Category Archives: Income properties

A rookie’s guide to buying a rental home

Duplex for sale in Dana Point. Click photo for details.

Source: OC Register

As rents hit record highs, here’s a rookie’s guide to buying a rental home

Hugh Siler had a vision when he bought a full block of small houses in Orange this spring. He would restore the homes, built in the early 1900s and long fallen into disrepair, to their original state. After that, he’d rent them out at top dollar.

One house is done, and if it’s any sign, his payoff will come sooner than later. The 450-square-foot, one-bedroom cottage on Palmyra Avenue near Orange Plaza rented for $1,850 a month – immediately.

“Literally, it rented before I even stuck a sign in the ground,” Siler said a couple of weeks ago. His tenants, a young couple, plan to move in by the end of November.

As rents break records, apartment vacancy rates stay low, and millennials delay homeownership, buying houses to rent appeals to investors large and small. But the foreclosures of the Great Recession have been receding for years, and bargains can be hard to come by in Orange County, where the median home price was $640,000 in September.

That’s led many local buyers to set their sights on less pricey property in the Inland Empire and sometimes other states.

“Most investors still invest in their backyard,” said Daren Blomquist, spokesman for Irvine-based Attom Data Solutions. “So for those folks in Orange County, Riverside and San Bernardino are good options.”

Of course, risks abound, including the impact of housing and economic policies to be shaped by a new president, albeit a real estate developer. Also, Federal Reserve Chair Janet Yellen said last week the U.S. central bank is ready to lift interest rates. The hike is expected in December.

Earlier this year, real estate adviser RCLCO predicted, “If household income growth for lower and middle-class Americans remains slow relative to historic gains, and home mortgage standards do not loosen for subprime borrowers, it is likely that the recent boom in single-family rentals is here to stay.”

Here are five additional things investors and would-be landlords should take into account.

POPULAR PLACES

Attom released a report in October showing potential profits on rental homes throughout California. The analysis included capitalization rates – or rates of return on a real estate investment property based on the income the property is expected to generate.

With a potential annual gross rental yield of just 4.3 percent, Orange County came in at No. 461 out of 473. By comparison, San Bernardino County has a 7.6 percent potential capitalization rate, ranking No. 311. Riverside County has a 6.1 percent potential cap rate, ranking No. 399.

So where else are Orange County investors looking?

The company did an analysis for the Register last week and found the top 10 counties where Orange County residents own investment homes are led by Riverside, Los Angeles and San Bernardino counties.

Those places were followed by Clark County, Nev.; Maricopa County, Ariz.; San Diego County; Mohave County, Ariz.; Kern County; Wayne County, Mich.; and Harris County, Texas.

FINDING A NICHE

Many investors specialize in one type of residential property, whether it’s single-family houses, mobile homes or apartments.

Siler has found a niche within a niche: restoring and renting out historic homes.

It can be a difficult proposition. For one thing, he said, a bidding war ensued over the five homes – one a duplex – that he purchased in April. He said he spent a total of $1.62 million to come out the winner.

Then, there’s the exacting work of creating authentic restorations. “Most people would say I’m fairly nuts to take this on,” he said. Compared with remodeling homes from the 1970s or ’80s, “When you do a vintage home, the template goes out the window.”

He’s had some experience, restoring the historic Shaffer Cottages, a set of four tiny, attached apartments he bought elsewhere in Old Towne Orange for $585,000 in 2011. That project saw him spend about $175,000 and some 4,000 hours on refurbishing and restoration.

At least he could count on some future cost-cutting. The original, refinished floors eliminate the need to buy carpeting for every new tenant, and it takes only a gallon or two of paint to refresh a small interior.

RENTS UP

One of the most dramatic shifts in the U.S. housing market in the past decade was the “unprecedented” increase in single-family home rentals, RCLCO said in a report this year.

But, the firm added, “While there has been widespread discussion of the economic and demographic shifts affecting the U.S. multifamily rental market, a major component of the overall rental market – single-family rentals – has been largely overlooked.”

Reis Inc., which tracks apartment rents, said rates went up in all 79 major U.S. metro areas it studies. The average rent for all metros was $1,271 a month, up 19 percent over the past 4 1/2 years.

In Southern California, rents hit all-time highs. Orange County rents were the ninth highest among the top 79 U.S. cities.

The average asking rent for an Orange County apartment climbed to $1,781 a month, following 61/2 years of steady hikes, according to Reis. In the past 4 1/2 years, rents shot up 14.3 percent, or $223 a month.

In Los Angeles County, the average asking rent reached $1,676 a month, rising nearly 18 percent over the past 41/2 years, Reis reported. In the Inland Empire, the rents were up 17 percent to $1,239.

Meanwhile, homeownership has been dropping, and millennials are expected to rent for longer than their parents did.

John Burns, an Irvine-based real estate consultant, predicts an overall 60.8 percent homeownership rate among all age groups by 2025, the lowest since the mid-1950s.

THE RISKS

Still, investors can face plenty of uncertainty, starting with their newly purchased property.

For one thing, often, a home inspector won’t find everything, Siler said.

“So make sure to set aside an additional fund of money – about 15 percent of your overall renovation budget,” he said, “and call it your ‘just in case’ fund.”

Investors also say it’s best to have at least six months of reserves in the event a renter doesn’t turn up right away.

Institutional investors – those with 10 properties or more – have purchased more single-family rental properties this year, even though average returns dropped to a nine-year low, Attom said in an Oct. 27 news release. But, the data firm said, “After a drop-off in single-family purchases by both individual and institutional investors over the past two years, we’re starting to see investor acquisition activity pick up again.”

Blomquist said it’s a good idea for smaller investors to pay attention to what the larger, better-capitalized investors are doing.

“In some cases it may be so the smaller investor can simply follow the lead of larger investors who have found a market or strategy that delivers strong returns,” he said. “But in some cases, it may be to avoid the strategies and markets employed by larger investors, so the smaller investor doesn’t have to compete.”

NOT A LANDLORD?

A lot of mom-and-pop investors like the idea of collecting monthly checks, but balk at the hassle of finding renters or fixing dishwashers. Or they worry about being too far away to handle the upkeep.

An Irvine company is one of one of several online investment management firms helping buyers more easily pick up single-family rental homes in lower-cost markets where returns are higher.

HomeUnion acquires the property on behalf of the investor, completes the documentation online, lines up property management, and later helps the investor figure out when to sell. Transaction fees are 3.5 percent of the purchase price; management fees are 10 percent to 10.5 percent of the rent.

The company, operating in 18 U.S. markets, has penned the motto, “You invest, we do the rest.”

It appears to be working.

The firm recently announced plans for an initial public stock offering.

A property with a catch: Why zoning laws matter

Property: 607 Calle Canasta, San Clemente 92673
Status: Off market; listed in June 2016 for $1,298,000

This property COULD be a tremendous opportunity for the savvy investor, but it comes with a catch so I thought it would be good to take a look.

On its face, it seems like this 5-unit complex is priced competitively enough so that there’s a little meat on the bone for an investor to earn some income right out of the gate:

$1,298,000 with 20% down brings your mortgage payment to just around $5,000/mo. If pro forma rents hold up and you can in fact earn over $5,600/mo, you might think it’s worth looking into further.  However, also included in the notes of this listing:

“Since 5th unit is non-conforming, lenders will require loan to be commercial paper. Building is zoned a four-plex, however large front unit was converted to (2) un-permitted units.”

A non-conforming use issue can quickly turn a great deal into a nightmare for the uneducated investor. Most jurisdictions in the United States have some form of zoning regulations in place. Certain zones may only permit single-family dwellings and thus forbid apartments and commercial uses.

In the aforementioned example, a 4-unit complex was converted to a 5-unit complex without properly permitting, probably because the property is located in a zone that prohibits such use. Therefore, this property is “nonconforming” to modern day building and zoning codes. In some cases, a property can be designated as “legal” nonconforming if its configuration and use was legal at one time and pre-dated the zoning laws.

There are plenty of non-conforming properties out there and the practice of changing the configuration and use of a property is not uncommon, but it’s important to know the potential hazards of investing.  For example, if a neighbor files a complaint with the City about an illegally functioning 5-unit complex across the street, the City may force you to convert the property back to how it was originally permitted. You may have issues with insuring a nonconforming property.  You may run into liability issues with future tenants.

It’s also worth noting that the seller’s agent believes any buyer requiring financing will have to resort to “commercial paper,” which typically means harsher terms, higher interest rates and much shorter timeframes to pay back a loan.  All things to consider when considering a non-conforming property.

Questions to ask:

Is this “legal” non-conforming or “illegal” non-conforming?

How many utility meters are there?

How many units is the City building department monitoring for the property?

Have all 5 units been occupied continuously for the past year?

If you have questions about a property you’re interested in buying or selling, contact me.

26151 Via California

This week’s listing is a great income property in Capistrano Beach. You have to come in with a substantial down payment in order to make a profit each month, BUT the appreciation potential in this area is huge.

26151 Via California
Unit 1: 3 bed, 2.5 bath
Unit 2: 2 bed, 2.5 bath
3,600 square feet total
$1,299,000

house-1 house-2
Unit 1:

house-3 house-4

Unit 2:
house-5 house-6

Here’s why I think this is a great buy:

  • Like I said, the appreciation potential is huge. With the revival of the nearby Dana Point Harbor and Lantern District, along with planned upgrades to Capo Beach, property values should rise in the future
  • Both units are spacious and clean. There is an opportunity for some nice renovations, but the properties could rent as is for now
  • Highly-rated schools: Palisades Elementary is an 8, Shorecliffs Middle School is an 8, and San Juan Hills High is a 9

Want to check it out? Contact me today.

214 Via Robina #12: For Lease!

This week’s listing is a great rental in San Clemente.

214 Via Robina #12
2 bed, 2 bath
1,016 square feet
$2,400/month

home-1 home-2 home-3 home-4

Here’s why I think this is a great place to rent:

  • Ocean views
  • Walking distance to downtown San Clemente shops and restaurants
  • Walking distance to the San Clemente Pier and some of the most famous beaches in California
  • Nicely remodeled with new hardwood flooring and carpeting, an updated kitchen, and remodeled bathrooms
  • Dedicated carport and a large one-car detached garage (great for this area, where parking is often challenging)
  • In-unit washer and dryer
  • Trash, water, and sewer are included
  • Dogs up to 20 lbs are permitted
    Want to check it out? Contact me today.

The State of Real Estate

As we head into summer, the real estate market is expected to heat up. It usually does this time of year because families want to move and settle in before the school year begins.
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So, who stands to benefit most from the current market–buyers or sellers? Well, for once, I’d say both. Here’s why I think the market is looking healthy:

Home equity is up
According to CoreLogic DataQuick, the median price of an Orange County home is right around $590K, up 4.2% from the previous year. That’s the 5th highest median home price since they began tracking in 2012, and comes to within 8% of the all-time high of $645K.

Here’s a breakdown of the market by California county:

County/region Median price 1 yr ch Sales 1 yr ch
Orange $590,750 4.2% 2,074 -1.5%
Los Angeles $465,000 9.2% 4,479 -2.5%
Riverside $305,000 7.0% 2,349 -3.8%
San Bernardino $250,000 11.1% 1,631 -11.5%
San Diego $440,000 7.3% 2,568 1.1%
Ventura $460,000 6.5% 549 9.8%
Southern California Total $415,000 8.4% 13,650 -2.7%

Source: OC Register

These rising prices are not unique to Orange County (Source: Money magazine). Home prices nationwide are expected to rise 4.9% on average this year, according to the National Association of Realtors (NAR). That’s closer than we’ve been in a while to the long-term average of 3.3%–and a lot more manageable than either the sharp drops of the bust years or the 12% spike we saw in 2013.

What this means is that if you own a home, you can take comfort in its increasing value. And, depending on when you bought and the type of loan you got, you may even want to refinance. For a while, it wasn’t possible for many homeowners to refinance because they didn’t have equity in their home (meaning, the value of the house was lower than what they owed on their mortgage). With rising property values, only 11% of owners have negative equity.

Now that people have more equity in their homes, they’re more open to selling and buying something new. This is a great sign of a healthy market.

Interest rates are still low
Despite predictions that interest rates could tick up by summer, the 30-year fixed rate (most recently at 3.7%) is still relatively low. NAR is forecasting that the 30-year fixed-rate mortgage will average 4.3% in the third quarter of this year, 4.7% in the fourth, and 5.3% over all of 2016 (Source: Money magazine). For perspective, on a $300,000 loan, the difference between 3.7% and 5.3% would be $285/month ($102,600 over the life of the loan).

Low interest rates are good for buyers for obvious reasons, and they’re good for sellers too. Buyers know the rates won’t last forever, so if the rates tick up this summer, there could be a rush to buy. Of course, if rates go up too far, that will mean home prices take a dip. After all, home buyers look at their monthly payment and, with higher interest rates, they can’t afford as big of a sticker price.

Inventory is stabilizing
According to Money magazine, nationwide inventory is expected to loosen up, with 1.9 milliion units on the market this year. For the second year in a row, the number of homes that were “flipped” has dropped, while the foreclosure rate is less than half what it was 2 years ago.

Also, with a healthier market, builders are picking up the pace and there is expected to be an increase in houses and condos for sale this year. That means more to choose from for buyers.

Bidding wars aren’t as common
Because prices are more stable now, there aren’t as many “deals” for investors to pounce on. And with fewer investors in the picture, regular buyers have more opportunity and don’t have to worry as much about being priced out in bidding wars or by all-cash offers.

If you’re looking to buy or sell, or just have questions about the market, contact me . I’d love to help!

The pros and cons of investment property

One thing I didn’t know about Capistrano Beach until I moved into the neighborhood is that it has a ton of rentals. Almost every street has multi-unit dwellings–duplexes, triplexes, quads. Plus, many people who move out of Capo Beach keep their single family homes as rentals because of the market demand. Let’s face it–people will pay a premium to have the ocean nearby.

In many cases, rent paid can cover the mortgage (and, ideally, property taxes and some other expenses related to the property, like gardening, pool service, etc). But, even if you break even, owning a rental property can still be a great option. After all, there are tax benefits. In the eyes of the IRS, that property is its own little business. Yes, you have to declare the income, obviously, but you can also write off expenses you have on the property. Plus, consider that the property has a good chance of appreciating in value over time. While the market has plateaued a bit, the big picture shows gains. Even if are in the red a bit on a rental property, the long-term appreciation may make it worth hanging onto.

This is a vacation rental available in Capo Beach. Check it out here: www.homeaway.com/vacation-rental/p189857

This is a vacation rental available in Capo Beach. Check it out here.

Of course, like most investments, there can be downsides to income properties, too. They are considered “concentrated investments,” meaning you’ve got a lot of eggs in one basket. And they are “illiquid,” meaning you can’t get your money out quickly. On paper, you have this 400K asset, for example, but you can’t access that as real money overnight. And, by owning an income property, you find yourself in a new role–landlord. Dealing with tenants can be a really great experience, or a really tumultuous one. My in-laws always tell the story of the couple who refused to pay rent and, when finally evicted, they squeezed honey all around the borders of the house to draw in ants. It worked. There were lots of ants.

If you’re hesitant about being a landlord, there are property management companies that will oversee your property for you at a cost of about 8% to 10% of the monthly rent. They’ll collect rent checks and field calls about backed up toilets so you don’t have to. Property managers are not only convenient but essential if you live far away from your rental property.

Keep in mind, your property may make a great vacation rental. There are companies that specialize just in vacation rentals and they will be able to tell you how much your home would go for per night (it usually varies depending on season). They will collect a percentage fee to market your home and manage the tenants. Sometimes, you can collect the same cash in one week as you would in a month from a tenant on an annual lease. But, you also run the risk of not having renters for weeks or months at a time, depending on demand in your area.

If you’re considering adding a rental property to your portfolio, these would be my questions for you:

  • Are you okay with tying up your money in that property, possibly for several years, until it appreciates to a certain level?
  • Have you done the math on how much you spend on the property per year (mortgage, property taxes, property insurance, repairs and maintenance) versus how much you can bring in per month?
  • Are you ready for tenants?
  • Do you have an emergency fund when things like water heaters and air conditioners break?
  • Do you want a property manager?
  • Are there vacation rentals in your area, and would that be an option for your home?

Feel free to contact me if you want to discuss rental property opportunities near you!