Investing in Real Estate - Where is it best?

Investor clients often ask me where it is best to invest in real estate, in the U.S.

This is a tough question, and there is no easy answer: it depends partly on the circumstances and needs of the client, whether the investor wishes to manage himself/herself, where you believe the best prospects for appreciation are, opportunity, future family needs?...

RealtyTrac puts out a good study on their web site (see "RealtyTrac study on rental condition") showing that the best performing markets for rental returns are:

Baltimore, Maryland:  24.82%, followed by:
Clayton, GA with 24.26%,
Wayne, MI: 21.08%,
Pasco, FL: 19.2% .....

The markets with the lowest return on investment are:

New York County, NY, with 2.34%, followed by:
San Francisco County, CA: 3.2%,
then Kings County/Brooklyn, NY: 3.63%,
Marin County, and close behind San Mateo County and Santa Clara County, at 4.31%
... and Santa Cruz County at 4.54%

Return on investment is defined in this study as gross return: rental price divided into the purchase price.  There is a lot more that goes into a more real "net" return: you have to take into account expenses, which include such costs as: - management company, - repairs, - vacancy, - taxes & insurance, - wear and tear on the house etc ...  More on this subject with this "net operating income" link, noted above.

This study does not look at the rental market from the point of view of someone who has owned a place there for a long time, just someone who would be buying right now, in the market as it is currently.  What I mean is that it does not take into account the appreciation of the asset in that location over time.  This can be a strong factor in the buying decision, and an unknown in the future.

Thank you for reading,
Francis

Silicon Valley real estate

Trends: Local prices and graphs.
A noteworthy local non-profit event:  Coalition on Homelessness, SF - ArtAuction15

Fix small issues before you put your home on the market.

Fix Small Issues Before You Put Your Home on the Market.  

Thinking about selling a property? It is always better to prepare well, and part of the preparation involves doing some repairs in the house that will bring a good return on the investment.

One question that always comes up is whether it is better to do the repairs before or after doing the inspections.  You can do it either way, but I personally like to have the inspections done ahead of time.  There are 2 advantages:

1/ you have a list that you can give to a contractor, so this part is easier to deal with: you just highlight what you choose to address,

2/ you can annotate the inspections later, and show to the buyers what you have done to make it easier for them to move in.  I find that this is something that my clients buyers like a lot, and react well to (unless they do prefer to do the work themselves).

In general, and it depends on the market you are in, and the type of property you are selling, it is best to repair some of the following items, because it is often much less expensive than one thinks and will bring in a much higher sales price, by showing the house has been cared for:

-       Small plumbing items (leaky faucets, frozen valves, missing P traps …),

-       Painting, (which typically includes repairing cracks, and holes),

-       Small electrical items (broken GFCI outlets, broken cover plates…),

-       Small termite damage, and possibly larger ones depending on the cost and ease,

-       Hard to operate or broken locks,

-       Small roof repairs,

-       Window / door adjustments,

-       Ventilation screens,

-        And of course a large dose of cleaning (including windows and appliances).

As a seller, you also have to think hard about addressing safety items (think “gas, water, and electrical”) - anything that is currently noted as a safety hazard by the inspector.

In my experience this translates into a much higher final sales price.  Either because the buyers do feel better about the property and have fewer questions about its condition (hence a higher offer price) or because, more importantly, it brings another buyer to the table.  We all know that this simple "little" fact can add tens of thousands of dollars to the sales price.  

thank you for reading,

Francis

Silicon Valley real estate

Trends: Local prices and graphs.
A noteworthy local non-profit event:  Community Services Agency

ROI on home improvements?

How much do you recoup from home improvements?

When home improvements offer the most bang for your buck.
Source: CNBC

Remodeling is at its highest level since the spring of 2004, according to the National Association of Home Builders' Remodeling Market Index. One of the reasons is that it has been so difficult to move up or move down: once you sell your property, you are not sure you will be able to buy a replacement very soon.  As a consequence, people remodel their house instead.  How much will you get back from these expenses, when you sell?

In general, home sellers cannot expect to recoup all their remodeling costs when they sell their house. From the upgrades, one can expect the average portion of costs being recouped at 66.1%

This is a question that clients ask me all the time, and one of the best sources of information on the subject is the web site showing the “Cost Vs. Value” report study.  It shows, depending on the area in the US, how much each project statistically gives back at the time of sale.

Those projects that pay off the most are, according to the article from Kelli B. Grant of CNBC:

-       Entry door replacement (steel):  96.6% recouped

-       Minor kitchen remodel:  82.7%  recouped.

-       Window replacement (wood):  79.3%

Why would contractors who “flip” houses make money then, you might ask?  I believe it is because they start from a house that does not show well, and therefore is going to sell at a discount, and they have the cost-efficient means to improve on the house, emphasizing those projects that show off the most for the best value.  Examples of such improvements would be, as I indicate to my clients when preparing for a sale:

-       Light fixtures,

-       Painting,

-       Retiling a shower enclosure,

-       Changing counter tops (but not necessarily all the cabinets, where there is a lot more involved),

-       Floor refinishing,

-       Deep cleaning,

-       Staging.

All these projects have a fairly small, finite cost, while improving immensely the look of the property to be sold.

Moreover, I believe that there are some areas like the Bay Area where buyers are willing to pay top dollars for a remodel that has been done already.  Is it because people here are too busy to undergo or direct a home remodel? Or they do not have the patience?  In any case, it has been my experience that remodeling jobs in this area of the San Francisco Bay returns more money than shown on the statistics of the cost vs value report.

Do you have an input on the subject?  Please let me know.!

Thanks for reading.

Francis

Silicon Valley real estate

Trends: Local prices and graphs.
A noteworthy local non-profit event:  Coalition on Homelessness, SF

Investing in real estate.

Investing in real estate -

I recently read an article from NewsGeni.us that I found quite interesting, dealing with real estate investing.

Without repeating the whole article here I thought I would comment on some of their points:

Their advice is:

Focus on promising areas - the clientele in the SF Bay Area has been well served by believing in the local area in the past 30 and 40 years. 5 years ago though a lot of people got scared and some sold, or did not buy when they could have.  For those who bought when no one believed in it, I say “bravo”!  However the Bay Area is just one choice, mostly based on price appreciation, not return.  Indeed until very recently, the return on investment was not great - purchase price very high, rental fairly low. 

I personally chose another route: an area with very little appreciation, but with traditionally good return .  With the help of an investor mentor (thank you Louis!), my family invested in real estate in Texas.  There, the gross return was more like 10 to 11% per year, as opposed to ~3% in the Bay Area at the time.  The area was promising because of the job market, which had been very consistent, and strong.  Since it continued to be strong, the rental market stayed strong.

Never spend more than you can afford - unless you buy cash, mortgages start to add up when you purchase rental properties.  You have to count on a few set-backs, like damage due to weather, vacancies, repairs tied to finding new tenants, etc…  if you do not have reserves, it can start becoming a stretch.  Plan on a certain amount of unknowns, and I would say, plan generally on costs being higher than they should be.  (like insurance costs….).

All of the advice is well taken in this article called “When is the right time for investing in property?” .   I would add another item: choose a good management company (if you are going to invest away from where you live, or if you do not plan on managing yourself).  This is essential to staying out of trouble, so-to-speak.  That company should be used to missed payments and how to deal with them, and they should be well organized and standardized in their procedures.  Getting referrals or testimonials is very important in my opinion.

If you are thinking about investing in real estate, share your thoughts with me - I’d love to help you out with what I learned so far on the matter.

Thanks for reading,

Francis

Silicon Valley real estate

Trends: Local prices and graphs.
A noteworthy local non-profit event:  Coalition on Homelessness, SF

Home Improvements - ROI

How much should you expect to get back on a given home improvement?

 

It turns out that it depends on where you are, as much as the type of improvement you are planning to make.  Below are two infographics - 1 showing projects with not such great returns, and one showing those that have the best returns; these are provided by the California Association of Realtors and therefore are more appropriate for California. 

 

However, my experience is that here in the Bay Area of San Francisco, the returns are better than what would be typical anywhere else in the US.  In fact, this is something that one can verify by going to the "cost vs Value" web site link from this page out of the online Realtor magazine , and looking for instance at the "Pacific zone" and in particular " San Francisco", where the return for a kitchen remodel or a 2nd bath remodel will indeed be in most cases over the cost of the improvement.

(Click on the picture to enlarge)

 

 

As always, thank you so much for reading, and if you like what you read, let your friends know!

 

Francis

Silicon Valley real estate specialist
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A place worth noting: Our Brother's Home in MountainView