Warren Buffett’s Investment Advice Is To Buy Houses

Warren Buffet was on CNBC a few days ago and he said that he would buy "a couple hundred thousand" single family homes if it were practical to do so.

Let's break down what it means to own a property right now in San Diego. First of all we need to look at the historic prices of houses here. Please see the Case-Shiller chart below of the HPI (House Pricing Index) from 2000 until 2010;

Unfortunately, I could not find a chart that was updated up to 2012 from 2000 but I did find this chart that just came out with Case-Shiller data that shows where the market has gone from 2005 and on.

As you can see, the prices have dipped since the middle of 2010. Right now, house prices are roughly the level that they were at in the middle of 2002. Many people think that if they buy a house right now, it's as if they bought it in 2002, but most people forget that interest rates in mid 2002 were at about 7% for a 30 year fixed. Our current interest rates are below 4% for a 30 year fixed or 40% less than 2002 rates. So if you buy a house to live in, it will cost you a little more than half the price it did then. What that translates to is almost half the mortgage payment. For someone buying a property to live in, this is great news.

If you are buying a property as an investment, right now is a great time as well. For the past decade we have seen a mere 1% increase per year in rent since 2002 (according to commerce statistics, adjusted for inflation). I believe that the rental market has been depressed because it was so easy to buy a property during the "boom" time of real estate, that is when vacancy rates went up in San Diego. When the "bust" of real estate came, we saw young adults not being able to afford to live on their own anymore and this kept the vacancy rates up. According to Peggy Alford, president of Rents.com, more than 1.2 million of them moved back with their parents from 2005 until 2010 and many others doubled up together. In order to curb the depressed demand for rentals, landlords had to provide rent concessions such as a period of free rent in order to win leases. Now that the economy has started its recovery, many of these young adults are starting to look for a place to live again as renters rather than owners. They have seen so many of their friends and family suffer from foreclosures and short sales. The memory of the heartache is fresh in their minds.

As good as this all sounds for the rental market, the predicament in which we find ourselves is that we are in the bottleneck in financing. If you are one of the select few that qualify for financing, you are able to take advantage of this situation. Here are a couple of examples of the deals that I have recently funded;

Studio Condo in West Point Loma

$71,000 - Purchase Price

$255 - Monthly HOA

$74 - Monthly Taxes and Insurance

$1,050 - Rent

---------------------------------------------

$721 - Monthly Positive Cash Flow

12.2% Return on Invested Funds

3 Unit Property in Lakeside

$156,000 - Purchase Price

$30,000 - Rehab Costs

$162 - Monthly Taxes & Insurance

$400 - Monthly Utilities

$2,875 - Monthly Rent

---------------------------------------------

$2,313 - Monthly Cash Flow

14.5% Return on Invested Funds

These are the two best examples of great cash flow properties. Although these were purchased with cash, if one were to get financing on these properties, the return would increase.

http://sequ.com

I Survived Real Estate 2011 - Appraisal Issues

Last Friday I had the pleasure of attending the "I Survived Real Estate 2011" meeting that was organised by Bruce Norris.

First of all, I have to say that Bruce Noris and his team really do a great job of putting together information and asking the questions that everyone has on their mind. Bruce Norris has a hard money company that is in Irvine that does a lot of the loans that I do, they also have a loan program that they extended to the public where they give loans for 8 years at a lower interest rate with higher points (kind of the opposite of what I do). Even so, at any event that I go to where Bruce speaks, he never pushes his product and I must really commend him for that.

The reason for this blog post is to address a certain topic that was barely touched on by Shaun O'Toole from ForeclosureRadar.com (great site for anyone that is interested in learning about trends of foreclosures or looking to buy properties at the auctions). At the end of the whole evening when the panelists were asked about what they would like to see happen in real estate this upcoming year, Shaun stated that the whole appraisal process is completely screwed up and I agree with him. He stated that if you go into a market where there are no comparables for an appraiser to pick out, they pick the closest comps that they can get and a lot of times the values don't make sense. His idea was to comp out properties not by other sales but by the cash flow that they produce. If you can make sure that the property cash flows with the market rent, then you can decipher the value from the rent that the property will produce. I don't necessarily agree with him on the whole idea but if someone is willing to buy a property based on the cash flow at a certain price, there should be some sort of variance that you can have on the appraised value.

I was just affected by this issue on a certain multiple unit property that I was selling. We went through the whole inspection, appraisal and walk through process and the buyer was completely satisfied with the sale. When the appraisal came back, it came back lower than the sales price and it put a hitch in our sale. Now this property is superior to any comp that the appraiser had on the appraisal report but because there was a value discrepancy according to some HACK appraiser, the buyer was thinking to back out of the sale.

The buyer was agreeable on the sales price based on the market rents of the units and the cap rate until the appraisal came in. This particular property was completely superior to other multi-unit properties in the area yet the appraiser could not bring the value up. There should be a 2% variance on the allowable discrepancy between the appraised value and the purchase price. When you go to buy a car, the loan company has an allowable 20% variance on the purchase price and that is just on a car. When you are buying a property that is in some cases close to a million dollars, you can't stretch even $10,000. This is ridiculous.

If the case is that the appraiser knows EXACTLY what properties are worth what do you need real estate agents for? Why doesn't someone that is selling a property just get an appraisal and put that appraisal in the classified section? The seller can save 5-6% on commissions that way and there is no second guessing what the property will appraise at.

The other problem is that if a bank orders an appraisal, they are held to the  "Home Valuation Code of Conduct" or HVCC. According to HVCC the bank must use a third party company that will order the appraisal for the bank. The bank can not contact the appraiser directly as well as anyone else that is in the transaction. The company that is responsible for picking the appraiser only have a certain amount of choices to pick from (appraisers that have signed up with them). Most of these companies will not give the same appraiser more business than the others so what they do is switch appraisers that they send requests to so that everyone gets their fair share (kind of like communism). What ends up happening in many cases is they pick appraisers that are not from the area to appraise properties. If you are sticking with the current appraisal system, this presents a problem because it's really easy to overlook the railroad tracks that the appraiser is crossing.

In my business, this is not a big deal because most of it is hard money loans but I feel bad for my clients that are rehabbing properties because they are at the mercy of this royalty that we call appraisers.

Thank you for lending me your ear, or rather your eyes, and entertaining an issue that I'm sure many of you have run into.

I would lime to thank Michael Khunis for lending me some ideas for this post.

Flip in La Mesa

Unit 2

Front Unit 

Unit 3

Side of 1st unit

If you are a reader of my blog, you know that Priority First is involved in many aspects of real estate investment from hard money loans, to acquisition and now to flipping.  In this particular case, we are doing a joint venture with one of the flippers that I work with.

I found this great deal near the historic down town area of La Mesa.  This is a 3 unit property that I am in contract for at about $370,000. This is a really great deal due to the fact that this is 3 separate buildings that house one unit each. 

The main building is a Spanish Mediterranean two bedroom one bath. This unit was the original structure on the property, it was built in 1934. This unit will be the main part of the property as we will plan to sell this unit to someone that is planning to live in it. The reason that we are doing this is because the house is so charming and the neighborhood is a very nice residential neighborhood. 

The second building is a two bedroom one and a half bath. This unit was built after the construction of the main house, most likely in the mid 1940s. If you look at the picture of the second unit, you will notice that it looks like it has a 2nd story. Apparently the previous owner has put up some stairs outside of the property and had turned the attic area into a loft/additional rental. When the city came, they made the owner rip off the exterior stairs because they were not permitted. The room is still there but now has no access. Due to the fact that it's an existing part of the house, it becomes grandfathered in legally. What we will do is build a staircase inside the property and open up the loft above in order to give this an extra bedroom. When we are done, this unit will be a 3 bedroom 1.5 bath or we might just add another bathroom upstairs and make it a 3 bedroom 2.5 bath.

The third unit is in the back of the property and it is a one bedroom one bath. This is situated at the back of the lot. Normally this is not a great thing because the tenant will need to go through the whole lot to get out to the street but in this case, there is a alley way in the back of the property where the tenant can come in and out as he /she pleases. There is an additional bonus for this unit, attached to the unit there is a garage AND a car port. If the tenant has a couple cars or has some sort of desert toys, they can easily park them there.

As you can see by the pictures, this place has some serious deferred maintenance. We estimate that the property will need anywhere from $80,000 - $100,000 in work to restore it.

I think that once this place is done, we will be able to sell it for about $600,000. In the area there are two bedroom houses that are selling in the $400,000 range. If someone were to buy this property to live in, they would almost cover their whole mortgage with the rents from the units in the back.

The current rents are at $3,250, once we are done with the work the property should rent out for $4,700.

Property Acquisition in Lakeside

I am very excited today because we are acquiring a new property in Lakeside. The property came to me from one of my flipper clients. I had called him about his opinion on a 2 unit property that I was looking at (it needed a lot of work). When he stopped by he had mentioned that he had a deal for me that was better than the one we were looking at.

This is a 3 unit property that is in Lakeside. The property is 2 buildings and each unit is 1 bedroom 1 bath. The rent on units like this is about $1,000 (in fixed up condition). So I figure that I will calculate conservatively and estimate that I will get $900 per door. The property needs about $30,000 in work in order to get it to high end sale shape.

Some may wonder why I am building the units with granite counter tops and nice appliances but I think that by doing this I will get more high end tenants that respect the property and will take care of it.

The key to this property is that I am in escrow for $156,000!!!!

If this unit gives me $2,700 a month in rent;

$2,700 -Rent
-$162.50 - Taxes
-$270 - Management
 -----------------------
$2,267.5

This gives me a 14.5% return on $186,000 ($156,000+ $30,000)

This will be a great cash flow property for many years to come.

Here are the before pictures, I can't wait to see it when the contractor is done with it.