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Real Estate: Is It In A Bubble?

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I originally wrote this article 6 months ago but the same question applies so I’m updating and improving it. The question still applies, is real estate at a bubble? Is it at the top?

I was at the bar for a friend’s going away party and a random guy at the bar started telling me how I needed to buy some new coin. Not Bitcoin, he said, but some other coin he had discovered that is going to make you rich.

In fact, he had just quintupled his money since this morning. I needed to hurry up and get in on the action!

…When the local regular at a small bar in small-town USA has finally started giving investing advice, it’s time to move on to the next big thing. So, I’m done with cryptocurrency (until it collapses).

Mind you, I wrote those words back when Bitcoin was was reaching new highs every day (it’s since lost 90% of it’s value)

But, What About Real Estate?

Ten years ago when I got started in real estate, everyone thought it was a terrible idea.

“If it was so easy everyone would do it.”

“Don’t you think real estate is too risky?”

You know the lines. I heard them all. But now, real estate is the best investment on the planet.

A huge number of friends and also former co-workers of mine have jumped into real estate investing within the last year. People who used to warn me how dangerous real estate was are now telling me real estate is probably the best thing to get into (except cryptos, of course!).

It’s the “best” because their best friend’s, uncle’s, nanny just house-hacked a home and earned $50k and quit being a nanny and is now a full-time house flipper!

Or…someone they knew bought a house 3 months ago and already sold it for $20k profit!

Maybe…their friend’s nephew just became a landlord though he’s 19 and doesn’t really even have a stable job (so he’s technically “retired”, right?).

The Vibe in Real Estate

If you’re getting this feeling or this vibe with any sort of investment, you need to be very cautious. Every time I’ve seen it, it’s been bad.

I turned 18 in 2003. Though I was young, I remember the boom years – I was 16 and everyone was offering me part time work at $10-$12 per hour to do construction work that I had no idea how to do.

When I was 18, 19, and 20, I was remodeling apartments at $10-$15 per hour though I had basically no experience.

Everyone was making money and throwing it around. Then I graduated college in 2008 and the economy collapsed.

It was the same feeling with cryptos. Everyone was excited about them, now I never hear about them anymore.

…and now, everyone I know has become real estate investors.

Real Estate & Economic Fundamentals

When your gut tells you something, you need to pay attention. But, I question myself at the same time.

Housing inventory is chronically low which is forcing housing prices to go up. House construction simply can’t keep pace with demand and the same is true with apartment developments.

Interest rates are dampening demand. If interest rates continue to rise, it could affect the entire economy, but the Fed has signaled it might slow or stop their interest rate increases.

The economy is great, unemployment is rock bottom, real estate prices are increasing. New wealth has been created by the trillions in the last year or two.

Stocks are going through a correction, but stock prices are not an economic indicator. If they get too low it can change people’s perceptions of the economy though and reduce spending. So, we need to pay attention to it.

Wages are growing faster than inflation for the first time in decades.

But, cap rates are amazingly low and property prices are ridiculously high compared to the income being produced. This means people prefer real estate over other investments.

Economists are constantly revising up their estimates for growth.

But… the yield curve inverted, at least on part of the curve, which usually signals an upcoming recession within 1-2 years.

So, which is it? Is real estate at the top or are economic indicators showing strong fundamentals?

Image result for real estate rates

Is it Rational or Irrational Exuberance?

Well, my crystal ball is as clear as yours. No one can predict the future but here’s my take.

I don’t feel that all signs point to bubble yet because there is enough conflicting thoughts to make me believe we aren’t quite there yet. Real estate is cooling down, but a lot of that is due to interest rates. If they don’t continue to rise, then real estate should be more stable or continue to rise.

For now, though, all we can do is to plan and to prepare. Here are your options.

Joining The Herd.

Most people invest a lot and take risks when times are great, but pull way back when times are bad. They dump $50k into stocks then when they drop 20%, they immediately sell to protect them from further losses.

Then once stocks have dropped 40%, they are too scared to reinvest until stocks are back up or higher than where they were before.

People jump into bitcoin when it’s 15,000, ride it to 17,000, then dump it when it gets to 10,000.

This is the herd mentality and is the absolute wrong way to invest.

Back in 2007, they were giving loans to anyone with a pulse but by 2011 it was basically impossible to get financing, even though housing was at rock bottom prices.

When properties could be bought for literally 40 cents on the dollar, nobody was lending and nobody was buying.

Bucking The Herd…

The hardest part of doing the opposite thing is you’ll have some serious FOMO (fear of missing out).

I know people who have made $200k+ in cryptos. FOMO was taking hold of me and I almost I actually invested $1,000 into bitcoin right around $15,500. I played with it for a week or two and sold it, losing roughly $3. That is not a typo.

I did it for fun because investing due to FOMO is the absolute worst reason to invest. A lot of people put a ton of money into it right at the wrong moment.

Instead, I believe people should invest when times are great and invest way more when times are bad. Also, I only want to invest in well known and historically good investments. In a way, it’s like dollar cost averaging.

Using the above example, if the market is hot, I wouldn’t dump all $50k into the market. Instead, I might dump $20k and leave $30k cash. As the market drops, I keep buying more. If it goes up, I buy more too, just more slowly.

In fact, this is almost exactly what I did during the market crash after Lehman Brothers collapsed. I invested my life savings in the beginning of september 2009 and lost half 2 weeks later.

I was somehow able to make all my money back within about 6 months because of dollar cost averaging.

Dollar Cost Averaging Works in Real Estate

The fact is that nobody knows when we will be at the top and nobody knows how hard the market will correct when we get there. It could come in 3 years or it could come tomorrow.

3 years ago I knew a person who sold a lot of their multifamily because they said we are at the top. 3 years later they lost out on a ton of money because it’s still going strong.

So, if you held back your investments today, you could lose 3 more years of a bull market.

My point is, I wouldn’t avoid buying. Just buy a deal or two, buy them right, and focus on adding serious value to keep you above water when the market corrects.

During a correction, use your capital reserves to really get in and buy as many properties as possible with as little money as possible. Don’t focus on adding a lot of value, just focus on getting them cash flowing.

Adding value means typing up capital. Tying up capital means buying fewer properties for huge discounts.

So, save those improvements for when the market is hot and deals are hard to find.

How Are You Planning to Invest in the Next Few Years?

Are you following the herd and diving in, or are you bucking the herd and doing the opposite.

 

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

Real Estate Investing

Chicago Real Estate Mogul: Here’s How You Flip Houses

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Chicago-based Sean Conlon is a real estate investor extraordinaire. He started his career in the early ’90s, quickly becoming the top residential realtor in the nation with nine figures in annual volume.

Conlon’s the host of CNBC’s real estate show The Deed. In this video, Sean gives some insights into how to become a real estate investment master.

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Real Estate Investing

​4 Tips For Managing Your Airbnb

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I’ve been talking a lot about vacation rentals lately.

No, I haven’t gone out and bought one…yet. But, I want to!

And interesting factoid… Nearly 45 percent of all real estate purchases in the United States are made by people in search of profit. Investing in a short-term rental property is a great way to generate a steady income stream.

With the use of websites like AirBnB, just about anyone can turn a condo or house into a short term rental property. This is a great source of income for many families, and can be for you too!

But, most investors think that managing a short-term rental property is just too much work. The reality is, it’s not easier or harder than any other rental, you just need the right management in place.

There are a lot of options out there, but I’ve recently stumbled upon some software such as Rentbelly, which helps you manage property like this and makes it a lot easier.

The biggest hurdle that you will have to overcome as a short-term rental property owner is keeping enough bookings. This hurdle can be overcome with the development of a comprehensive marketing strategy.

Here are some essential tips for properly managing your short-term rental property.

1. Get A Feel Of What’s Happening In Your Local Area

Renting out your property in the off season can be a bit difficult. The only way to combat the lull that occurs during this low season is by staying up to speed on the events happening in your city. Knowing what events are coming up in your area can help you market your rental to the right audience.

Running targeted Facebook ads is a great way to connect with prospective customers. These ads allow you to target Facebook used based on things like their occupation, location and age. Once you know what type of event is happening in your area, you can make decisions regarding what type of people may attend this event. With this information, you can fine tune your Facebook ads and get more bookings.

2. Set The Right Minimum Stay Requirements

Setting the right minimum stay limit is crucial when trying to make money with your short-term rental. Ideally, you will want a higher minimum stay limit. While this may initially deter certain consumers, it will allow you to make more money in the long run.

Accepting a one night booking in the middle of a week can make you miss out on a one week booking later on. Realizing that short-term rental success is a numbers game is your first step to achieving your financial goals. Setting a minimum stay of three to four nights will guarantee that each booking will have a higher value overall.

3. Focus On Keeping Your Property Well-Maintained

In the world of short-term rentals, only the most pristine properties get consistent bookings. This is why you will need to devote time and money into keeping your rental property in good shape. If you are like most property owners, you simply don’t have the time to do this work on your own.

Instead of letting your short-term rental fall into a state of disrepair, you need to hire professionals to perform essential maintenance. With a minimal investment, you can avoid extensive repairs and keep your property booked solid.

4. It’s All About Great Customer Service

If your short-term rental is located in a larger city, chances are there is a lot of competition. Finding a way to set your property apart from competitors is something you need to view as a priority. One of the best ways to do this is by going above and beyond for your guests on a consistent basis.

Anytime a guest calls you with a problem, you need to address it in a timely manner. By providing guests with this type of service, you will be able to get great reviews from them. These reviews are like gold when it comes to attracting new bookings for your property.

If you are unsure about how to properly market your short-term rental, working with professionals is a great idea. They will be able to develop and carry out marketing campaigns on your behalf for a reasonable fee.
This article originally appeared on idealrei.com. Read the full article here.

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Real Estate Investing

Here’s How To Get A Mortgage You Can Actually Afford

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So, you’ve finally decided to purchase a home. After years of contemplating if you should buy or rent, then saving, building your credit etc, it’s now time to dive in and get it.

Purchasing a home is exciting. After years of dreaming, you’re finally getting a place that you can call your own.

It’s really easy to get caught up in the excitement making you forget to ask one crucial question – how much “home” can you really afford?

…and, once you decide how much you can afford, you should stick to it. It’s all too easy to decide on a price, then find the home of your dreams is only $25,000 more. Then you start thinking, “we can make this work…” But, can you really?

According to statistics, the median monthly mortgage payment for homeowners in the U.S. is $1,030. That’s a lot of money.

While you may love the fabulous kitchen or huge backyard one house offers – if you can’t pay the mortgage every month or get the cash to fix what’s broken, your home’s never going to be a blessing.

The good news is, determining how much ‘house’ you can afford isn’t rocket science. You can use the four tips here and utilize online tools to help you figure things out.

Build a Solid Foundation

There are countless people who have gone broke by buying a house simply because they believe it’s the “grown-up” thing to do. However, life events such as having a baby or getting married aren’t reasons to buy a house.

The time will be right when the money is right. Before trying to figure out how much house you can afford, be sure you are financially ready to purchase a home.

To do this, ask yourself the following questions:

  • Are you debt free and have an emergency fund of three to six months put back
  • Do you have enough cash to cover moving expenses and closing costs?
  • Can you afford a 15-year-fixed-rate mortgage?
  • Can you make a 10 to 20 percent down payment?
  • Do you have enough money to set aside each month into passive investments above and beyond your mortgage?

If you answered “no” to any of the questions above, it may not be the right time to purchase a home. Wait until you have a better financial foundation.

If you are currently financially stable, then move on to the next tip.

Maximize Your Down Payment

One of the biggest costs in a new mortgage is PMI or MIP. Both of these are different ways of saying that you need to pay an extra fee every month because you didn’t put enough down.

If you can get to 20% or more, then you won’t have to pay mortgage insurance for the lender. This can save you hundreds of dollars per month.

When buying a home, remember – the more money you can put down, the better. Higher down payments mean lower mortgage payments every month and the ability to pay your home off faster.

While the best option is to pay 100 percent of the home cost in cash, this isn’t viable for most. If this is the case, then try to put down at least 20 percent. By doing this, you can avoid paying for private mortgage insurance.

Calculate the Costs

All you need to do to figure out what you can afford when it comes to buying a home is to crunch a few numbers. If you need help with this, consider using a mortgage calculator with down payment, which will help you figure things out.

If you want to do things manually, consider the following:

  • Add up all the income you bring in every month. If you bring home $2,000 per month, and your spouse makes $3,000, then your total monthly take-home pay is $5,000.
  • Multiply your total monthly take-home pay by 25 percent to determine your maximum mortgage payment.If you are bringing home $5,000 per month, then it means that your mortgage payment should not be over $1,250 each month, including insurance and taxes.

Remember, your bank or lender will tell you that you can afford WAY more than that. In fact, some loans allow you to get to 40% or even 50% of your income going toward loans. While they may allow it, it isn’t financially smart to borrow every dollar you can afford.

Don’t Forget About Maintenance and Capital Expenditures

When comparing if you should rent or buy, most people look at the total rent, compare it to the mortgage, and say it’s better to buy a house.

What you are forgetting is that rent includes all the maintenance costs in a home whereas a mortgage does not.

As a general rule of thumb, it’s good to plan on spending around 1% – 2% of the total home value every year in maintenance and CapEx.

Major capital expenses are things like a roof or HVAC that last for several years. Even though you might have 10 years left on your roof, you should start saving for it now, along with the dozens of other major items that will not last forever.

So, if your home is $200,000, you should think about adding another $2,000-$4,000 per year in maintenance and capex. You definitely won’t be spending this much every year, but what you don’t spend now will be spent in a year or two when you have to replace a $12,000 roof, replace a garage door, etc.

If you have higher end appliances and fixtures, you should be more toward the 2% whereas standard grade homes can be closer to the 1% mark.

Conclusion

When you know your numbers, you will be able to shop for a mortgage and a home with confidence. Trying to determine what you can afford without considering the tips here may leave you with a home that’s going to cause you financial hardship in the future.

Remember, buying a home is not an investment, it is an emotional decision. Once you recognize that, you can begin to take it seriously and make decisions based on actual facts, rather than be driven entirely by your desires. If you base everything on the emotions involved with buying a home, you’ll dive right into a mortgage that you can’t really afford.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

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