What are the factors that prevent someone from losing money in real estate?

Written by David Greene for FORBES: We all know some who frequently lament their decision to invest in real estate. Constantly blaming the market, or real estate as an industry, they believe the entire process is predicated on luck and timing, an exercise in chance. For people who have lost money investing, it’s easy to sympathize with them-but are their beliefs regarding results being beyond their control actually accurate? 

Many who bought property between 2001 and 2007 lost money. These were years where prices aggressively increased, largely due to loose lending practices that allowed people to buy homes they could not afford using loans that were only temporarily manageable. Prices continued to climb until these loans reset, at which point houses fell into foreclosure, prices continued to drop, and the overall housing market spiraled into chaos. 

But was this truly unavoidable or impossible to predict? Is it justified to live in fear of something like this happening again?

If you believe the answer is “yes”, you’re not likely to get started investing in real estate. The constant fear of an anvil dropping on your head like a looney toons cartoon will prevent you from ever taking any serious type of action. This will also prevent you from having any serious chance of success. The consequences for incorrectly assuming real estate investing is a gamble are grave.

If you believe the answer is “no”, it begs the question-what are the factors that prevent someone from losing money in real estate? Is it just a matter of timing the market? Is it found in getting only great deals? Or are there more pieces to the puzzle?

If we can understand what causes folks to lose money in real estate, we can take preventive measures to ensure it doesn’t happen to us. While no investment is without risk, smart investors understand there are certainly precautions that can be taken to mitigate that risk. In my nearly ten years of investing in real estate I’ve found there are certain steps to take that have a big impact on avoiding the wrong deal. I’ve spent a considerable amount of time listening, interviewing, and speaking with real estate investors. I’ve found patterns in what went well, and I’ve also seen patterns in what led to things going horribly wrong.

The following is a list of the things I’ve noticed often lead to catastrophe. Avoiding these mistakes will greatly increase your odds of real estate investing success.

Negative Cash Flow

If you want to make money in real estate, you should plan on holding an asset for a long period of time. Good things happen when real estate is owned over the long haul. Loans are paid down, rents tend to increase, and the value eventually goes up. The number one problem preventing investors from winning the long game is buying a property that loses money every month.

Don’t buy real estate assuming the price will go up and you can sell it later(this is an issue I’ll cover a little later). Nobody knows what the market is going to do. This is why trying to time the market is a bad strategy to base your decisions on. Instead, only buy properties that generate more income each month than they cost to own. By avoiding “negative cash flow”, you are protected from market dips or stalling home prices. You only lose money in real estate if you sell in unfavorable conditions or lose the asset to foreclosure. Ensuring you earn positive cash flow each month will put the power for when you exit the deal back into your hands.

Lack Of Reserves

If lack of cash flow is the number one culprit for losing money in real estate, lack of reserves is number two. Too many variables are involved in owning rental property to be able to accurately determine when unexpected expenses will hit, and how much they’ll be. Whether it’s an HVAC unit going down, a roof leak, or a water heater busting, there will always be something you need to repair or replace.

None of this takes into consideration evictions, destroyed property, and more. While you’ll eventually end up positive if you hold a property long enough, there will be times when your bleeding cash. Having a sufficient amount of reserves during these times is crucial to your success. Conventional wisdom suggests keeping six months of expenses in reserves for each property. While this number can vary for individual people with unique financial situations, make sure you have enough set aside to comfortably weather the storm when Murphy’s law hits.

Following The Herd

As Warren Buffet stated, “Be fearful when others are greedy and greedy when others are fearful”. While many of us know this to be true, the fact remains too many people still follow the herd. Many bad decisions are made when they are based on what others are doing, rather than basing them on sound financial principles.

It may be tempting to follow the herd, but understand it is a false sense of security. Just because everyone else is buying doesn’t mean you should too. In fact, it may be the opposite. The best deals I ever bought were purchased when no one else was buying. The only reason they were for sale is because someone else lost them who originally bought them when everyone else was buying! Make decisions on fundamentals like cash flow, ROI, equity, and a solid long term plan-not on what you see everyone else doing.

Betting On Appreciation

This is the number one reason I’ve seen for those who lose properties to foreclosure. Amateurs buy a house assuming it will go up in value and they can sell it later. Professionals buy under-valued properties in solid locations that produce positive cash flow. This gives them the flexibility to exit the deal when it makes financial sense to do so. When someone bets on appreciation, doesn’t have positive cash flow, and doesn’t keep accurate reserves, they are gambling on the market continuing to rise to bail them out from a risky investment. 

Buying in Bad Neighborhoods

While we all know the first rule of real estate (location, location, location), there is also still the temptation to buy a questionable property in an area that seems too good to be true. When it seems too good to be true, it usually is. While homes in undesirable locations can look great on paper (read, in a spreadsheet) the reality is they almost always look better in theory than they’ll be in practice.

When you buy in an area where good tenants won’t want to live, you’ll be forced to rent to less than desirable tenants with lower credit scores, less reliable income streams, and a worse rental histories. The cons just won’t justify the pros. Having to pay for multiple evictions, destroyed homes, and theft will cause even the most stalwart investors to lose their cool. Avoid the temptation and only buy in areas where reliable tenants want to live.

Underestimating Rehab Costs

Whether you’re a total newbie or a seasoned pro, everybody makes this mistake. Experienced investors assume their rehabs will go over budget and over schedule. They prepare for this by writing these overages into their budgets and planning for them accordingly.

There is no use in running out of money with 10% of your rehab left to go! You can’t rent out the property and can’t generate income unless 100% of the property is ready to be dwelled in. Don’t be the person who makes the mistake of buying a property then running out of money before it’s ready to be rented out. Don’t bet on contractors, don’t bet on estimates, and don’t bet on numbers in a spreadsheet. Make sure you bet on yourself and have enough money set aside to finish your rehab, even if you’re told that’s unnecessary.

Planning on Doing The Work Themselves

All too many people have assumed they would save on a deal by doing the rehab work themselves rather than paying someone else. While there are some people who can pull this off, it’s a mistake to assume you can pay too much for a property, or not have enough in reserves to pay for the work, simply because you plan on doing the work yourself.

It’s been said “The man who represents himself in a court of law has a fool for a client.” The same can be said of the person who assumes they’ll do the rehab work themselves to avoid budgeting correctly. You don’t know which direction your life will take, what time you’ll have later, or what unexpected problems will be uncovered once you start the rehab. If you’re able to do the work yourself, consider that icing on the cake-just don’t count on it.

Failing to Educate First

The final lesson I’ve learned from those who have lost money in real estate is that they didn’t understand what they were getting into until after they had committed to purchasing a property. Certain decisions like buying a property, starting a rehab, or putting money into a deal, can’t be taken back once they are made. The time to realize you’re not prepared, or it’s the wrong deal, is before you pass the point of no return.

If you want to invest in real estate, that’s great! Start by educating yourselfnow, before you’re committed, then use that information to help you make the best choice possible. I wrote the book “Long Distance Real Estate Investing: How to Buy, Rehab, and Manage Out of State Rental Property” to help save others money by learning from my mistakes. I document my systems, strategies, and the criteria I use to make my own decisions so others can avoid catastrophe. This is just one example of ways you can invest a very small amount of money to save yourself thousands of dollars in mistakes.

Reading articles like this show a propensity for avoiding mistakes and saving money. I encourage you to read as much as possible before jumping in. Other resources include websites like BiggerPockets.com, podcasts, and online blogsites where you can learn from the wisdom of others.

No investment is without risk, but that doesn’t mean we need to live in fear. Start by avoiding the eight mistakes I’ve outlined here and you should be well on your way to growing wealth through real estate.

Written by David Greene for FORBES.com

What are the factors that prevent someone from losing money in real estate?

Written by David Greene for FORBES: We all know some who frequently lament their decision to invest in real estate. Constantly blaming the market, or real estate as an industry, they believe the entire process is predicated on luck and timing, an exercise in chance. For people who have lost money investing, it’s easy to sympathize with them-but are their beliefs regarding results being beyond their control actually accurate? 

 

Many who bought property between 2001 and 2007 lost money. These were years where prices aggressively increased, largely due to loose lending practices that allowed people to buy homes they could not afford using loans that were only temporarily manageable. Prices continued to climb until these loans reset, at which point houses fell into foreclosure, prices continued to drop, and the overall housing market spiraled into chaos. 

But was this truly unavoidable or impossible to predict? Is it justified to live in fear of something like this happening again?

If you believe the answer is “yes”, you’re not likely to get started investing in real estate. The constant fear of an anvil dropping on your head like a looney toons cartoon will prevent you from ever taking any serious type of action. This will also prevent you from having any serious chance of success. The consequences for incorrectly assuming real estate investing is a gamble are grave.

If you believe the answer is “no”, it begs the question-what are the factors that prevent someone from losing money in real estate? Is it just a matter of timing the market? Is it found in getting only great deals? Or are there more pieces to the puzzle?

If we can understand what causes folks to lose money in real estate, we can take preventive measures to ensure it doesn’t happen to us. While no investment is without risk, smart investors understand there are certainly precautions that can be taken to mitigate that risk. In my nearly ten years of investing in real estate I’ve found there are certain steps to take that have a big impact on avoiding the wrong deal. I’ve spent a considerable amount of time listening, interviewing, and speaking with real estate investors. I’ve found patterns in what went well, and I’ve also seen patterns in what led to things going horribly wrong.

The following is a list of the things I’ve noticed often lead to catastrophe. Avoiding these mistakes will greatly increase your odds of real estate investing success.

Negative Cash Flow

If you want to make money in real estate, you should plan on holding an asset for a long period of time. Good things happen when real estate is owned over the long haul. Loans are paid down, rents tend to increase, and the value eventually goes up. The number one problem preventing investors from winning the long game is buying a property that loses money every month.

Don’t buy real estate assuming the price will go up and you can sell it later(this is an issue I’ll cover a little later). Nobody knows what the market is going to do. This is why trying to time the market is a bad strategy to base your decisions on. Instead, only buy properties that generate more income each month than they cost to own. By avoiding “negative cash flow”, you are protected from market dips or stalling home prices. You only lose money in real estate if you sell in unfavorable conditions or lose the asset to foreclosure. Ensuring you earn positive cash flow each month will put the power for when you exit the deal back into your hands.

Lack Of Reserves

If lack of cash flow is the number one culprit for losing money in real estate, lack of reserves is number two. Too many variables are involved in owning rental property to be able to accurately determine when unexpected expenses will hit, and how much they’ll be. Whether it’s an HVAC unit going down, a roof leak, or a water heater busting, there will always be something you need to repair or replace.

None of this takes into consideration evictions, destroyed property, and more. While you’ll eventually end up positive if you hold a property long enough, there will be times when your bleeding cash. Having a sufficient amount of reserves during these times is crucial to your success. Conventional wisdom suggests keeping six months of expenses in reserves for each property. While this number can vary for individual people with unique financial situations, make sure you have enough set aside to comfortably weather the storm when Murphy’s law hits.

Following The Herd

As Warren Buffet stated, “Be fearful when others are greedy and greedy when others are fearful”. While many of us know this to be true, the fact remains too many people still follow the herd. Many bad decisions are made when they are based on what others are doing, rather than basing them on sound financial principles.

It may be tempting to follow the herd, but understand it is a false sense of security. Just because everyone else is buying doesn’t mean you should too. In fact, it may be the opposite. The best deals I ever bought were purchased when no one else was buying. The only reason they were for sale is because someone else lost them who originally bought them when everyone else was buying! Make decisions on fundamentals like cash flow, ROI, equity, and a solid long term plan-not on what you see everyone else doing.

Betting On Appreciation

This is the number one reason I’ve seen for those who lose properties to foreclosure. Amateurs buy a house assuming it will go up in value and they can sell it later. Professionals buy under-valued properties in solid locations that produce positive cash flow. This gives them the flexibility to exit the deal when it makes financial sense to do so. When someone bets on appreciation, doesn’t have positive cash flow, and doesn’t keep accurate reserves, they are gambling on the market continuing to rise to bail them out from a risky investment. 

Buying in Bad Neighborhoods

While we all know the first rule of real estate (location, location, location), there is also still the temptation to buy a questionable property in an area that seems too good to be true. When it seems too good to be true, it usually is. While homes in undesirable locations can look great on paper (read, in a spreadsheet) the reality is they almost always look better in theory than they’ll be in practice.

When you buy in an area where good tenants won’t want to live, you’ll be forced to rent to less than desirable tenants with lower credit scores, less reliable income streams, and a worse rental histories. The cons just won’t justify the pros. Having to pay for multiple evictions, destroyed homes, and theft will cause even the most stalwart investors to lose their cool. Avoid the temptation and only buy in areas where reliable tenants want to live.

Underestimating Rehab Costs

Whether you’re a total newbie or a seasoned pro, everybody makes this mistake. Experienced investors assume their rehabs will go over budget and over schedule. They prepare for this by writing these overages into their budgets and planning for them accordingly.

There is no use in running out of money with 10% of your rehab left to go! You can’t rent out the property and can’t generate income unless 100% of the property is ready to be dwelled in. Don’t be the person who makes the mistake of buying a property then running out of money before it’s ready to be rented out. Don’t bet on contractors, don’t bet on estimates, and don’t bet on numbers in a spreadsheet. Make sure you bet on yourself and have enough money set aside to finish your rehab, even if you’re told that’s unnecessary.

Planning on Doing The Work Themselves

All too many people have assumed they would save on a deal by doing the rehab work themselves rather than paying someone else. While there are some people who can pull this off, it’s a mistake to assume you can pay too much for a property, or not have enough in reserves to pay for the work, simply because you plan on doing the work yourself.

It’s been said “The man who represents himself in a court of law has a fool for a client.” The same can be said of the person who assumes they’ll do the rehab work themselves to avoid budgeting correctly. You don’t know which direction your life will take, what time you’ll have later, or what unexpected problems will be uncovered once you start the rehab. If you’re able to do the work yourself, consider that icing on the cake-just don’t count on it.

Failing to Educate First

The final lesson I’ve learned from those who have lost money in real estate is that they didn’t understand what they were getting into until after they had committed to purchasing a property. Certain decisions like buying a property, starting a rehab, or putting money into a deal, can’t be taken back once they are made. The time to realize you’re not prepared, or it’s the wrong deal, is before you pass the point of no return.

If you want to invest in real estate, that’s great! Start by educating yourselfnow, before you’re committed, then use that information to help you make the best choice possible. I wrote the book “Long Distance Real Estate Investing: How to Buy, Rehab, and Manage Out of State Rental Property” to help save others money by learning from my mistakes. I document my systems, strategies, and the criteria I use to make my own decisions so others can avoid catastrophe. This is just one example of ways you can invest a very small amount of money to save yourself thousands of dollars in mistakes.

Reading articles like this show a propensity for avoiding mistakes and saving money. I encourage you to read as much as possible before jumping in. Other resources include websites like BiggerPockets.com, podcasts, and online blogsites where you can learn from the wisdom of others.

No investment is without risk, but that doesn’t mean we need to live in fear. Start by avoiding the eight mistakes I’ve outlined here and you should be well on your way to growing wealth through real estate.

Written by David Greene for FORBES.com

What’s really measured by days on market, and the implications this figure has for homebuyers and sellers alike ( FROM US NEWS)

Homes sold for record-high prices in the San Fernando Valley during the month of June, according to a new report from the Southland Regional Association of Realtors. FTOM CURBED LA)

The median sale price for single-family homes was $722,000—nearly $15,000 higher than the previous record of $708,000, set last year. Condominium prices also reached an all-time high of $455,000 during the month.

“I’ve had multiple offers on everything I’ve sold this year,” says a local Sherman Oaks Realtor.

It’s not just the Valley. Prices across Los Angeles are crawling upward. The county’s median sale price tied an all-time record in May, according to real estate tracker CoreLogic. Sale numbers from June will be released later this month.

Perhaps because of those high prices, June also saw an unusually low number of sales in the Valley. Only 487 houses and 158 condos changed hands during the month; both numbers were the lowest recorded during the month since 1984, when the Realtors association began tracking sales.

“Prices have risen to a point where affordability issues combined with limited availability constrain buyer choices,” the group’s president, Dan Tresierras, said in a statement.

Tresierras points out that relatively low mortgage interest rates may be inspiring home shoppers to hit the market, but that there aren’t many options for them to choose from once they start looking around. Only 1,352 homes and condos were listed for sale during the month of June, down slightly from the same time last year and far below the level of inventory typically available in the Valley.

Still,  buyer interest remains strong, in spite of high price tags.

“As long as they’re priced right, homes in the southern Valley are still selling like crazy,” say local realtors.

With buyers persisting in their home searches for the time being, prices will likely continue to rise for the limited number of homes available for purchase, says Southland association CEO Tim Johnson.

“Lower interest rates help buyers get more house for their dollars,” he says. “Yet it also brings out more prospective buyers, which translates into additional upward pressure on prices.”

WRITTEN BY ELIJAH CHILAND FOR CURBED LA

FROM MARKETWATCH.COM: Rates for home loans were little-changed during a choppy week for financial markets, but hovered near their lowest in about two years, giving a boost to home shoppers.

The 30-year fixed-rate mortgage averaged 3.75% in the July 11 week, unchanged compared to a week ago, Freddie Mac said Thursday. More than halfway through the year, the popular product has managed only eight weekly increases.

The 15-year fixed-rate mortgage averaged 3.22%, up four basis points. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 3.46%, up from 3.45%.

Fixed-rate mortgages track the yield on the 10-year U.S. Treasury note, which has moved higher in early July as investors pause to consider the massive rally of the past few weeks. Bond yields rise as prices fall, and vice versa.

Investors snatched up bonds in May and June as concerns about slowing global growth and an intensifying trade war made riskier investments like stocks less attractive. In unsettled times, investors prefer the certainty of safer, fixed-income assets.

Also fueling investor interest for bonds: the Federal Reserve. Policymakers at the central bank have been rattled enough by those cross-currents that they seem certain to cut interest rates at an upcoming meeting. The Fed doesn’t directly control the 10-year Treasury note, but its overall sense of caution can set the tone for financial markets.

The fixed-income streams bonds pay out would be less valuable if interest rates or inflation were rising, but neither looks to be the case now. After the jump of the past week, rates – including those for mortgages – look set to decline again, good news for anyone on the hunt for a home.

Written By Andrea Riquier For MarketWatch.com

FROM REALTOR.COM : It doesn’t matter if you’re owning or renting, buying or selling, or still sitting on the sidelines waiting to join the game. Just about everyone wants to know what’s going on in the housing market.

Because it’s a moving target. While plummeting prices can be a boon for buyers, they can throw sellers into a panic—and, in a worst-case scenario, plunge the world into a recession, as we saw when the housing bubble burst a decade ago. Meanwhile, a lack of new housing coming onto the market can lead to price spikes for both buyers and renters.

That current dearth of new construction is exacerbating a national housing shortage and leading to an increase in prices, according to the recently released annual State of the Nation’s Housing report from the Harvard University’s Joint Center for Housing Studies.

“The major takeaway is that the housing market is strong,” says Daniel McCue, senior research associate at the center. But “there’s a housing shortage brought on by several years of low levels of homebuilding. It’s led to increased competition, which has driven up home prices. And it’s led to [a lack of] housing affordability.”

Here are six key findings from the report.

1. Homeownership rate is rising again

Over the past two years, homeownership has been rising again, hitting 64.4% of U.S. households in 2018. The rate rose 0.5% from the previous year, resulting in an additional 1.6 million households who closed on properties.

That’s fantastic news. The homeownership rate had plummeted during the financial crisis as scores of foreclosures swept through the country. Now it’s back up to what it was from about 1985 through 1995, according to McCue.

“Homeownership had declined a lot,” he says. “So [for many buyers] it was finally having the money and the income to make this happen.”

The bump was primarily thanks to more millennials and young Gen Xers flooding the market. An additional 1.1 million of them closed on properties from 2016 to 2018.

“You have a bigger group of young adults getting older and reaching the ages where they are getting married, having children, and reaching the prime first-time home buyer [point],” McCue says.

The boost in homeownership was in spite of record-high home prices in many parts of the country and rising mortgage interest rates.

In 2012, the monthly median home payment was only $1,176, after adjusting for inflation, according to the report. But just six years later, it had jumped almost 51%, to $1,775 a month.

“The fact that homeownership is rising despite all of the affordability challenges that buyers are facing reflects how important homeownership is to the American dream,” says Chief Economist Danielle Hale of realtor.com®.

2. Fewer folks are renting

Simple math: If the number of homeowners is rising, it means that the number of renters is falling. The number of households renting the roofs over their heads fell by 110,000, to 43.2 million, from 2017 through 2018. That’s in stark contrast to the previous 12 years, when the number of tenants grew by nearly 850,000 households annually.

Increasing rents, going up 3.6% annually in 2018 compared with 3.8% in 2017, may have something to do with it.

“Rents are high and rising,” says Hale. But homeownership tends to be more of a fixed cost as folks know what their monthly mortgage will be. “Renters tend to pay more of their income toward housing than homeowners do.”

But here’s another shift: Renters are becoming wealthier. About a quarter of them now have household incomes of $75,000 or more. That means many are choosing not to become homeowners even though they could afford to do so.

But more middle-class renters, earning between $45,000 and $75,000 a year, are becoming cost-burdened. The percentage of these folks spending more than 30% of their income (which is considered the max folks should pay for housing) shot up from 13% in 2001 to 25% in 2018, according to McCue.

3. The rate of new home construction is slowing

Even with record demand from prospective buyers, the rate of home construction slowed in 2018. Yes, the number of new, completed homes was up 2.8%, to 1.18 million units, from 2017 to 2018, but that growth rate is actually the lowest since 2012, when the recovery from the Great Recession kicked in.

“We’re eight years into the recovery, and we’re still only 75% back to normal rates of home building,” says McCue.

He blames the lack of building to increasing land prices, cumbersome local regulations, and a construction labor shortage that make building more difficult and expensive.

Still, building was more prevalent in some parts of the country than others. For example, home construction starts were up 7% in the West, where the population is growing, and 5% in the South, where land is more plentiful and cheap. But they fell just under 1% in the expensive Northeast, where there’s not as much land available to build on, and dropped 4% in the Midwest.

“Some of that is simply a reflection where people are moving,” says Hale.

4. Homes are getting bigger and less affordable

Most first-time buyers don’t want—and can’t afford—a megamansion. They’re seeking smaller, more affordable single-family houses. But builders aren’t putting them up.

Just 22% of single-family homes clocked in at under 1,800 square feet, according to the report. That’s compared with 32% from 1999 through 2011.

That’s because it’s simply more profitable to put up bigger, more luxurious abodes and sell them for higher prices.

“It’s difficult for builders to build modest-sized, more affordable homes,” says McCue. But “there’s plenty of demand out there for these [homes].”

5. Home sales are slipping

The lack of homes, the rising prices, and the crazy competition may be why the number of home sales is falling. After years of a white-hot, frenzied real estate market, 5.3 million existing (i.e., previously lived-in) residences were sold in 2018. That’s compared with 5.5 million in 2017.

“Home sales declined mainly at the end of 2018, when mortgage interest rates increased,” says McCue. Even the slightest interest rate increase can add quite a bit to a monthly mortgage payment.

But there are now more homes available for sale, even though they tend to be on the more expensive side. The number of homes for sale priced at under $200,000 has dropped, while more properties going for $750,000 or more are coming onto the market, says Hale.

“The biggest increase in inventory is in expensive homes for sale, where demand is the weakest,” she says.

6. Home price growth is also slowing

Buyers shouldn’t get too excited. Home prices aren’t coming down—they’re just not increasing at such a fast pace. Home price appreciation went from 6.5% at the beginning of 2018 to just 4.6% at the end of the year, according to the S&P/Case-Shiller National Home Price Index.

The median home list price is $310,000, according to realtor.com.

“Home prices have gotten so high in so many areas that it was just unsustainable to keep rising at the rates that they had,” says McCue. “Home prices have far outpaced rises in income over the last five years.” 
  
 WRITTEN FOR REALTOR.COM BY CRAIG TRAPASSO