MarketStats Blog

When it comes to real estate investing most investors make mistakes as they work to build up their portfolio.  Hopefully we learn from those mistakes as we move from one deal to another so that we can become better and our deals (hopefully) get easier.  As a real estate investor I am certainly no exception to this.  Last month I shared a post on real estate investing and rehabs and a costly mistake I made with my general contractor.

Today I’d like to share a mistake that I’ve made more than once when it comes to rentals and why I’m a big advocate of property management now.  I’m a huge fan of rentals that cash flow.  They can (and should) be the least work of any type of real estate investing.  When you couple real estate timing with holding properties as rentals it is certainly the best way to make money in real estate.

The biggest drawback with rentals is that you actually have to have tenants in the properties   Now don’t get me wrong, there are a lot of good tenants out there.  But there are also some professional bad tenants out there who have radar for “suckers for a good story,” like myself.  These professional tenants just seem to know what rentals to apply for where the owner is gullible enough to buy their lame excuses about why they can’t pay the rent.

I had one such tenant in a fairly upper end home that managed to come up with story after story after story.  Mostly because I seemed inclined to listen to them!  I didn’t finally evict them until they owed me 6 months of past due rent!  They bounced 2 checks during that time, made numerous promises and delivered on none of them and finally trashed the house.  Then to top it all off, this tenant was arrested for assaulting his wife and he had the unbelievable gall to have his attorney subpoena me to testify on his behalf as a character witness!!!  Needless to say when the attorney heard what I had to say about the character of his client he released me from the summons without testifying.

You know what the worst part of this whole story is?  These were not the first tenants I had to evict.  I’d heard the sob stories before from other tenants.  My wife tells me I’m too softhearted, which is certainly true.  But I think more importantly I’m too gullible to be a property manager.

But real estate investing is about learning lessons.  I’ll tell you this, I still love rentals!  I love real estate timing and cash flowing rentals as my favorite investing strategy.  So what did I learn from all of this?  That I can’t manage tenants!  Oh sure, if I kept doing it over and over and over again I would eventually get better but the simple fact of the matter is that I don’t like dealing with tenants.  It’s too much work, too much headache and simply not worth it.  I will never self-manage a rental property again.  I will always use property management to handle rentals for me.

Lately I’ve been seeing some real estate markets where investor speculation has really been taking off again.  Investors are buying up every property they can lay their hands on because they seem like such good deals.  A good example of this is the Ft. Myers-Cape Coral area in Florida.  This real estate market was very popular during the boom years for investors who had dreams of massive appreciation.  As a result home sales went through the roof and tons of new properties were built.  The problem was the market tanked before most of these investors could flip their properties.

Now investors have surged back into that market because the home prices have dropped so far and would you believe that the rate of existing home sales is even HIGHER now than it was in the boom years in the Ft. Myers-Cape Coral market?  It’s almost all investor speculation again.

Now the purpose of this post is not to slam on the Ft. Myers-Cape Coral real estate market.  I’m not telling you to buy there any more than I am telling you not to buy there.  That is for you to decide for yourself as a real estate investor.  I would hope that you would make use of the real estate timing charts at REMarketStats so you can analyze any market before you buy or sell.  It’s a whole lot safer than just buying because that’s what everyone else is doing.

The main reason I’m bringing up this surge in investor speculation in different areas is that I want to encourage you to plan for your exit strategy.  What is the purpose of buying your real estate investment?  Are you buying planning on future appreciation?  Are you buying for cash flow?

In real estate investing it’s crucial to have your exit strategy in mind before you buy.  How will you get paid and make money on the deal?  If you are buying planning on appreciation I strongly urge you to have a look at some real estate timing charts before you buy.  If you are just thinking about buying because everyone else is or you heard it’s a good deal, I hate to break it to you but you might be in for a long, long wait before your investment starts to climb in value.

Are you buying for cash flow?  This is a little safer because if a property cash flows you can pretty much hold it forever, whether the market appreciates or not.  I would still recommend looking at real estate market timing charts before you buy.  I would do this because, in my opinion, if you had to choose between two properties, both cash flow, but one is in a market that is going to start going up and the other is in a market that is still going down I would definitely want to chose the market that is about to go up.  You’ll make a lot more money that way.  The other thing about cash flow that you need to take into consideration is how is the rental market in that real estate market?  No matter how good a deal sounds, if you can’t find tenants for it, or are afraid to collect the rent because the neighborhood is so bad, it really isn’t a deal worth getting into.  Talk to some property managers before you buy.  They should be able to give you some information about the rental market in that area.

The other thing that I strongly encourage you to do in addition of planning for your exit strategy is to have a BACKUP PLAN.  Unfortunately sometimes things don’t go as planned.  Your first exit strategy may not always work out the way you wanted. If you have a backup plan in mind you’ll be a whole lot better off.  It will be much easier for you to deal with whatever problem comes up.  For example, if you are buying in a market that is getting ready to go up and you are buying planning for appreciation, that’s your first exit strategy.  As a backup exit strategy I think it would be good to make sure that the property at least breaks even on cash flow, but preferably cash flows.  That way if it takes longer than you anticipated for the values to go up you can at least hold the property and still have it be a sound investment.

This is one of the reasons I don’t like negative cash flow investments.  It makes it harder to have a strong backup plan when you are bleeding money every month.

Remember, I’m not saying whether you should or should not buy in any particular market you are interested in.  That’s up to you.  I’m urging you to exercise caution.  Don’t just buy because everyone else is buying or it seems like such a good deal.  That’s not smart investing.  Do some research first and then have your exit strategies in place.

I received a very good question today regarding the real estate market timing charts at REMarketStats.

JP asked:

“There’s no doubt in my mind that timing emerging real estate markets can be super profitable, and your indicators are great.  The problem I have is this…

To determine the next emerging markets, I would have to study hundreds of charts every month.  Is there some easier way to do this?”

JP asked an excellent question and I wanted to share my answer with everyone.

In fact, there is an easier way to make use of the real estate market timing charts.  Certainly the first couple of months will take a bit longer no matter how many charts you look at because it takes a bit of time to become comfortable with analyzing them.  The training videos on the REMarketStats site certainly will help you to learn how to analyze the real estate markets.  In fact, I can read through the 230 or so charts in about 3 hours now because I’m used to looking at them.  So definitely over time it will get quicker.

But more importantly, it really isn’t necessary to look at every single chart.  It will depend some on your investment criteria but what you’ll probably want to do is to keep a “watch list” of markets you are interested in.  That way each month you can just look at the charts that meet your criteria.  It will go much, much quicker that way.

For example, a market like Flint, Michigan or Dayton, Ohio probably wouldn’t be on your watch list unless you live in that area or you are buying purely for cash flow and not appreciation, because even when the indicator data is up in those markets the appreciation rate isn’t nearly as strong as in other areas.

Also, some markets may have entry price points that are just too high for you to want to invest in, even if the home prices appreciate quite well when the indicators are up.  Markets such as San Francisco or Washington DC are going to be much too expensive to cash flow or even have a low negative.  If having positive cash flow or at least break even cash flow is high on your priority list you can also take those types of markets off your watch list.

Other criteria to consider are markets that are in population decline.  For the most part you probably won’t see these markets having significant appreciation rates any time soon.

Once you establish your criteria and then put together a watch list you can probably review those markets each month in about 1 hour, which really isn’t that much time at all.  If you can spend only 1 hour per month to determine the best real estate markets for you to invest in, isn’t that time well spent?  Especially since it can make you tens of thousands of dollars more in profits per deal.

In my last post I talked about doing 1031 exchanges with real estate timing as a way to pay ZERO capital gains taxes when you sell a piece of property.

This is a great strategy to really build your wealth because you can grow it so much faster if you aren’t having to pay a huge chunk of money to the government each time you sell.  However, I also pointed out that 1031 exchanges are tax deferred, meaning that eventually the government wants their money.  They’ll get it as soon as you sell a property and actually keep money from the sale.

So is there a legal way to avoid this?  You bet there is.  You’ve got several options.

Let’s look at the first choice.  Let’s say you use the real estate timing market momentum charts to buy a real estate investment and then down the road when the momentum charts say its time to sell you want to sell and move only part of your profit into another property.  You want to keep some of that income for yourself.  Any portion of the income you keep would be subject to capital gains tax.  Wouldn’t it be nice to not have to pay any tax on that?

Here’s a good way to do this.  When you sell the first property and move your profits via 1031 exchange into the next real estate investments, hopefully more than 1 now so you can really grow your wealth, move ALL of the profits into the next investments.  Stay with me here, I’m going to explain how you’ll get to keep some of it.  After you meet any seasoning requirements necessary do a cash out refinance on one of the investments.  This way you can get that money without it being a taxable event!

Let’s say you’ve been doing 1031 exchanges for a while now, you’ve really made some money in real estate investing but you are ready to retire.  Now if you were to just sell your real estate investments the tax man would come calling wanting Uncle Sam’s cut.  So what do you do?  There are a couple of options here and I like the idea of using a blend of them.

First, let’s say you want to get a big chunk of money out.  Here is a creative way to handle it.  Do one more 1031 exchange.  You’re going to sell off some of the investment properties and use that money to purchase another home via 1031 exchange.  Let’s say for example you sell off 2 properties for $200,000 each and then move the money via 1031 exchange into a much nicer, beach front, single family home for $400,000.  You need to turn that home into a rental for at least one year.  Then after the rental period you can turn it into your principal residence.  If you choose, you can sell your existing principal residence and take advantage of the principal residence tax deduction (the first $250,000 is tax free if you are single, $500,000 if you are married).  You may also want to keep the family home, that’s completely up to you.  The point is that this second home needs to become your principal residence for at least 2 years, then you can sell it and use that principal residence tax deduction to take your 1031 exchange profits out – TAX FREE!

Do you see how that works?  You did a 1031 exchange into a single home.  You have to rent it for a period to meet the 1031 requirements and then by you living in it for 2 years it becomes your principal residence and qualifies for the principal residence deduction so when you sell it those profits are now tax free.

Obviously you’ll need to meet the 1031 requirements and the principal residence deduction requirements to do this.  I’m certainly no tax advisor so I recommend you talk with one as well as a 1031 specialist to do this right.

Myself, I also really like the idea of having rental income when I retire.  Real estate is how you build wealth, it’s also how I think wealth should be kept.  That way when you retire you have that rental income coming in no matter what you do.  A common expression the wealthy use is “never touch the principal.”  In other words live off the income the principal generates without depleting the principal that way you’ll always stay wealthy.  That’s exactly how rentals work.  You keep the principal in place, the real estate investment, and live off the rental income when you retire.

So when you are ready to retire you can do 1031 exchanges and move your many real estate investments into a couple or few apartment buildings.  Remember, the tax man only gets paid from the tax deferred exchange if you keep the money from the sale.  If you sell those properties and do a 1031 exchange into apartment buildings that you are going to keep for the rest of your life you don’t have to pay the tax.  Then you can live out your days with rental income coming in each month no matter what you do.

I know this is a long post, but I’ve got one more idea to throw out as well.  Normally when you hold a rental property you take a depreciation deduction to help reduce the amount of tax you have to pay off the rental income.  This depreciation deduction would be subject to recapture when you sell the property.  But NOT if you do a 1031 exchange!

Just remember to please talk with a tax advisor who understands 1031 exchanges so you can really make this work for you.  Also talk to a 1031 exchange specialist so you do that properly.

Yesterday I did a post on real estate timing and avoiding taxes and I promised to follow it up today with a way to pay ZERO capital gains taxes on your real estate investing.

The point of real estate timing is to buy low when a market is down and then sell high once the market has climbed back up again.  We know which markets to do this in from the real estate timing market momentum charts at REMarketStats.  Once you have purchased in a particular market you want to watch the charts to know when to sell.  At the same time you want to be watching the market momentum charts in other real estate markets to identify the next markets you want to invest in.  Once you sell your property from the current market you move to the next market where you can buy low and then sell high again.

The only catch with this is that normally you would have to pay capital gains tax each time you sell.  It would be long term capital gains but it’s still a big chunk of your profits getting eaten up by taxes.  That’s less profits you have available to put into the next deals.  We want to grow our wealth in real estate and we do this buy increasing the number of deals we can do.  If we are paying taxes on these deals each time we sell it means we have less money available to buy more deals.

Our goal isn’t to just buy one property at a time.  It’s to use the profits generated from the last deal to buy more than one deal the next time.  What I mean by this is, let’s say you use the real estate timing charts to pick your first market to buy and you purchase 1 real estate investment.  Once it comes time to sell you are ready to move onto another market.  You can use the profits from that sale to buy 2 investment properties in the next market.  Once those properties are ready to sell and you move on to the next market after that you can take the profits from those 2 properties and buy 4.  See how this grows exponentially?  Just starting with one real estate investment is enough to grow your wealth into many, many properties.  Sure it takes time but the payoff is well worth it.

The only problem here is that if you are paying capital gains tax each time you sell it’s that much less money you have available to put into the next properties.  So how do you avoid captial gains?  1031 exchanges!  This is a perfect legal tax deferred exchange that allows you to take the profits derived from one real estate transaction and move them into another without paying any tax at all!  Think about it, let’s say you make a $75,000 profit off your first real estate investment where you used real estate timing.  If you had to pay taxes on that it would be a big chunk of your profits, like tens of thousands of dollars.  The taxes alone would be almost enough for a down payment on another property!

If you do a 1031 tax deferred exchange you don’t have to pay any of that tax and can move it into the next properties.  Sounds too good to be true?  It’s not.  This is a legal device set up by the US Government and recognized by the IRS.

There is one small caveat though, 1031 exchanges are tax deferred exchanges meaning that eventually the IRS would want their money.  Except there are two great solutions even for this so that you NEVER have to pay them back.  I’ll talk about these tomorrow.

Real Estate Timing is all about growing your wealth in real estate.  As we all know though when we sell real estate investment property it’s subject to capital gains tax. Income taxes are a quick way to substantially reduce the amount of money we can make in real estate.  They chew up a big part of our profits.  This is especially the case with quick flip properties.

Properties that you hold for less than 1 year are subject to your regular tax rate.  This can easily chew up about 1/3 of your profits.  Quick flip real estate deals are things like wholesaling, rehabbing, short sales,and probate.  Don’t get me wrong.  I’m not knocking any of these real estate investing techniques.  They can be great ways to make money in real estate.

Longer term properties that are held for more than 1 year are subject to long term capital gains instead of short term.  This can substantially reduce the amount of income tax you are paying on your real estate investment.  Lease options, land contracts, emerging market investing, and rentals would fall under this category.

Real estate timing can fall under either category, depending on how you are using it.  If you are using it to decide what investment strategy you should use in your own real estate market then it will be either one or the other tax category.  For example if you use real estate timing and determine that you are in a declining market, you aren’t going to want to hold properties very long because they’ll lose value.  This is a good market for short sales and wholesaling, both are subject to short term capital gains.  However, if you use real estate timing and determine that you are in a market that is about to go up then you’ll want to hold for a while and capture appreciation.  You might want to buy a cash flowing rental property and hold it until the real estate timing market indicators tell you it’s time to sell.  In this case you would be subject to long term capital gains.

The other approach is the national investing approach where you use the real estate timing charts to select the best markets in the country for investing.  When you do that you are going to be holding longer term.  This strategy will make you more money on your deals because you are investing in the best markets instead of just in your own back yard.  Plus it gives you the advantage of paying less in taxes because your investments will be subject to long term capital gains.  So you get to keep more of that money too.

Obviously the less we have to pay in taxes the better.  We love our Uncle Sam but we work hard for our money, so we’d like to keep as much of it as possible in our pockets.  Tomorrow I’m going to talk about a strategy that allows us to pay NO TAXES at all so be sure to check back.

Identifying the right markets to buy in using real estate timing is the first step of buying.

Once you have identified a market however, you need to select where you want to buy your real estate investment.  All real estate markets have different neighborhoods, some more desirable than others.

There are two good ways to select the right neighborhoods to invest in once you’ve identified the right real estate market using real estate timing.  These aren’t the only ways, but they are good methods for smartly selecting where to do your real estate investing.

The first way is to buy where there are good schools. Most MSAs have different school districts, especially the larger ones.  But even the MSA where I grew up, Ann Arbor, which isn’t huge still has multiple school districts:  Ann Arbor, Ypsilanti, Saline, Dexter, Chelsea, Willow Run and so on.  Some of those schools are very good and some aren’t so good.  School districts can be very reflective of desirability.  If you buy close to good schools you are going to have more people wanting to rent your real estate investment during your hold period and you are going to have more people wanting to buy when it comes time to sell.  There is a trade off however, in that the areas with the best schools are also likely to have higher prices.  So you’ll need to find a balance between schools and affordability.  You certainly don’t want to be carrying a large negative cash flow during your hold period.  I hate negative cash flow!

The second way to buy is to look for up and coming neighborhoods.  If they have good schools that’s always a bonus, but in the up and coming neighborhoods you are more likely to see a younger crowd who is more interested in the quality and quantity of amenities, because most of them don’t have children yet.  Neighborhoods that are starting to see revitalization are great for this.  These buyers tend to prefer smaller, starter homes or even condos but they want lots to do around them.  Coffee shops, nightclubs, theater, arts, music and so on.  This is a kind of emerging market investing.  When the real estate timing is right and this type of neighborhood is up and coming you’ll see a rapid upswing in desirability.

Once you’ve identified the market you want to invest in you need to start doing the research to select the right area within that market.  The internet is a great asset to get you started.  I also recommend talking to some real estate agents.  Ask them about neighborhoods and resources to find out where the good schools are, where people want to live and so on.

I’ve talked a lot about real estate timing and knowing when to buy, whether you are in real estate investing or are a real estate agent.  It’s a topic that’s been on everyone’s minds lately – when is it safe to buy again.  But real estate timing and knowing when to sell your home is just as important.

If you currently own a property you are thinking about selling or if you are planning on using real estate timing to buy and then sell after the property has appreciated you need to know when to sell your home.  If you are thinking about selling now you are probably wondering is your market in decline and how much more is it going to go down.  Your goal would be to minimize your losses and sell before property values decline further in your area.  Not every place in the country is in decline right now!  Despite what the news media is broadcasting you need to remember that real estate markets are local.  Some are going down, but some are also going up.  Keep this in mind when you do your real estate analysis.

Before you just put your home up for sale you should find out which your market is.  After all if your market is going up that means it isn’t time to sell yet.

If you are planning on using real estate timing to buy and then sell later you need to watch the market you bought in.  If you used timing to buy you need timing to sell too.  The market momentum charts at REMarketStats can show you when to sell so you get out before the market turns.  Remember, we never want to sell at the peak of the market.  While that may seem like a great way to maximize on all of the appreciation, the peak of the market is really the beginning of the decline.  If your property doesn’t sell quickly you’ll find yourself at the beginning of a long downward trend.

Are buyers in your market sitting on the fence?

A lot of real estate agents I know are hurting these days – some have even dropped out of the market entirely.  Let’s face it, in the current financial climate there are just fewer buyers out there.  Some would be buyers are having trouble getting mortgages and some would be buyers are just waiting to see what happens with the market.

Both of those situations are making it very difficult for Realtors.  It makes it hard to sell listings and it makes it hard to find buyers.  Fortunately there are solutions for both of those problems.

How do you convince buyers sitting on the fence that it’s time to act?  Real estate timing.  The problem is that the news is too much gloom and doom, and even when they talk about signs of recovery no buyers want to be the first ones to take action.  They want to wait until it’s clear that the market has recovered and it’s safe to act.  The reality though is that if they wait until everyone else is buying then they’ll have missed out on one of the best buying opportunities of our lifetime.  Buyers really should be buying when prices are down not wait until they’ve already gone back up again.

What most buyers don’t realize is that the news and media don’t know when people should buy real estate and when they should sell real estate.  Certainly there are some markets out there where it may be better to wait, because price declines haven’t finished going down yet.  But there are a lot of markets out there where prices have flattened or started climbing already.  In those markets NOW is the time to act!  But you need facts.  You need hard data to show your buyers and sellers what is going on in the real estate market.

The real estate timing charts we offer are the perfect solution for real estate agents trying to get buyers off the fence.  By calculating a real estate market’s momentum we can determine whether a market is going up or down, which means they show us whether it’s time to buy or not.  Imagine being able to show these charts to your potential buyers.  Show them what’s really happening in YOUR real estate market.  Not just the attention getting headlines that the media loves to publish.  And the best part is, these charts are VERY affordable – only $19.95 per month!

If you want to learn more about real estate timing take a look at the video titled, “How Market Indicators Work”

I also mentioned some buyers out there who are ready to act but can’t qualify for a mortgage right now.  Those buyers are painful to turn away these days because you know they are buyers, they are ready.  What do you do if they can’t qualify for a mortgage?  There are alternatives.  Lease options are a great choice.  It gives the buyer the opportunity to get into a home now before they can qualify for a mortgage.  Then they can improve their credit while they are in the home and buy it at the end of the rental period.  The best part for you as an agent is that you’ll get your full commission instead of just placing a renter – and the buyers and sellers will thank you for it!

There are a lot of sellers out there looking for creative options these days because their home just isn’t selling with conventional methods.  All of those sellers out there who are telling their Realtor that if they can’t sell their home they’ll have to rent it out are PERFECT candidates for rent to own.  They’ve already accepted the idea of tenants in their home plus they still really do want to sell – what could be better for them than doing a lease option?

I did a post yesterday on real estate investing – rehabbing and a couple of mistakes I made.  Today I wanted to share a tip on something I did right with the same property.  I’ll also show you another before and after set of pictures – this time of the bathroom.

I have to say if you are a real estate investor and you are into ugly houses, you can’t be faint of heart.  I mean look at this bathroom!

Real Estate Investing Rehab Bathroom-Before

It’s usually a good idea to make sure you are wearing protective footwear before going into a house like this.  After all who knows what you might end up stepping on.  By the way, this home was not in a bad neighborhood.  In fact, it was in one of the better neighborhoods in the city it’s located in.

Back to the point though, one of the things that I really recommend to real estate investors that are buying properties that need work is to MAKE SURE YOU PULL THE APPROPRIATE PERMITS.  In this case my contractors pulled all of the right permits and we had the work inspected by the city.  After it was all approved the inspectors signed off and cleared the permits.

This is actually good for two reasons.  The first is that, I’m a real estate investor, not a carpenter, plumber, HVAC specialist, electrician, etc.  Sometimes I do a bit of non-permit related work in houses if I feel like getting my hands dirty, or really dirty in this case.  But that doesn’t make me a specialist.  My job is to find the real estate investment and have an exit strategy, not rewire an electrical panel.  This means that I don’t actually know how to properly wire an electrical panel.  I have to trust the electrician on that.  But while I have to trust him it doesn’t mean I shouldn’t verify (you know what they say, “trust but verify”).  That’s why having a permit pulled is important, the city inspectors check the contractors work to make sure it meets the appropriate codes.

By the way, on this house the city inspector found that the contractors didn’t install enough roof venting so they had to add some in before the inspector would approve it.  Since all work has to be done to code, this means I didn’t have to pay anything extra to have the contractor come back and do it right.

Here is the after shot of the bathroom.  Yes, it really is the same bathroom!  Hard to believe isn’t it?  We actually gutted that bathroom all the way down to the studs and started fresh with it.

Real Estate Investing Rehab Bathroom-After

The second reason it’s so important to pull the appropriate permits is for your end buyers.  I’m a licensed real estate agent, so sometimes I list properties myself, which I did in this case.  I actually showed it to the family that ended up buying the property.  One thing I like to do is to tell them about all of the improvements that have been made – new kitchen, new bath, new roof, etc.  This way they know they are getting a totally renovated home.  I also told them that we pulled all of the appropriate permits with the city and had it inspected.  And you know what?  They checked to see if I was telling the truth!  They wanted to know that the work had been done right.

Sometimes investors like to cut corners to save on costs when it comes to real estate investing.  Pulling permits can be a pain in the butt sometimes because it slows down work while they have to wait for an inspection approval.  But it’s worth it.  If I hadn’t made sure the contractors pulled permits for this house I would have lost those buyers.

By the way, I could have made a lot more money on this investment if I had used real estate timing as part of my investing strategy.  But I didn’t know about it yet.  Oh, if I’d only known then what I know now!