 percent financing. Is that a good business practice in the long-run?

I think 2006 proved to us all that’s not a sound credit policy.

Another theme we’re seeing is that because institutional money, by nature, wants you to scale, there is pressure to scale, and if you scale too quickly, you may not have the necessary systems in place, which will hurt you badly in a downturn.

Another thing that tends to happen is that the bigger you get and the more loans you do, the more a borrower becomes just a file number as opposed to a person, and then the lender starts to just check boxes in the underwriting process.

The lender loses touch with its business, and the investor loses that relationship aspect of the business that’s so important.

Is there a question of misrepresentation on the part of these new lenders?

Why is that so disturbing?

No, I don’t think that’s a major problem. Right now, all the companies can get your deal funded. They all work; the question is, what are the pros and cons to the lender that you work with?

If you go with most aggressive quote, it may be good for your current deal, but from the viewpoint of the investors, they should keep in mind that they are to a certain extent “picking a horse,” and if they plan on being around for the next cycle, they should make sure that their lender is going

In the past, hard money has always been a very relationship-oriented business and one of the things that we’re very concerned about is that as hard money scales, you’re going to lose that service aspect of the business.

And in our opinion, what has always been kind of the foundation of the business is high service lending, someone who understands your business model, who can be flexible on terms, who’ll create a structure that works for your deal, and who remembers you

when you come around for the next deal and who’s able to … when you need a deal funded this Friday, get that done … someone who can jump through the necessary hoops to get your deal done.

Right now, the hard money lending space is not consistently regulated from state to state. Do you see that changing as a result of the trend to scale?

It’s true that the hard money business is largely unregulated in most states, but in my opinion it’s not a problem, because it’s business-to-business rather than consumer lending.

i THE DOMINION GROUP Founded in 2002, THE DOMINION GROUP family of

affiliated companies focuses on the affordable housing market and is a fully integrated firm with extensive experience acquiring, renovating, leasing, managing and selling single-family homes.

Dominion is headquartered in Baltimore, Maryland, and led by Fred Lewis, CEO and Principal/ Founder, and Jack BeVier, Partner/Acquisitions & Business Development. Its primary divisions are Dominion Properties, LLC; Dominion Financial Services, LLC; and Dominion Management, LLC. PHONE 410-727-0908 WEB www.DominionPrivateLending.com

P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

| 39

The idea is that the borrower is sophisticated. Most of this lending is to flippers, as opposed to on rental properties—at least, what I’m talking about here. The rental property space is kind of its own conversation.

Outside of situations where lenders are engaging in outright usury, I don’t think we’ve seen a lot of negative fallout that would infer the need for regulation. If anything, having this many entrants in the market is actually pushing hard money pricing down. Yields are dropping, I would say, in general across the market, because borrowers can go get two, three competitive bids now.

That’s good from a borrower’s view; they can actually now shop, which was unheard of even two years ago. I mean, hard money shopping … you just couldn’t even do that; that wasn’t realistic.

Competition is good. Competition should keep our peers in line.

Are there ways an investor who is not familiar with these many, many different lenders is able to identify the good from the not-so-good?

I wouldn’t say that there is a particular problem with “bad seeds” in the industry.

What I would say, is that the newer entrants in the market are still figuring the game out, so I don’t know what kind of consistency investors are going to find over time with someone who’s brand new to the market.

Any tips, then?

Certainly, from the investor’s point of view, or someone who’s flipping a house, I would avoid up-front fees. Because I don’t think you need to pay them right now. I think there are enough lenders out there who want to do your deal that you don’t need to pay for access.

I think you should be looking for a hard money lender who

to be able to provide to you is going to be handicapped.

There are all kinds of little nuances that pop up in the course of this business.

And the rules—or at least the application of the rules— change over time. So working with someone who’s very active in the business, they can help you foresee potential problem areas and avoid any

COMPETITION IS GOOD. COMPETITION SHOULD KEEP OUR PEERS IN LINE.

gets paid when your deal gets funded and not before—period.

“11th hour” kind of drama that can surprise you at the closing table.

How about tenure in the hard money space?

Any other big considerations?

I do think it’s very important that a hard money lender be able to speak the clients’ language and want to understand their business and their needs as a borrower.

One thing that concerns me about some of the newer entrants is they don’t have any experience doing deals themselves. If you don’t know what the FHA guidelines are for flippers, for buying a place and doing rehab and then reselling the property … if your lender doesn’t know what those rules are when they are underwriting the deal, then I think that the level of service that they’re going

Yes, one other very important thing to point out is that because hard money doesn’t report to credit, there is a temptation for the investor to go borrow from this lender and then go down the street and borrow from that lender and then go down the street and borrow from yet another lender.

The only defaults we’ve had in our company’s portfolio since 2009 have been investors who got out over their skis and borrowed too much hard money—they borrowed money from us and then they borrowed money from somebody else and then they borrowed from some third

40 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

lender—and what ended up taking them down was not the construction management of deals, it was not the numbers in the deals, but it was the cash flow management of their operation.

You can find yourself in a cash flow crunch and all of sudden turn yourself into a distressed seller where you’re living hand-to-mouth and can’t quite make the interest payments on a monthly basis. And those cash flow issues are the only scenarios where we have seen distress in this kind of market in the past five years.

Do you think that sense of “good fortune” is here to stay for awhile?

Our personal view is that sometime—and sometime fairly soon—we’re going to experience another downturn in the cycle, and so all of those kinds of weaknesses in other hard money lenders’ underwriting—where they don’t care about how much hard money you’re borrowing—you know, if you’ve got 20 percent down, they’ll lend you the rest—that approach, I think, is super-dangerous.

Because it doesn’t take into consideration the cash flow management aspect of this business. And that management aspect of the business is what we’ve seen take guys down, take investors down, take good investors down.

BY LINDA WIENANDT Linda Wienandt is editor-in-chief of Personal Real Estate Investor Magazine. Contact her at lwienandt@ affinitymediaservices.com.

INSIDE

WHY ATLANTA? More jobs means more people and more need for housing.

LENDING Area is ripe for private money, on both sides of the equation.

REBIRTH A profitable new life for formerly distressed historic homes.

SEPT OCT

2015

l Specia t r o p Re A t la n t a

Growing Along With Atlanta EpiCity has been in TOM STOKES’ family—and serving Atlanta real estate investors—for 80 years.

www.communityinvestor.com

, Ga.

TABLE OF CONTENTS ATLANTA

C3

Capital of the New South

STEADY

as She Goes

Atlanta is frequently referred to as “Hotlanta” for several reasons, from the temperature, to the entertainment, to the

RealtyTrac data shows Atlanta is settling into a good, long-term

favorable business climate for growth and sizzling real estate market.

sustainable market for investors.

By The Editors

While the term originally was created to help tourism, it is now commonly used by those who live in the Atlanta metro area.

C4

This sprawling capital of the South, where

OVERVIEW

Ted Turner founded CNN and where Billy

Why Invest In Atlanta?

Payne brought the Olympic Games in 1996, has been growing in population and jobs for many years, creating the ideal climate for real estate investing.

More people—especially a growing renter population— means a need for more houses.

In this supplement, we will examine some of the issues today in the community of 5.5 million people that are still driving good,

By Linda Wienandt

strong real estate growth in “Hotlanta” and why it is worth a look as a continuing, long-

C11

term investment opportunity.

Reclaiming

Atlanta is a sprawling region with

ATLANTA

several growth counties, such as Cobb and Gwinnett, well outside the city center area of Atlanta.

Investor Network is transitioning distressed—and often-abandoned— historic structures into something special once again.

Atlanta is a story of great urban growth.

By Brandon Thompson and Will Hardy

right areas of the metro where housing is

There are no natural barriers to stop growth in Atlanta, so investors need to learn the affordable and they can get good returns on rental properties.

ON THE COVER

INSIDE

WHY ATLANTA? More jobs means more people and more need for housing.

LENDING Area is ripe for private money, on both sides of the equation.

REBIRTH A profitable new life for formerly distressed historic homes.

C6 Growing With and For Atlanta

While investors have flooded the Atlanta market and picked the low-hanging fruit,

SEPT OCT

2015

Tom Stokes EpiCity Atlanta, Ga C2

Growing Along With Atlanta EpiCity has been in TOM STOKES’ family—and serving Atlanta real estate investors—for 80 years.

www.communityinvestormedia.com

Community Investor sept/oct 2015

EpiCity, one of the area’s leading real estate businesses, is celebrating 80 years of family ownership and service to Atlanta.

Photography by Matthew Blackstock

there are still opportunities in the right areas in a metro area that will continue to be a job and population growth hub.

MARKET TRENDS

Steady As She Goes THE ATLANTA MARKET IS SETTLING INTO A GOOD, LONG-TERM SUSTAINABLE MARKET FOR INVESTORS.

by The Editors

family home purchases in the metro area in the first istorically, the Atlanta metro market has been good for investors quarter of 2013.

“Home flipping is even with the tumult of the housdown substantially ing market of the past few years. also, at 5.5 percent of Atlanta is now settling into a pattern all single-family home preferred by many investors—the longsales in the second quarter term, steady growth pattern without the compared to as high as jerky ups and downs.

10.2 percent in the first quarter of 2013.

A look at the RealtyTrac.com charts But flippers are still making hefty profits, and trends over the past few years for with returns of 42 percent—indicating the cash and investor sales, the home that flippers are flipping activity staying disciand the historical THE ONCE ‘HOTLANTA’ plined in their medium home decision-makprice sales show MARKET IS SHOWING ing even if that this trend.

SIGNS OF COOLING. means fewer “The once flips,” Blom‘Hotlanta’ market Daren Blomquist :: RealtyTrac quist said. is showing signs of “This all adds up to good news that the cooling a bit,” Daren Blomquist, vice presmarket seems to be settling into a more ident of RealtyTrac.com, told Personal sustainable pattern after a nice bounceReal Estate Investor Magazine. back recovery between 2012 and 2014.

“Most noticeable is the median home Of course, that means investors may not price, which was down 4 percent in June have as many or as profitable opportucompared to a year ago—the first yearnities in Atlanta in 2015 and 2016, but it over-year decrease following 33 consecalso means we are unlikely to see another utive months of year-over-year increase bubble bursting, which could hurt many that started back in September 2012. One investors,” he said. reason for the cooling is that the big instiAdded Dan Forsman, president and tutional investors and other cash buyers CEO of Berkshire Hathaway Homeare slowing down their purchases in the Services Georgia Properties: “Companies and individuals are moving to Metro Atlanta market,” Blomquist said.

Atlanta in larger numbers and that creates Cash buyers represented 31 percent investment opportunities. The most desirof all buyers of single-family homes able areas with good schools are hot.” and condos in the second quarter, down Forsman was recognized by the from more than 50 percent as recently as Atlanta Business Chronicle in 2014 as the first quarter of 2013, he said. Instithe most admired CEO for residential tutional investors in the second quarter real estate in Atlanta. represented less than 2 percent of all single-family home purchases, down www.realtytrac.com/news from as high as 15 percent of all single-

H

RESOURCES

For More Information About Atlanta Atlanta Real Estate Investor Alliance www.atlantareia.net :: 770-216-1560 (Fax) Atlanta Regional Commission www.atlantaregional.com :: 404-463-3100 Bureau of Labor Statistics www.bls.gov/eag/eag.ga_atlanta_msa.htm City of Atlanta www.atlantaga.gov :: 404-330-6004 CoreLogic www.corelogic.com :: 866-873-3651 Federal Reserve Bank of Atlanta www.frbatlanta.org :: 404-498-8500 Georgia Department of Labor www.dol.state.ga.us :: 404-232-7300 Georgia Multiple Listing Service www.gamls.com :: 800-289-1214 Georgia Real Estate Investors Association Inc. www.gareia.org :: 770-451-8800 Local Market Monitor www.localmarketmonitor.com :: 800-881-8653 Metro Atlanta Chamber www.metroatlantachamber.com :: 404-880-9000 RealtyTrac www.realtytrac.com :: 800-550-4802 Trulia www.trulia.com U.S. Department of Housing and Urban Development www.huduser.org :: 800-245-2691 Zillow www.zillow.com

www.communityinvestor.com

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OVERVIEW

WHY INVEST IN ATLANTA? THE MODERATE WEATHER, ABUNDANCE OF SPORTING AND CULTURAL EVENTS, LOW COST OF LIVING AND PRO-BUSINESS CLIMATE DRAW EMPLOYERS. JOBS DRAW PEOPLE. AND MORE PEOPLE—ESPECIALLY A GROWING RENTER POPULATION—MEANS A NEED FOR MORE HOUSES.

by Linda Wienandt

A

tlanta is the land of plenty for real estate investors. And there’s so much more than just Atlanta proper. Opportunities for investing success range to adjacent counties and cities in every direction.

“Atlanta is a great city and a thriving city for business,” says Will Hardy of Investor Network, a real estate investment company that focuses on the Greater Atlanta area. “What’s really attractive is that we have some wonderful suburbs just right outside Atlanta. To be only 15 or 20 miles in any direction from professional sports, beautiful skyscrapers, a great downtown area with restaurants and theatrical events … and on top of that, so many absolutely beautiful communities within about 15 miles of the airport, that’s really hard to find.”

Brandon Thompson, Hardy’s co-founder at Investor Network, adds, “Typically when you have that kind of setting, you’re never really looking at depreciation. There’s always going to be appreciation of real estate properties.

The commuting is fantastic, and obviously we’re seeing Atlanta grow leaps and bounds.”

The 29-county Atlanta MSA already is home to an impressive lineup of Fortune 500 companies—18 are headquartered here—including Delta Airlines, Home Depot, Coca-Cola, UPS and PulteGroup Inc., with more businesses relocating to the area because of lower taxes, an educated and growing workforce, low cost of living, mild climate and overall better quality of life. Numerous medical facilities and institutions of higher education

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Community Investor sept/oct 2015

also have headquarters or major operations here, including Emory University/Emory Healthcare, Georgia Tech and Georgia State universities, Kennesaw State University, Kaiser Permanente Georgia and Atlanta Medical Center, to name only a few. Fast-food powerhouse Chick-fil-A began here (in Hapeville). CNN has its global operations headquartered in Atlanta, and it’s also home to Turner Broadcasting System (both owned by Time Warner).

And now a number of large film and television studios are getting into the game.

THE VALUE PLAY: A WIN-WIN-WIN

“You’ve got major corporations coming to this hub because of—if you could sum it all up in one phrase—it’s the ‘value play,’” says Thompson. “It’s a value play for corporations, it’s a value play for Hollywood, and it’s a value play for investors.

It’s the perfect time to get into real estate.”

Among notable corporate newcomers and the accompanying estimated new jobs: General Motors’ IT Innovation Center (1,000 jobs), Airwatch corporate headquarters (1,000), Athena Health branch office (500) and Pulte Group corporate headquarters (350).

For investors, all of this translates to a healthy renter base, not only from the steady churn of college students and vibrant labor force, but also a growing number of retirees, Baby Boomers, Millennials and others who simply prefer renting to owning.

“Hotlanta is a hotbed for real estate investors acquiring buy-and-hold single-family houses,” observes RJ Palano, whose turnkey company BuyCashFlowHouses has been active in the area since

2009. From his view “on the streets, doing multiple transactions every week,” Palano sees a market coming back into balance after it was hit hard during the recession, when foreclosures were running rampant.

“Retail sales are back in the Metropolitan Atlanta area,” he says. “Appraisals are finally starting to become more realistic as the market continues to grow in value.”

The demand for houses has increased, and builders are returning to the market, Palano notes.

THE STATE OF THE MARKET

Home prices have risen 8 percent in the last 12 months, according to Local Market Monitor’s June 2015 report on the Atlanta-Sandy Springs-Marietta, Georgia market. The report lists a current average home price of $192,826, with a strong housing market expected for the next several years. Rents are forecast to increase 20 percent over the next three years, to an average of $1,293 per month.

Local Market Monitor regularly analyzes conditions in 300 U.S. markets, using such economic data as home values and growth in employment and population.

The report shows jobs have grown by 3.2 percent in the past 12 months, com-

pared to a national rate of 2.2 percent.

Job growth is the most immediate guide to the demand for housing, according to the research company: new jobs spur population in-migration and translate to reduced investor risk. Rents are high compared to home prices, presenting investment opportunities, says the report, which gives the market an investment rating of “medium risk.”

The U.S. Census Bureau ranked the Atlanta market No. 4 in Most Net Migration in the Nation 2013-2014, with an increase of 51,110. It’s the 9th Largest MSA in the U.S., according to the Census, with a population of 5.5 million (2014).

Net job creation (non-farm employment change 2013-2014) was listed at 88,200 by the U.S. Bureau of Labor Statistics.

Of course, the bottom line for investors is knowing they’ll get a consistently good return on investment.

“In all of our research,” Hardy says, “we have not been able to find any other city that gets the kind of value and return that Atlanta does.”

Thompson says that remodeling costs in the Atlanta market are basically a third of what you

incur in California or other big U.S. cities for the same kind of property, meaning a better ROI for investors. “Again, it’s the value play that we have,” he says.

For instance, says Hardy: “We’re able to provide in the Atlanta market a three-bedroom/two-bath home in a great community, fully renovated, for $125,000, whereas if you purchased that same property in Texas, California, Miami, New York, Chicago, wherever … it would be double—if not triple—that cost. So I think Atlanta is really just a hidden jewel for investors.”

SPOTLIGHT NOW ON ATLANTA

A major contributing factor—and one that is likely to help sustain the sparkle— is a recent trend of film studios moving into the area. “Hollywood is calling Atlanta ‘the island between New York and California’ for filmmaking now,” Hardy says. With many more films and TV miniseries being developed and produced in Atlanta, there’s a need for short-term extended-stay housing for cast and crew.

A number of small communities and subdivisions have sprung up around the studio operations on the outskirts of Atlanta where there was only farmland before.

“From an investor’s standpoint, it would be a great opportunity to buy into some of these local communities,” says Hardy, for the values that exist now and the appreciation that will happen in the next three to five years as studios are expected to expand.

WHERE INVESTORS SHOULD LOOK

Investors will get “their biggest bang for their buck” on the west and south sides of metro Atlanta, he and Thompson say.

Among areas they recommend investors consider are Peachtree City, Newnan, Palmetto and Chattahoochee Hills southwest of Atlanta; Douglasville, Villa Rica and Carrollton to the west; and Marietta, to the north.

“Within the 20- to 25-mile radius, there are so many fantastic communities and cities to live in across Atlanta,” Hardy says.

Closer to the core, All Property Management’s Q1 2015 Rental Rank-

ing Report suggests prospective rental property owners look at neighborhoods like Kirkwood, West End, Old Fourth Ward and East Atlanta, which are gaining popularity. Demand for condos and townhomes in Atlanta is particularly high now, the report says.

“One of the great aspects about investing in Atlanta is the low entry point into the market,” Palano says. “The average sales price in Atlanta last year was $259,577, which is a lot less than other trophy markets. However, the bedroom communities surrounding Atlanta have lower price points. First-time homebuyer price points can be $80,000-$180,000 for really nice houses in good areas.” He sees continuing price appreciation in Atlanta’s bedroom communities.

“While we don’t have the super bargains of yesteryear,” he says, “we have a more balanced market of buying and selling that is very interesting to be a part of, especially when you can list a house and have offers within 24 hours—at least, where interest rates are right now.”

Funds and institutional investors are not nearly as prevalent in the market as they once were, with only a few small ones remaining after Colony’s and Blackstone’s exits, Palano says. “They left because the opportunities had dwindled to a level that doesn’t support their model of buying 200+ houses per month,” he said.

That opens up the opportunities for smaller real estate investors. With foreclosures continuing to dwindle, investors may need to re-evaluate their models for acquiring properties. Palano says auctions are no longer the source for the greatest discounts on single-family houses, and buying off the Multiple Listing Service may not be the best option either, as there is competition against other investors and homebuyers alike. He prefers identifying potential acquisitions “under the radar,” before they become available to the public.

For investors employing a buy-andhold strategy, Palano says, “the key is to buy quality, well-located houses in areas of growth to obtain predictable residual income.”

Linda Wienandt is editor-in-chief of Personal Real Estate Investor Magazine. Contact her at lwienandt@affinitymediaservices.com. www.communityinvestor.com

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IN MY MIND, IT’S FAITH, GOOD FORTUNE AND GREAT PARTNERS. C6

Community Investor sept/oct 2015

COVER STORY

TOM STOKES EpiCity Atlanta, Ga.

One of Atlanta’s leading real estate businesses— EpiCity, led by Tom Stokes Jr., along with cousin Jim LaVallee and business partner John Mangham— is celebrating 80 years of family ownership.

Growing Along With

ATLANTA

Y

ou have to wonder what D.L. and Florence Stokes would think if they could see how far their family business has

come in 80 years.

What began as a small real estate business in 1935 is now EpiCity, one of Atlanta’s leading real estate investment and services compa-

nies. The firm manages a portfolio of commercial and residential properties worth more than $250 million. It also offers clients a menu of services encompassing construction, leasing, brokerage, property management and more.

An affiliated company, Epic Development, has quickly become an awardwinning home-builder with a national reputation since forming during the heart of the Great Recession.

“We’re a full-service real estate shop,” said Tom Stokes Jr., EpiCity’s director for property management and commer-

cial leasing. Stokes is D.L. and Florence’s grandson and a co-owner of EpiCity with cousin Jim LaVallee and business partner John Mangham.

Building a company as successful as EpiCity is a major accomplishment, but it’s particularly striking when you consider how long the company has been

Story by James Hart • Photography by Matthew Blackstock www.communityinvestor.com

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around. The family often talks about what’s allowed their business to endure for eight decades.

“In my mind, it’s faith, good fortune and great partners,” Stokes said. “Our family has instilled in us the belief that if we treat people right and do it for the right reasons, the universe, the Higher Power, will take care of us.”

STRONG FAITH, GOOD FORTUNE, GREAT PARTNERS

For Davis Lee “D.L.” Stokes, the desire to succeed started early. Growing up, he and his nine siblings shared a home with a dirt floor and a single lightbulb, and he decided he wanted something more.

“He did not want to be a poor farmer in middle Georgia,” Tom Stokes Jr. said.

by investing in housing near military production facilities, which attracted huge numbers of workers.

Over the years, as the business has evolved, a member of the Stokes family has always been ready to step up and run the business.

D.L. and Florence raised three sons and a daughter.

When D.L. died unexpectedly in 1953 at age 57, the couple’s second-oldest, Jim Stokes, took charge of the family business.

But tragedy struck just a few years later as Jim died in a boating accident. The leadership of the company was assumed by D.L. and Florence’s youngest: Mona LaVallee and Tom Stokes Sr. Tom Stokes Jr. wouldn’t join the firm until Oct. 19, 1987— the same day as the Black Friday stock market crash.

LONG STORY SHORT, IT TURNED INTO A SCREAMING SUCCESS. AND THAT TURNED INTO A BUSINESS. D.L. got his start in business by helping farmers work out their farm loans during the Great Depression.

When he and Florence started their business, they expanded its horizons. D.L. Stokes & Co. sold insurance programs, served as a broker and offered help with leasing and a range of other services.

The decision to locate in Atlanta also made a huge difference.

“They just happened to be here as the war effort was ramping up,” Tom Stokes Jr. said.

“Atlanta was a hub of transportation and war production.”

D.L. and Florence made a series of smart decisions C8

Community Investor sept/oct 2015

It also happened to be the anniversary of his grandfather D.L.’s death.

“It was a little daunting, looking back on it,” Stokes said.

Stokes would buy (and eventually rename) the business with his cousin, Jim LaVallee, who became director for development and strategic planning, and John Mangham, the director for consulting and special asset services.

The new generation introduced updated technology and modern management techniques. They also contributed their own valuable experience and skills to the enterprise.

While Tom oversees the property management ser-

vices, Mangham brought his background as a CPA to bear by consulting on real estate tax treatments and taxdeferred exchanges—he’s helped facilitate thousands of 1031 exchanges, Stokes said.

LaVallee had worked in executive roles for both Citicorp Real Estate and CB Commercial before joining the family business. He serves as a kind of utility player—tackling whatever project needs him most. It’s how he found one of the company’s single biggest opportunities.

REINVENTION DURING THE RECESSION

Jim LaVallee has a saying: About every three years or so, he has to reinvent himself. And that’s been good advice for the business, too, Stokes said. Just look at Epic Development.

A few years ago, LaVallee and EpiCity’s development manager, Rick Bennett, came back from a field assignment and quickly called a meeting. They had uncovered what looked like an intriguing opportunity.

It was late 2007. EpiCity had been buying distressed

single-family homes in the urban core for $25,000 to $30,000. With another $20,000 in rehab work, those properties could be rented out for $800 to $850 per month.

But Jim had started seeing distressed properties that didn’t fit their traditional business model.

These were better homes in strong school districts. True, they cost more. A property in the Oak Grove Elementary district, for example, would run $80,000 and might require $100,000 in work. But it could easily sell for $295,000.

The company decided to make a big push into those properties by launching Epic Development. “Long story short, it was a screaming success,” Stokes said. “And that turned into a business.”

There were complications as the economy worsened. “Banks just shut their doors to real estate operations, at least in the residential arena,” Stokes said.

Since no institutional capital was available, Epic Development reached out to high-net-worth individuals.

Many of them had just rolled out of five-year CDs that were generating 5 percent or more

in interest—only to learn that future CDs would be making basically nothing in interest.

Instead, those individuals invested with Epic Development, which produced returns

of 6, 8 or even 10 percent in some cases. The win-win deal provided investors a way to make money, and it gave Epic the capital it needed to thrive during the worst of the economic crisis. The business has since branched into new construction of high-end properties.

Stokes still thanks those early investors in Epic.

“Our business would not be here in the way it is today without the help they gave us during that very scary time,” he said.

Once again, good partners made a difference.

“Jim has one saying, one axiom I love to quote,” Stokes said. “He says all the time, ‘We’re in the real estate business. We can never know enough people. We can never have enough capital.’”

You can’t explain EpiCity’s success without talking about Atlanta itself. It’s been an ideal place to be a real estate professional, Stokes said.

“The city of Atlanta is just green,” he said. “There’s vegetation that’s green. It’s green in the sense of wanting to be a good steward of our natural resources. And it’s green in terms of being a good, profitable place to work.”

‘COULDN’T IMAGINE DOING ANYTHING ELSE’

A fourth generation of the Stokes family has started to work in the business. Tom and Jim’s nephew’s wife is a portfolio manager for EpiCity. Jim’s son and daughter have helped with the company’s tech and office work on a part-time

basis. Tom’s children, who are a little younger, have, too.

It’s too early to tell if any of the kids will eventually join the business full-time.

When he was younger, Stokes had zero desire to join the family business. His father and other relatives had to actively recruit him after he completed his MBA. But he’s glad they won him over.

“It’s the best professional thing that’s ever happened in my life,” Stokes said. “I couldn’t imagine doing anything else.”

James Hart is senior staff writer at Personal Real Estate Investor Magazine.

Contact him at jhart@ithinkbigger.com.

Matthew Blackstock is a Georgiabased photographer. Contact him at matthew@mattblackstock.com.

www.communityinvestor.com

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LENDING

A Wealth of Possibilities in Private Money, Real Estate THE ATLANTA METRO AREA IS AMONG THE BEST-POSITIONED IN THE COUNTRY FOR REAL ESTATE IN THE NEXT FIVE YEARS, AND WISE INVESTORS ON BOTH SIDES OF THE EQUATION ARE MOVING RAPIDLY TO TAKE ADVANTAGE OF IT.

by Carole J. VanSickle Ellis

T

hanks to a dynamic community of real estate investors, a proliferation of great collateral (read: deals) with attractive profit margins and a burgeoning demand for housing, Atlanta and the surrounding metro area are ripe for private money, and investors are not holding back when it comes to putting funds in on both sides of the equation.

The high level of investor activity is nothing new to the Atlanta housing

The Atlanta market is ripe for picking investment returns, for a number of reasons: The area is a hotbed of investing activity, with more than one in every 20 deals being a flip—a favorite type of transaction for private money lenders.

The city is also extremely wellpositioned for future housing price growth, making the collateral involved in a real estate-related private money loan particularly attractive. Most analysts, including those at real estate data giants

THE AREA IS A HOTBED OF INVESTING ACTIVITY, WITH MORE THAN ONE IN EVERY 20 DEALS BEING A FLIP.

scene. The city resisted the housing crisis for several years after most other major metros fell and, as a result, when prices bottomed out in 2012, the New York Times promptly dubbed Atlanta “one of the biggest laggards in the economic recovery.” While that title is certainly not one to be envied, it drew real estate investors like moths to flame.

For the next two years, as Atlanta’s foreclosure activity skyrocketed, institutional investors swarmed the market and actually expedited a home price recovery by driving up values with their bulk purchases. By the time those institutional entities began to slow their purchasing pace several years later, Atlanta homes were once again appreciating and today appear to have several more years of strong growth ahead of them.

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Community Investor sept/oct 2015

RealtyTrac and CoreLogic, agree that the city will experience metro-wide appreciation between 5 and 6 percent in 2015, far better than its counterparts that are farther along in their housing recoveries.

Furthermore, in the event that one is interested in making longer-term private money loans on rental properties, Atlanta was also named one of the top markets for rental returns for 2015 by RealtyTrac, with some areas boasting gross rental yields of nearly 27 percent.

Finally, Atlanta is poised for greater population growth and a solid, steady supply of well-heeled, steadily employed homebuyers and renters in the future.

The key to Atlanta’s attractive real estate market—whether you are a real estate investor or a private lender looking to fund real estate investors—lies at the very heart of city policy. During one of the most tumultuous times in its history—the

1960s—Atlanta became known as “The City Too Busy to Hate,” and the city has steadfastly adhered to the concept that productivity trumps just about all else.

Today, the Greater Atlanta area and surrounding counties court a wide variety of business and entertainment industry interests in aggressive fashion, which has resulted in an influx of new industry and corporate headquarters. And Atlanta’s Hartsfield-Jackson Airport, home of Delta and busiest airport in the world since 2000, ensures the metro’s place as one of the most important transportation hubs in the world.

All of this literal and figurative hustle keeps the metro jobs market strong and the metro population growing, ensuring that there are plenty of buyers and renters for the existing housing inventory and creating a constant demand for new housing options. This past summer, Atlanta boasted the second-fastest rate of job growth in the country, and the population of the country at large responded by moving south at a record pace. In fact, CNN Money ranked Atlanta 10th in its annual “Cities People are Moving to” list, and Forbes ranked the city as the 12th-fastest growing metro in the U.S. “with more room to grow” with a growth rate of 1.27 percent and a population of more than 4.3 million. A private lender holding a note on an Atlanta property can rest easy, knowing that the odds are quite good that the investor who borrowed that money is likely to experience a successful transaction and that in the event that they do not, the collateral is well worth collecting on.

Carole J. VanSickle Ellis is editor and JV Manager of The Bryan Ellis Investing Letter. www.investing.bryanellis.com :: 770-542-7359

RESTORATION

Reclaiming Atlanta REHABBING DISTRESSED HISTORIC HOMES REAPS REWARDS FOR INVESTORS AND THE COMMUNITY.

by Brandon Thompson and Will Hardy

T

he suburbs surrounding Atlanta are great areas for local and national real estate investors to consider.

Our company, Investor Network LLC, is investing in multiple projects throughout these areas, with a core focus on upgrading distressed homes in the $100,000$400,000 price range. We annually buy and sell more than 100 homes that are diversified both in type of structure and community.

One of our latest and very successful rehab trends has been purchasing distressed historic homes in various downtown suburban communities, then transitioning these often-abandoned structures into something special once again.

Through forecasting our markets, we have sensed the desire by many families in Atlanta’s surrounding communities to return to a small-town, quiet lifestyle while having easy access to downtown’s many historic restaurants and shops.

Basically, we are creating a lovely and

valuable home for a deserving family while restoring these downtown landmarks to their original splendor.

These types of rehabs are not for firsttime investors, but rather for experienced flippers in the market because of the detail and cost involved in renovating a historic home. At Investor Network, we have made six-figure profits on flipping historic houses.

Our latest project was an 1890s Colonial-style home at 1177 Powder Springs St. in historic Marietta. This property was dilapidated and uninhabitable, needing well over $100,000 in renovations. The remodel took us 90 days to complete, but through great design and innovation, we were able to be all-in with a full investment value of $335,000. We sold this property for $455,000 cash! As you can imagine, our investors were pretty excited to receive 50 percent of those profits within four months, not to mention the value created for the community.

Another great example of our efforts was our restoration of an early 1900s ranch-style farmhouse at 515 Toombs St. in the historic community of Palmetto.

The community there was begging for an experienced team to come in and restore the history that was in danger of being lost through the neglect of this home.

Unlivable and extremely distressed, this property was acquired by us through an estate sale for $65,000. We were able to fully reconstruct the home for a final renovation budget of $150,000 and now will put this property on the market for an appraised value of $249,000.

At Investor Network, we have been buying and selling real estate in the Atlanta market for more than a decade, and it has been both amazing and exciting. We are taking forgotten treasures of the past and making them useful again while “Reclaiming Atlanta.”

And there are many other reasons to invest in the Atlanta market, as well. In our opinion, properties here have the potential to gross the highest returns we have ever seen. However, we encourage in- and out-of-state investors alike to do their due diligence by connecting with the right experts to manage their money with pride and efficiency. You as an investor deserve the greatest returns.

Brandon Thompson and Will Hardy are co-founders of Investor Network in Villa Rica, Georgia. www.investornetworkstore.com :: 404-937-4011 www.communityinvestor.com

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| 53

FEATURE STORY

BIG TH IS SMALL THE NEXT

54 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

In today’s housing market, good things come in small packages. The increasing popularity of smaller dwellings presents opportunities for wise investors.

HING? P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

| 55

FEATURE STORY

Is Bigger Better?

TINY HOUSES

AT AN AVERAGE square footage of 2,600, the typical American house isn’t exactly tiny compared with an average of 1,000 in the United Kingdom and Japan.

However, new styles of smaller houses are currently getting lots of attention in the U.S. Several television shows, including “Tiny House Nation,” celebrate tiny homes with their custom interiors and lofts.

Zoning is slowly changing across the U.S., allowing Accessory Dwelling Units with cities like Portland, Oregon, championing ADUs with tours and educational events.

When it comes to apartment life, small is in, too. Densely populated cities are proving you can live large in a few hundred square feet, with New York hosting a design competition to find the most efficient and stylish micro.

People are going small for several reasons. Millennials who want to spend most of their time enjoying urban life are drawn to more affordable and centrally located apartments. Empty nesters who want to downsize, travel and visit grandkids find small fits their new lifestyle. And for those who value a smaller carbon footprint, these greener spaces are also appealing.

Here we take a look at three types of smaller dwellings and their investment opportunities.

56 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

The definition of these truly tiny houses varies, but most agree they are less than 400 square feet. They may be built on wheels or on a foundation—a fact that matters depending on where the owner intends to put it. Investors need to check local zoning and codes because there’s no consistency to tiny house rules. If on wheels, some RV parks will accept them.

If built on a foundation, some municipalities allow them, yet others don’t.

Also, there are tiny house communities sprouting up across the country, some in retrofitted RV parks.

While builders of tiny homes say this type of dwelling is growing, it’s hard to find accurate figures since some tiny home dwellers are tucked away on land where they are on gray legal footing.

“If you kind of fly under the radar, and you’re not loud, and your neighbors like you, sometimes you can get away with it,” says Denise Ryals, who with her husband Tommy owns Hummingbird Housing, a builder of custom tiny houses in Georgia.

For investors working within local zoning laws, there are opportunities through several business models. Mark Pantak, owner of Houston-based Capital Resources Group and an organizer of Atlanta Tiny House MeetUp, has his eye on small patches of land near the San Francisco Bay area that are too rocky or unbuildable for a traditional house yet suitable for tiny houses. He would manage his rentals by offering them online through Airbnb, taking payment through the site, having a coded lock and providing maid service.

Pantak advises savvy investors to look constantly at trends and new ways of maximizing their rate of return. His search has led him to one demographic that is seeking affordable options.

“You’ve got millions of Baby Boomers who did not prepare adequately for their retirement, and they’re going to have to look for alternative housing,” says Pantak, who adds that cities where retirees have access to amenities and services are key places to invest in tiny houses.

Pantak has noticed a few investors building tiny houses for veterans—something that is both a “profitable niche” as well as a solution to the problem of affordable and permanent housing for vets. Also, he is interested in having tiny houses in areas where he loves to visit.

“Then I could travel and have (my property) rented out when I’m gone.

They’re so affordable I could literally have it paid free and clear. It’s an additional revenue source, but also I can control the calendar, so when I come into Austin or San Francisco I’ve got a place to stay,” says Pantak.

Two builders see investor opportunities too. Hummingbird builds 22-foot-long stick-built houses on wheels starting at $30,000 with “everything except your mattress,” including refrigerator, cooktop, microvent, ceiling fan, fireplace,

flat screen TV and full bathroom with a residential size toilet. The Ryalses paved the way for buyers to obtain loans by holding tiny house tours in their local bank’s parking lot because they believe, “It’s our job to educate lenders.”

They are currently working with investors who plan to build six or eight houses around a Central Georgia pond for short- or long-term rentals.

“We’re on the threshold of something that’s not going away. People are wanting to downsize—not everybody wants a McMansion anymore. They want to get out of big homes and travel and spend time with their kids and grandkids,” says Ryals, who notes tiny houses also appeal to people who choose to live off the grid.

Brevard Tiny House in Texas is a family business specializing in custom tiny homes built on wheels under 250 square feet. Customers have purchased their houses for use as guest quarters, vacation homes, hunting cabins and mother-inlaw spaces.

“The tiny house movement is definitely growing. The No. 1 thing that is limiting it is zoning and rules on where you can park tiny houses,” says Marielle DeJong, web designer for Brevard.

DeJong says their company town of Brevard has started allowing tiny houses on foundations for the purpose of rentals, adding, “The more builders who put on foundations, the more opportunity there will be for investors.”

With popularity booming, DeJong says there needs to be more accommodating zoning plus consistent approaches to regulating them.

“Because the movement is growing so much, there’s a need to re-look at how tiny houses are managed and inspected,” says DeJong.

Elaine Walker is founder of Tiny House Community, which shares infor-

mation about the movement, and one of the founders of American Tiny House Association, a nonprofit organization that works with legislators to make zoning more tiny house friendly. Walker says some people place tiny houses in their backyards as an extra source of income.

She sees an opportunity for investors to develop tiny house communities for renters who want to reduce their financial burden, but can’t afford to buy a tiny house. She thinks a good demographic is retirees who would be drawn to a community, especially if it offered amenities such as a pool or clubhouse.

“Often it’s hard to get a loan for tiny houses. So a lot of lower-income people would welcome the opportunity to live in a tiny house community,” says Walker.

“I think it’s going to continue to be a solution for people who don’t have a lot of money and yet want that specialized home that they can call their own.”

Kol Peterson owns Caravan Tiny House Hotel in a commercially zoned part of Portland with six custom-made homes that sleep two to four people; he’s also an ADU advocate and editor of AccessoryDwellings website. Peterson says there is political activity across the U.S. to try to legalize tiny houses for affordable housing.

“So hopefully, one day that would become a viable option and open up a whole new marketplace of interesting investment opportunities,” says Peterson.

ACCESSORY DWELLING UNITS

ADUs, sometimes called “granny flats,” are smaller than the main house. They can be built detached in traditional stick-built construction such as a backyard cottage.

Or they can be a dwelling constructed within the house, such as in an attic or basement. In ADU-friendly Portland, they average 500 square feet. In the many P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

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FEATURE STORY

Is Bigger Better?

cities where they are not legal, Peterson says there still are thousands of nonpermitted ADUs. Peterson, who lives in an ADU and rents out his main house, says ADUs are attractive financially because you’re developing a second residence on “free dirt,” so there’s no additional land cost—only the construction cost.

“The investment is recouped by renting out the property over a period of time, and typically ADUs have an extremely good return on investment— anywhere from two years until eight years is average,” says Peterson.

He recommends investigating local planning ordinances to learn all the rules. For example, even in some cities that allow ADUs, the rules don’t allow you to use both dwellings as rentals.

“Whereas in Portland you can rent out both, so it serves as an open, free market and a potentially very profitable way for a real estate investor to produce rental income off of two properties essentially

like a duplex would be,” says Peterson.

A new angle for investors to consider is cities that allow ADUs to be “condo-ized” and sold rather than rented.

MICRO APARTMENTS

Seattle leads the country with several thousand micro apartments. Not surprisingly, micro apartments, usually a couple hundred square feet, are in other packed cities such as Washington, D.C., and Chicago. However, interest has spread to less expected cities, too.

“There are people trying to get this done in medium-sized cities, and they’ve gotten lots of interest from local politicians. As cities try to be more innovative, they are attracted to these types of developments,” says Adam Hengels, who works with developers to create urban apartments and who founded The Micro Maker, a site dedicated to overcoming the obstacles to micro apartments.

Hengels sees planning departments across the country being more open to liberalizing their zoning to allow micro apartments. It can be a “political chess game” if community groups oppose the dwellings, believing an influx of lowerincome residents won’t be good for their neighborhood.

While many micro apartments are new, developers are also renovating existing buildings such as hotels and shopping arcades.

“The key on the financial side is you can usually generate more revenue on a dollar-per-square-foot basis from a micro apartment. But you also have to keep

in mind construction costs are higher because there are more things you’re packing into a small space,” says Hengels.

Hengels sees a big opportunity for investors to appeal to single 20something professionals who want to live in the urban core. Cities benefit where there are lots of young people, job growth and companies seeking tech workers and creative types. Also, empty nesters who want to travel or have a second home are drawn to micro apartments “There’s a lot of investment capital hungry for this type of investment because it’s a development product that has a pretty deep demand that could potentially bring more units to market and attract people to new construction who might otherwise go to an older stock of apartment,” says Hengels.

With the majority of U.S. households being one- to two-person households, Peterson says there’s an “enormous mismatch” between the housing supply and the housing demand, a gap investors can fill.

“So, any creative way that a real estate developer or investor can invest in small urban infill dwellings, whether that’s micro-apartments, tiny homes on wheels, ADUs or something else altogether, there is a huge demand for that nationally, specifically in coastal cities where there is a huge housing crunch going on,” says Peterson.

BY SUSAN THOMAS SPRINGER Susan Thomas Springer is a regular freelance contributor to Personal Real Estate Investor Magazine. Contact her at susan@susantspringer.com.

RESOURCES Accessory Dwellings :: www.accessorydwellings.org | American Tiny House Association :: www.americantinyhouseassociation.org | Brevard Tiny House Company :: www.brevardtinyhouse.com | Capital Resources Group :: 832-766-6997 | TinyHouseInvestments@gmail.com :: meetup.com/Atlanta-Tiny-House-Meetup | Caravan—The Tiny House Hotel :: www.tinyhousehotel.com :: 503-288-5225 | Hummingbird Housing :: www.hummingbirdhousing.com :: 844-583-0948 | Portland Alternative Dwellings :: www.padtinyhouses.com | The Micro Maker :: www.themicromaker.com | Tiny House Community ::: www.tinyhousecommunity.com .

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NARPM 2015 Annual Convention and Trade Show ®

October 14 - 16, 2015 Hyatt Regency Peachtree Atlanta, GA Education classes begin October 12.

Pre-Convention activities begin October 13.

Photos: ©2006, Kevin C. Rose/AtlantaPhotos.com ©2103, James Duckworth/AtlantaPhotos.com

NARPM® is the professional, educational, and ethical leader for the residential property management industry.

Join with our 2015 industry partners for this fabulous event. You do not have to be a NARPM® Member to attend, but you must register. We also welcome you to become a NARPM® Member. Registration and membership is available at http://www.narpmconvention.com/ email conventioninfo@narpm.org or call 800-782-3452 for more information.

THE CONVENTION FEATURES: • President’s Celebration at the Georgia Aquarium; • Education Classes; • Workshops; • Internationally Renowned Speakers; • 6th Annual Charity Golf Tournament; • Network with Other Property Managers; • Trade Show with Exhibitors.

NUTS & BOLTS

ACCOUNTING

Buy-And-Flippers Beware IF THE IRS DETERMINES THAT YOUR INVESTING STRATEGIES PUT YOU IN THE “DEALER” RATHER THAN “INVESTOR” CLASSIFICATION, YOU FACE STRINGENT TAX REQUIREMENTS.

I

f you’re doing a lot of buy-and-flips, the Internal Revenue Service may consider you a real estate “dealer.” “Dealer” status is an IRS classification that determines how the income an investor receives from his or her real estate holdings will be taxed.

In its “Publication 334: Tax Guide for Small Business,” the IRS very generally defines a real estate dealer as one who is engaged

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in the business of selling real estate to customers with the purpose of making a profit from those sales.

That definition creates a lot of gray area, leaving a lot of room for interpretation. In fact, this is an area of frequent litigation, stemming primarily from the fact that real estate investors can use multiple sales strategies in their investing

activities. For instance, investors often sell their properties on a lease-purchase or contract-for-deed (e.g., land contract or installment sale). The gains from these types of sales occur over a long period of time (e.g., 15-30 years), and in some cases the profits from these sales transactions may not occur at all.

The dealer status is very subjective and depends on a number of factors that the IRS will consider, including: > Purpose of the acquisition. > Length of ownership. > Number of transactions by the investor. > Proportion of income from real estate transactions. > Frequency of sales. > Amount of gain realized. > Nature of advertising for the properties.

If the IRS determines the investor to be a dealer, then all of the investor’s real estate-related profits may be taxed as ordinary income and be subject to self-employment taxes as well.

This applies even when the investor’s true intent is to keep the property for the long term (i.e., the buy-and-hold). As a result, the investor will lose the benefits of depreciation and long-term capital gains treatment. This is the case even if you collect your profit over 15 to 30 years. What’s worse is that if you are found to be a dealer, you also lose the ability to do 1031 exchanges.

The following examples illustrate a few of the ways in which you may be affected. In these examples I have assumed that the investors have not established separate entities for performing the investment activities and are doing the investment in their own name.

EXAMPLE NO. 1 YOU’RE A FLIPPER :: If you buy and flip properties for short-term income, then the IRS will classify you as a dealer. Your properties will be treated as inventory, and you will report your profits on a Schedule C of your federal tax return. The gains will also be subject to selfemployment tax.

YOU’RE PRIMARILY A LANDLORD AND DO OCCASIONAL FLIPS :: If you buy and hold property for longEXAMPLE NO. 2

term appreciation, then the IRS normally considers you an investor. However, if you start to do a number of buy-and-flips to generate additional income, the IRS may treat you as a dealer.

Thus, all of your real estate income may be subject to dealer tax

treatment. Your rental income will be treated as ordinary income and be subject to self-employment taxes.

EXAMPLE NO. 3 YOU SELL MOST OF YOUR PROPERTIES THROUGH AN INSTALLMENT SALES METHOD AND DO OCCASIONAL FLIPS :: If you sell your properties using owner

financing or lease options, then you likely use the installment method to report your gains. However, since you do a few flips on the side, the IRS may classify you as a dealer and tax all of your properties as such. Instead of getting taxed over a 15to 30-year period on your potential profits from these sales as you receive them, you will be taxed up front on all of your paper profits—even if you never receive the profits!

EXAMPLE NO. 4 YOU ARE PRIMARILY A FLIPPER AND HAVE A FEW RENTALS ON THE SIDE :: If you buy and flip most of

your properties, then the IRS will classify you as a dealer and tax you accordingly.

Savvy real estate investors will operate their different real estate activities through multiple entities. In other words, they may have one entity for buying and flipping properties and another for holding real estate for the long term. This separation of activities segregates your passive investing (long-term rentals and lease options, installment sales) into one entity that will continue to enjoy the benefits of depreciation and long-term capital gains treatment. The other entity will recognize income for the active activities (e.g., flips).

As you can see, there are many situations where a real estate investor may cross into the realm of the real estate dealer, which is not something you want to do. As such, it is important to bring a certified public accountant onto your Wealth Team™ to prevent this from happening.

BY CARTER T. FROELICH Carter T. Froelich, CPA is the founder of The Property LedgerTM, the cloud-based real estate analytic software, and the author of “The Real Estate Wealth SystemTM. ” For more information, go to www.thepropertyledger.com.

DISCLAIMER This information is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose.

The information contained in or provided from or through this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. This information is general in nature and is not specific to you, the user, or anyone else. You should not make any decision— financial, investment, selling or otherwise—based on any of the information presented herein without undertaking independent due diligence and consultation with a certified public accountant and/or legal adviser.

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NUTS & BOLTS

LAW

Joint Venture or Security— What’s the Difference?

SECURITIES AND JOINT VENTURES BOTH HAVE ADVANTAGES AND DRAWBACKS. BE SURE YOU KNOW WHICH YOU ARE SELLING AND FOLLOW THE RULES, AS THE CONSEQUENCES OF NONCOMPLIANCE ARE GREAT.

I

f you are using other people’s money for your real estate investments, you need to know the difference between a Joint Venture and a Security. The questions you need to ask are: N0. 1 Will investors invest money in a common venture with you?

N0. 2 Do your investors have an expectation of profits based solely on your efforts, skills or experience?

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If the answer to both of these questions is yes, then you are selling Securities, and you must comply with Securities laws.

Conversely, if the answer to the second question is no, then it may be a Joint Venture. If your investors are actively involved in managing the project along with you, it may be a Joint Venture; but if they are passively investing money with you, then you are probably selling Securities.

If you have determined you are selling Joint Ventures, you are not home free, as Joint Ventures still require a Joint

ate documents drafted and follow the rules for the exemption.

Typical rules for Securities exemptions may include advertising restrictions, limits on who can invest (financial or geographic) or limits on the number of investors. They usually require disclosure of the risks of the investment.

Under Securities laws, the issuer has the obligation to provide all “material facts” so investors can make “informed consent.”

Omissions or misrepresentations can lead to charges of fraud.

Material facts are anything that could influence an investor’s decision to invest, such as whether the issuer has criminal convictions, a recent bankruptcy or other failed investments.

Exempt Securities Offering documents typically include a Private Placement Memorandum, a Subscription Agreement, Securities notice filings, and the Investment Contract.

IGNORANCE IS NO DEFENSE

Venture Agreement. That agreement provides a clear and written understanding of who will perform what tasks and how each Joint Venture partner will be compensated. Additionally, Joint Ventures have some drawbacks for both you and your investors.

WHAT IF YOU ARE YOU SELLING SECURITIES?

Federal and state definitions of “Securities” include the term “Investment Contract.” The definition of an investment contract is “an investment of money in a common enterprise, with an expectation of profits based solely on the efforts of the promoter.” (Securities and Exchange Commission v. W.J. Howey Co., 328 U.S. 293-1946.) This is called the four-prong “Howey Test.”

A typical investment contract may be an operating agreement for a manager-managed limited liability company, a limited partnership agreement, a corporate shareholder’s agreement or a trust agreement with multiple beneficiaries. In each of these entities, there is a “management group” and passive investors.

The sale of Securities (i.e., investment contracts) must be registered (preapproved by Securities regulators) such as in a Regulation A+ offering, or a public offering, unless exempt.

To follow a Securities exemption, the “Issuer” of the Securities (aka, the promoter, manager or syndicator) first must decide which exemption is applicable, and then have the appropri-

Investors often don’t want to know they are selling Securities because they have heard that the rules are complex or that it’s too expensive to draft the offering documents. There are four categories of people who use other people’s money and don’t follow Securities laws: those who don’t know about them, those who don’t care, those who are in denial (by convincing themselves that Securities laws don’t apply to them) and those who are in jail. Don’t be one of them.

The truth is, the consequences of noncompliance with Securities laws are steep and simply not worth the risk. Securities litigation fees can rapidly approach six figures, in addition to steep fines that could be imposed by regulators, or in the worst cases, jail. Further, if you want to take your company to a higher level, where you are not dependent on just a few investors, you need to have a Securities Offering so that you can be in control of the investment.

Securities Offering rules (e.g., Rule 506 and Regulation A+) can actually help you grow your business. They may allow you to have an unlimited number of investors and raise an unlimited amount of money, and with the new crowdfunding rules, you may even be able to advertise your offering with limited restrictions.

WHAT IF YOU ARE SELLING JOINT VENTURES?

A Joint Venture is “an undertaking between two individuals or companies for the purpose of carrying out a particular project.” Another name for a Joint Venture is a General Partnership.

Joint Ventures can range from simple to complex.

In a simple Joint Venture, two or more individuals or companies may combine resources (money, labor or skills) P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

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to accomplish a common goal, such as buying and rehabbing a house or forming an entity that acts as the manager of a company raising money via a Securities Offering (a “Syndicate”).

A complex Joint Venture could involve a private equity company or family office and a Syndicate combining resources to acquire a large commercial property, where each puts up part of the money for the down payment and closing costs, signs on the purchase loan and shares in management responsibilities.

HOW IS THIS DIFFERENT THAN AN INVESTMENT CONTRACT?

may not want to take on the liability that comes with being a manager or responsible party in the common venture.

The only advantage is that a Joint Venture requires a more simplified Joint Venture Agreement in lieu of Securities Offering documents, which may be cheaper to draft initially, but could cost much more later in legal fees and emotional turmoil if the deal turns sour.

According to Investopedia.com, “it is estimated that nearly half of all Joint Ventures last less than four years and end in animosity,” generally due to disparities among expectations and contributions of the parties.

CONCLUSION

In a Joint Venture, there may be an investment of money (or Many people try to claim they are selling Joint Ventures, labor) in a common enterprise with an expectation of profits, when they are actually selling Securities. They make these but the fourth prong of the Howey Test is missing. The success claims to avoid complying with Securities Offering rules. of the project is not “based solely on the efforts of the promoter” A former SEC commissioner once said: “95 percent of the (as in an investment contract) because the investors remain time when we are asked if something is a Security, we determine actively involved in manageit is.” To maintain a defensible ment of the project.

Joint Venture, all parties must The downside of this is have an active management that everyone is a manager, role in the common project so no single individual can or company.

TYPICALLY, JOINT VENTURE PARTNERS ALL make decisions on behalf This role must be more than of the group like they can just a right to vote; the party SHARE PROPORTIONALLY IN THE RISKS, in a company that raises should have an actual defined money via a Securities scope of work, and you should REVENUES, EXPENSES AND ASSETS RELATED Offering. Further, investors be able to demonstrate that he with jobs may not have the or she actually did it. Calling time, inclination or ability to TO THE PROJECT. THEY ALSO SHARE LIABILITY. someone a Joint Venture participate in management partner and then treating that of a real estate venture. person as a passive investor From the practical side, is no defense, as it is not what do you really want your you say, but rather how you run the company that will determine physician-investor telling you how to rehab a house or purchase whether you have sold Securities or Joint Ventures. If your invesan apartment complex after you’ve invested time and money tors rely on you to make the profits, it’s a Security. learning how to do it from experts in the field?

If you are not sure whether you are selling Securities or Joint The primary drawbacks to a Joint Venture are that invesVentures, you should consult a qualified Securities attorney and tor earnings may be taxed at ordinary income rates, and the figure it out. It’s better to be safe than sorry. requirement of active involvement by all participants could preclude self-directed IRA investors (due to prohibited transaction rules). Further, everyone is a manager, so decisions must be

BY KIM LISA TAYLOR Kim Lisa Taylor is a California- and Florida-licensed attorney and made by majority or, perhaps, unanimous consent. partner in the law firm Trowbridge, Taylor & Sidoti, LLP, whose Typically, Joint Venture partners all share proportionately in practice areas are real estate investment and Securities law and the risks, revenues, expenses and assets related to the project. private placement offerings. She has written numerous articles on They also share liability for the acts of each other. This is a those topics and is a frequent speaker at real estate investment and education burden your investors may not knowingly take on, because they events. She also has firsthand experience in personal real estate investing. don’t have the time or skill sets to actively participate, or they Contact her at kim@syndicationlawyers.com. www.SyndicationLawyers.com

DISCLAIMER This information is of a general, educational nature and may not be construed as legal advice pertaining to your specific offering, exemption or situation. Such advice must be sought from your own attorney pursuant to an attorney-client relationship, after consideration of your specific facts or questions.

64 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

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NUTS & BOLTS

LAW

New & Improved—But How Much?

REGULATION A+ HAS BEEN TOUTED AS WIN-WIN FOR INVESTORS AND SECURITIES ISSUERS. WHETHER IT FULFILLS THAT PROMISE, HOWEVER, REMAINS TO BE SEEN.

setts’ refusal to accommodate Apple’s IPO in 1980). The reviews are supposed to come under a new “coordinated review” program developed by the state Securities administrators, but it is unclear as to whether this coordinated process will really be a smooth and inexpensive one.

Much of the potential utility of Reg A+ depends on how a real estate issuer wants to structure its investment offerings. If an issuer wants to register a set of Securities that can be used in multiple transactions—for example, notes that can be issued for various projects with only references to a specific deal summary and interest rate differences as distinctive features on he Securities and Exchange Commission’s adoption of particular projects—then Reg A+ might be a way for issuers final rules amending Regulation A has provided compato gain entrée to the broader pool of general public investors, nies some exemptions from the SEC’s registration requirements assuming the cost / benefit analysis makes sense. For many issufor certain smaller offerings. The previously existing rule had ers, however, security issuances are project-specific—and those only limited utility—the low dollar threshold, the disclosure projects have deadlines. requirements and residual jurisdiction of state blue sky laws Typically, a real estate sponsor enters into purchase and made the rule “low, slow, costly and burdensome.” Other sale agreements that allow for one month to finish additional exemptions—such as Rule 506 under Regulation D, which diligence on the propapplies only to “accredited” erty and another month investors, but which has no to finish rounding up its dollar limit—proved much financing and to close the more popular. (From 2009 to sale. Sometimes sellers will THE POTENTIAL UTILITY OF REG A+ DEPENDS 2014, only 19 Reg A offerings grant limited extensions occurred, compared to over ON HOW A REAL ESTATE ISSUER WANTS on such deadlines, but not 27,000 Reg D offerings.) always. Since buyers are The new and improved TO STRUCTURE ITS INVESTMENT OFFERINGS. already using much of the Reg A (Reg A+) makes things available time to prepare somewhat easier for some any offering materials Securities issuers—but not that might be used, the all that much. It’s likely better additional wait time for suited for companies that want SEC review of those materials may cause problems. On a perto grow into publicly reporting companies than for sponsors project arrangement, then, Reg A+ may not make much sense— of real estate projects, who generally seek to avoid additional there’s really not much room for lengthy SEC and state-by-state Securities compliance burdens for single offerings not involving reviews when hard-and-fast deadlines loom. large sums. For a sponsor trying to raise a few million dollars, The primary drawbacks of Regulation A+ can be summarized private placements are probably still the way to go. as follows: Under the new Reg A+, issuers must still file a Form 1-A

T

offering statement, which the SEC must review and qualify, thus significantly delaying any offering. For smaller offerings (up to $20 million), state “merit” reviews also remain required; these reviews can not only add additional delay to the process but can also place unusual conditions on the offering (e.g., Massachu-

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EXPENSE :: The expense of the SEC compliance work on a Reg

A+ offering is not to be taken lightly. Offering statements filed with the SEC are not cheap to prepare; even with its somewhat scaled-back disclosure requirements, a Reg A+ offering is probably an endeavor involving more than $100,000.

LACK OF SPEED :: Once the offering document has been prepared, the SEC still needs to review and qualify the offering.

It’s unlikely that the SEC will look at these offering documents with significantly less scrutiny than they give to those prepared for a full IPO. You’re probably looking at a process of at least a few months.

LACK OF TRADING INFRASTRUCTURE :: Currently, the benefit

of having publicly traded Securities is somewhat overstated; if the issuer isn’t going to list those Securities on a national exchange, then secondary trading market options remain limited. Some entrepreneur may solve this one, but for now the full potential of this clear benefit can’t be easily realized or marketed to encourage investment.

PRIVATE PLACEMENTS ARE STILL AVAILABLE :: For many

issuers—especially real estate sponsors looking to raise less than $20 million in equity—private placements would still appear to be easier, faster and cheaper. The issuer needs to stick to accredited investors, but that doesn’t seem to be a big obstacle; thousands of Reg D offerings are completed every year.

These drawbacks are why many critics argue that the social media buzz about Reg A+ is much ado about nothing. Silicon Valley lawyers seem unimpressed; many seem unsure as to whether a mini-IPO market will make much of a dent on the existing private placement market, which is relatively unconstrained by the disclosure, audit and filing requirements that accompany Reg A+.

Retail market access and limited preemption of state review are attractive benefits of the new Reg A+. The relative simplicity of traditional private offerings, however, makes them likely to remain the capital formation tool of choice for most real estate issuers.

BY LAWRENCE FASSLER Lawrence Fassler, an attorney and real estate investor, is Corporate Counsel of RealtyShares, a leading real estate investment marketplace that places equity investments through WealthForge, LLC, a registered Securities broker-dealer and a member of FINRA/SIPC. RealtyShares as an institution does not advise on any legal issues, and this article is for general information only and does not represent professional legal advice. Contact Lawrence at lawrence@realtyshares.com.

find more information at gorillacapital.com or call 541.393.9042

P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

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TAXES

1031 Exchanges—The Essentials EXCHANGEABILITY IS ONE OF THE PRIMARY BENEFITS OF INVESTMENT REAL ESTATE. HERE’S A BASIC PRIMER ON USING A 1031 EXCHANGE TO YOUR TAX ADVANTAGE.

031 Exchanges are named after Internal Revenue Code Section 1031. The law only applies when you are selling one property and purchasing another property. That is why it is called “a 1031 Exchange.” This law creates an exception to the general tax rule that when an investment property is sold, tax is due (recognized) on the gain achieved (realized).

When an investment property is sold, the gain is usually divided into two categories: capital gains and recaptured depreciation. These two categories are treated differently for tax purposes and are taxed at different rates. But for purposes of this article all you, the investor, need to know is that if you follow the detailed rules of a Section 1031 Exchange, you will defer tax liability. Also, remember that we are dealing with federal law here, so the rules that I give you are applicable nationwide.

1

THE RULES

In order to achieve tax deferral, you must follow all of these IRS-imposed rules: > The relinquished property and the replacement property

both must be either held for investment or used in trade or business. Primary residences and vacation homes (usually) do not qualify for 1031 Exchange tax deferral.

> The replacement property must be of equal or greater

value than the relinquished property if you want to defer all income tax liability. Trading down in value will create a partially taxable exchange.

> All of your net equity in the relinquished property must be

used as the down payment on the replacement property. If you take some of the cash proceeds from the sale you will pay tax on the cash out (“cash boot,” in IRS-speak).

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> There are also strict deadlines in which to complete a

1031 Exchange. The replacement property must be identified in writing, signed by the exchanger, within 45 days after the relinquished property is sold. The general rule is that only three potential replacement properties may be identified. If one of the identified properties is not purchased, then the exchange fails and taxes are due. The replacement property must be purchased within 180 days after the sale of the relinquished property.

> You may mix and match, trading more than one smaller

property into one larger property or trading one large property into numerous small properties. You may even trade fractional interests in property.

> All real estate is “like-kind” (1031 Exchangeable) to all other

real estate. For example, you may exchange a ranch for an apartment building or a warehouse for a shopping center.

> The law applies nationwide. You may trade real estate in

Baltimore for real estate in Orlando.

> Generally, in a 1031 Exchange, you may sell your relin-

quished property to a related party, but you may not buy

your replacement property from a related party. The rules here can get rather complicated. > Before you sell the relinquished property, you must employ

a “Qualified Intermediary” to act essentially as an escrow agent for your money. If you receive the money from your sale, it is too late to perform a 1031 Exchange. The intermediary company, with your help, can create new individual bank accounts that require your signature to open and your signature to withdraw funds.

WHO CAN USE A 1031 EXCHANGE?

Any taxpayer is qualified for 1031 Exchange treatment on the sale of his or her investment real estate. Individuals, couples, LLCs and corporations all can use 1031 Exchanges. However, the taxpayer who sells the relinquished property must be the taxpayer who buys the replacement property. After all, the 1031 Exchange must be reported on only one taxpayer’s tax return.

THE BENEFITS

As you can see, 1031 Exchanges allow you to relocate your investment, reshape your investment and restructure your investment, all without paying taxes.

When you perform a 1031 Exchange you get to hold onto all of your net proceeds. This means larger down payment, smaller mortgage payments, easier borrowing, greater cash flow and faster wealth creation.

I like to think of a successful 1031 Exchange as an interest-free loan from the government for as long as the tax deferral continues!

THE DETRIMENTS

Keep in mind that in a 1031 Exchange you are deferring taxes—not avoiding them. This deferral is accomplished by carrying your tax basis in your relinquished property forward into your replacement property. If you sell the replacement property without another 1031 Exchange, then tax liability will be calculated using the carried-forward basis.

Because tax basis is carried forward, you do NOT get a reset of your tax basis to the purchase price of the replacement property. This means lower depreciation allowances going forward.

You must want to stay invested in real estate with all of its risks when you decide to do a 1031 Exchange.

BY STEVEN HICKOX Steven Hickox has been a licensed attorney in Colorado since 1981. He is the co-owner and founder of 1031x.com. In business since 1994, 1031x.com has handled more than $1 billion in 1031 Exchanges. Contact him at Steve1031x@gmail.com or 888-899-1031.

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NUTS & BOLTS

PROPERTY MANAGEMENT

IT’S CHEAPER TO OWN A HOME THAN TO RENT ONE, AND THAT’S GOOD NEWS FOR INVESTORS. HERE’S WHY.

7 Reasons Why Now Is a Great Time To Be a Landlord e’ve been telling you for a while that it’s a good time to buy and hold real estate—property values have nowhere to go but up. But appreciation isn’t the only perk. Demand for rental property is stronger than ever. Here are seven reasons why now is a great time to be a landlord.

W

adds that reduced hours at work and lower paying jobs in general are making it more difficult for people to make

1

A WEAK ECONOMY

The economy may be on the mend, but many are still uncertain about their jobs and their future and, as a result, are reluctant to put down roots. Renting makes sense to them, even though they can afford to purchase a home, because they don’t know whether they will be living or working in the same area in the near future, according to Tim Herriage, regional president of Dwell Finance.

Don Lawby, president of Property Management Business Solutions, the franchisor of Real Property Management,

70 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

homeownership a reality.

They are forced to rent.

That’s not to mention those who lost their jobs during the

economic downturn, even if they have since found new ones. Job loss forced many to rely on savings, maybe even the money they were saving for the down payment on a house. Some even lost their homes through short sale or foreclosure or had to declare bankruptcy—more renters.

Which makes it a good time to have properties available for rent.

The demand for rentals, especially single-family homes, is strong, and there’s no reason to believe that will change in the near future.

“I think, until the economy in the country actually increases, you will see the rental market

continue to remain strong,” Lawby says.

2

A ‘WAIT AND SEE’ MENTALITY

Economic uncertainty has other implications. People are not only waiting to put down roots because they want the mobility to follow the jobs, but they also are waiting to get married and start families.

According to the U.S. Census Bureau, the median age of men and women walking down the aisle for the first time has increased roughly 10 percent since 2007. Men are waiting until they are nearly 30 years old to marry, while

women are tying the knot, on average, at age 27.

That translates to less pressure to purchase a home, Herriage explains, citing Commerce Department estimates that ownership will drop from its current rate of 64 percent to less than 61 percent. Each 1 percent drop in the ownership rate translates to an increase of approximately 1.2 million renters.

“We can reasonably expect the trend toward renting to continue to strengthen,” he says.

Broker Steven Cohen with Keller Williams Realty in Boston points out that the 2016 presidential election will only exacerbate this. People may decide to continue renting until they feel comfortable with the direction the new president is leading the country.

of Venture REI in Phoenix.

He doesn’t see that changing anytime soon.

But the implications go further than just fewer days on the market and minimal lost rent. You may be able to be pickier in the selection process by rewriting your acceptance criteria with higher standards (i.e., a 550 minimum credit score versus your previous 500). Once you have a good tenant, he or she may want to stay put rather than jump into such a competitive market.

Real Property Management believes the rental vacancy rate will continue to decline even as the economy improves. Lawby says a stronger economy will allow those who couldn’t afford to—think Millennials— to move out on their own, most likely into rentals.

3 4 FEW AVAILABLE PROPERTIES

The weak economy, decline in the marriage rate and fallout from the short sales and foreclosures of the housing crisis have created a strong rental market. More people are competing for the available rental properties, and vacancy rates reflect that, steadily declining from a peak rate of 10.7 percent in 2009 to the current rate of 6.7 percent.

For investors, that means fewer days on the market; in fact, in some areas, available single-family homes are being snatched up in just a few days, says Dan Noma Jr., owner

HIGH RENTAL RATES

Fewer available properties mean higher rent rates. Real Property Management recently released rental statistics showing that through the first quarter of 2015, the average monthly rent for a singlefamily, three-bedroom home was $1,286, a 5.4 percent increase over the previous year.

“As long as rental markets are tight, it’s going to put pressure on rental rates,” Lawby says. “Rent rates will go up or remain high.”

He cautions, though, that it depends on the local housing market and economy.

THE TIME IS NOW—TAKE STOCK OF YOUR OPTIONS Think you can’t afford to invest in real estate? You really can’t afford not to invest right now, says Dan Noma Jr., owner of Venture REI in Phoenix. Demand for rental properties has pushed rent rates to new highs, and homes continue to appreciate.

Some aspiring investors think because they don’t have cash, they can’t invest.

That’s not necessarily true.

“A lot of times, people have the assets to get into real estate, and they don’t even realize it,” Noma says, referring to self-directed IRA and 401(k) plans. “Using cash isn’t always the best option.”

If you want to invest in real estate, or purchase more real estate, but don’t think you have the funds to do it, schedule an appointment with a financial adviser to find out what your options might be.

Broker Patty Brockman with Windermere Real Estate in Portland points out that because it’s cheaper to own property right now than it is to rent, most investors will be able to generate positive monthly cash flow. They can

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that an investor would, according to Noma, so you aren’t necessarily competing with them. In fact, it can be a good, steady market for investors.

“You don’t need to rush into things like you did in 2005 where you were doing deals on the back of napkins just to get your hands on a property,” he explains. “You can be selective.”

6

INABILITY TO BUY

charge more in rent than they would have to pay on their mortgage or a loan, if they even have one. On top of this, she’s seeing a higher appreciation on homes lately.

5

LOW INVENTORY

There just aren’t that many available houses out there if you want to purchase a single-family home as your primary residence.

“In Portland’s market, the inventory of available homes hasn’t been this low since 2005,” Brockman says.

“We are in desperate need of housing, and that need is only going to grow.”

Leslie Kilpatrick, branch manager with Willis Allen, is seeing the same thing in San Diego County. In May 2015, the average San Diego home spent only 36 days on the market. Add to that how difficult it is to get a loan these days and soaring building costs, and Kilpatrick doesn’t see a drop in rental rates or demand any time soon.

It comes down to affordable housing, she explains. If someone can’t find affordable housing to purchase, they are going to have to rent.

That’s where the investor comes in. Homebuyers don’t necessarily want the properties

72 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

Many Americans who can find a property and want to buy can’t.

“It’s a tough time for someone who is renting to get out of rentals because they have to be able to come up with the money for the down payment and closing costs,” Lawby says. “Until the economy turns around, that’s going to be hard for a lot of people.”

Statistics bear that out. Over the last five years, median housing prices in the United States have increased by 27 percent from $172,300 in April 2010 to $219,400 in April 2015 while income has increased just 6.5 percent from $51,100 in April 2010 to $54,578 in April 2015. In the last year alone, median housing prices have increased by 9 percent while income has stumbled along at 2 percent.

Even if a renter can save enough for a down payment, stricter lending regulations have made it difficult to get approved for a mortgage. Until banks

loosen up a little, these renters will remain renters, increasing demand for rental properties and keeping rent rates high.

7

THE STIGMA IS GONE

Homeownership used to be the American Dream. Owning a home was a sign of success, proof that you had “made it.”

Renting, on the other hand, was looked down upon, and renters were often viewed as financial failures.

The housing crisis changed that. Suddenly, people who never dreamed of renting a home found themselves doing just that, and they realized they actually preferred it to owning. Meanwhile, younger generations watched their parents and their parents’ friends lose homes and savings when the housing market crashed and decided they wanted no part of homeownership.

As a result, more people are renting by choice, and that number is expected to increase. The National Association of Realtors estimates that 5 million to 6 million families will become new renting households within the next 10 years, and those families will need landlords.

BY TERESA BITLER

Teresa Bitler is a regular freelance contributor to Personal Real Estate Investor Magazine. Contact her at teresa@teresabitler.com.

RESOURCES Dwell Finance :: www.dwellfinance.com :: 800-227-8107 | Keller Williams Realty ;; www.stevencohenteam.com :: 617-861-3636 | Real Property Management :: www.realpropertymgt.com | Venture REI :: www.venturerei.com :: 480-269-8499 | Willis Allen :: www.willisallen.com :: 877-515-7443

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NUTS & BOLTS

PROPERTY MANAGEMENT

THERE’S NOTHING LIKE FIRSTHAND EXPERIENCE TO HELP YOU UNDERSTAND THE ADVANTAGES—ON BOTH SIDES— TO HAVING YOUR RENTAL MANAGED BY A PROFESSIONAL.

Why I Only Rent From Professional Property Management Companies

ver the years, I’ve written countless articles on the benefits of hiring a professional management company to manage your property.

Property management companies, I’ve noted in these articles, thoroughly screen your tenants and adhere to written acceptance criteria, reducing your risk of vacancy.

They also act as a buffer between you and the tenant, so you don’t have to collect late rental payments or answer 2 a.m. maintenance calls.

I’ve also written that good tenants often prefer professionally managed properties to self-managed ones, but it wasn’t until I became a tenant myself that I truly understood why.

O

BETTER QUALITY

When my husband and I, along with our two teens and dog, became renters in 2013, we had specific needs

and shopped based on those, not really caring whether the property was professionally managed or not. The house we found was self-managed and seemed well-kept.

Over the next two years, though, it became obvious that the tenants before us had been rough on the house, and each time the property had become vacant, the landlord understandably worried about the lack of income. He made the most important repairs, touched up the paint, but not much else. As a result, the home had issues.

At the beginning of this year, when the landlord decided to sell instead of renew our lease, we started looking for a new property. That’s when I noticed a big difference between self-managed and professionally managed properties. Self-managed properties often showed signs of

74 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

abuse—broken blinds, gouged kitchen cabinets, stained bathtubs, and worse. The properties seemed to be rushed through the rehab process to cut costs.

Professionally managed properties, on the other hand, usually had fresh paint throughout and new carpet. Everything shined.

The landscape was neat. They often looked like brand-new homes. I stopped wasting my time looking at self-managed properties and focused on professionally managed ones.

PROFESSIONALISM

Unfortunately, landlords and tenants sometimes have an adversarial relationship.

The landlord stands on one side of the lease, the tenant on

the other, and both think the other is out to take advantage of the situation. I know. Right or wrong, I’ve been on both sides of it.

A property management company takes the emotion and personalities out of the equation. Management companies have written policies in place so when a particular situation comes up, there is a set way to handle it. Plus, they usually have an attorney on retainer, so if there are legal questions, those can be addressed. Believe it or not, that’s comforting to me as a tenant, too.

The professionalism goes beyond that. I feel as if I’m treated as a customer when I contact the company that manages the home we now rent, rather than a problem. Also, when I call during business hours, I get a person on the phone, not a voicemail. The property management company also has a team of professional contractors with whom it works, so when I need a repair, like the tree that blew over during a storm, a professional landscaper comes by, not my landlord’s uncle or friend from church.

NO DRAMA

I’ve always joked that some tenants’ excuses for why they can’t pay the rent would make

great country songs, and I’ve written that having someone else to listen to these sob stories was one of the major advantages of using a property management company.

What I didn’t realize is it works both ways.

During the last six months that we were in our previous home, the smoke detectors needed to be replaced, the main water pipe leading into the house burst, the road washed out, and the water heater broke. To his credit, the

landlord fixed them, but before he did, we heard about his mother dying, his sick child, and just how much the house was costing him.

With a property management company, I don’t have to hear any of that. In fact, I don’t

even know the owner’s name (without looking it up) or know anything about her. And I like it that way.

BY TERESA BITLER Teresa Bitler is a regular freelance contributor to Personal Real Estate Investor Magazine. Contact her at teresa@teresabitler.com.

ECONOMIC SNAPSHOT :: SECOND QUARTER

63.9% HOME OWNERSHIP RATE

32.9%

62.7%

HOUSE PRICE TO RENT EQUIVALENT

LABOR FORCE PARTICIPATION

553,000 4.60

101.30% AS OF MARCH 31, 2015

5.7% VACANCY RATE

3.7% 30 YR. FIXED MORTGAGE RATE

5.5% UNEMPLOYMENT RATE

1.8 MM 0.2% $1,286 Source :: Real Property Management

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NUTS & BOLTS

LANDLORD/ TENANT ISSUES

WHETHER IN LOVE OR IN REAL ESTATE, BREAKING UP CAN BE HARD TO DO. HERE ARE SOME FIRST-PERSON ACCOUNTS OF TENANT-LANDLORD RELATIONSHIPS THAT HAD RUN THEIR COURSE.

Eviction Nightmares

BiggerPockets is a social media investing network that is gaining some traction, according to Pantak, and has advice on handling evictions. “The biggest mistake that people make as new landlords is that they don’t get educated in basic landlord-tenant law,” says Pantak. > Hire an experienced

I

f an investor owns a property, then probably one day he or she will need to evict a tenant. By knowing state and local laws and documenting every interaction with the tenant, investors can make an onerous process go more smoothly and with less lost revenue.

“As any investor in real estate knows, the value of your building is predicated on the gross rents multiplier,” says Drexel Bradshaw, managing partner at Bradshaw & Associates, a San Francisco-based law firm that handles evictions. “So the more rent you’re collecting, the more valuable your investment has become.

Both sides in the case become very invested in achieving their particular result: getting the tenant out for the landlord, and maintaining their tenancy on the side of the tenant.”

PLAY BY THE RULES FOR FASTER EVICTIONS

“You’ve got to know what you’re doing when you’re trying to evict somebody,” says

Bradshaw. And that varies, depending on where the property is located.

Take Maryland, for example. Most areas of the state require that a specific number of people be present for an eviction, depending on the size of the house, according to Suleman Hooda, president and owner of Real Property Management Capital. “If you have a three-bedroom home in Montgomery County, Maryland, you need to have 12 people there at the time of the eviction, otherwise the sheriff will cancel the eviction,” he says. “The idea behind it is that the sheriff only has one hour and within that one hour you need to be able to completely empty the house of all the belongings, all the furniture, all the personal belongings, everything. You need to completely empty it out and lock it up, and that’s the rule.”

If the evictor shows up with less than the required number of helpers, the sheriff will cancel the eviction, delaying the process another 60 to 90 days.

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Clearly, knowing the rules is crucial for an expeditious eviction. Experts offer several tips for keeping the eviction process on schedule: > Document every interaction

with a tenant. If it’s a spoken conversation, put it in an email or a letter. “Juries want to see the paper trail,” Bradshaw says.

> “Measure twice,

cut once,” i.e., get educated before starting the eviction process. One mistake in the eviction process, especially in tenant-friendly states like New York and California, could cost an investor months of lost income. Private equity investor Mark Pantak recommends attending local real estate club meetings to learn the ins and outs before filing papers. And he says many jurisdictions have pamphlets that can help educate an investor.

property management firm or talk with an attorney.

Investors who have never had to evict may not have the time or inclination to deal with the process, so engaging a property management firm or speaking with an attorney could help them avoid expensive, time-wasting mistakes. Some tenants are pretty sharp, and “they can drag it out and live there for nothing for a long time, so you’ve got to be smart—a few hundred bucks could save you literally thousands of bucks,” says Dan Reedy, owner of MoreKC1 and a former property manager.

> Investors or property

managers who suspect a tenant will trash a property or steal something before being evicted should have someone stop by a couple of times a day to either catch the person in the act or change the locks once they’re gone, says Reedy.

THE SCENE A hoarder is evicted in San Antonio.

“They hoarded everything. So we had served a ‘notice to quit,’ we had gone to court because she didn’t pay, and she was in default for a number of different reasons, one of them obviously was the condition of the property inside. The biggest thing, and I think the thing that the courts look at, is this: ‘If you’re not paying, you’re not staying,’ so we’re really lucky about that. Compared to some other places, it’s a lot easier in Texas to get a tenant out than it is in some other states.

“So, needless to say, this went to the final level, which was a repossession. The day that it happens, the court system sends a constable out there to basically keep the peace.

We realized the day that we were going to do this, it literally required everyone in the company to stop what they were doing, put their phone on ‘do not disturb,’ change clothes and come out to this house because it took them half the day to get everything out of the house.

“They found dead cats. They had bags and bags of things. And you know there is a law that you have to push it out to the curb beyond the property, so we’re in the process of moving everything out literally to the street and the constable’s kind of watching the clouds because if it starts to rain at any point during a writ of possession you have to stop everything. The constable will stop it, and you have to put everything back in

the house. And the constable just leaned over to my brother and said, ‘I’m watching these clouds, you better get a move on, (if) I feel one drop, you’ve got to put it all back in.’ We got it all moved out.”

– David Birdy, director of business development at Birdy Properties

CASH FOR KEYS AND OTHER TACTICS

Sometimes a cash inducement will persuade recalcitrant tenants to leave in lieu of an eviction. Trying to induce a tenant to leave with an offer of cash may seem counterintuitive, as the tenant already owes the investor money, yet a few hundred well-spent dol-

lars could save thousands by getting a tenant to leave early, especially in states that have prolonged eviction processes.

Reedy presents it as a simple financial transaction for the tenant. He starts at $200 or $300, then goes up to $500 if necessary. “If you’ll clean the place up, if you don’t screw it up, if you move out and we don’t have to haul all your stuff to the street, then you’ll get the money,” he says to tenants.

“We’ll tell them it needs to be swept clean, all your stuff out of here, cleaned up and not trashed, and when you hand us the keys, when we walk through, we’ll hand you a check.”

He says this tactic works about 25 percent of the time.

“Other times they’re just mad and hateful, and maybe they’ve gone a day or two before the eviction, but they’ve taken our appliances,” says Reedy. “They’ve kicked (holes in) the walls. They’ve cut electrical or plumbing or that kind of stuff.”

Sometimes it’s difficult even to have the “cash for keys” conversation, according to Pantak. Tenants know that the > Continued to :: PG 90

BY ROBERT SPRINGER Robert Springer is a regular freelance contributor to Personal Real Estate Investor Magazine. Contact him at rtspringer@gmail.com.

RESOURCES Bigger Pockets :: www.biggerpockets.com :: 215-627-6005 | Birdy Properties :: www.birdy.com :: 210-524-9400 | Bradshaw and Associates www.bradshawassociates.com :: 415-429-7451 | Equity Conservation Group, LLC :: www.meetup.com/HoustonHousesandApartmentsInvestingGroup | MoreKC1 www.morekc.com :: 816-767-1188 | Real Property Management Capital :: www.propertymanagementcapital.com :: 301-869-5001

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NUTS & BOLTS

MAINTENANCE

10 TIPS FOR PREPPING YOUR PROPERTIES FOR COOLER WEATHER.

Prepare Your Rentals for Fall Weather Now should be replaced after 10 years of use. Change all batteries at the same time each year so you don’t miss any. The end of Daylight Savings Time is the perfect time to do this.

I

n many areas of the country, fall and winter can be two of the most punishing seasons for your property, so getting an early start is crucial. Use the tips below to keep the most common perils at bay.

DRY UP THE CHANCE FOR WATER DAMAGE CLEAN YOUR GUTTERS

Improperly channeled water can compromise the structural integrity of your property, including the foundation and sheetrock inside. If not immediately addressed, water damage can quickly lead to mold growth.

INSPECT THE ROOF, SOFFITS AND FASCIA BOARDS

Check for damage to shingles, nail pops and wood rot. Using binoculars is a safe alternative to climbing a ladder. Be cer-

tain that your “top” weather barrier is in good condition.

WINTERIZE ALL WATER SYSTEMS

Drain, disconnect and store your garden hoses. Installing an inexpensive faucet cover helps prevent faucets and any connected plumbing from freezing. Drain your sprinkler system and swimming pool pump. Turn off the water and fully drain the plumbing systems of any vacant properties.

SNUFF OUT THE PROBABILITY OF FIRE INSPECT SMOKE AND CARBON MONOXIDE DETECTORS

Make sure carbon monoxide and smoke detectors are installed on each floor of every one of your properties.

They should be placed in each bedroom, main hallway, kitchen and basement. Units should be tested monthly and

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MAKE SURE YOUR MULTIPURPOSE FIRE EXTINGUISHER IS FULL AND OPERATIONAL

Store your fire extinguisher in an accessible location, check the pressure and follow the manufacturer’s instructions for monthly maintenance.

HAVE YOUR CHIMNEY PROFESSIONALLY CLEANED AND INSPECTED

A $300 inspection will cost much less than an insurance deductible in the event of a fire. A professional can repair any cracks, remove soot and other buildup, and make sure the flue and gas lines are in good condition.

GIVE YOUR FURNACE A TUNE-UP

HVAC systems should be checked at least twice a year— before winter or summer arrive. Having the ducts professionally cleaned can prevent costly fires resulting from dust buildup. Be sure

furnace filters get changed on a monthly basis.

EXPOSE THE HIDING PLACES OF THIEVES AND VANDALS CLEAN UP THE YARD

Prune bushes, and trim trees and climbing plants. Thinning dead or overgrown tree branches can prevent catastrophic roof damage in the event of a storm. Don’t let weeds, ivy or other plants’ roots exploit your foundation or siding. Remove debris from your yard.

BANDAGE UP THE CAUSES OF INJURIES AND SICKNESS REPAIR CRACKED, BROKEN OR UNEVEN DRIVEWAYS, WALKWAYS AND STAIRS

The expansion and contraction caused by freezing and thawing can lead to significant damage to exterior walkways.

If kept unchecked, these hazards can cause slips and falls.

PREVENT BUGS AND RODENTS FROM ENTERING YOUR PROPERTY

As temperatures fall, these uninvited guests look for new sources of food and shelter. Seal or caulk cracks, gaps or holes near baseboards, windows and doors. Cable, plumbing and electric service entry points should also have a tight seal.

The presence of these critters can create significant health hazards—keep it clean!

BY BREANN STEPHENSON BreAnn Stephenson is the assistant vice president of Affinity Loss Prevention Services.:: breann@affinityLPS.com

NUTS & BOLTS

MARKETING

POTENTIAL RENTERS AND BUYERS LIKE TO HAVE A LOOK INSIDE, EVEN IF ONLY VIRTUALLY.

Quality Photos of Your Rental Property are Vital ood photos attract good tenants and serious buyers to your property; bad photos make it difficult to generate any online interest at all.

While hiring an experienced, professional real estate photographer ensures quality images, you can take market-worthy photographs of your properties without fancy equipment or editing software. You just need to understand the basics, properly stage the property and plan your shots.

G

COME EQUIPPED

For better photographs of your property, ditch the cell phone and replace it with a digital single lens reflex (DSLR) and wide angle lens such as a 10-20mm or 1224mm lens. (If your camera doesn’t have interchangeable lenses, shoot with as wide an angle as possible.)

Using a wide angle lens can add some distortion, so you’ll want to have an editing software like Photoshop that can tweak the image back into proportion, according to real estate photographer Andrew King.

“The processing is the other half of the secret,” he says.

Is a DSLR with a wide angle lens and the photo editing software essential? Although almost anything is an improvement over a quick cell phone shot, if you want quality photos, it pays to have a decent camera and to invest the time to learn how to edit your photographs. Community college courses and online tutorials can teach you the basics.

You might also want to invest in a tripod.

“We always recommend shooting on a tripod so you can capture more natural light with longer exposures and not have to worry about the images being blurry or out of focus,” says Jeff Corn, CEO and co-founder of Virtuance, one of the nation’s leading real estate photography providers.

Tripods have the added benefit of leveling your camera, which in turn keeps the vertical lines in a photograph straight. When the verticals in a property photograph— the doors, walls and window frames—aren’t perfectly straight, it makes a photo-

80 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

graph look unprofessional and the property unappealing.

PREPARE THE PROPERTY

If you want photographs that showcase the property

at its best, start by decluttering and cleaning. Corn says that is the most important thing investors can do before they photograph a property.

“People understand someone lives there, but they don’t

want to know who lives there,” he explains. “It’s hard for someone shopping to imagine themselves living in a home when all they see are photos of Aunt Tilly and the grandkids, and there are 200 porcelain dolls filling a bedroom.”

Once the property is decluttered, clean it. Vacuum, dust, mop. Paint, if possible, and make sure the light bulbs work. Outside, mow the lawn and pull the weeds.

King points out that, ethically, you can do some touch-up to make the photograph look its best, but you shouldn’t alter the photograph to make the property appear to be something it’s not. Too many times, he says, he’s been

asked to “plant” a flower bed or “create” a lawn where one doesn’t exist, and having been a licensed real estate agent, he feels this is wrong.

“I believe a certain amount of honesty is required in the photos,” he says.

SHOTS YOU SHOULD TAKE

People who are interested in your property expect to see certain images online.

The one shot people expect to see (unless you are trying to rent out a condo or apartment unit) is the exterior of the home, according to King. He advises waiting until the sun is on the face of the house. Avoid shooting the exterior at high

noon, and photograph the home from multiple angles.

Inside, the kitchen is key since it’s where people entertain and congregate, but the master bedroom, master bathroom and living room are also important. By far, the most difficult areas to photograph will be the bathrooms.

“Small spaces and mirrors make them difficult,” Corn says. “You don’t want to catch your reflection in the mirror, and you don’t want to have a door blocking half of the shot.”

For better bathroom photographs, set the camera on a tripod and use the timer on your camera so you can stage the shot and step out of the way.

> Use a “real” camera, not a cell phone. > Invest in a tripod. > De-clutter and clean. > Schedule exterior shots so the sun hits the home’s face. > Rely on natural light, not your camera’s flash or strobes. > Keep walls, doors and windows completely vertical. > Position the camera roughly four feet from the ground. > Shoot from one corner of the room to another.

COMPOSITION AND LIGHTING

How do you make a room look its best? That depends on the room itself, according to King. You have to take into consideration the furnishings and the lighting, but in general, you want the room to look balanced. Natural light is preferable to staged lighting, he says. Avoid strobes and flagging windows unless you have experience with these techniques.

Corn says the simplest way for a non-professional photographer to compose a room is to stand in one corner of the room and shoot into theother corner. “There is absolutely an art to this technique to perfect it, but in the simplest of methods, this will be a huge improvement over most amateur photos.”

His other piece of advice for investors as they compose the image: Don’t shoot standing

straight up. Take your photo from a lower point than you think you should, usually four feet from the ground.

WHEN GOOD IMAGES ARE IMPORTANT

You can take appealing photographs of your property with these tips and a lot of practice, but when you need great images, ones that will sell your property, it’s worth the money to hire a professional.

“There are still techniques that require skill, experience and, in many cases, a lot of technology to produce the desired result,” Corn explains.

BY TERESA BITLER Teresa Bitler is a regular freelance contributor to Personal Real Estate Investor Magazine. Contact her at teresa@teresabitler.com.

P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

| 81

NUTS & BOLTS

TECH TOOL REVIEW

ZIPDIGZ OFFERS AN AUTOMATED ONE-STOP RENTAL LISTING, APPLICATION, SCREENING AND BIDDING PLATFORM TO SIMPLIFY AND SAFEGUARD LANDLORDS’ PROCESSES.

More Than Just a Rental Marketing Advantage ending your rental property listings to sites from Craigslist, Rentals.com, Zillow, et al., is the way most newspapers and publications have tried to replace long-lost rental classified ad revenue.

Now ZipDigz aims to change the way renters rent and landlords lease again by using the Internet to combine listings, applications, screening and bidding on a rental into a streamlined, one-stop process.

S

WHAT’S IN IT FOR YOU?

FOR TENANTS ZipDigz offers better listing and sorting of rental properties by market, a rental watch list and notification, as well as pre-application screening and qualifying, thereby assuring a tenant of practically “preferred” service.

It’s an advantage similar to

that of a prospective homebuyer coming to the table with a guaranteed bank loan.

FOR LANDLORDS ZipDigz uses a bidding model for applicants designed to maintain the highest and best rents available in the market at the time the prospective tenant is looking for a rental.

ZipDigz does this by asking tenants to bid on the available property.

In a hot market, this assures upward pressure on rents from bidder feedback.

In a cold market, it allows a landlord to lower rents incrementally until a deal is found and the rental is filled versus remaining vacant. Similar to the workings of eBay and Hubzu, there is a “Rent it Now” feature on ZipDigz that allows a renter to grab a listing (at a premium price point) and forego the auction “timer.”

It benefits landlords by ensuring a higher rental rate and

82 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

fewer days on market, while offering the renter the ability to snap up a choice listing amid heated competition, ZipDigz executive vice president Mike Daniels points out.

This rental auction process alone appears both unique in rental property marketing and powerful because ZipDigz has already put the prospective tenant through screening with a respected, industry-leading partner, TransUnion.

The added value to the landlord is that the screening company carries the compliance responsibility and legal liability of tenant prescreening. Only after this prescreening can a prospective tenant place an application with the rental bid. By using the Internet to manage the application and screening workflow, coupled with the auction model, ZipDigz allows landlords to follow industry standards or set any legal standard they may want in their ZipDigz screening profile and

now save time by looking only at prescreened tenants. As the screening has been done, the landlord can focus on the bids only in determining the final tenant selection.

WHO IS ZIPDIGZ & HOW DOES IT DIFFER FROM THE COMPETITION?

Orlando, Florida-based ZipDigz bills itself as “the most effective and complete product on the market for residential rentals … the only online bidding platform allowing consumers to compete for rental properties in real time … fully automated and integrated with simpleto-use yet robust property management software.”

“Our tools promise to increase rental rates, reduce vacancies and time on market and allow a landlord to manage more with less,” says Daniels.

ZipDigz is a streamlined end-to-end process that keeps the rental marketing and lease-up within one platform.

Daniels’ experience includes being part of an organization that was the first online bidding platform for REO purchases, and oversight of a large number of tenantoccupied properties gave him a firsthand look at problems that could ensue from the traditional, subjective method of awarding leases. As the business grew and tenant applications went crazy, so did the claims of discrimination by unhappy prospects. The

research and explanations became a huge task.

Possible tightened regulation of the industry would mean only further documentation of applications, screening, offers and management of the audit trail.

The ZipDigz auction model is an antidote that mitigates a landlord having to prove equal treatment of prospective tenants, especially with TransUnion’s uniform, automated prescreening. Now multiple preapproved bidders can apply for the property, so risk has been pushed back a

step to the credit agency, not landlord.

ZipDigz charges an upfront fee to prospective tenants (average $50) so people tend not to game the application system. In return, they can bid on any property that matches their needs in the system. More than 10 percent of those who register on ZipDigz’s website are buying the prescreening service so they can watch their desired properties.

A landlord no longer receives unscreened tenant prospects but qualified candidates screened to customary

standards. For the landlord, the question of why did you accept the offer from prospective Tenant A versus Tenant B is answered by the fact Tenant A had the highest offer of $1,050 versus Tenant B’s offer of $1,000.

A landlord using ZipDigz self-manages his or her listings and pays $195 upon guaranteed lease. This includes auto-fill of a landlord-specific lease, which the winning bidder has 48 hours to execute.

liability and impacts rents positively. In a hot market, ZipDigz reduces a landlord’s days on market and drives up rent for a specific rental because of the auction model.

In a slow market, this same tool preserves rents for desirable properties.

ZipDigz reduces marketing effort, screening and selection

heads enterprise sales to investment

IN SUMMARY

BY ANDREW WAITE Andrew Waite, founding publisher of Personal Real Estate Investor Magazine, has been developing and selling investor software with Nitro Mobile Solutions since 2010. He now companies and investors for Nitro.

Contact him at awaite@ nitromobilesolutions.com.

SUBSCRIBE TODAY!

America’s Best-Selling Real Estate Investment, Business and Finance Magazine for Individual Investors www.PersonalRealEstateInvestorMag.com

P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

| 83

BY THE NUMBERS

JOHN BURNS CONSULTING

grew over many decades.

The vast majority of the growth of individually owned rental homes has historically come from households who lived in the home before relocating and decided to continue owning and renting out the home rather than selling it.

Approximately 54 percent of the landlords of single-family rental homes own only one home, per RentRange.

DETACHED RENTALS IN MASTERPLANS

DATA POINTS TO A TURNING TIDE: BUILDERS AND DEVELOPERS RESPONDING TO THE GROWING DEMAND FOR NEW SINGLE-FAMILY RENTAL PROPERTIES.

A New Opportunity to Build Detached Homes for Rent

uilders and developers are poised to start building more detached homes for rent, as this historically ignored segment of the rental housing industry finally is getting the attention it merits.

For years, home builders have ignored 10 percent of housing demand, allowing resale homes to fill the demand. Of today’s 120 million households, 12.7 million rent a detached home.

B

NEARLY A THIRD OF RENTAL DEMAND

The nation’s 44.3 million rental households occupy:

15.5 MILLION INDIVIDUALLY OWNED RENTALS > 12.7 million detached

homes (29 percent)

> 2.8 million condominiums

and townhomes

26.8 APARTMENT BUILDINGS > 13.2 million units in

small apartment buildings (less than 10 units)

84 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

> 13.6 million units in

larger apartment buildings (10+ units)

2.0 MILLION MOBILE HOMES, BOATS, ETC.

HISTORICALLY A MOM-AND-POP BUSINESS

The 12.7 million detachedhome renters have largely been ignored by builders and developers for years as both supply and demand steadily

We have noted that even actively selling masterplans, despite not building single-family homes for rent, have a significant number of single-family renters. Just go into Zillow and look for yourself. The proactive developers are now looking to develop these neighborhoods and homes themselves, rather than letting others meet the demand.

Our research, which we confirmed with the CEOs of several of the institutional investors, shows that these renters live in detached homes primarily because that is the preferred lifestyle. Most of them did not even consider renting an apartment. They prefer to live in a detached home and are renting either because of: NECESSITY They do not have the ability to qualify for a mortgage.

FLEXIBILITY They choose to rent to maintain the flexibility to move.

They would rather spend what they earn today than save for a down payment.

5%

CHOICE

6%

12.7 MM detached

mobile homes, boats etc. detached homes condos and townhomes small apartment buildings apartment complexes

30%

2.8 MM attached 13.2 MM units in small buildings (2-9 units)

75.6 MM :: owned

119.9 MM :: households

44.3 MM rented

14.8 MM vacant

29%

134.6 MM :: housing units

Thus, the single-family rental home competes more with the detached resale and new home market than with apartments.

Clearly, there is a subset of renters who will pay a premium to rent new, as evidenced by the 200,000+ apartment units that are built and leased every year. If it works for apartment developers, why has there not been much attempt to build single-family homes for rent?

Those days are now ending.

30%

• • • • •

13.6 MM units in large buildings (10+ units)

35% 54%

2.0 MM mobile homes, boats, etc.

• • •

2-10 porperties 11-50 properties 1 property

7%

Source :: John Burns Real Estate Consulting, LLC

SEIZING THE OPPORTUNITY

Here come the homebuilders, seizing the opportunity to build single-family detached homes to be sold to professional investors or to manage themselves.

Consider the following: > Starwood Waypoint, an

owner of about 16,000 rental homes, has worked with 12 builders to buy homes from them. While they have often bought the slowest selling floor plan or the last few homes in a community, they are now actively pursuing new subdivisions in areas where they currently operate. Their CEO recently told me that their business has shifted dramatically in the last few years, with only about 25 percent of their tenants now having gone through foreclosure, versus more than 50 percent a few years ago.

> The CEO of American Res-

idential Properties shared

at our recent client conference that their tenant profile has shifted as well, with new leases typically to young families with more than enough income to buy but who are choosing to rent primarily to have the flexibility to move. > Masterplan developers

have taken notice. Bob Sharpe, the owner of Rancho Sahuarita in Tucson, surveyed his 5,500-home community and found that renters occupy 22 percent of the individually owned homes. With 4,000 homes left to sell, why not build and rent homes to this group, many of whom will buy homes in the future?

> Lennar has been a pioneer

in detached subdivisions for rent with their Frontera community in a suburb of

Reno, Nevada. Rents for 1,210- to 2,182-square-foot homes range from $1,499 to $1,999 per month, or $0.92 to $1.20 per square foot, per apartmentguide.com.

While Lennar also runs an apartment company, they acknowledged that the management complexities are very different. Lennar’s CEO recently noted that “it’s a pretty exciting opportunity for our company… and we’re probably going to launch another one or two as part of our evaluation as we go forward.”

DROP THE STIGMA

often—and that they have always been great neighbors and their homes have been very well maintained.

CONCLUSION

Last year, approximately 25,000 detached homes were built for rent. We believe that number will increase significantly over the next several years. We expect detached homes for rent to become an important segmentation opportunity for the top masterplans in the country, who will no longer ignore 10 percent of housing demand.

BY JOHN BURNS

There remains a stigma that renters are not as good for the neighborhood as owners.

From personal experience in my own neighborhood, as well as Census data, I can testify that they certainly move more

John Burns Real Estate Consulting, founded in 2001, provides independent research and consulting services related to the U.S. housing industry. The company includes a team of research analysts and consultants collecting data in offices across the country. www.realestateconsulting.com 949-870-1200

P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

| 85

BY THE NUMBERS

ALTOS RESEARCH

Why Investors Should Understand Real Estate Cycles hen investors understand where a market is in an expansion/contraction cycle, they are better

W

able to make wise investment decisions.

To this end, we publish Altos Research market data

that identifies homes-available-for-sale inventory, prices and days on market (DOM) for the last month, the month

INVENTORY CHANGE 7/31/15

ALTOS RESEARCH :: JULY 2015 REPORT

INVENTORY (# SDFS)

prior to that and a year ago.

The reason is to put the numbers in context.

The “snapshot” numbers by themselves are important, but they become even more valuable when plotted over a month, quarter or year, so that market behavior can be followed. Tightening inventory is a desirable market that forecasts shorter sales cycles

DAYS ON MARKET 7/31/15

MO/MO CHANGE (%)

YR/YR CHANGE (%)

DAYS ON MARKET

MO/MO CHANGE (%)

YR/YR CHANGE (%)

PRICE ($)

NORTHEAST

Baltimore-Townson MSA

10,236

6.23%

22.91%

130

-4.40%

3.49%

383,397

Boston-Cambridge-Quincy

11,546

14.62%

-6.18%

90

-8.70%

3.66%

581,473

New-York-Jersey-Long-Island

70,231

6.96%

15.05%

133

-1.79%

-17.90%

608,831

Philadelphia-Camden-Wilmington-MSA

20,492

4.92%

-11.24%

152

-4.38%

-5.64%

339,150

Rochester-NY-MSA

4,355

10.70%

-5.09%

118

-9.02%

-15.65%

170,128

Washington-DC-MSA

14,982

8.73%

11.86%

113

-2.94%

3.60%

605,413

Chicago-Naperville-Joliet

45,966

5.93%

7.52%

129

-4.21%

6.36%

342,361

Dallas-Fort-Worth-Arlington

20,280

4.38%

6.81%

79

-0.07%

-6.17%

319,589

Houston-Sugar-Land-Baytown

22,035

4.94%

-17.85%

95

-2.22%

-5.11%

354,483

Indianapolis-Anderson-Columbus

9,821

5.40%

-2.37%

112

-5.73%

-1.33%

196,624

MI-Detroit-Warren-Livonia-MSA

16,022

9.94%

7.96%

105

-7.36%

8.75%

230,997

Oklahoma-City-MSA

5,3111

2.56%

-2.53%

112

-3.68%

-2.12%

225,386

MIDWEST

SOUTH

Atlanta-Sandy-Springs-Marietta

21,010

4.66%

3.07%

110

-2.73%

-1.02%

283,296

Baton-Rouge-LA-MSA

4,247

-11.76%

12.97%

142

1.46%

10.89%

213,858

Birmingham-AL-MSA

7,715

0.96%

-7.88%

133

-4.64%

-13.65%

210,665

FL-Jacksonville-MSA

7,350

-0.90%

-3.93%

112

-1.71%

1.61%

264,662

Miami-Fort-Lauderdale-Miami-Beach

17,421

-1.73%

-4.71%

125

-0.85%

-4.19%

624,525

NC-Charlotte-Gastonia-Concord

10,275

3.69%

-6.88%

110

-1.42%

-8.66%

289,676

Denver-Aurora-Boulder-MSA

4,827

16.71%

-9.91%

90

-9.53%

-8.48%

591,720

Las-Vegas-Paradise-MSA

6,874

2.30%

3.71%

104

-3.19%

4.34%

278,701

Los-Angeles-Long-Beach-Santa-Ana

15,903

5.32%

-1.89%

83

-2.90%

5.49%

1,112,277

Phoenix-Mesa-Scottsdale

19,212

-7.94%

-23.50%

107

-2.47%

-11.63%

390,223

San-Diego-Carlsbad-San-Marcos-MSA

6,048

4.08%

-5.01%

87

-3.11%

1.91%

923,171

Altos-20-Composite

345,132

4.67%

-0.10%

112

-3.34%

-4.93%

483,452

Mid-Cities-Composite

114,280

4.01%

-3.76%

125

-4.14%

3.01%

334,857

WEST

ALTOS COMPOSITES

KEY

is better

means # is retreating

86 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

contracting inventory

expanding supply

fewer DOM

expanding # DOM

improving price

and rising prices. Expanding inventory is indicated by lengthening sales cycles and static or slipping prices.

REAL ESTATE ECONOMIC CYCLES

Cycles are like a clock and are relatively predictable in nearly every sense except timing.

There are three distinct phases to the property clock or cycle: boom, slump & bottom,

ASKING PRICE 7/31/15 MO/MO CHANGE (%)

YR/YR CHANGE (%)

then recovery. The cycle only moves clockwise and cannot reverse from slump to boom, as the excesses generated in a market run-up must be methodically worked out to allow the market to reach equilibrium and begin regeneration.

Property cycle follows a predictable pattern and is a powerful catalyst for investor fear and greed. The mainstream media typically give clues as to

MO/MO - DATED 6/26/15

where we are in the cycle but tend to report the facts and trail investor behavior because of the nature of headlinedriven reporting. The media messages also follow a cycle: BOOM :: “Prices are affordable

but rising; buy now or risk being priced out of the market!”

SLUMP :: “It’s cheaper to rent than buy; prices are too high and correction is on the way.”

YR/YR - DATED 7/25/14

INVENTORY (# SDFS)

DOM (DAYS)

PRICE ($)

INVENTORY (# SDFS)

DOM (DAYS)

PRICE ($)

0.55%

-5.16%

9,636

136

381,306

8,328

125

404,244

-0.26%

6.46%

10,074

98

582,993

12,307

87

546,185

0.23%

-2.22%

65,662

135

607,451

61,042

161

622,633

1.00%

-0.38%

19.531

159

335,777

23,086

162

340,427

-0.47%

3.40%

3,934

130

170,939

4,589

140

164,538

-0.70%

3.97%

13,779

116

609,682

13,393

109

582,299

1.35%

6.92%

43,420

135

337,790

42,779

121

320,214

0.95%

6.84%

19,429

79

316,588

18,987

84

299,120

0.13%

19.12%

20,997

97

354,040

26,822

100

297,585

0.41%

3.20%

9,318

119

195,827

10,060

114

190,521

0.48%

9.85%

14,574

113

229,883

14,840

96

210,291

0.77%

8.58%

5,179

117

223,649

5,449

115

207,554

0.85%

8.83%

20,074

114

280,913

20,385

112

260,313

4.54%

-0.26%

4,813

140

204,572

3,760

128

214,419

0.45%

3.76%

7,642

140

209,711

8,375

154

203,018

1.05%

11.99%

7,417

114

261,914

7,651

111

236,334

-1.20%

7.88%

1,728

126

632,083

18,282

130

587,903

0.28%

6.52%

9,910

111

288,878

11,035

120

271,937

-2.30%

8.97%

4,135

100

605,661

5,357

98

542,987

-3.07%

4.46%

6,720

107

287,542

6,628

99

266,799

0.92%

13.05%

15,100

85

1,102,123

16,210

78

983,837

-1.04%

19.66%

20,869

110

394,332

21,115

121

326,114

1.41%

4.95%

5,811

90

910,343

6,368

86

879,598

0.79%

7.00%

329,725

116

479,646

345,473

118

451,825

0.63%

8.76%

109,871

130

332,769

118,746

121

307,885

decreasing price

www. altosresearch.com

Or, to complicate matters, those with a vested interest say: “The market is coming back—soon!” This is often accompanied by reports of property investment falling out of favor.

RECOVERY :: “Properties are

in short supply and rents are rapidly increasing. Property values are flat or going down, then there is a hint of change.”

Reporting on a recovery is normally boring, compared to a boom-and-bust.

It’s appropriate now to ask: are we reaching a peak in American real estate? And the answer is: maybe, or maybe not—depending on which market and tier you are investing in.

ALTOS DATA REPORT

July data from Altos Research shows that inventory is generally expanding across a majority of markets. DOM, or the time it takes to sell a property, is slightly up, while asking prices are flat to mildly higher, reflecting a lowering of seller expectations.

The reason this data is shown by market (MSA) is to help investors select a general market, focus on a sub-market or neighborhood, and then a house with acceptable flip margins or rental cashflow.

The housing market is waiting for a couple of shoes (more like steel-toed boots!) to drop.

What will happen to interest rates and credit availability and what effect—if any—will devaluation of the Chinese yuan have on the U.S. economy? Stay tuned. Next issue we will explain the Property Economic Clock.

BY THE EDITORS P E R S O N A L R E A L E S TAT E I N V E S T O R M A G . C O M

| 87

BY THE NUMBERS

LOCAL MARKET MONITOR

MARKETS WITH A GROWING HEALTH CARE INDUSTRY ARE GOOD BETS AS REAL ESTATE INVESTMENT HOT SPOTS.

with an older population (Fort Pierce, Fort Myers) or markets that serve as regional health care centers. In both cases, the health care workforce is growing rapidly, which means good demand—for years to come— for investment housing, both single- and multifamily.

Healthy Investing

BY INGO WINZER Ingo Winzer, president of Local Market Monitor,

n America, the economy is dynamic, which means that things change all the time. This is good for the country as a whole, as new technologies provide opportunities for growth. And it’s good for those local markets where the technologies come into play—just ask those farmers in North Dakota who a few

I

years ago were sitting on marginal land but now are piling up oil royalties.

An often-overlooked “new” technology is health care, which usually is only in the news because it is expensive.

A combination of innovation,

expanded insurance coverage and an aging population make health care a growth industry in many local markets.

Our Top 10 list shows medium-sized markets with a rapidly growing health care sector. These are either markets

has analyzed real estate markets for more than 20 years and in 2005 warned that many housing markets were dangerously overpriced. His views on real estate markets are often quoted in the national press. Previously, Winzer was a founder and executive vice president of First Research, an industry research company that was acquired by Dun and Bradstreet in March 2007. He is a graduate of MIT and holds an MBA in finance from Boston University. www.localmarketmonitor.com

2013 POPULATION

AVG. HOME PRICE (000)

3 YR POPULATION 2011-2014

TOTAL JOB GROWTH

HEALTH CARE JOB GROWTH

HOME PRICE INCREASE

3-YR HOME PRICE FORECAST

UNDER PRICED

Greenville, SC

850,965

$190

3%

1.9%

6.2%

5%

15%

-16%

Port St. Lucie-Fort Pierce, FL

438,095

$173

4%

2.6%

5.5%

13%

29%

-10%

Asheville, NC

437,657

$217

3%

2.1%

4.9%

7%

24%

0%

Cape Coral-Fort Myers, FL

661,115

$205

8%

2.7%

4.9%

11%

27%

-18%

Colorado Springs, CO

678,319

$218

4%

1.5%

4.5%

6%

19%

-19%

Salem, OR

400,408

$195

3%

2.2%

4.5%

7%

21%

-11%

Santa Maria-Santa Barbara, CA

435,697

$419

3%

2.0%

4.2%

8%

15%

5%

Fort Collins-Loveland, CO

315,988

$264

6%

2.0%

4.1%

9%

22%

-1%

Tacoma, WA

819,743

$239

4%

2.3%

4.1%

8%

25%

-19%

Charleston-North Charleston, SC

712,220

$274

7%

2.0%

3.9%

8%

19%

1%

LOCAL MARKET MONITOR

Source :: Local Market Monitor 88 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

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| 89

> Continued from :: PG 77

Eviction Nightmares landlord wants to speak with them, so they tend to avoid the conversation, so landlords need to get resourceful. Pantak gets to know the tenants’ habits so he can intercept them on the way to work. He even blocked one man’s car in the driveway so he couldn’t leave, forcing that tenant to deal with him.

A family is evicted right after Christmas.

THE SCENE

“One of the sad ones is one we had in Missouri. I’ve got my guys there, and I was actually doing it for the bank. I had a couple of local banks that I handled. In order to get into buying houses, I started in the back door by doing their evictions, clean-outs, board-ups, OK, and so I’m standing there with the banker across the street.

“My guys are over there, and it was right after Christmas, and this was the heartbreaker because we had told them many times when the sheriff would come. Well, this was the sad one because there was a husband and a wife and just the cutest little blonde-haired girl, and we’re taking everything out—the Christmas tree’s sitting out in the yard, unopened presents just sitting out in the yard, and it wasn’t my property.

“I don’t know that I could’ve done it and I was just like, ‘Dude… .’ The banker’s like, ‘It’s terrible, but they had plenty of

notice.’ The little 4-year-old girl’s crying because they’re putting the Christmas tree out in the yard, and they’ve got to leave. It was just … it was not pleasant.”

– Dan Reedy

INVESTOR RECOURSE: ‘SEE YOU IN COURT’

The advice varies for what investors should do with a tenant who leaves while still owing thousands of dollars in back rent, but most experts suggest trying to recover the money. Property managers tend to try to garnish the evictee’s wages or turn the matter over to a collections firm to protect the property owner’s interest, according to Reedy, even if it felt like just going through the motions.

“Whether you get anything or not, it’s the principle of the deal, and it’s also letting the owners know that you’re managing for them and that you’ve got their best interests at heart,” he says.

Reedy files a police report if there is damage or he discovers something missing.

He also suggests trying to get a judgment for back rent and turning the evictee over to a collections agency. It’s rare that he would be able to recoup anything, as the evictee probably already was experiencing financial hardships before the eviction.

Hooda goes after deadbeat tenants as well, but says that “nationally, the percentage that you collect is in the single

90 | PERSONAL REAL ESTATE INVESTOR MAGAZINE | SEPT :: OCT 2015

digits, so the landlord unfortunately does end up writing off most of these expenses in a lot of cases.”

Blowing off a debt makes sense if an investor doesn’t have a very high likelihood of collecting, according to Bradshaw. “What you find is that people who would run up an eviction defense bill and people who would trash a place

on the way out the door are by and large judgment-proof,” he says. “So it’s not worth it from the landlord’s perspective to try and spend money on attorney’s fees collecting a worthless judgment.”

An eviction isn’t supposed to be a sweet dream for either side—smart investors try to make sure it doesn’t turn into their personal nightmare.

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