June Letter From My Heart: Good Bad &Ugly with Rent vs Own thoughts

Good morning, as summer fast approaches,

Real Estate continues its 5-year recovery, running near hot the last 4. Later, we will talk more about Rent vs Buy equation. Why? Because Nationwide, 2/3 looking will buy while 1/3 rent. Both have good points. It is far more about reviewing your situation and bringing your future into play. It is about what is best for you, knowing our 20+ years of expertise is ready to help. We are only a phone call away.

A few new facts I hope you find fun and interesting:

1) All Cash sales: 28% cash local, while Nationwide the number is 25%

2) Residential Housing: Bay Area added 115,000 jobs in 2015, but only 13,000 units.

(Translation: Standard is a 40 % ratio of jobs to housing. If so, there is a real short fall of supply, causing rents rising, and longer commutes. Over the last four to five years, there have been 350,000 jobs, but only 40,000 residential units added. The projected 10,000 new units in San Jose in 2016, should help.)

3) The art of “Flipping”: Nationwide: looking back to the 1st Q of 2005, 80,000 units flipped. This was 6.4 % of the market, with a profit per unit of $ 48,000. Current day, 1st Q 2016, the estimate is 24,000 units flipped. This was 4.4 % market share with profits per flip rising to $ 56,000. There is no bubble, and the potential for flipping is real.

4) Lending: New ways of reporting credit are coming soon. The change will now include 2-years trailing information on payment balances and payments made. This will be Good News for those who learn how to pre-pay their mortgage – and we can help. Likely this will become part of your credit score, as your FICO is meant as a predictive tool. It will be a positive change for those prepared to take advantage of this change. Call us, as we continue to help steer you through the maze and unto even greater rewards of success. We are here for you.

5) Affordability: A fun term, sometimes confusing. Here’s one good tidbit: A 5% increase in home price, is offset by a 1% increase in income. To confirm: Recent statistics show our 10 +% increase in home prices, are being offset by annual income increases of about 2 %. We have seen income going up the past couple of years, and why there has not been a loud cry about affordability as the number has been moving very slowly.

Time for this month’s Good, Bad n’ Ugly:

THE GOOD: State of California working to pass ‘right to cure’ for ADA compliance breaches.  It will allow business owners 4 months to cure an ADA deficiency. Hopefully this will bring an end to the nuisance lawsuits from those seeking to make a living by suing businesses for non-ADA compliance.

Also, legislation is being submitted ( AB 2668 ) to extend the Proposition 60 & 90 transfer of Prop. 13 when you buy down in value. This would free households seeking to down size – to sell their homes to people with growing families – without the fear of losing their current one-time exemption. Everyone will benefit and passage will bring needed homes to those in need. It is time.

THE BAD: Over the last 5 years, regulatory compliance costs are up 30 % . This is hurting entry-level housing, when more housing is needed. Perhaps if the State of CA passes legislation ( SB 1069), it will help. It will not only expand allowances for ‘granny units’ size and parking requirements, it will help reduce the impact from fees charged. Let’s hope the State does the right thing, and Cities don’t sue for their loss.

THE UGLY: Media selling headlines, not what is helpful? We need to expect better. Case in point: Rent control. The headlines love to sell the scare and the fear, while denying the helpful and constructive perspective. How about a “rental increase chart” able to provide: 1) a 20-year viewpoint to smooth out the realities of our boom and bust cycle. It is not all straight up and such charts would show when landlords both lose and win. And 2), how about a stand alone chart of actual rental increases for “rent-control” units. This would provide the more honest view, one needed for making wise decisions. One wonders: Do they trust us and our ability to decide, or instead trust their personal agenda and political motives as being far better and preferred?

The Challenge: Ever wonder how those who own these units, who risk their tomorrow, will respond to rent control? What is their incentive to update and modernize to keep up with competition? Notice how first is the complaint of increasing rents, then the complaint the rent-control units do not meet their needs? Life is seldom smooth nor does it always seem fair. Is it possible the very preventing regulating of rents are the same ones preventing new housing from being built or older ones remodeled. Rules, fees, and regulations, do have their negative effects and sadly, government seldom likes to take the blame, admit its mistake, or change its ways.

Rent vs Own: Quite the shift from the politics of housing, to life being lived at ground level. Buying or renting? Let’s consider an example along with concern for stability of incomes, and a sense of tomorrow, today. And the good part, it applies equally to a home owner or real estate investor.

For our comparative model, let’s use a 4 % increase in both rents and valuation each year;

$ 600,000 purchase – 10 % down vs. 20 % down vs. continuing to rents

Option #1: 10 % down with $ 60,000 invested, $10,000 closing costs, $540,000 Loan

5 years @ 4%: Net Equity $130,000 appreciation plus $70,000 initial = $190,000. ROE (Return On Equity) near 200% @ $730000 future valuation.

Option #2: 20 % down with $ 120,000 invested, $ 10,000 closing costs, $ 480,000 Loan

5 years @ 4%: Net Equity $130,0000 appreciation plus 130,000 initial = $250,000 ROE near 100% @ $730,000 future valuation.

Option #3: Rents $600,000 house for 5 years

Current rents very close to mortgage payment – $3000

5 Year rent = 3,650/ month; total out of pocket $200,000; ROE = Zero.

$70,000 invested safely in the market at 5%/yr = 90,000 or plus $20,000

Liquid vs less liquid; cash is portable while real estate is a fixed asset.

Does this analysis work with rental properties? Yes. Both are a question of bringing together a strategy and approach, gaining knowledge and insight of the market, and timing whether buying or selling.

As we wrestle with choices and possibilities, it should be clear, we cannot do it alone. We need lenders, appraisers, Title companies, and real estate brokers. It takes a team with experience, but equally, one who knows the language, knows how to work with multiple personalities, and loves it when you carry the smile of success and satisfaction.

Give us a call, let us know how we can best serve you. Our experience and success stories will hopefully bring you the confidence and trust needed as we turn your down payment into a stronger and more secure tomorrow.

We are ever, Gratefully yours.

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