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April rental market report: Highest rents on record plus units leased soar 24%

May 2, 2013 By Erion Shehaj Leave a Comment Tags: rental market report

Every year since 2007, the number of properties leased during the month of April had been 8-10% lower than the corresponding March figure.

This year, the Houston rental market shattered this well-established trend. According to statistics obtained directly from the MLS for investment grade rental properties, a total of 507 single family homes were leased during the month of April. That figure represents a 24% increase year over year and an 8% jump over last month.

The solid jump in units leased was certainly welcome news. But was this increase as a result of higher demand or lower prices? The numbers answered that question emphatically in April. Average rents climbed to $1578 per month – a 6% increase year of year and a 3% jump over March 2013. Not only that, but the April average rent is the highest rent on record. So clearly, organic tenant demand is the culprit not reduced rents.

Average days on market came in at a low 27 days – on par with both April 2012 and last month.

Available inventory of investment grade properties for lease dropped to 465 homes (down from 507 on April 1) on the back of the increase in units leased. When we look at the average units leased over the last 12 months, that number comes in right at 500 properties/month so there’s less than 30 days inventory on the market. The current supply demand relationship points to further strength in the rental market for investment grade properties in the months to come.

houston rental market — Houston Rental Market Report for April 2013

To view our interactive Houston Investment Grade Rentals (HIGR) Chart click on the chart image above.

In the path of growth: Exxon’s mammoth campus under construction in North Houston

April 25, 2013 By Erion Shehaj Leave a Comment Tags: path of growth

During the acquisition phase of your Blueprint real estate investing strategy, the temptation is to focus exclusively on well established neighborhoods. But as a neighborhood becomes more and more established, home prices rise and returns drop. So how can you get better returns without sacrificing quality?

You buy properties in the path of growth.

That well established neighborhood of today was at one point not so well established. Needless to say, investors that purchased properties in the neighborhood during that period paid considerably less money for them that you’d have to pay today. It makes perfect sense: At that time, the investment was riskier since no one could know for sure how the neighborhood would turn out. Therefore it was only right that the return should be higher as well.

So, how can we determine which locations and neighborhoods are going to be the popular neighborhoods of 10-15 years from now? More importantly, how can we avoid the misstep that the location we thought had promise doesn’t turn into a dog instead? To get the answers to those questions, let’s take a look a current case study.

Exxon Mobil’s mammoth campus

. There are over 20 structures being constructed on a 386 acre site west of I-45 just south of the Woodlands in what the Houston Chronicle is calling a “mini downtown”. The completion of the project is expected in the middle of 2015. When completed, the complex will house 10,000 employees, 2000 of which will be transferred from Fairfax, VA and the rest will be repurposed Houston employees. The company has already sold its Downtown tower and has put their Energy corridor facility on the market.

That’s great, but what’s that have to do with residential real estate? How does a commercial project of this magnitude impact future growth?

It’s Economics 101. Employment drives demand which in turn drives growth. At the moment, there are about 3000 construction workers dedicated to the project. When the project is complete, 2000 Exxon employees will be transferred from out of state and 8000 Houston employees will probably need to move closer to the area. But that’s not all. Because there are two kinds of employment: Basic and supplemental employment. Two thousand new Exxon jobs are basic jobs which in turn create a multiple of supplemental employment. Here’s how it works: When new jobs are created those families add to the local demand for housing and services. The need homes to live in, grocery stores to shop in, restaurants to frequent etc etc. So, builders will build more (and hire more construction workers), additional commercial shopping centers will be developed and businesses will lease more space. So, the added employment will create added demand which leads to local growth and higher home prices and rents over time.

I’d say the area around this massive project will look very different 10 years from now, wouldn’t you? We can’t know for sure as no one can tell what the future holds but we can be assured that big changes are coming. And we can get on the “train” before it leaves the station and prices get out of reach. We can do that a couple of different ways. We can purchase recently built resale and bank owned homes within a few miles of the project. Or we can build new and take advantage of the warranties and low hassle of a new home. The opportunities are still there even though they’re thinning out as builders and sellers alike try to take advantage of the very thing we’re talking about.

If you’d like to discuss how you can take advantage of buying investment properties in the path of growth as described above, you can call my cell at 713-922-2702 or contact me.

Steve Snodgrass via Compfight

Houston housing market: Inventories Shrink Further Pushing Sales and Prices Up in March

April 18, 2013 By Erion Shehaj Leave a Comment

The housing market in Houston strengthened further and posted higher sales and prices during the month of March fueled by an ever shrinking inventory of properties. As usual, I want to give you the “espresso” version of the report with the numbers you need to know:

Total sales came in at 7006 properties (19% increase over March 2012)
Active listings on the market were 32,704 (down 22%)
Pending sales were 4433 (up 6%)
Average price was 236,195 (up 4%)
Median price was 172,000 (up 6%)
Inventory shrank to 3.5 months (down 38% over last year, and down from February’s 3.6 months, too)

I also want to share with you a couple of interesting statistics.

When the sales numbers are broken into price brackets, the only bracket that experienced decline in sales were properties under $80,000. Every other price bracket experienced double digit increases. Why is that? Well, it’s NOT because homes in that price range aren’t selling as well. It’s because homes in that price bracket are becoming fewer and fewer as the market as a whole rises.

Furthermore, when you think about homes under $80k, what’s the first thing that comes to mind? Foreclosures, right. Not all properties in that price range are foreclosures but most of them are. And there’s the second statistic I wanted to share with you. Bank owned foreclosures as a percentage of sales are declining substantially. During March, foreclosures accounted for just 12% of total sales – that’s down from the 15-19% levels we’ve seen this year and the 25% that’s been the norm during the period after the 2008 recession. And even the properties that banks are bringing to market usually come with higher price tags as banks seek to take advantage of the increased demand.

The biggest story these numbers tell continues to be inventory. At 3.5 months this is the lowest inventory level since 1999 and 34% lower than the national average of 4.7 months. The big question remains: What’s going to happen in the coming months? Can the Houston housing market continue to gallop at these levels and keep the inventory at current levels or will it level off and allow supply to catch up with demand? In the short term, I suspect that I will be writing similar articles about the market through the summer. Then I think the market will take a breather and slow down to a more sustainable pace. It certainly feels like demand is realizing that the train of low interest rates is leaving the station soon and no one wants to be left walking.

Alex via Compfight

Fine tuning your asset protection strategy for real estate investing

April 11, 2013 By Erion Shehaj Leave a Comment

A few weeks back I wrote about how long term real estate investors can protect themselves from liability exposure.

That article argued that a wise investor that builds a great long term real estate portfolio must also build a strong impenetrable “wall” around it for protection.

A properly constructed asset protection strategy protects you in two primary ways. First, it protects you and your other assets from liability that might arise from your ownership of investment real estate. In that sense, it creates separation between your “personal” assets (primary residence, cash, stocks etc) and your real estate portfolio. Second, it protects your real estate assets from liability that might arise from your ownership of other real estate assets. In other words, it should prevent “liability contamination” within your portfolio.

The proposed solution to these issues is the utilization of limited liability companies as a holding vehicles. And to avoid triggering the due on sale clause in their mortgage, investors should setup land trusts. So far so good.

But after several conversations with current clients on that very strategy, I realized that there were still many unanswered questions. For instance:

Should each property have its own dedicated LLC or should you hold your entire portfolio in one LLC?

If you setup dedicated LLCs will you need to file taxes for each LLC each year and is that practical?

Will you lose important tax benefits like depreciation and tax deferred exchanges if the property is held in an LLC?

Let’s address each of those questions individually.

From a purely asset protection standpoint, setting up dedicated LLC for each property is the optimal solution as it covers both bases. It creates a separation between your personal assets and real estate portfolio as well as insulates your real estate assets from each other.

But from a pragmatic or practical standpoint it may be a bit overkill. For instance, in investment blueprints that involve the acquisition of 9 or more properties, that means there are at least nine LLCs, nine tax ID numbers and nine bank accounts to setup, pay for and maintain.

On the opposite end, you could put everything into one LLC and it would be practical and easy to setup. But while you would create a wall of separation between your personal assets and real estate holdings, a liability issue with one property could take down your entire portfolio. And your retirement plans with it.

So a good middle of the road solution is to hold about two to three properties in a single LLC. That way you protect from liability contamination within your holdings and keep it practical.

What about tax returns? Will you need to file taxes for each LLC each year and won’t that get cumbersome and pricey?

Actually, no. When you setup your LLC you are given an option to make an election for “disregarded status”. That means, the LLC will be disregarded for tax purposes and will not be required to file annual tax returns. The gains or losses from the properties held in these LLCs will just flow through to your personal tax return. It’s important for you to make this election otherwise you will question the necessity of your asset protection plan come April 15. You will save yourself a lot of headache and dollars.

Finally, for those who are concerned about losing tax benefits by holding properties in an LLC – there’s no need to worry. Whether you hold a property in your own name or in an LLC, depreciation and mortgage interest expenses are used to offset the rental income the property produces in a given year. Then, the resulting gain or loss simply flows through to your personal tax return and there its treated in accordance with your personal tax bracket and particular situation. One item of concern is that LLC aren’t allowed to perform a tax deferred exchange by the IRS. So if you are holding the properties in a trust whose beneficiary is the LLC, you should transfer those beneficiary rights and close the sale under your personal name. Then perform the 1031 exchange in your own name and transfer the new property into a trust yet again.

tropicaLiving – Jessy Eykendorp via Compfight

Note: I am not nor do I pretend to be an attorney. Which is why I direct all my clients to an attorney that specializes in asset protection. You should always consult an attorney prior to executing any asset protection strategy.

Fine tuning your asset protection strategy for real estate investing

April 11, 2013 By Erion Shehaj 3 Comments

A few weeks back I wrote about how long term real estate investors can protect themselves from liability exposure.

That article argued that a wise investor that builds a great long term real estate portfolio must also build a strong impenetrable “wall” around it for protection.

But after several conversations with current clients on that very strategy, I realized that there were still many unanswered questions. For instance:

Should each property have its own dedicated LLC or should you hold your entire portfolio in one LLC?

If you setup dedicated LLCs will you need to file taxes for each LLC each year and is that practical?

Will you lose important tax benefits like depreciation and tax deferred exchanges if the property is held in an LLC?

Let’s address each of those questions individually.

So a good middle of the road solution is to hold about two to three properties in a single LLC. That way you protect from liability contamination within your holdings and keep it practical.

What about tax returns? Will you need to file taxes for each LLC each year and won’t that get cumbersome and pricey?

tropicaLiving – Jessy Eykendorp via Compfight

The more things change

April 9, 2013 By Erion Shehaj 4 Comments

File this under “you can’t make this up”.

RealtyTrac has developed a list of the “20 best markets to purchase single family rentals” based on cap rates and cashflows. According to the study, these markets offer great opportunities for “conservative” individual investors.

And let me tell you, RealtyTrac didn’t disappoint. The list contains some of the perennial favorites of conservative investors like Detroit (MI), Phoenix (AZ), Las Vegas (NV). Not to mention a half dozen markets in Florida and several rust belt cities like Dayton and Toledo (OH).

Most importantly, RealtyTrac managed to say all of that while at the same time, keeping a straight face.

Oh how quickly we forget. Next thing you know, we will be bringing back other “conservative” favorites like the 80/20 subprime mortgage, Triple A rated second mortgage backed securities and start using our homes as ATMs again.

Do me a favor and never forget to ask WHY. Cap rates are high in those markets? Why? Could it be that they have to be that high to even stand a chance that any investor would touch them with a 10 ft pole?

The more things change, the more they stay the same.

H/T to Brandon Turner’s story on BiggerPockets