The Multi-Generational Home Is Depressing Home Sales

The reports and surveys are still coming in and they're telling us that in record numbers the millennial generation is staying at home with their parents. The latest number I heard was 32% of this generation are still at home. This hasn't been the case for around 100 years, but what's the problem?

Well, if you're parents who would love to have your children live with you forever, then there's no problem at all. If you had dreams of downsizing the empty nest, then it's not so great. It's not like it's the dream of the younger set either. They would probably for the most part want the freedom and privacy of their own digs.

So, what is causing this huge divergence from the historical younger generational "leaving the nest" trend? There are a number of factors:

• There is a lasting suspicion of past housing appreciation trends and a fear that they're gone for good. It's no longer the shining American Dream for many.

• Student loan debt is reducing this generation's ability to qualify for or pay off a mortgage.

• The economy and their job prospects are anemic and they aren't confident enough to take on a long term commitment.

• Social and moral trends are allowing them to put off marriage and a family indefinitely while still being "couples" not married.

• Some just love the fact that mom and dad are willing to take on the chores of home ownership and leave school, work and fun to their children.

This is interesting, but it's also pretty damaging if you think about home sales statistics. Its impact is in two areas that previously fueled a more normal market.

First Time Buyer Demand WAY Down

The graduating students and younger generation have been the fuel for entry level home purchases in the past. Home builders now are not constructing entry level homes at anywhere near previous levels, simply because there is little demand. There is little reason to believe that this trend is going to change soon.

Boomer Generation Isn't Selling or Buying

Those in the Baby Boomer generation who in the past would have been downsizing, selling one home and buying another, simply are not doing so now at anywhere near past levels. Some of them can't get their children to leave. Others are simply not thrilled with what's on the market and prices.

It's interesting that the current rising prices are a whole lot about lack of inventory and not so much about demand. So, when Boomers do not sell, the inventory is further depressed. Supply and demand takes over, as it always does, and prices rise when fewer homes are available to buyers.

Investors are Loving It

So, fewer homes for sale, prices rising, rental demand up, rents rising, so what's not to love? Sure, it's more challenging to find a really great deal, but rising rents help in that regard. Let's take the news with the knowledge that there is always opportunity in real estate investment, no matter how strange the market.

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Unleashing the Power of the Real Estate Investor's Team

It's popular in writing business content to use the "toolbox" concept for things we use to conduct or market our business. You'll see, put this real estate valuation tool into your toolbox to get to the right value of your next investment purchase. Or, your marketing toolbox isn't complete without a Facebook Business Page.

I choose a different container when it comes to the big picture of my real estate investment business when it comes to management, marketing and sales. Call it my real estate investing "briefcase." When I open my briefcase, I want to find all of the resources I need to operate my business. Even more, I want to find what I need to supercharge the referrals that are the best source of business, no matter which investing niche I'm working in.

It's probably not the best approach to refer to your accountant or a real estate agent as a "tool" anyway. Let's take a look at the resources in my business briefcase and how each is of value and important to my success.

Real Estate Agents

Yes, even though I don't buy at retail often, real estate agents are quite important to several of my investment strategies. As far as referrals, there are times when a distressed homeowner wants to list their home for sale but the numbers don't work. The real estate professional can send them my way to see if I can be of help, perhaps with a short sale.

I also have an early warning system made up of real estate agents who do BPOs, Broker Price Opinions. These come very early in the foreclosure process, and getting a heads-up to a nice property well before the bank puts it on the market can be of real value. Every now and then I can even bid against the bank and pick it up at auction.

Real estate agents can deliver a rental property bargain now and then, so I never tell them not to send what they consider good deal listings my way.

Accountant

While this team member may not ever send me business, they will certainly save me huge sums of money over the long haul through tax planning and legal tax avoidance. I rely heavily on my accountant for advice and trust them to keep me on the edge but out of trouble tax wise.

Attorney

Most of the time, not needing my attorney is a good thing. However, sometimes it's good to have them take a look at a new lease I'm putting into use to see if I am jumping through all of the legal hoops properly. You want to do the due diligence to have a good attorney on your team before you need them.

Mortgage Broker

Sure, you want to know a great mortgage broker if you're seeking funding for rental properties. But, you also may want an aggressive broker if you're selling properties, especially at retail. Helping your buyer to get a great mortgage can get you a higher price at the closing table.

Transaction Lender

While some mortgage brokers dabble in this niche, the specialty transaction lenders do only short term or specialty real estate investor lending. Unless you're already cash fat, you're going to need this type of funding for wholesaling and fix and flip. It's not a cheap source of funds, but without it fewer deals would get done.

Title Company or Title Closer

Title companies have the information, or can easily get it, about what's happening in relation to the ownership of real property. While they may not be able or want to do free property searches for you, often you can ask a question and get an answer that will help you in making decisions. An example was when I asked a title closer if there were any problems with a particular condominium project.

Based on their recent title searches I learned that the ratio of rentals to owner occupants was too high for Fannie Mae or Freddie Mac loan guarantees. I passed on the deal I was considering, as selling it would have been tough, and rental competition was too great.

Contractors

Of course, if you're doing any type of fix and flip or fix to hold investing, you want some strong contractor relationships. The right contractors can make you a lot of money. They can at times refer business to you as well. I had a contractor send me a deal where the homeowner found they needed a new roof and couldn't afford it. I got a good deal on the home, used the contractor to replace the roof, and it's a great cash flow rental property.

All of these are important and valuable relationships that I keep in my real estate investment briefcase.

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Fix-To-Rent is Creating the Perfect Rental Home

Foreclosure inventories are down, and many of those that are available are in pretty rough condition. The good news is that this situation is helping to reduce investor competition, as fix-to-rent is costlier and requires a lot more involvement on the part of the investor.

Sure, you can turn over a rundown home to a contractor with an all-inclusive bid and hope for the best result. However, this usually runs up the costs and can deliver results that don't meet your expectations. The investors who are willing to get out of the passive role and control the project and costs can still end up with some really great rental home investments.

What it is Isn't What it has to Be

Start your next fix-to-rent home search with a different plan. Don't just find one that you can repair and rehab and take to the rental market as it is. Find one that you can make into the perfect rental home for your market area. The beauty of taking this approach is that you'll have choices in homes with less competition because they're not what other investors are seeking.

Maybe you find a small 3-bedroom foreclosure home in a great neighborhood, and of course it needs some work. Small is the keyword, as the three bedrooms are all pretty small. This neighborhood is sought out by millennial renters due to its location near downtown and high tech employment. These aren't families with children, and a house with three small bedrooms and an overall small room floorplan isn't really that appealing to this group.

They like room to entertain, and they want what buyers want, a large master suite. So, why not give it to them and create it with this home? Strategically remove one or more walls to create a large master bedroom and increase the size of the bathroom as well. Reduce the home to a two-bedroom plan, and they can use the second bedroom as an office or for guests.

These are renters who have good jobs and can afford to pay the rent you'll need to create the home in which they want to live. The increased costs of doing the major renovations may be partially offset by buying this home with no competition at a better discount to its ultimate value.

Another example might be a larger home with 4 or more bedrooms in a community where renters want to be. Instead of just fixing it up, you see the opportunity to create a separate entry and a mother-in-law suite or separated rental unit. Your added costs are not that great, but the rent you can charge can take a nice jump. Potential tenants can rent out their other unit to cut their costs.
The key is to look at a property not as what it is but as what it could be. If the numbers work, why not create the perfect rental home?

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Entry Level Rental Property Investing -- Even if You're Renting

You want to be a real estate investor, but you don't even own your own home. How can you make it happen? Especially when you check out your assets and cash and can't find a 20% down payment anywhere in the pile, it looks impossible.

You've toyed with the idea of buying a personal home, but you're still renting. You can manage to scrape up a low FHA down payment for your own home, but you can't get that low down for an investment rental property. Wrong! Not only can you make that happen, you can live close to rent-free and later you can move to positive cash flow.

You can get a mortgage through the FHA with a super low down payment if you live in the home. So, how do you live in it and rent it out too? No, not a roommate. You can purchase a duplex home and rent out one side while you live in the other. Because it is your principle residence, you can get FHA lending. You not only now own your home, you're an investor too! The FHA will even let you count the future rental income to help you to qualify for the loan!

I'm not blowing smoke, and I'll use a real life example duplex for sale in Houston, Texas, as well as rental rates, all as currently listed at Zillow.com. Here are the home particulars:

• Listed selling price is $255,000.
• Each side of the duplex is approximately 1996 square feet in size.
• Built in 2007.
• Rents of apartments and one side of duplexes in the local area justify a conservative rent income of $1,100 to 1,200/month.
• Zillow's mortgage estimator shows the payment will be approx. $1,497/month.

Let's become the world's worst negotiator and pay full price for this home. However, we're going to take advantage of the FHA and our credit score is good, so we're going to be able to get a 3.5% down payment. With closing costs, we'll bring about $9,350 to the closing table. Let's run the numbers:

• You'll be paying approximately $1,687/month with taxes and insurance included.
• You can reasonably expect to rent out the home for $1,150/month.
• Your gross out-of-pocket to live there is now $537/month.

So, you own a home and you only fork out around $537 per month to live there. But, I'm not through yet. You get some tax breaks that reduce your monthly net cash out-of-pocket. These are estimates, but pretty close based on the example mortgage. First, you get to depreciate the rented portion of the home (not the land value). Let's say that the lot here is worth $40,000, so the structure for depreciation is worth $215,000. You can depreciate the rented portion (one-half) right now over 27.5 years, so:

• $215,000 / 2 = $107,500  Divide that by 27.5 for $3,909/year.
• $3,909 / 12 = $326/month deduction off your income.
• In a 25% overall tax bracket, $326 X .25 = 80/month cash not going out.
• Our previous out-of-pocket of $537 - $80 = $457/month net out-of-pocket.

I'm not through yet though. You also get to deduct the mortgage interest on the half of the property that's rented (you're still getting to deduct your own mortgage interest on your personal residence side). The amortization schedule for this loan showed approximately $760 on average per month in mortgage interest the first year.

• $760 / 2 (half is rented) = $380/month X 25% (tax bracket) = $95/month
• Current $457/month out-of-pocket - $95 = $362/month new out-of-pocket.

Next we can look at our tax bracket and deducting one-half of the property taxes and insurance, but you're getting the drift. You'll not get this down to zero or positive cash flow, but are you living in a nice home for around $300/month now?

Consult an accountant, as this is an on-the-fly example, but it's all realistic and on a real home in a real market. Then think about enjoying this for two years and then renting something else for you and renting out the other side of this property and moving to a positive cash flow position. The two-year requirement is how the FHA makes sure that you're building on a solid rental history that will allow you to use all of the income to qualify for another loan.

Also, if you have the discipline, taking the difference in what you were paying for rent that is now staying in your pocket and investing it somewhere is the way to go. If you were paying $1,100/month, you should see a cash infusion of the $800 +/- difference now. Use it to build a savings account balance to fund your next property purchase down payment.

NOW you'll see some positive cash flow and you're a rental property owner/investor ready to grow your business!

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Buying Real Estate Notes for the Small Investor

There is a lot of information out there about buying notes as a real estate investment niche strategy. It can be very profitable, particularly if you approach it with more than one strategic goal. There are investors doing this now, and some are helping homeowners to keep their homes while profiting in the process.

The Profit Focused Approach

The approach taken most often is to buy a note on a distressed property and to either foreclose on it or to continue to work with the homeowner within the structure of the current mortgage and payments. The investor can also flip the note, selling it to another investor for a profit.

With notes available in the open market at large discounts to value, the investor can realize a nice ROI even if the homeowner continues to be late or short on payments. The asset is worth far more than the money invested, so risk is minimized and the option to foreclose is always available.

The Borrower Focused Approach

A new breed of note-buying real estate investor is focusing on helping distressed homeowners as the top goal and the ROI as a secondary consideration. This doesn't mean that a great return isn't still part of the deal, just that it's not quite as fat. There is still plenty of profit to motivate the investor, but there is a human side to the deal that's quite satisfying as well.

Because some of these notes are purchased at a major discount to the home's market value, there's room for a humanitarian goal in the deal. This new breed of real estate investor is getting into the investment with a goal of helping the homeowner to keep their home, even when it requires concessions or refinancing so that they can afford it.

Many homeowners in this situation have some equity, but they're experiencing financial hardship and are having trouble making their mortgage payment. The real estate investor who can purchase the note at a deep discount to value can enter the deal with the goal of helping them to stay in the home. The due diligence of course requires that the investor knows what they can do and still justify the end ROI result.

Refinancing the home to reduce the debt and monthly payment and still yield an acceptable return on the investment is satisfying from both investor and humanitarian viewpoints. There can be some icing on the cake as well. There are some local and national government homeowner assistance programs that may offer some incentives to the note holder to help the borrower to remain in the home.

One of the most interesting things about real estate investment is the many ways in which you can get into the game. This is just one, and it offers the investor a way to help someone while enjoying investment profits.

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Should You Worry About a Housing Price Bubble?

The Case-Shiller Home Price Index reported that home prices rose on average 5.7 percent in January from January the year before. That was pretty much as expected, but there was also a statement in the report that could raise alarms in some circles: "Home prices are rising very rapidly -- twice the rate of inflation. There is very, very little supply."

Could we be seeing a housing price bubble building similar to the one that burst in 2006 and took down the market? In one word, the answer is "No." There is very little similarity in today's housing market and the pre-bust market in 2006. Other than rising prices, other factors are very different.

Most analysts agree that a major factor in the crash that began in 2006 was lax lending standards and numerous programs spurring careless home buying and speculative flipping. People were in a frenzy to buy houses back then, and prices showed it. When the bubble burst, it was a nasty situation that lasted for years.

Today's market is very different. The rising prices today are caused by a fundamental economic supply and demand imbalance. There are simply far more buyers than sellers in the current market, and this is creating competitive buying and higher prices.

Another major difference is the financial market and home loan requirements. It's much more difficult these days to get a loan, with the old "stated income" and "no income verification" loans nowhere to be found. This keeps the careless buyers out of the market and isn't contributing to price increases.

So, what can we expect if it's not going to be a big bubble burst? With fewer artificial influences on home price action, the market will take care of itself. There are still a great many would-be sellers who are waiting to list to get back equity they lost in the crash, or just to maximize their equity and sell when they meet their cash goals.

A large group holding onto their homes is the baby boomer generation. Some housing analysts are blaming some of the supply problems on boomers sitting on their homes and not selling at anywhere near the rate they sold in the past. Part of this is because they're not wanting to buy a replacement home in this market, or they don't want to pay high rents. Rents have been rising faster than home prices, and it's not the best time to be checking out retirement rental properties.

The market will take care of itself, and when prices hit points that spur sellers to list their homes, the supply will increase quickly. I don't think demand will rise nearly as quickly when this happens, and there will be a slowing of price increases, and possibly even reversals in some areas. Will some recent buyers get hurt? It's possible, especially if they paid up for a home in a bidding war. However, the overall market will be healthier.

To learn more about how YOU can profit from real estate in 30 days or less CLICK HERE to get a copy of Dean's best-selling book "30 Days To Real Estate Cash"!

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Flipping Houses on the Rise Again

RealtyTrac.com has just released their annual house flipping report for 2015. The report showed that 179,778 single family houses and condos were flipped in 2015. This accounted for 5.5% all home sale transactions that year. This was up from a 5.3% share of sales in 2014.

For this report RealtyTrac counted a flip as "defined as a property that is sold in an arms-length sale for the second time within a 12-month period based on publicly recorded sales deed data collected by RealtyTrac." The data was collected from 950 counties accounting for more than 80% of the population.

The trend indicates that there is a larger number of smaller investors doing fewer flips each. The total number of investors who completed at least one flip was the highest since 2007. However, the average number of flips per investor was at the lowest level since 2008. This is interesting and in a way gratifying. I would hope that my work in educating new investors has helped more of them to get started and successfully flip houses.

This is also interesting because opportunities for flipping aren't as plentiful or easy to locate as they have been in the recent past after the market crash. These newer and less active investors are obviously doing their homework and due diligence. Some performance numbers from the RealtyTrac report show it:

• Homes on average were purchased at prices 26 percent below estimated market value.
• The homes were sold at an average 5% premium over estimated market value.
• The average gross profit per flip was $55,000, a 10-year high.
• The average was down to 1.63 flips per investor.

These are conservative numbers, and that's not a bad thing. When new investors are jumping into the market and prices are rising, there will be fears of over-speculation. However, these conservative margins tell us that they're being careful and profitable.

I think that we'll see even more new investors in 2016, and that there will be a low number of transactions each on average. There are a number of reasons. Of course there has been plenty of promotion of flipping, with TV shows all over. The gyrations of the stock market, ho-hum job markets, and a generally slow economy have definitely been contributors to more interest in real estate.

It's not unreasonable for us to believe that all of the promotion and exposure on real estate investment and house flipping has been a part of these numbers. However, we should also be happy that there has been enough good solid education in how to do it right that we're seeing this success data. I hope we'll build on the new investor interest and keep them successfully growing their businesses.

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