Month: March 2018
7 questions for evaluating a real estate investment
By Maggie Barr, Keller Williams Santa Cruz
MARCH 15, 2018, SANTA CRUZ >> A real estate investment is a business. You need to evaluate the investment as if you were going into business. You want to decide if the flow income from the investment will be high enough to justify, a) the hours of work you will put in it and b) the amount of risk you are taking on. Ideally your investment will generate a steady flow of income, just like a business. It will also give you an asset you can sell later – the property has value just by holding it. But that value reduces over time if the property is not properly maintained. It might also reduce over time due to a housing market turndown. Your six research questions are:
1. Will the income stream be high enough?
You’ll want to determine how much income you’ll get and KEEP, i.e., what your Net Income will be after taxes and expenses. To calculate this use a spreadsheet or free online calculator like this one: Real Estate Calculator For Analyzing Investment Property. Take your monthly income over 12 months (rent) and subtract out expenses like utility bills, property management service costs, estimated repair and maintenance costs averaged over the year, property taxes, and property insurance. You’ll also need to assume if you’re renting you will have some time each year with the property vacant between tenants. Assume 1 month with no rent, for example. That gives you your income stream. This is called Net Income Before Tax, or NIBT. Then subtract out your income tax on that income at whatever rate will apply to you. That’s income after taxes. Got any money left? You might be surprised what you end up with.
2. What risks are you taking on?
You should also subtract another 5%-10% for the risks you’re taking on. In any market, whether it’s the housing market or Bitcoin, you get paid for risk. That means the people making big money are getting lucking because they didn’t experience a loss that was statistically likely to happen. You’re gambling! To factor in risk to your formula, you’ll want to subtract 5% to 10% from your income for market risks like downturned rental markets and major unexpected expenses like a fire, or a lawsuit. Now how much do you have? Is this investment still worth your time and effort after you factor in risk? Would you make more money in a mutual fund? Or Beanie Babies?
3. Do you need to subtract financing costs?
If you are not paying cash for the property you financing the property with a loan. That’s another expense you need to subtract. What interest rate are you paying? Is it a variable rate that brings the risk of higher rates with it? Is there a change you will lose your job, and not be able to pay the loan off? That’s more risk. In California where I live, even though rents are high, it’s usually not financially worthwhile to rent a residential property you have to get a loan on. Whatever slim margin of profit you might have had gets eaten up by your mortgage interest. And don’t forget to add to your expenses the cost of BUYING the property too. You’ll incur closing cost that you’ll want to amortize, (spread out) over the first year or two when calculating your income for that period. (Ask your CPA how to amortize it and other major expenses.) These costs can be calculated with an online investment calculators like this one: Real Estate Calculator For Analyzing Investment Property.
4. How low will your purchase price be?
I’ve heard investors tell me, “you make all your money on the purchase.” They mean that you have to get a really great deal on the purchase to make any long-term profits on the investment. They break even on renting the property. They only see a profit after they’ve held the property for a decade or so, then sell it for more in an expanding market. Again – you’re gambling! They “buy low and sell high.” That’s why as a Realtor I see significantly more investor purchases in a downturned housing market. Investors love foreclosures and auctions! That’s where the deals are. If you’re good at looking at an ugly house in disrepair, and determining if you can fix it up easily without breaking the bank, then you’ve done well. But if you don’t know much about construction, dry rot, mold, and foundation problems, you might accidentally buy a lemon. You’re in for a huge loss. Be very careful.
5. Who can help you with renovations?
Unless you’re Bob the Builder you’ll need to consult an expert when evaluating properties to purchase. This is true even for properties that appear to be in great condition. You just never know. Sellers can be very crafty at hiding problems. They are legally supposed to disclose current and past problems, but……. people are people. You’ll need an inspector and a contractor that has lots of experience evaluating and renovating properties. And you have to pay them too! There’s another cost to add into your calculation. This is why TV shows about flipping are so popular. You really need to renovate a house to get a big gain from your investment. And you don’t even have to hold the property and rent it out for years. You could sell it right away and realize your gain immediately. Either way, don’t assume you can “wing it” or just buy some books at Home Depot. You need help figuring out things like how to get permits, how to fix foundations and roofs, and how to get rid of asbestos legally without poisoning yourself. A renovated property could generate 50% more income. But not if it burns down because you did the wiring wrong,
6. Where will you buy the property?
Consider investing in a property in another part of the state, or even the country. Every real estate market can be rated in terms of how lucrative it is for investors. Google it. Some cities are great places for investors because a building boom is keeping housing prices relatively low, and expenses are also lower than other places in the country. Las Vegas is a good example. Some places are not good for investors because permit costs for remodeling are unusually high, or because tenant laws are very restrictive for landlords. Check city, county, and state regulations. Don’t assume where you live is where you’ll make the best return. You can hire property managers and contractors in another city. Call a local Realtor for recommendations. Is there a favorite vacation place or relative you go to see a couple times a year? Do you have a close friend or relative somewhere else you can partner with? If you search online you can find articles about the most favorable places for investors today – both commercial and residential.
7. Who do you trust that can help you?
Because every market is different, you’ll want to consult with an expert in the market you’re operating in. Offer to buy someone lunch and get all your questions answered. There will be some gotcha’s you didn’t think of. For example, is the Coastal Commission passing a law this year prohibiting expansion permits for homes without 3 blocks of the ocean? Is rent control coming soon? Is a new city ordinance going to forbid short-term vacation rentals in that particular neighborhood? Does the condo you’re buying have a new rule constraining renting going forward? There’s no way to know about some of these risks if you don’t talk to someone in the know. They might have information about a great new opportunity coming up too! The task is to ask.
Hopefully this guide has given you some insight into how to analyze a real estate investment. Like a business, an investment property has income and expenses. You’ll want more income than expenses – that’s the bottom line. And you’ll need to calculate in risks. The more expert advice you can get before you buy an investment property the better. It’s the investors that have been in business for 10+ years that are making a killing. They’ve made tons of mistakes and learned from them. Be smart and learn from them first before diving in. Best of luck on your new venture!
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Maggie Barr is a Realtor at Keller Williams Santa Cruz that specializes in mountain properties. She serves on the Santa Cruz County Women’s Commission on behalf of the 5th District County Supervisor, Bruce McPherson. Maggie serves as Treasurer on the board of the Valley Women’s Club of the San Lorenzo Valley. Maggie is the 2018 President of the Women’s Council of Realtors Santa Cruz. Maggie lives in Boulder Creek with her husband Michael Barr. To contact Maggie Barr visit her website at http://www.MaggieBarr.com, or call 831-252-0504.
Santa Cruz’s renter protection ballot initiative, explained
By Jondi Gumz, Santa Cruz Sentinel
http://www.santacruzsentinel.com/article/NE/20180310/NEWS/180319977
MARCH 10, 2018, SANTA CRUZ >> City residents and property owners are trying to understand emergency rent control rules adopted by the City Council last month in the wake of tenant advocates seeking to put their own rent control measure on the November ballot. This is the second of a two reports by the Sentinel to help residents understand what they could be voting on if tenant advocates gather 3,774 valid signatures by Aug. 4 for their ballot initiative.
The biggest difference between the 33-page document tenant advocates submitted to the city Feb. 9 and the seven-page set of rules the City Council adopted Feb. 13 is that the proposed ballot measure calls for an independent entity, the Santa Cruz Rent Board, to administer and enforce rent regulations. Single-family homes are exempt from rent control because of the state’s 1995 Costa-Hawkins Act, and so is housing first occupied after Feb. 1, 1995.
What is covered under the ballot initiative? An estimated 5,100 to 5,800 rental units in the city were built before that date. That’s about 22-24 percent of the city’s housing stock. Both the current and the proposed rules offer protections to tenants by limiting rent increases and evictions. Current rules set a limit of 2 percent and the proposed rules saying annual increases cannot exceed the consumer price index of the prior year, with rent in effect on Oct. 19, 2017 as the starting point.
The ballot measure specifically excludes rentals in hotels, motels, tourist homes, boarding houses, vacation rentals for less than 30 days, college-owned dormitories, nonprofit homes for the aged, hospitals, convents and extended medical care facilities. The new city rules on “just cause” evictions apply to all landlords in the city but those who own a single rental are exempt. So are landlords who live in the same home as the renter, in a duplex or in a single-family home with an accessory dwelling unit.
The ballot measure does not contain these exemptions. Current rules leave rental oversight in the hands of the city manager and his staff but the ballot measure would create a new agency with broad powers independent of the City Council, city manager and city attorney,
Here’s how it would work, as detailed in 33 pages of regulations submitted by tenant advocates:
Elected board: Initially, each City Council member would appoint one member for the seven-member rent board. At the next municipal general election, city residents would run for a five-seat rent board. The three top vote-getters would serve a four-year term, with the next two serving for two years. After the first election, all terms would be for four years. Terms would be limited to 12 years.
Pay: The rent would determine the compensation of board members based on their time and work performed.
Disclosure: Board candidates and nominees would have to submit a verified statement listing their interests and dealings in property during the past three years, including ownership, sale or management. Interests include partnerships, corporations, joint ventures and syndicates.
Staffing: The rent board would hire an executive director, and ensure sufficient staffing, which would include hearing officers, housing counselors and legal staff.
Rent adjustments: The rent board would determine the annual rent adjustment based on the consumer price index, publicize it, establish hearing procedures, appoint hearing officers to consider individual petitions from landlords or tenants, and then render a decision.
Penalties: The rent board would set penalties for noncompliance, pursue civil remedies, and refer violations to authorities for prosecution. Landlord violations would be considered misdemeanors. If these rules are approved, a tenant facing eviction could use landlord violations of the rules as a defense in a legal action to contest eviction.
Agency financing: Landlords are to pay a fee for each rental unit annually, a fee to be set by the board to fully fund its operating costs. Fees would be collected at the same time as business license fees, with landlords not allowed to pass on the rental fee to the tenants as a separate charge. The board has authority to reduce the rental housing fee on units where the rent is 10 percent below market rate for a comparable unit; a definition of market rate is not in the measure, leaving that up to the rent board.
The city is required to advance all funds until the rental housing fees collected are sufficient for operations. The rent board’s budget would be decided by the board, after scheduling a hearing prior to July 1. The amount considered reasonable and necessary would be up to the board. The ballot measure includes detailed procedures for landlords to request a rent adjustment to ensure a fair return, maintaining net operating income in 2016 adjusted by 80 percent of the consumer price index.
Tenants can request an adjustment downward, alleging failure to maintain a habitable premises based on state law, and specifying the conditions and showing the landlord was given “reasonable notice and opportunity to correct the conditions.” Tenants also can request a downward adjustment, alleging a deterioration beyond ordinary wear and tear and specifying the conditions not corrected by the landlord. Thirdly, tenants can file a petition if the landlord charges excessive rent, and if the board rules for the tenant, the landlord will be ordered to return the excess. Decision by a hearing officer can be appealed to the full board.
The ballot measure would allow landlords to evict for not paying rent, being a nuisance, using the rental for illegal activity, the owner or owner’s family members moving in, repairs and breaching the lease, such as unpermitted subleasing. Subleasing has become common as tenants seek to make their rent affordable. The ballot measure details a procedure for subleasing, prohibiting subleasing evictions if the sublease is a one-for-one replacement, the tenant requested permission in writing and the landlord did not respond within 14 days.
The current city rules are similar but the ballot measure adds more tenant protection, requiring landlords to pay relocation assistance equal to six times fair market rent as determined by U.S. Department of Housing and Urban Development. If a tenant who is unable to pay rent increases of more than 10 percent in a 12-month period is displaced, the landlord must provide relocation assistance at the time of move-out if the tenant has applied to the rent board for help with 15 days of being notified of the rent increase. The measure gives the board authority to set a threshold of less than 10 percent for rental assistance.
If a landlord plans to exit the rental business, the rent board would require forms to be filed. In case demolition is planned, a 120-day notice to tenants would be required, with a year’s notice required for tenants who are 62 or have a disability and have lived in the unit for a year.
More protections are provided for renters who are families. The measure says a landlord cannot terminate a tenant for adding a child, foster child, parent, grandparent, grandchild, sibling, or a spouse or partner of those relatives as long as the number of occupants does not exceed the maximum in state law. The board would have authority to write rules to further protect families of school-aged children.
A landlord cannot evict a tenant who is 62 or disabled and has lived in the rental for five years or who is certified as terminally ill by the treating physician unless the landlord or the relative to occupy the unit is 62, or disabled, or is terminally ill. A victim of domestic violence or sexual assault or stalking can challenge an eviction if the notice to terminate the lease is based on noise, disturbances or police activity related to the stalking or assault.
Santa Cruz County median home price dips, as area is among hardest hit by tax law changes
By Jondi Gumz, Santa Cruz Sentinel
http://www.santacruzsentinel.com/business/20180309/santa-cruz-county-median-home-price-dips-as-area-is-among-hardest-hit-by-tax-law-changes
MARCH 9, 2018, SANTA CRUZ >> Andy Manzi is looking to buy a bigger home, one with space for his 4-year-old daughter’s toys and room for the grandparents to visit — ideally in Boulder Creek, where his family lives now.
Manzi, 52, a hardware engineer, said $750,000 is realistically what he expects to pay but so far, nothing meets the family’s criteria.
“Definitely the market’s a little thin,” he said Friday.
Check MLSlistings.com in the $600,000 to $800,000 range for Boulder Creek and only 10 homes are available.
Real estate information company Trulia calls it “homebuyer gridlock,” a nationwide phenomenon resulting from higher prices squeezing out move-up buyers, first-time buyers seeing nothing in their price range and cash buyers holding onto lucrative rental properties.
The number of homes for sale in Santa Cruz County is historically low.
As of the first week in February, there were 247 single-family homes listed for sale, the fewest for that month in 22 years, according to Gary Gangnes of Real Options Realty in Aptos, who tracks the numbers.
The median price for January, the midpoint of 114 sales, was $787,000 — dipping below $800,000 for the first time in 15 months.
The percentage of sales for homes more than $1 million was 28 percent, the lowest since April, and the percentage of sales in San Lorenzo Valley and Watsonville was 34 percent, the second highest in 14 months, according to Gangnes.
CONDO RECORD
The median price for condos jumped to $634,500, an all-time high, on 33 sales in January, and just 58 condos were listed for sale the first week of February, the fewest for that months in 22 years.
Living in the mountains, Manzi knows some roads are better than others. Some roads are awaiting repair after Boulder Creek was hard hit by winter storms a year ago. Manzi also noticed some homes have square footage not listed in the ads, which can be due to unpermitted additions.
Santa Cruz County is among the counties in the nation hardest hit by the tax law change approved in December to limit mortgage interest deductions to the $750,000 in home loans, down from $1 million, according to Apartment List, an online company listing rentals nationwide.
TAX LAW CHANGES
Apartment List projected the median cut in deductions to be $4,300 a year for Santa Cruz County, adding up to $129,000 over a 30-year mortgage, San Francisco-Oakland, losing $5,400 a year in deductions and San Jose-Santa Clara-Sunnyvale losing $5,400, while the impact in Houston, Phoenix and Las Vegas was expected to be $0.
Seb Frey of Realty World Virtuoso in Capitola sees an impact locally,
“It is definitely giving buyers pause, especially those looking at higher-end properties at $750,000 or over,” he said. “I find people are more skittish this year than they were a year ago.”
He added, “It’s not just the tax consequences but mortgage rates are also higher. I feel there is more pullback from buyers and less of a feeling they should be super-aggressive when it comes to how much they’ll offer.”
‘A HUGE HIT’
Santa Cruz attorney Nicole Adkison, who has a graduate degree in taxation, sees major disincentives for homeowners to sell.
If you bought your house 10 to 20 years ago, you are locked into property taxes based on the purchase price plus a two percent increase because of Proposition 13, she pointed out, adding, “Your real estate taxes will go up when you buy a new place because it gets reassessed.”
So instead of paying $5,000 in property taxes, you could be paying $15,000, and one of the tax law changes capped the deduction for state and local taxes at $10,000.
“That is a huge hit,” she said.
INTEREST RATES
Manzi said he will try to save more money so he can make a bigger down payment, which could downsize monthly payments to compensate for higher interest rates.
He could sell his current home to put toward the new one, but he’s thinking of using it as a rental.
“That would be the preferred strategy,” he said.
JANUARY 2018 STATISTICS
CLOSE TO THE MEDIAN
City of Santa Cruz:
237 Union St., $700,000
211 Stanford Ave., $780,000
136 Wendell St., $790,000
Santa Cruz County:
1900 Kinsley St., Live Oak, $780,000
1121 Lost Acre Drive, Felton, $784,000
150 Siesta Drive, Aptos, $805,000
Highest:
105 Manor Place, Santa Cruz, $2.3M
596 Henry Cowell Drive, Santa Cruz, $2.295M
161 St. Andrews Drive, Rio del Mar, $1.796M
Lowest:
710 Primavera Road, Boulder Creek, $265,000
560 River Drive, Boulder Creek, $306,000
113 California, Watsonville, $318,000
Source: Real Options Realty
Single-family homes:
Median price: $787,000 ($810,000 a year ago; $694,500 in 2016)
Listings: 247 (263 a year ago; 250 in 2016)
Sales volume: 114 (115 a year ago; 96 in 2016)
Distressed: 1 bank-owned; 2 short sale
Average price: $858,940 ($861,675 a year ago)
Condos:
Median price: $637,500 ($486,000 a year ago; $529,000 in 2016)
Listings: 58 (68 a year ago; 73 in 2016)
Sales volume: 33 (38 a year ago; 25 in 2016)
Distressed: 0 bank-owned; 0 short sales
Average price: $650,410* ($529,513 a year ago)
Source: Real Options Realty
CLOSE TO THE MEDIAN
City of Santa Cruz:
237 Union St., $700,000
211 Stanford Ave., $780,000
136 Wendell St., $790,000
Santa Cruz County:
1900 Kinsley St., Live Oak, $780,000
1121 Lost Acre Drive, Felton, $784,000
150 Siesta Drive, Aptos, $805,000
Highest:
105 Manor Place, Santa Cruz, $2.3M
596 Henry Cowell Drive, Santa Cruz, $2.295M
161 St. Andrews Drive, Rio del Mar, $1.796M
Lowest:
710 Primavera Road, Boulder Creek, $265,000
560 River Drive, Boulder Creek, $306,000
113 California, Watsonville, $318,000
Source: Real Options Realty
Why are there so many more homes for sale in Monterey than in Santa Cruz (or in Marin for that matter)?
By Maggie Barr, Keller Williams Santa Cruz
https://www.quora.com/Why-are-there-so-many-more-homes-for-sale-in-Monterey-than-in-Santa-Cruz-or-in-Marin-for-that-matter/answer/Maggie-Barr
MARCH 5, 2018, SANTA CRUZ >> Why are there so many more homes for sale in Monterey than in Santa Cruz (or in Marin for that matter)? In one word, Traffic. The vast majority of jobs in Central California come from Silicon Valley and companies like Facebook, Google, LinkedIn, and this company, Quora. The cities and towns that make up the area know as “Silicon Valley” (not a real city), are San Jose, Santa Clara, Mountain View, Campbell, Milpitas, Palo Alto, and Redwood City. Before the tech boom in the 90’s those towns were primarily orchards. Homes were built spread out – not packed in efficiently like in a major city. Thus there are NOT ENOUGH homes for all those tech workers. 90% of the workers at those companies can’t afford to live in Silicon Valley today. The average 2-bedroom home a typical family would buy costs $1.5M. The average worker makes 85k/year. Not good.
Most tech workers have to live in the suburbs WAY out of the area, with over a 1-hour commute in horrible traffic due to insufficient infrastructure. Towns like Pleasanton and Gilroy that are 40 minutes away without traffic now take 2 hours to reach in rush hour. What’s a tech worker to do? Well, how about the beach? If you’re going to sit in miserable traffic anyway, might as well go live somewhere nice.
The young hip workers like San Francisco. But the young families and seniors like Santa Cruz and the Santa Cruz Mountains — Scott Valley, Felton, Ben Lomond, Brookdale, and Boulder Creek (where I live). In Boulder Creek, you can get a 2-bedroom with 1200 sqft in good condition for $600k. Not cheap, but it definitely beats $1.2M! And it’s a beautiful mountain community with good schools and a little downtown area. Gas station, restaurants, drug store, dentist, all that you need for a lovely lifestyle. 4 State Parks close by for hiking, and 45 minutes to the beach. Santa Cruz is a good option too, if you’ve got a little more to spend. For a 2-bedroom with 1200 sqft in good condition, you’ll pay $800k. Still much less than Silicon Valley. And you’ve got the beach!
Monterey is also a lovely seaside town like Santa Cruz. But it’s another hour’s drive to Silicon Valley. Thus fewer tech workers choose to live there. And if you take the route through Santa Cruz, there’s a terrible bottleneck South of Town in Aptos that slows traffic to a crawl between 4pm-8pm every weekday. That makes your commute home (at to work in the AM) more like 2.5 hours, instead of 1.5 hours. If it weren’t for that horrible traffic bottleneck I’d guess more tech workers would live in Monterey. There are alternate routes through Gilroy – but you get stuck in traffic in Gilroy too, for the same reason. Roads don’t have the capacity to handle the Silicon Valley commuter volume.
Last time there was a tech boom int he 80’s there was lots of building and road expansion that happened to accommodate the greater demand for housing. But, then there was a tech crash and employment in Silicon Valley dropped dramatically over the course of a year. Some developers got burned, and the city lost out of the property tax revenue the housing boom was promising. Home values crashed, and there were thousands of foreclosures. So for this tech boom, there is hesitancy for the city and the major developers to do more building in town — when is the next tech crash?
The number of jobs in Silicon Valley is directly correlated to the stock market. When we have a bull market tech companies that are normally considered high-risk get more capital from institutional investors – and thus take on more projects and need to hire more people. In a bear market institutional investors shy away from “risky” tech stocks, thus reducing the number of new tech projects in Silicon Valley, leading to slower hiring or even layoffs.
Think of the Silicon Valley housing market like a balloon. The hotter the tech market and stock market, the bigger the balloon gets spreading upward pressure on the housing market further and further from the center. Housing prices in Monterey (and Marin) go up too, but not at the same rate as Santa Cruz. Santa Cruz values go up slower than Scotts Valley. San Scotts Valley prices go up slower than Los Gatos, and so on. When the stock market, and thus the tech market contract, the balloon gets smaller. Thus buying real estate in markets farther away from Silicon Valley is more risky. Those values are likely to come down sooner, and ultimately down farther, than homes closer to the “hot” center.
The smartest investors buy property in the center of Silicon Valley during the bust years, then sell them in the boom years. But who knows when the next bust will be? Anyone? Also, more and more tech jobs at these top employers are moving overseas. Many companies prefer to hire developers in India, China, and Korea. Just like manufacturing jobs go overseas, developer and supporting jobs go overseas too. And what point will the majority of those jobs go overseas? And what impact will that have on the housing market in Silicon Valley, and the surrounding areas? Only time will tell.
Maggie Barr is a Realtor at Keller Williams Santa Cruz that specializes in mountain properties. She serves on the Santa Cruz County Women’s Commission on behalf of the 5th District County Supervisor, Burce McPherson. Maggie serves as Treasurer on the board of the Valley Women’s Club of the San Lorenzo Valley. Maggie also serves at the 2018 President on the board of the Women’s Council of Realtors Santa Cruz. Maggie lives in Boulder Creek with her husband Michael Barr. To contact Maggie Barr visit her website at http://www.MaggieBarr.com, or call 831-252-0504.
ABOUT KWSC: Keller Williams Santa Cruz is a top-ranking brokerage with over 80 REALTORS serving the greater Santa Cruz County area. For more information about working with, or becoming an agent at Keller Williams Santa Cruz, contact Elaine Della-Santina at 831-457-5577, or visit www.kwsc.om.
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