Indianapolis Rental Market Going Strong …

I’ve owned and managed rental properties in Indianapolis for 18 years … it’s been quite the journey.  (See “A Bit About Barb” along the top of this blog site.)  I started with low-income properties, moved into middle income and have added high-end property management to my repertoire.

The low-income rental market will remain constant, regardless of what’s going on in the economy.  After all, everyone needs a place to rest their head, and those who earn 25K or less will be life-long renters.  They seek a well-maintained rental, accompanied by an attentive landlord … and that’s where I come in.

But the upper level rental market in Indianapolis — and across the country — is booming.  Thousands of people lost their homes to foreclosure and although their credit is a mess because of it, they still have decent jobs and the ability to make rent payments.  They won’t be able to buy a home but they want to live in one, of course!  The other factor is, there are many who have lost faith in “the American dream” of home ownership and are becoming renters by choice.  They can afford to buy but are choosing not to.  They don’t trust the government, the economy, the stability of the real estate market.  They’re happy to be renters, not buyers.   And again, that’s where I come in.  And many others as well …

Hedge funds, huge companies like American Homes For Rent, and thousands of international buyers are snapping up homes, doing a quick rehab and renting them out.  I just sold a home to a woman from Singapore who was spending two weeks here in Indianapolis, and hoping to buy 40 rental properties in that time.

The Indianapolis rental market has always been steady … a good money maker.  Even when the real estate market tanked, we weren’t hit nearly as hard as many states.  And with the growth of our downtown area and wonderful suburbs, the sky’s the limit.

Life is good …

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“Shut Your Mouth!”

I was pleased to be quoted twice in the current edition of Personal Real Estate Investor magazine … they were doing an article on what NOT to say to a tenant and since I made so many errors along these lines early in my career, I was able to give them some good input for the article.  Of the seven areas listed, I’m quoted in numbers three and five.  Here’s the piece:

Personal Real Estate Inv., Fall ’12

And by the way, if you’re into this kind of thing, Personal Real Estate Investor is an excellent publication.  They discuss investment strategies, the housing market in general as it relates to the economy, foreclosures and how they’re affecting the market … valuable info for those who are looking to profit from this downturn in the economy and come out whole.  Definitely worth taking a look.

Onward and upward …. !   🙂

All We Need is Love …

I passed this house when I was at work yesterday and I was struck by the simple beauty of the message:

Peace

This home is in a pretty rough area.  The sign on the telephone pole advertises “CrimeWatch” for the neighborhood but evidently it hasn’t been effective.   Countless times I’ve driven by, there have been police cars out in front of various homes, with several individuals sitting on the lawn in handcuffs.  Drugs and gang-related crimes are prevalent.

But this homeowner is sending his own message, with his garage mural depicting the last supper, Jesus on the cross, praying hands and the written words, “Jesus Loves Peace.”  A beam of hope and light in an otherwise dark and sinister area of the inner city.

With the economy in a state of disarray, investors are snapping up vacant, foreclosed homes throughout the city, but the lower-income areas will lag behind the other (higher-end) areas.  There are tremendous bargains to be had in the inner city, and the return on the investment in rentals is excellent if you have the heart for it.

I’ve seen improvement in some areas, some rebuilding and rehabbing, and I’m hopeful it will continue.  But progress has been slow lately . . . onward and upward . . . or is it onward and sideways?

1M Foreclosures Delayed til 2012

With the housing market already struggling to recover, RealtyTrac recently reported that an estimated one million foreclosure-related notices that should be filed by lenders this year will be pushed back until next year.  Here’s the full article:  http://www.realtor.org/RMODaily.nsf/pages/News2011071401?OpenDocument

While this may be good news for homeowners who feel they can get back on their feet and get caught up on their payments, this “shadow inventory” of foreclosed properties wil delay the housing market recovery even further.  Given this scenario, RealtyTrac predicts we won’t return to normal foreclosure activity until 2015.  Yikes!

The number of homes repossessed by lenders dropped 30% in the first half of this year compared to last, but delays — lenders taking longer to take action against late payers — are stalling the housing recovery.

Is there any good news here?  For the economy as a whole, I’d say no.  For homeowners who are delinquent, yes.  Perhaps they can get caught up on payments and keep their homes.  For investors, yes.  Foreclosed homes will continue to hit the market and prices will continue to bump along the bottom for at least the next year.  So, now is the time to jump, if you have the drive, desire and determination … oh, and the cash …

Onward and upward!

Rent, or Buy?

The early 2000s . . . ah yes, the good old days, when home prices were soaring and investors were flipping houses and making money hand over fist. And then, the total collapse . . .

With today’s economy in a state of flux and the real estate market still flat-lining, thousands of wonderful homes are sitting on the market. Homeowners are under water on their mortgages and can’t sell, and are becoming landlords by default.

People are nervous. The banks, who were so crazily free-wheeling a few years back, have tightened the purse strings to the point where applicants who deserve loans are being denied. Even those who are capable of purchasing homes are hesitant:

  • They’re unsure of the direction of the economy
  • They fear being laid off.
  • With the rising cost of education, they’re choosing to put money in their children’s college funds rather than invest in “The American Dream.”

But for those who still lust after that traditional dream, there’s a formula — although a loose one at that — that might help determine if your city is one in which it’s better to rent or buy. It’s called the rental ratio formula and here’s how it works.

You take the cost of the house you’re looking to buy, and find out what the comparable place would cost to rent, for one year. Divide the total yearly rent by the sale price of the home. If the asnwer is less than 15, it makes sense to buy rather than rent.

For example, on the three-bedroom foreclosure I purchased last fall (See “And Speaking of Fortunes Being Made . . .”, October 2010) the rent I receive is $825/month x 12 = 9900. In this Indianapolis market, I bought that home for 35K and with repairs, have a total of 40K in it. But, the surrounding homes are worth (in a normal market) 80K. Either way, when I do the equation, the results are 4 and 8.5, meaning Indy is definitely a city where it’s better to buy.

But don’t be fooled by the numbers or the gurus. Even though this formula says it’s more costly to rent than buy, our Indy rental market is very strong and I don’t see the end in sight. My 27 rental units never stand empty, which tells me there’s opportunity on both ends — both as a buyer, if you can qualify, pay cash or use private money — and as a landlord who rents out your properties.

So don’t be shy . . . now’s the time to buy!

Thinking of Flipping?

Home prices are low right now, as you know.  And from what I’m reading, they’re going to stay low through 2011 and into 2012.

So, are you thinking of snatching up one of these homes at a great bargain price, putting a little money into it, and reselling it for a nice fat profit?  Think again.  Those days are gone, at least for now.

I flipped a few along the way, back in the late 90’s and early 2000’s when the real estate market was booming.  Aaah, those were the days.  Back then, the foreclosure I just bought last fall would’ve been a perfect candidate for a flip.  Purchase price, 35K.  I put another 5K into fixups and it was ready to go.  The homes around it are worth 80-85K.  But!  Who’s going to pay 80K when they can find a nice foreclosure for 30?  No one in their right mind, that’s for sure.

So, I’m renting it out.  And actually, there are thousands of homeowners who need to sell their homes and can’t — for a decent price — so they’re renting them out.  They’re becoming unwilling landlords, poor things.  At least the rent payment should cover the mortgage.  The demand for rentals is strong and is driving the price up in most areas of the country.

So, if you think you’re going to make a fast buck by flipping a property, think again.  Now is not the time and, if I were you, I wouldn’t hold my breath.  If you want to make money, buy the bargain home and rent it out.

You won’t get the fat reward of the one-time payoff of a flip, but you’ll reap the nice tax breaks and steady stream of income the rental  provides.  I know, it’s not glamorous.  But it works.   🙂

Onward and upward!

Still Tumbling Down …

Everywhere I turn, I hear analysts talk about how the economy is on the upturn, and the housing market is on the mend.  I don’t know about the economy, but I’m not buying that stuff about the rosy housing market.

Zillow’s chief economist Stan Humphries is now predicting the housing market won’t hit bottom until sometime in 2012.  Home values have fallen for 57 consecutive months.  Doesn’t sound very rosy to me . . . The full article containing this info appeared in the WSJ on May 9th.  Here’s the link:

http://online.wsj.com/article/SB10001424052748704810504576309532810406782.html?mod=djemRealEstate_h

We saw the surge in home purchases last year, spurred by the $8000 tax credit, but when that expired in late summer, so did the breath of fresh air that had been pumped into home sales. 

There’s just sooo much inventory out there, prices aren’t going anywhere soon.  The glut of foreclosures on the market make it nearly impossible for someone to sell their home at anything near its true value.

Remember the cute three-bedroom ranch I bought a few months ago for $35,000?  It’s on a cul-de-sac with other homes valued at $80-85,000.  With that kind of (foreclosure) competition, those people can’t sell their homes right now. 

So yes, the housing market is still tumbling down, but we investors are taking advantage.  Really, anyone who has decent credit and wants to be a homeowner should be seriously looking to buy right now.  However, the banks have tightened their purse strings — many are demanding a credit score in the 700s — — which makes it challenging for many to obtain a mortgage.  How do we clear the huge inventory of homes on the market when very few are able to get loans?  Cash is king, of course, but aside from the investor segment, there aren’t many potential buyers who can pay cash for their home.  Definitely a “catch 22” situation!

What I know is this:  there’s a huge inventory of wonderful homes out there — single- and multi-family — a lot of value for a little money.  These prices are going to bump along the bottom for at least nine more months.  And I plan to take full advantage.

How ’bout you?

The American Dream Revisited

When people ask me about buying rentals in Indianapolis, I like to tell them stories like this one.

Back in 2005, I found a cute three-bedroom foreclosure and bought it for $26,000.  It didn’t need a lot of work, really.  The basement was full of junk, the place smelled like dog urine (it made my nose and eyes burn) and the previous owners had left trash all over the house.  It needed to be totally redone but it was structurally sound, and the major operating systems were in good shape, as was the roof, siding and garage.  So I jumped on it.

It didn’t take long to complete the rehab . . . I planned ahead and got it done quickly, spending about $5000.   After the purchase, every day that goes by is a day I’m not making money, so I organize myself and my sub-contractors and get the rental up and running.

My first tenants wanted to be buyers, so Idid a land contract with them, also called a “rent-to-buy.”  It didn’t work out — they defaulted — so I got them out and rented to a wonderful guy who’d fallen on hard times.  Bill had been in an accident and wasn’t able to work for two years, due to multiple major surgeries.  He tried to keep up with medical bills and just couldn’t.  He ended up losing his home, etc.  But now he was back on his feet (literally) and had a good job. 

I started renting to him about two years ago and he called yesterday and asked about the possibility of buying the house, below:

Of course, my first question had to do with his credit situation.  Bill told me he had been working on credit restoration, and also that he was going to receive clost to $20,000 in monies (disability payments) that were owed to him from the time he was injured and out of work.  He wanted to know how much I’d charge him for the house so I did a quick review of comps in the area —  comparable homes for sale and sold in the area — and came up with a $50,000 price tag.  I felt this would hold up to an appraisal by a bank.  So, he’s working on it from his end, and we’ll move forward.  He’s excited and so am I.  I’ll take that money and run!  Maybe pay down some debt, buy another rental . . . we’ll see.

But, I’m so happy for him.  For Bill, the American Dream is alive and well.  This is why I love what I do . . .    🙂

Short Sale? Oxymoron!

I’m always looking for a bargain, whether it’s in home goods, clothing, makeup, shoes, vehicles, vacations or rental properties.  So I’m constantly on the lookout for a great deal.  And right now, there are hundreds of them, in every city in the nation.  I recently purchased a foreclosure for $35,000 that sits on a cul-de-sac with homes that are worth $75-85,000.  It took about $5000 to get it up and running but it looks great, and I’m going to rent it out and make a very nice return on my investment.

Last year, I came a cross a similar deal . . . actually, it was even better.  The house was a little bigger, and cheaper yet, so I jumped on it and put in a full price offer of $25,000.  Of course, so did about six or seven other investors.  When that happens, you must give your highest and best offer.  So, I offered $30,500.  When I didn’t hear anything from my realtor after about a week, I called to see what was up.  “It’s a short sale,” she said.  “This may take a while . . . or a really long while.”

I knew what a short sale was.  The homeowner owed more on the property than it was worth, and the home is put up for sale.  For instance, if he owes $50,000 and my offer is only $30,000, that’s what makes it a short sale.  The sale price doesn’t cover what is owed on the mortgage, but the lender and homeowner work it out.  Sometimes. 

It gets very sticky when there’s a second mortgage on the home.  If he owes 30K on his first mortgage and 20K on his second, the lenders often end up fighting it out as to who gets the money offered up in the short sale.  The primary lender may say the second mortgage holder will  only receive a couple thousand dollars of the proceeds.  But the second mortgage holder can come back and say it will scrap the deal if it doesn’t get at least five thousand or more.  So, you can see how these short sales can drag on and on, especially if there is more than one lender involved.

That was the case with the great little house I bid on last year.  After three months, I got tired of waiting.  Another good deal came along, I put in an offer, it was accepted and I withdrew my offer on the short sale property. 

The lesson learned was this:  in the future, I’ll check to see if there’s more than one lender involved, if I try to buy a short sale property. 

The sad thing is, it’s a lose-lose situation to have these properties just sit.  It doesn’t help the recovery of the real estate market at all.  It doesn’t help homeowners, who are trying to avoid foreclosure by doing a short sale.  It can take months for loan servicers to agree on a price . . .

And sadly, 11 million homeowners owe more than their homes are worth and, according to CoreLogic, another 2.5 million have only 5% equity.  Those people — if they want to sell — must cover the difference or ask the bank to take a loss via a short sale. 

Short sale?  Not!  The red tape, the hassling back and forth . . . they should rename it “long sale.”  And in the meantime, the housing recovery continues to be in stall mode . . .

“Foreclosuregate” Update . . .

What an interesting past couple months it’s been.  Prior to “foreclosuregate,” the real estate market was already struggling.  We were experiencing new lows in homeownership and new residential home building start-ups, and new highs in the number of foreclosures each year.  Well over a million people lost their homes in 2009, and the Federal Reserve’s Sarah Raskin fears that number may top 2.5 million this year and next.

And if that wasn’t bad enough, we’re now dealing with the real possibility that many lenders may have done shoddy work in reviewing and processing several thousand of those foreclosures.  Yikes!  Let’s face it . . . the banks have been overloaded the past few years, with the sheer volume of paperwork involved in all these foreclosures coming through their offices.  Their systems couldn’t cope with the volume of work resulting from this serious down cycle.  Evidently, they may have rushed some of the paperwork, using “robo-signers,” or employees who didn’t read all the details or weren’t qualified to do so. 

The end result?  A huge bottleneck.  Attorneys general in most states, wanting to go through everything with a fine-tooth comb.  Lawyers representing former homeowners, filing suit against banks who may have processed their foreclosures inappropriately. 

Here’s the bottom line:  it’s not a question of whether these people deserve to lose their homes.  They do.  They didn’t pay their mortgages and they won’t be allowed to take back their homes.  But the ones who are still in their homes and are in the foreclosure process will buy a little time.

And in the mean time, there’s a huge shadow inventory of foreclosed homes that haven’t even been put on the market for sale yet.  About 600,000 of them, according to Realty Trac, the big online foreclosure website. 

Unfortunately, this mess will drag on for months to come, and what it means for investors  is that the buying process will be slower.  There are still excellent deals out there, and the prices are going to bump along the bottom through this year and next, and on into 2012.  So the opportunities for the smart investor are endless at this point.  But the wheels will be turning slower, for sure.

So, my advice would be the same as what I always told my kids when they were little and wanting immediate gratification . . . “Patience is a virtue.”   It’s still a wonderful time to acquire property.  We need to be patient with the process until all this foreclosuregate business gets straightened out, and by all means, make sure your loan originator dots all the i’s and crosses all the t’s!