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Houston rental market rises again: Highest average rent on record

August 30, 2012 By Erion Shehaj Leave a Comment

Houston rental real estate market has been on a steep upward trajectory throughout the year and the trend continued during the month of July. If you already own investment real estate in Houston Texas, none of this will come as a surprise to you. You probably have experienced first hand the spike in demand for well located properties and the rising rents across the board. In fact, all of our clients properties that have come up for re leasing this year have fetched higher rents and longer terms due to this demand. But many who come to read these pages aren’t local Houston folks and they always wonder how the market is doing so we try to answer those questions as empirically as possible. From HAR latest press release :

Houston’s lease property market saw mixed activity in July. Rentals of single-family homes climbed 15.0 percent compared to July 2011 while year-over-year townhouse/condominium rentals declined 2.8 percent. The average rent among single-family lease homes reached a new all-time high of $1,669 in July, up from $1,642 last month. The average rent among leased townhouses/condominiums declined to $1,388 from the record high of $1,410, also reached last month.

Since May, the rental market for single family homes has been on a 15% year over year increase trend and that continued in July. Average rents continue to climb and reached the highest point to date. Town homes and condos have a hard time competing – High monthly maintenance fees in this property class require higher than normal rents to make the numbers work. And when you start asking higher than normal rents you bump up against single family home rents. What tenant would pick a town home or a condo when they can have a single family home for the same price or close to it? But in the end this doesn’t spell doom for the owners of those properties either. Rentals might be down slightly but that’s compared to what was a pretty good year last year.

Lastly, a note of caution: Everyone’s a genius in a bull market. Make sure these high rents we’re experiencing aren’t just covering up cracks in your overall strategy temporarily. When in doubt, pick quality and be disciplined.

FutUndBeidl via Compfight

Houston rental market rises again: Highest average rent on record

August 30, 2012 By Erion Shehaj Leave a Comment

Houston’s lease property market saw mixed activity in July. Rentals of single-family homes climbed 15.0 percent compared to July 2011 while year-over-year townhouse/condominium rentals declined 2.8 percent. The average rent among single-family lease homes reached a new all-time high of $1,669 in July, up from $1,642 last month. The average rent among leased townhouses/condominiums declined to $1,388 from the record high of $1,410, also reached last month.

FutUndBeidl via Compfight

Paper tigers

August 28, 2012 By Erion Shehaj Leave a Comment

At some point or another, every real estate investor has experienced temptation. You could be the new real estate investor just getting started that gets his head turned by an obscene cash on cash return rate. Or you could be well on your way after purchasing several quality assets and questioning your direction when you see higher cap rates or lower prices elsewhere.

Analytical minds love simplicity. I know because I’m the proud owner of one. We hate ambiguity, it’s “maybes” and “it depend”s. Instead we seek factual benchmarks, hard statistics that show what’s what without a shadow of a doubt. It’s simpler that way: A cap rate of 9 is better than 6 or a cash on cash return of 20 is better than 13.

The problem is long term real estate investing is much more complex than that. When you try to reduce in depth analysis down to the myopic perspective of an indicator or two, it leads to wrong answers.

Ceteris paribus – all else equal – a higher cap rate and cash on cash return is better than a lower one. Thing is, all else is rarely equal. Higher returns on paper typically reflect a higher level of risk. Think about it this way. In order to acquire a property in a great location you will generally have to pay more than if you were to acquire the same in an inferior location. In addition, properties priced lower tend to have lower property taxes, insurance costs and HOA dues. When you pay less to acquire the same income stream, your rate of return on paper increases substantially. So it follows that to get off the chart returns you have to settle for lower asset quality. Since the property “picks” the tenant, that leads to lower quality tenants which leads to higher vacancies and turnover and lower actual returns. Defeats the purpose, doesn’t it?

So when you read that pro forma income and expense statement the question you should ask yourself is: Am I looking at a paper tiger? Because in the end, the only returns that matter are the ones you get to keep.

Paper tigers

August 28, 2012 By Erion Shehaj Leave a Comment

Your most important wealth building tool

July 29, 2012 By Erion Shehaj Leave a Comment

I’m writing this from Terminal D of Houston’s Intercontinental airport so I’ll be brief. Brevity notwithstanding, the concept I want to talk about today will deeply affect your success with real estate investing.

Most aspiring real estate investors think that success in this business looks like a series of home runs. You know, you buy a house, flip it, double your money – then rinse and repeat till you get to your desired number of millions. Or the other popular choice: Buy five dozen homes, leveraged to the neck, rent them and walk to your mailbox to collect your wheelbarrows of money.

What I want to share with you today is this: Real estate is where you come to put your capital to work not where you create your capital. You see, you already possess the most important wealth building tool. It’s your income. Think about that for a second. When put to work properly, your income provides the savings that become the capital you invest. In addition your income provides the support that allows you to leverage that capital and acquire a higher asset value than you would paying cash. And most importantly, your income helps you pay off your properties faster so you can retire sooner.

Knowing that your income is your most important wealth building tool is one thing. But realizing that how you choose to spend that income can make a difference between retiring a millionaire and working till you’re 90 is the very heart of my point. When you increase your overhead by taking on debt payments – credit cards, cars, furniture etc – you are impairing your ability to build wealth.

Look, I have a “live and let live” kind of mentality. I won’t sit here and tell you how to live your life and how to spend your money. However, it’s important to understand that there’s a huge opportunity cost to debt payments. When you take on that $800 car payment, you aren’t just agreeing to pay that amount every month for 5 years. You are also forfeiting the wealth that that chunk of your income could build for you.

Success in real estate investing isn’t a series of home runs. It’s a well planned long series of hits. And the “bat” you need to get those hits you already possess. It’s up to you how you use it.

Everyone is a genius in a rental bull market

July 27, 2012 By Erion Shehaj 5 Comments

The rental market in Houston Texas is hot. Rents have been rising steadily for the last 4-5 years with average time on market dropping to under 30 days. Landlords are in the driver’s seat and the high demand for their properties allows them to ask for longer term leases, higher credit tenants and rent escalations built into the deal. What’s most important is that this rush of demand is fueled by real economic and job growth, not some artificial inflation. Under the current conditions you could literally close on any property on Friday and have a long term tenant in place the following Friday. And he probably had to fight off four or five other applicants to get accepted.

In the current market, it is easy for an investor to feel invincible – feel like they can’t go wrong. All the talk about quality of neighborhood, school district, amenities, upgrades etc. seems irrelevant. After all why would you go and spend 40% more money on a “better property” when you can buy cheaper, lower grade assets for a fraction of the price. With rental demand as strong as it is now, they will both rent out quickly and your ROI will be much higher on the lower end stuff. Right?

Mark Cuban said: “Everyone’s a genius in a bull market. Recessions are the great equalizer”. These are good times for investors but they’re also dangerous times. The euforia produced by the rental bull market can fool shortsighted investors into dropping their guard and skimping on asset quality. Incoming rent will cover all the cracks in your asset selection for the time being. There’s a funny thing about cracks though. No matter how often you patch over them, sooner or later they always show through in times of great tension. So ask yourself this: What would happen to your portfolio if the rental market weren’t this hot? If there were fewer tenants looking for properties and competition among assets, would they pick yours? In other words, would your portfolio withstand the test of time and all the changes in market conditions it brings?

If you are a long term investor, the number one factor you have to seek when building your portfolio is Quality. Don’t listen to the siren calls of cheap properties in cheaper locations. Build a portfolio that will perform no matter the market.

Miguel Angel via Compfight