Oct112016
Buying out-of-state rental properties goes mainstream
New businesses help people overcome the hurdles of finding, securing, and managing rental properties in far-flung locales.
Back in August of 2010, I bluntly told people to buy Las Vegas real estate. I noted that the median home in Las Vegas — a 3 bedroom 2 bath detached property — cost less than $500 per month to own while rents averaged over $1,000. Here is what I told everyone who would listen:
“Anyone thinking of investing in Las Vegas, now is the time … because the price-to-rent ratio is outstanding, and unless you are buying in the worst neighborhoods, I don’t see how prices could go much lower … and the rental stream makes ownership there very rewarding. I am bullish on Las Vegas real estate because I perceive it as the best buy-and-hold value we will see in our lifetimes.”
When I went out to Las Vegas, I needed to overcome the biggest hurdles every investor in residential real estate away from home needs to overcome.
First, I needed to find the right properties.
Second, I needed to acquire the properties once I found them.
Third, I needed to find competent management.
If any one of those elements is missing, the investment fails.
My journey was not without its trials. Las Vegas is a wretched hive of realtor scum and villainy. Three different realtors attempted to steal money from me and the investors I represented, and I went through two management companies before I found the good one I use now.
Shevy watched the success I had in Las Vegas and duplicated my efforts in Orlando. He’s already secured properties for several local investors in that market. But like my experience in Las Vegas, the window of opportunity closes quickly, and although good deals abound in the Orlando area, the deals aren’t as good as they were a year ago.
What Shevy and I learned is that establishing a beachhead in a new market requires a lot of work. It takes far more time and effort than most people can put toward the venture. Further, it’s a difficult business model to sustain because markets change, and opportunities can dry up quickly.
Despite these challenges, some upstarts are up to the task.
Real estate investors on U.S. coasts target cheap, out-of-state markets
By David Randall, October 7, 2016
Even with a good salary as a data scientist at a San Francisco technology firm, Yang Guo, 30, knew he couldn’t afford a home in the Bay Area, among the priciest U.S. markets.
He still wanted to own property in addition to stocks, however, and soon found a way to buy cheap rental houses in faraway cities – and to outsource the associated hassles to HomeUnion, a three-year-old startup in Irvine, California.
The firm is among a small crop of new companies, including competitors Investability and Roofstock, that offer ways to buy, renovate and have rental property management in markets that command relatively strong rents compared to their low home prices.
These companies face the same issues Shevy and I faced when setting up new markets. Of course, it’s a little easier when venture capital puts up the money to cover the cost of pioneering these markets.
The risks remain the same as any landlord faces, from vacancies to broken appliances to the potential for a rent- or home-price downturn. …
The companies are pulling in money from clients in costly coastal markets that is boosting demand and home prices in the lower-cost cities they target. “In the last 12 months, I’ve seen more cash buyers from California than I’ve ever seen in my career, and I’ve been doing this for 25 years,” said Anne Callahan, a real estate agent in Cleveland, Ohio, where the average rent for a single-family home is up 4.2 percent over the last year, according to Zillow Research.
Ultimately, the influx of new cash from these investment groups will extinguish the opportunity they set out to exploit. I’m hopeful the service they provide will endure, but over time, the activities of these companies will equalize prices across many of these markets, just as the REO-to-rental funds did.
Earlier this year, Guo bought and fixed up a small home in the suburbs of Birmingham, Alabama that he found through HomeUnion. He purchased another home in the suburbs of Columbia, South Carolina – spending about $60,000 on the pair.
Now, from his apartment in San Francisco’s trendy South of Market neighborhood, Guo collects monthly checks from tenants he has never met in properties that he has never seen, all located more than 2,000 miles away.
“There’s too much risk with buying property in the Bay Area,” Guo said. “As long as the cash flow is coming and hitting my bank account, I basically don’t care about seeing them in person.“
I never met any tenant in any of the properties I manage. I don’t know their race, ethnicity, religious affiliation, their likes, dislikes, their children, nothing. I only know their money is green, and it either comes in reliably, or they get replaced with someone new. What benefit would I gain from meeting these people?
Buyers like Guo are attracted to less glamorous regions where home prices and rents have risen at modest rates in the housing recovery. They’re eyeing steady income rather than rapid home-price appreciation.
Good idea, wouldn’t you say?
“It’s all people from the coasts coming to us and saying, ‘We want to find a way to buy properties out of state,’” said Don Ganguly, the chief executive of HomeUnion. …
He takes some of out every paycheck and earmarks it for real estate, hoping to build a portfolio of at least 10 rental properties for less than what it would cost to buy a single home in the Bay Area.
“There’s nothing like the competition that you see in San Francisco,” he said.
It’s nothing like you see anywhere in California.
Some well-intentioned Angelenos traded grass for gravel on their front lawns. It got ugly.
“We thought we were doing the right thing to save water,” Staci Terrace Goldfarb, a Southern California homeowner, said late last winter. “I hate looking at it.”
It had been a little more than a year since Goldfarb had the small, semicircular lawn in front of her 1960 Cape Cod in the San Fernando Valley replaced with drought-tolerant landscaping. Yet her front yard was a flat patch of gravel, the kind you can buy in bulk at Home Depot. It was the work, she said, of a company called Turf Terminators.
Goldfarb hired the company in December 2014 to install stone ground cover and low-water plants, but in the months that followed, the plants failed to thrive. Turf Terminators came back three times to replace dying yarrow, rosemary, and day lilies before Goldfarb gave up.
Fourteen months after the initial job, those shrubs looked uniformly stubby. Some were withering. Weeds poked up through the rocks. This month, Goldfarb wrote in an e-mail, “My yard just looks worse than ever. So sad, the plants may be drought tolerant, but certainly not heat tolerant. Soon I could end up with all rocks.”
Goldfarb’s property is one minor casualty in Southern California’s greater war on the lawn. For decades, owning a private patch of grass here signified an American dream achieved and man’s engineering triumph over pesky regional conditions. California’s five-year-long drought changed that.
I love my lawn. The kids use our front yard and backyard constantly. I would hate to live in a place like Irvine where that wasn’t a possibility.
Are schools the new vehicle for redlining in the real estate market?
* Schools can be somewhat of a proxy for discussions about the racial makeup of communities, which gives real estate agents the power to steer certain families into or out of areas based on their race or ethnicity.
* NPR reports the practice can be compared to redlining, when government agencies explicitly refused to back mortgages in poor black communities and black house hunters were steered toward them, only now prospective buyers get their cues from color-coded school rating systems that are easily accessible from major real estate websites like Zillow, Redfin and Homes.com.
* School quality drives real estate values and vice versa, creating vicious cycles when wealthy individuals are encouraged to stay away from neighborhoods because of their schools — especially if the test scores that make up these ratings are themselves a proxy for race and poverty.
Investment Income: The Best Markets For Real Estate Investment In The Heartland
Quick Hits: These are not high-growth markets, the opportunity is for long-term growth at low risk. Best investment bets relate to the expanding Walmart suppliers in Arkansas, the high tech industry in Minneapolis, and the relocation of manufacturing from the center of Kansas City. With home prices low, single-family rentals – especially near universities – are a good possibility in all these markets. Expect stronger construction loan and mortgage demand in Benton County AR and Clay County MO.
The land in the middle of the country, much of it open plains, was settled by farmers – and its cities were rail and river stops that brought supplies in and shipped products out. Farming is still big, along with local food processing, but the mechanization of farming means that most of the population now does something else – mainly various kinds of services. In some places, what started out as purely local services grew into major industries (Mayo Clinic, Walmart).
High growth usually comes from new technology or the exploitation of a local resource. Growth in the middle of the country is of a steadier sort but with pockets of stronger demand for housing where expanding urban population spills over into suburban/rural surrounds. As in much of the country, the growth is mainly in service jobs that provide a modest income and feed an appetite for renting.
Benton County, Arkansas – Fayetteville
Population growth has been more than twice the national average, matching the high growth in jobs that results from the expansion of Walmart and – more importantly – the many suppliers that want to locate nearby. Much of the growth is in business services, trucking and retail – a mixture of high and low-wage jobs that supports demand for single-family homes and rentals. The demographics show a growing Latino population, moderate local income and a low home price to rent ratio that is favorable for investing in single-family home as rentals. With the growth of population, I expect a 24 percent rise in home prices over the next three years and a high level of new construction – 6,000 single-family homes and 4,000 rentals.
San Jose: New law would make city first to allow “tiny homes” for homeless
SAN JOSE — A newly signed law will allow San Jose to become the first California city to create tiny homes for the homeless by bypassing the state’s confining building codes.
City housing officials and advocates for the homeless call the new legislation a “game-changer” in the fight to solve one of the Silicon Valley’s most intractable problems.
The law, authored by Assemblywoman Nora Campos, D-San Jose, as Assembly Bill 2176 and signed by Gov. Jerry Brown on Sept. 27, goes into effect in January and sunsets in five years. It allows the city to temporarily suspend state building, safety and health codes for the purpose of building “unconventional” housing structures — everything from wood-framed sheds to tiny homes. The city will adopt its own regulations, the law says, based on some minimum standards.
“It was huge for the governor to sign this because it’s outside-the-box and no one else has done it,” Campos said. “Other big cities like San Francisco and Los Angeles will be looking at what we do here. We had to do something because what we were doing wasn’t working.”
The law requires the city to first declare a “shelter crisis” — which it did last December — and to use city-owned or city-leased land for the tiny homes. The homes must be insulated, have weather-proof roofing, lighting and electrical outlets, according to the bill.
It’s unclear how many homeless people will benefit from the homes, which must be at least 70 square-feet for individuals and 120 square-feet for couples. A half-acre piece of land, according to city documents, could house up to 25 people inside 20 units.
America’s New Normal Will Look Pretty Slow, Fed Economist Says
* San Francisco Fed’s Fernald sees productivity key uncertainty
* Tepid growth will mean weaker wages and tax revenue gains
The new normal for long-run U.S. economic growth could be 1.5 percent to 1.75 percent a year, a major slowdown from the 1990s and early 2000s as an aging population, more gradual gains in education and weak productivity growth take their toll.
In a new paper, Federal Reserve Bank of San Francisco economist John Fernald takes a stab at projecting the future normal rate of growth given long-term trends in the economy. The historically slow pace he comes up with would have major implications for America’s future prosperity.
With slower economic growth, worker wages and living standards would improve more slowly than in the past, and business sales would grow more slowly. Fiscal policy makers would be held back by more modest growth in tax revenue, and monetary policy makers would face a lower neutral rate of interest — the one that neither stimulates nor stokes the economy — meaning less room to cut rates to spur the economy in the event of a crisis.
While that paints a glum picture, there’s reason not to give up hope, because productivity could pick up from its current subdued pace and boost growth in the process.
“The major source of uncertainty about the future concerns productivity growth rather than demographics,” Fernald writes. “Another wave of the IT revolution from machine learning and robots could boost productivity growth.”
PHH wins landmark victory: CFPB ruled unconstitutional
What was once unthinkable actually happened, as the United States Court of Appeals for the District of Columbia Circuit handed an earth-shattering victory to PHH, declaring the Consumer Financial Protection Bureau’s leadership structure unconstitutional and vacating a $103 million fine against PHH.
PHH, a mortgage lender, made national headlines when it challenged CFPB Director Richard Cordray’s $103 million increase to a $6 million fine initially levied against PHH for allegedly illegally referring consumers to mortgage insurers in exchange for kickbacks.
The case was one of the first occasions that a company fought back against the CFPB, the governmental agency that formed after the financial crisis and was a celebrated achievement of the Dodd-Frank Act, at least by those on the left.
In this case, the issue began in June 2015, when Cordray exercised his authority to layer an additional $103 million fine on top of the original $6.4 million penalty from Administrative Law Judge Cameron Elliot.
The fine centered around Cordray saying that PHH violated the Real Estate Settlement Procedures Act every time it accepted a kickback payment on or before July 21, 2008 – going far beyond Elliot’s ruling, which had limited PHH’s violations to kickbacks that were connected with loans that closed on or after July 21, 2008.
Cordray issued a final order that required PHH to disgorge $109 million – all the reinsurance premiums it received on or after July 21, 2008.
PHH challenged Cordray’s authority to levy the additional fine and the constitutionality of the CFPB, and after much deliberation, the court agreed with PHH on all counts.
In essence, this is what Republicans in Congress have been arguing and attempting to change; They wanted the leadership structure to have accountability. IR and Perspective have been writing inflammatory comments on these Republican members of Congress for months, yet the DC Court of Appeals unanimously agrees with the Republican position that the CFPB structure is unlawful, breaks with American tradition, and represents unchecked power that violates the Constitution. You can’t fine companies or violate their due process rights simply because you don’t like their industry.
What a great day for America.
Funny you posted this today. I was just looking at buying some properties in the Midwest and East Coast through one of these companies. Good idea, or not?
These are legitimate companies selling solid rental properties. Unlike a realtor that will push you into whatever’s a commission for them, these companies want repeat business and referrals, so they do the legwork I described in the post.
Whether it’s a good idea or not depends largely on the fees they charge. If their fees are high and they eat up all the profits, then it’s not a good idea. If their fees are reasonable, then the fees they charge are appropriate to the service they provide. In the final analysis, it depends on the character of the people running these companies. If they value their customers, and if they want repeat business, they will sort out the good properties from the bad ones and only put their customers into good properties. If they want a quick buck, they will sell whatever crap they can and burn their bridges. To be honest, most realtors I’ve worked with had the latter strategy.
Thanks for that. Need to keep an eye on the fees.
I’ve also been looking at investing with a real estate crowdfunding platform, which strikes me as much more compelling.
Ive looked at both. The crowdfunding platforms are much less risky in my opinion. You can look at past performances and see that most of these are returning 9-10%. What I have found with most of these turnkey rental companies is that they GROSSLY underestimate or completely leave out vacancy and maintenance costs. They will offer cash on cash returns of 15-20% because they leave out these crucial costs. They do so because often times they state the homes have just been renovated and tenants are usually in place. I think this is a huge mistake as these two items (vacancy and maintenance) will be the two that ultimately eat up profits or cause you to have losses…
The crowdfunding deals show promise, but they have the same issue with high fees as these rental deals. Crowdfunding debt is a bit more attractive because the borrower pays most of the fees, but when crowdfunding equity, the investor pays them.
If you find a firm you trust to do the proper due diligence, these can be very good deals. This will certainly be a growth industry of the future.
Newport Ned-
These turnkey companies generally have a shady reputation. There are a handful of good players in an industry of sharks that takes advantage of their buyers’ lack of experience and knowledge. If you do decide to go this route, look for a company that has existed since PRIOR to the ’08 housing crash. You won’t find many. Then ask for references from customers that have been with them for at least 5 years. That should tell you if you are dealing with a reputable firm or not.
How Class-A Office Fares In A Beach Town
SEAL BEACH, CA—Seal Beach is a highly insulated office market with close proximity to major employment centers in Los Angeles and Orange County and has great freeway visibility, ensuring its popularity, Parallel Capital Partners’ CEO Matt Root tells GlobeSt.com. As we recently reported, the firm has secured $48.5 million from Pacific Western Bank to refinance the newly rebranded the Ranch at Seal Beach, as well as completed lease transactions at the class-A office property valued in excess of $20 million. We spoke exclusively with Root about why the property has been so successful, as well as the appeal of Seal Beach office market.
GlobeSt.com: How would you characterize the office market in Seal Beach?
Root: Seal Beach is a highly insulated office market located on the coast of northwestern Orange County. It can generally be described as a beach community located approximately 30 minutes from LAX. The advantage of the Seal Beach office market is its proximity to both major employment centers in Los Angeles and Orange County, making it ideal to do business in both business centers from one location. When you amalgamate a highly desirable location and high-quality tenant experience with extremely high barriers to new construction and strong economic growth, the result is significant declines in vacancy rates and upward pressure on rental rates. That would characterize the current class-A office market in Seal Beach.
When an investment idea/model becomes “mainstream”, it’s time to pause and reflect.
Buying out of state rental props went mainstream back in the early 2000’s. When that party ended ~late 06/early 07, the inflation adjusted rate on the 10yr UST was +2.25%. This party is ending with the REAL rate @ -0.52%. OUCH!
The best deals are certainly gone. The first properties I bought and sold in Las Vegas had cap rates north of 12%, and with 4% mortgage rates, the cash-on-cash returns were incredible. The deals today are far less compelling, which is typical of a mature market move.
I would be far more worried if people were buying negatively cashflowing properties for appreciation. That’s a sign of mania that’s due for a nasty correction.
negative cashflow properties hoping for appreciation is basically the current RE investment market in Irvine.
I see TONS and TONS of people considering a rental purchase in Irvine with negative cash flow (based on 20% down, 3.5-4% interest rates). They lie to themselves that its not a bad deal simply because the rents cover their mortgage or nearly covers the mortgage. Sadly many on other blogs encourage this bad behavior…
I cant tell you how many times I have told people on other blogs, dont even bother looking for a rental in Irvine for cash flow. I have looked and looked and they DO NOT exist.
I’ve also spoken with investors who consider putting 50% down to avoid the negative cashflow. So I ask them, “what provides a return on their investment?” The answer is rent growth and appreciation. In other words, the current performance is crap, but they’re hopeful about the future. Not a particularly good investment plan, in my opinion. It’s the same kind of thinking that inflated the housing bubble.
Why not pay 100% cash and then you can cash flow like crazy!!!! haha
If out of state investing was so “lucrative” I am sure you would not need to drum up investors to buy properties. I agree with el O looks like it might be time for the music to stop
These new businesses responded to demand from investors dating back to the housing crash. Had they been in business in 2009, one of them would have emerged as an industry leader and made huge money from 2009-2013. Since these companies didn’t get going until after the recovery took hold, none of them has a dominant position in the market.
Any growing business tries to find new customers. I shut down my operation in Las Vegas, so I’m not looking for more customers. Shevy is running short of opportunities to sell to the investors he already has, so he’s not looking for more either. These upstarts are trying to see if they can sustain the model, and right now, the biggest hurdle they face is a lack of awareness of their services. In the early stages of businesses like this, there are more opportunities than customers. If the market starts to turn, that can change quickly, but in many of the markets where they are active, like Atlanta or Memphis, opportunities are more plentiful than investors who want to buy them.
This is what worries me about buying out of state right now. There is so much dumb money chasing these types of deals, especially from the Bay Area. Buying from a turnkey rental company means getting mediocre returns that do not compensate you enough for the risks involved. If the buyers have no experience managing or putting together their own deals it’s so easy to mislead them on the pro formas by overstating vacancy and understating capital expenditures. You can bury just about anything on the financials and they will not have the experience to spot it when/if they do their own due diligence. I’m seeing a ton of these types of newbie out-of-state buyers popping up on Bigger Pockets and to me it’s a huge red flag that these rustbelt markets should be avoided.