When property values spike up into the clouds
My Grandfather used to say that there was only one time when real estate was a lousy investment, and that was when it was standing still. With no momentum up or down there was no point of insertion and accordingly the speculator could only stand and watch.
Once again we find ourselves in a sharp up surge with prices in the single and multi dwelling properties soaring away like a balloon off the string. Of course the requests for rental payments have also increased and the two figures are chasing each other higher and higher.
As leases terminate and come up for renewal the landlord requests have in many instances doubled. The poor tenant trying to hold his housing expense at the traditional 25% of total income is finding that he cannot afford proper housing, the increases put his finances in jeapordy. Any little bobble in employment or job change and the tenant is upside down.
Example: Tenant with family has been renting a small 2 br and 1 ba for $900 a month. Comes end of yearly lease and the landlord informs him that he will not be releasing as he wishes to sell the property to take advantage of the increase in value. This property which used to be worth about $125,000 has now increased to $325,000 and buyers que up to buy.
the tenant goes out and searches for a new little house and there is nothing. The only item available is for rent at $1,450 a month. 1st and last months rent and a $2,000 deposit. Almost $5,000 plus moving expenses. The tenants income around $4,000 a month. He is now upside down and a very good possibility that he will default on his rental payments.
A wave begins and ripples through the rental market. For some reason only known to Landlords they increase the rental rate as high as they can. Ignoring the economic level of the average tenant in their area of operation. If the normal income level is $4,000 a month, and the proper housing payment is 25% which is about $1,000 a month, they ignore and go for higher. Of course it is short sighted and leads to future failures and spasms in rent payment. The urge to increase the rents is endemic.
This coupled with the fact that many many present owners of single family rentals have bought these rentals after double and triple flip/flops after foreclosure. One property a few blocks away was bought prior to foreclosure by a young speculator. He cured the foreclosure, spent a hot $500 on a new door lock and a knocker of brass, painted the door and sold the property. The new owner being unable to qualify for a loan, kept the existing loan current and made a downpayment of $6,000 and executed a small second for $15,000. In one months time a nice speculator recently arrived from Israel bought the property. New loan went on 10% down and he has now invested a total of $345,000.To make an income in proper porportion is impossible but even so he wants $1,600 a month. This is a lower income area. As of now it is vacant. But a nice man newly arrived from Central America is gathering four other families to help him rent and splitting the rent up so that each family pays $400 a month. They will live in relays. Overflowing into the garage and toolshed. It will not be a pleasant occasion. I am sure when the new landlord discovers this state of affairs he will try to correct with an eviction. And the beat goes on.
Now that is the situation. What can we the highly evolved super experienced Real Estate Investors do to correct this situation and at the same time make a profit.
The obvious answer is to obtain the property with no money or a token sum down payment. Perhaps an offer to purchase should be made that enables the existing owner to recover some of his funds and at the same time reduce the monthly payment on the property. lst step bargain for possession of the property. and adjustment of monthly payments.
2nd step, examine the property to see what necessary developments or physical changers to the structure can be made to increase the income or create a proper division of the property into divided rental units so that the existing families do not have to take turns using kitchen and bathrooms.
Examine the placement of the house. Is there enough room at the rear of the lot or at the side to implace another structure. If such a structure were added, could advantage be taken of new forms of construction so that perhaps a more advanced efficient type of house could be added.
Example. House existing 785 sq. ft. 2 br 1 ba. The Zoning of the lot is R-3 which is a limited multiple dwelling. Thus an additional house could be added.
If this housing would take the form of a four unit structure formed from steel shipping containers and erected at a cost of about $150,000. Each unit rented for $800 this would produce a rental income of $3,200.
The existing house could be modified turning it into a super efficiency of 4 units at a cost of $62,000. This also producing a rental income of $800 a unit total $3,200 for structure and the two structures now throw off an income of $6,400 a month.
The rental rate is once more within the grasp of the renters in that area. The income gnerated can more then service the mortgage debt. You have made a contribution to the area housing and what is most important you have turned a bad investment into one that is now positive. So you let your investment grind away.
I saw a house yesterday that was purchased way high it was a two bedroom one bath and about 800 Sq. Ft. It was imediately converted into four sleeping areas and this was accomplished by the utilization of Soji screens dividing each of the two bedrooms into very small bedrooms but capable of holding two adults which gives you sleeping room for 8 persons. My god I thought I was back in Japan. The best part is the additional bathroom which was added at the back so it can service two of the sleeping areas. It also was super efficient in that the shower was over a soaking tub just big enough for two persons at a time to sit in it facing each other. Yes it is a Japanese solution. But necessity is the mother of modification. It works and in time you adjust. The rear patio is going to be enclosed and that gives just enough room to modify it into an additional great room complete with a little Acme efficiency kitchen unit.
What you are doing is modifying existing single family dwelling into multiples. Trying to work with what you have and add the necessary additions as cheaply and as efficiently as posssible.
Given another six months, steel shipping containers utilized in construction of up to 4 units the cost of additional structure on lot will be as quoted above. That solves the problem. Of course there will never be enough to really solve the problem but it is a start.
So here we are Real Estate Investors at function during one of the steepest spikes that has ever been observed. The end result housing that is affordable and is also super attractive and the units so created are at profit.
A secret to erection of container housing is that the financing is going to be performed by the construction company itself. If this can be done (without government support) then price corrections can be accomplished both in the rental market throughout suburbia but also in the erection of new advanced efficient 21st century Modern housing.
We might also consider the offer of long term lease (99 years) on properties which are experiencing problems where the purchase price has gone so high as to be unaffordable to the population within the area. If a long term lease can be made with no money down to speak of, and the payments reflective of reduced interest on the loans outstanding. Or perhaps an excuse of interest during the first five years of the lease in consideration of bringing the properties back into an income stream. A reduction in taxes might also be obtained on an appeal of tax rate. At which hearing evidence is introduced which shows that purchase price of real estate is not truly reflective of true value of the properties as the income to support such values is not forthcoming. This has been done but not since the 1930's.
So fear not the Spike in Price, it is but an opportunity to negotiate with those who bought high in a high market. Many of which are now ready to take losses. Interesting situation and a fun one to negotiate.
Lucius
Busy in the vineyard of Real Estate for the past 50 years. Sometimes profitably and sometimes not. But always interesting
This is a really interesting post, thank you Lucius. I have bought and sold shipping containers over the past 20 yrs associated w/ an intl freight forwarding biz that we own so I know what they are. Put 2 40 footers together and you hv a 640 sqft of floor space to divide as you will. you cut in windows and doors as appropriate, insulate ,decorate and poke a few holes for water in water out w/climate control and you hv a habitat.
Seems someone has to fight thru the permit barriers which i hv to believe are considerable for this type of structure to p***** code. I'm in florida and yr in california which hv different development concerns. Just curious if you hv feedback re: the permit problems. I'm sure you wud be stacking them up wherever you cud right now if possible. Everywhere there is the need for more affordable housing. The burden of regulation (which much is needed) requires considerable influence to alter.
Just wondering what response hv you received from the building dept locally.
Great job,
Bob
Dear Bob,
You hit the nail on the nose. I have been jousting the windmill for over two months and only just lucked out in finding the directive the building department issued which says. No material not approved and tested by the proper authority will be utilized in the erection of structure here in the great progressive state of california.
I have just realized that I am involved in a political situation. I am now searching for the group or company that makes domestic type containers to ride the back of very large 18 wheel trucks. Their cost is over 200% higher.
damn they must have a lot of drag. I have a little help from associates within the Building Department. Looks like I may be delayed a bit on permit. You would think they would grab at the $8,000 per permit. Oh well, I have bucked this problem before. Nothing changes. I will keep all abrest my favorite position.
Cheers Lucius
Wow, shipping containers. Last time I saw that was in the dusty streets of Mazar-i-Sharif back in early 92, a few days before the town fell to the mujahadeen. The merchants would sell their wares out of the front, and live in the back with the whole extended family. Glad we don't have such a housing crunch here in the wilds of rural Minnesota! I did p***** up a chance to buy a rural pre-foreclosure house that came with a couple of containers, which had been used for ATVs and other toys but were too heavy for the owners to cart off.
Good luck on the permits, though. At least they're not likely to rot or cave in like so many urban fire traps. But how the heck do you keep them cool in the summer?
Lucius--
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), but here in Bay Area rent prices dropped 40% since 4 years ago and they continue going down. There are a lot of vacancies in residential areas as well as commercial. I guess, this happens because interest rates are so low, that many people who could not afford houses before are buying now. Also, Bay Area lost 300,000 jobs and even so everybody's expecting new biotech boom, it does not seem to happen. Biotech jobs as most of engineering jobs are going overseas. This explains rents going down and vacancies.
Judging by the headline "When property values spike up into the clouds" I expected to read something about "what to do and what not to do", e.g. do not buy now for long term investmement, only to turn around; or stay away; or even buy agressively
I was quite surprised to read that rents went up in LA (well we have entire California between us
I would also expect a rain of foreclosures 2 years from now and perfect conditions to buy "subject to".
Now about containers to houses.
Let's say you sell it for low price to a family that otherwise would not be able to afford buying a house. The price is still under market value and, by the way, the number of houses like this is very limited. Limited to number of lots for infill, at least. I suspect that the new owner may as well sell the house for quick profit at double or triple price. But, yes, I agree. For some families you will solve housing problem.
Another point is that there's still affordable housing. There are many "super commuters" here buying houses around Sacramento or Modesto, where land is almost unlimited. 300K - new house. Living in CA is expensive, those who cannot afford it just move somewhere else. It is called survival.
And you know that I am FOR houses from containers. I am sure that there will be a demand for those.
It's just... the situation now is not THAT bad as drow it. 4 years ago it was worse.
Lucious, you've been in this business long enought to know this, but it's intersting to discuss. There is a stigma out there that landlords are evil rich people that just like to take advantage of people.
Welcome to America. The land of Capitalism, opportunity, and the american dream. As long as monoplolies do not exist, the laws of supply and demand will govern. Survival of the fittest still rings true.
The american dream is not working for $12 per hour until you're 65 and then retiring. Most landlords know this. Most tenants do not.
Where I'm going with all this is the fact that it is impossible to charge more than a fair market rent. Sure, you can try hard, but as soon as it's too high, people will move and you've got a vacancy. You can't force people to live there. You might "get lucky" sometime and get an uneducated renter, and take advantage of them, but they'll soon figure out that there are cheaper places to live.
The problem with landlording is that you've got a face. When gas, car, food, and utility prices increase by 25%, people complain, but they're never quite sure who's responsible. Addittionally, they tend to be "small ticket items" so that the effect is less noticable.
Are landlords greedy??? Yes. Is everyone else greedy? ....Also yes. I know that's a pessimistic outlook, but true 98% of the time. You can use the same argument and say that the tenant is greedy because he's complaining about a $20 rent increase. There are always cheaper areas, smaller places, and other options. Capitalism creates the most strain on "the least common denominator" so to speak. Capitalism does have an ugly side, and that is what you just described.
The fact is that there are a lot of blue collar workers in places like LA that get squeezed out of the equasion before an adjustment period occurs.
If people can't afford to live in LA and clean hotels, then they won't. Pretty soon the hotel business realizes that they have to pay them more, and perhaps charge more for their rooms. The system will monitor itself....but that doesn't mean that it will do so without hurting some individuals.