OPENING REMARKS
In my previous life, I was a police officer for the city of Los Angeles. In prior emails, I have written about some of the more exciting incidents I was involved in during my career. However, a police career does not consist of chasing bad guys all the time. Some of it also involves mundane assignments that are just as important to the police department as catching bad guys.
At one point during my career, I worked in an administrative unit where we were responsible for conducting research. The information was used to develop policies and procedures for officers working in the field.
I remember a particular police officer who worked for me. Her name was Dolly. Dolly was very smart, an excellent writer, and a hard worker. However, no one is perfect. One of her weak points was that she was a perfectionist. Often, she would take longer to complete a research assignment than was necessary in her attempt to make the report perfect. I remember one time my boss was on me to get a report out because the due date was closing in on us.
I had been given the assignment to Dolly. I asked her the status of the report. She stated she had completed the research phase and was writing the report. I reminded her she had told me the same thing the week before. I asked her how long before she completed the report. I hoped she would tell me she would have it to me by the afternoon. After all, she had been working on it for a week. I remember her telling me, “It will be done by the end of next week.” WHAAAT!!! I told her I needed it by the end of the next day. She then said, “Sergeant, I can’t get it to you by tomorrow because it has to be perfect. I then told her, “It does not have to be perfect, it just has to be.” It did me no good to get a perfect report if the report was late and the information was no longer of any use to our bosses.
I believe that when it comes to pulling the trigger on buying an investment property, many of us sometimes suffer from what I call “Dolly Syndrome.” The need for the deal to be perfect. If you wait for the perfect deal, you are going to be waiting for a long time before investing in real estate. In the meantime, windows of opportunity will come and go and you will miss out on money.
A deal does not have to be perfect for you to invest in. In some ways, you do not want it to be perfect. In previous newsletters, Sam has mentioned that he looks for the “hidden value” in a property. What he means by that is that as an investor, you want to invest in a property whose value you can increase by fixing deferred maintenance, managing it better, stabilizing tenant occupancy, increasing rents when appropriate, etc. All of these actions will increase the value of the property, thus increasing your cash-on-cash return. A perfect property will not allow you to take advantage of “hidden value.”
So, the next time you are looking at a property, and you are thinking this is not the perfect property, take a harder look, talk to people who have invested in these types of properties, look for the “hidden value.” In finding the “hidden value” you will realize you have found the perfect property.
If you want to learn more about how to find “hidden value” in real estate, or are interested in partnering up with Sam and me on one of our deals, send us an email at the below email address.
THIS WEEK IN REAL ESTATE
Californians Flee the Coast to Inland Cities in a Mass Pandemic-Era Exodus
Since moving out of the Los Angeles area, Eva and Randy Fluker say they miss summer weekends at the beach, monthly trips to Disneyland and their favorite Mexican food and ramen joints.
They don’t miss trying to squeeze their work life, two stuck-at-home kids and Ms. Fluker’s 98-year-old grandmother into a 1,700 square-foot house in Norwalk, Calif. They joined a pandemic-era exodus of Californians to the Riverside-San Bernardino metropolitan area known as the Inland Empire, the biggest movement of people in the most populous state in America.
The Flukers followed some quarter-million others who last year moved east to the 27,000 square-mile swath of Southern California that stretches from the Los Angeles County border to Arizona and Nevada.
The Inland Empire effectively tied the Phoenix region in 2020 for the biggest gain in households from migration nationwide, according to U.S. Postal Service permanent change-of-address data. Phoenix-area migration gains shrank last year from 2019, while the pandemic accelerated the flow of humanity into Riverside and San Bernardino counties by 50%, the postal data show.
The migration is shuffling California’s demographics. Increasingly, the state’s middle class is moving to inland desert and mountain communities. Its coastal cities such as L.A. and San Francisco are housing more of its affluent residents and low-income people who can’t afford to move.
Nearly a half-million California households—both individuals and families—moved from one metropolitan area to another throughout the state, and many left coastal regions, where home prices have jumped to new highs.
The median price for existing single-family homes in California hit a record $827,940 in August, more than 17% higher than a year earlier, according to the California Association of Realtors. In Riverside County, where the Flukers moved, the median figure in August was $570,000, compared with $830,070 in Los Angeles County and $1.85 million in San Francisco.
“People say over and over again, ‘Oh, the millennials are going to stay in the cities.’ They are not,” said Doug Shepherd, a real-estate broker based in the city of Riverside.
The Flukers found a five-bedroom, 3,700 square-foot house with a Jacuzzi and a yard big enough to grow strawberries, bok choy and kale. They paid $670,000 for the property, located in a former dairy town called Eastvale. They are a two-hour drive to downtown Los Angeles in rush hour and half that during other times of the day.
Last year, a net of 129,000 households left California, according to postal data, a small share of the state’s 13.5 million households. Separately, the state Department of Finance said California logged its first yearly population loss in 2020.
Most Californians aren’t fleeing the Golden State, said D.J. Waldie, a cultural historian who has written extensively about Los Angeles. Instead, residents are spreading out.
“California is changing because of a desire of many millions of people to have something that looks like the conventional, traditional California Dream: a house on a lot in a neighborhood of similar houses on lots,” Mr. Waldie said.
The pandemic boosted the flow of households from California’s coastal counties to other parts by nearly 50%, postal data show.
In Southern California, the center of the state’s shift, the Inland Empire had a net gain of 25,000 households last year, according to the postal data. That figure doesn’t count immigration, a longtime source of new Californians.
Over the past 30 years, the population of the Inland Empire has grown by 78% to 4.6 million, more than twice as fast as the state during that time. Financial data firm CoreLogic recently reported that more home buyers had moved into the Inland Empire last year than any other metropolitan area in the U.S.
The local economy is booming with dozens of warehouses for e-commerce companies like Walmart Inc. and Amazon.com Inc., which operates a two million square-foot fulfillment center, one of the company’s largest.
The stampede of new arrivals has bid up housing prices and pushed out some working- and middle-class families. For every 10 households that moved to the Inland Empire, nearly eight moved out, largely to less expensive locales in Arizona, Texas and Nevada, part of a march east. Some older residents are selling homes to help fund retirement elsewhere.
Since 2000, about 15,000 homes have been built in Eastvale, making up 92% of its housing. The population grew to 70,000 from 4,000. New tracts, top-rated schools and landscaped thoroughfares covered former pastures. By the end of 2020, the city’s last dairy farm closed.
“It’s safe, it’s family-oriented and also diverse,” said Jocelyn Yow, the city’s 26-year-old mayor. About 40% of residents are Hispanic, 30% are Asian and 9% are Black, according to census data, and Eastvale ranks among the highest in median household income—$119,213—of any city in the region.
Ms. Yow compared her city with Irvine, Calif., the affluent master-planned community about an hour’s drive away in Orange County. “We have everything that Irvine has to offer,” she said, “but half price.”
Among the eight retail businesses that opened last year were a Sprouts supermarket, a ramen restaurant and a yoga studio. Another two dozen businesses are expected to open in the next year, Ms. Yow said.
Five miles away, near downtown Riverside, Lorena Guy and her husband, Terry, learned two things shortly after moving from Los Angeles last year: Their new home lacked good Cuban food, and, judging from the Trump bumper stickers, Riverside County was a purple enclave in the deep-blue state.
The couple paid $715,000 for a Craftsman-style bungalow with a covered front porch. Inside, a bookcase hides the entrance to a basement they intend to transform into a speakeasy-style den. Friends who first joked the Guys were moving to a farm have since visited, inquiring about local real-estate listings.
Erin Chavez’s parents moved there from the city of Anaheim in Orange County when she was 10 years old. Like others, her parents wanted a bigger home and better schools. After they divorced, Ms. Chavez’s mother lost her home to foreclosure in 2009, when fallout from the financial crisis sank the Inland Empire’s housing market.
As an adult, Ms. Chavez, 31, has kept moving east, trying to outrun rising housing costs. Her Moreno Valley home was bursting at the seams with six family members last year, and rising prices sent her on another house hunt.
She and her family found a 3,200-square-foot dream home in Beaumont, one of the fastest-growing Inland Empire cities. They now have a backyard that bleeds into nature trails. Two community pools are a short drive away, an escape for summer days when temperatures in parts of the region can reach 115 degrees.
Between 2000 and 2019, the state’s median rent jumped 35%, adjusted for inflation, according to the nonprofit California Housing Partnership. Over that same period, the median price of existing single-family homes statewide rose to $591,866, according to the California Association of Realtors, a 95% increase when adjusted for inflation.
Home-building has failed to keep pace with California’s population growth for decades, in part because of grass roots antigrowth and antitax efforts. The Proposition 13 voter initiative in 1978 capped property tax increases, giving local officials an incentive to favor commercial development, which generates sales tax revenue.
The nonpartisan state Legislative Analyst’s Office has estimated the state needs to build twice as many homes each year to meet demand.
Short supply has left the Inland Empire’s half-million renters with fewer affordable choices. After a divorce two years ago, Bandit Hall was priced out of Los Angeles. He moved with his two children to Yucca Valley, a desert town 30 miles northeast of Palm Springs. Rents are lower, yet the family’s three-bedroom house costs $1,475 a month, equal to about three-quarters of Mr. Hall’s pay as a grant coordinator for a local nonprofit.
A similar home in western San Bernardino or Riverside counties—closer to his office and in neighborhoods with better schools—would cost three times as much, he said.
Last year, a half-dozen families left Eastvale for Montgomery County, Texas, a suburb of Houston near lakes and resorts.
Michele Nissen, a former city manager of Eastvale, was among them. She sold her house in June for $910,000, 3½ times what she paid for it in 2001.
Now, she and her husband own a 3,500-square-foot, four-bedroom home surrounded by dozens of trees and down the street from Lake Conroe. They paid $532,500.
Ms. Nissen, 51, said she doesn’t have to work for the couple to live comfortably, in part because of the proceeds from the sale of their California house. “It feels like freedom,” she said.
REAL ESTATE TIPS
As we continue with our back to basics, one of the questions that is often asked is how do you find properties. Before looking for properties you have to know a few things. 1) What market do you want to invest in? In other words, what state, county, city, and even neighborhood do you want the investment property to be in. 2) Once you have that figured out, the next thing to determine is what type of property you want to buy: retail, industrial, storage, single family homes, small multifamily (four units or less) or apartments (five units or more).
Once you have answered these two questions, you can start looking for properties. In my opinion, one of the most effective and efficient ways is to find a real estate broker.
You want to work with a real estate agent/broker who is busy looking for and making deals. One way to do this is to go to a real estate website like Zillow or Loopnet. Zillow is generally good for single family homes, and Loopnet is good for multifamily apartments.
The trick is not so much to find a property on one of these websites, but to get the name of the agent listing the property. These are the agents who are looking for deals and getting properties listed on the Multiple Listing Service (MLS). Pick out agents who are working in the market you are interested in and work with the type of properties you want to invest in.
Once you have done this call them, introduce yourself, tell them you are an investor and let them know the type of property you are looking for. It may take a few calls to find the real estate agent/broker you want to work with.
Here are a few questions you want to ask an agent when they send you a property you are interested in:
- When did the property last trade?
- Who was the lender last time it was traded?
- How would you rate the location on a scale of 1 to 10?
- What do you like most about the deal?
- What do you like least about the deal?
- What terms, other than the price, is motivating the seller to sell?
- Who is the buyer for this property?
- How many people am I competing against?
- What else do you have this is listed or off the books.
Finding good deals take work, and this is the type of work you have to do. It isn’t digging ditches type of work, but if you want the best deals out there, get a real estate agent/broker to work with you. But make sure you ask these questions to know if the property you are looking at is one you want to invest your hard-earned money.
Opportunity Zone
No. 00707, New Castle, Indiana. Three rental units, tons of square footage, and a 4 car garage, great income potential! The home features two units: a 3 bedroom apt and a 1 bedroom apt. The 3 bedroom apt is over 2,000 SF with a family room, dining room, half bath, kitchen, laundry room and large master bed on the main floorl. The second floor features 2 large bedrooms and a full bath. The second unit is a 1 bedroom with large living room, dining room, kitchen, full bath and laundry room. Outside are two 2-car garages (shared wall). Above the garage is a 2 bedroom apt with all appliances. Updated gas furnace and water heater. New exterior paint and other updates. Great tenants are in place and the garage apartment is available for lease.
Sale Price $189,000.00
Down Payment $47,250.00
Closing Costs $5,832.00
Hedgehog Capital Investment $1,890.00
Total Out of Pocket $55,472.00
Loan Amount $151,200.00
Annual Mortgage $9,193.30
Annual Rent Income $20,388.00
5% vacancy rate $1,019.40
Annual Expenses $5,262.08
Net Operating Income $14,106.52
Annual Mortgage $9,193.30
Annual Net Cash on Cash Return $4,913.22
Annual Percent Return on Investment 8.86%
MY JOURNEY (Sergio Sais)
As those of you who read this newsletter regularly know, the tri-plex deal I had been working on for several weeks did not close. One of our values at the Real Estate Hedgehog newsletter is transparency. We are committed to telling you the truth about real estate investing: the good, the bad, and the ugly. Last week I mentioned that the seller and I could not reach an agreement on a couple of critical items that I felt needed to be fixed. As with any investment you take on, there is always risk. The risk I took here was that the deal would not close, and it did not.
So, what was at risk. The risk in investing generally involves money. In this case, the risk involved the earnest money ($2,000), the cost of the inspection ($500), and the cost of the appraisal ($659), for a total of $3,159.00. The inspection and the appraisal are services that were provided, so that money is not refundable. However, the earnest money, which I have mentioned in a past newsletter is the down payment on the down payment is refundable. This brings the loss to $1,159.00. Better to lose a little than to lose more later on. Investing comes down to managing your risk.
Earnest money is the money you put down that lets the seller know you are serious about buying their property. The seller and I could not come to terms with a particular item involving the property. As a result of this, the money will be returned. I submitted paperwork to the title insurance company, which was holding the money, advising them the deal was off and to return the earnest money. As of the writing of this letter, I am waiting to receive the money.
We are now in the thick of the Holiday season. Usually, things slow down for many businesses. For me, it means I continue to look for properties, start the process of setting goals for next year, solidify relationships that were formed this year, and of course, start buying Christmas gifts for my wife and our grandchildren. It is never too late to start buying those gifts, and I feel I have already fallen behind.
MY JOURNEY (Sam Yin)
Having closed a 10-plex just before Thanksgiving puts me in a time crunch. Planning and preparation are crucial for the exit strategy to be timely and successful. Covid-19 is still here and remote work is widespread. Here is the nitty-gritty on the three days leading up to Thanksgiving:
Mon/Tues – Transfer all utilities. This includes the House Electricity and House Gas to cover the laundry room and security lights, Trash, Water, and Sewer. Most agency offices are understaffed. In tertiary markets, there are no sophisticated websites to allow for online Start-Up applications; it must be done in-person or by phone/email, with a 24-hour follow-up call.
Tues/Weds – Establish/confirm monthly pest control services, demonstrating a commitment to tenants.
Tues – Meet with the Property Management Company to interview them and obtain copies of the keys.
Tues – Meet with tenants to sign leases that included a $100 rent increase (approx. 12% – 14% per unit).
Meanwhile, another unit’s remodel requires attention for final paint and trim choices. Other tenants advised they vacated their unit Monday, and it was ready for inspection. On Tuesday, the inspection revealed the tenants did not follow proper oven cleaning procedures, causing the stainless-steel oven racks to discolor; new ones were ordered (deducted from their Security Deposit) and will be delivered in four days. On Wednesday, in the midst of all this, another unit’s heater was inoperable, requiring major repairs. The live-in manager dispatched a specialist to complete the emergency repairs.
The processes and systems in place cured this side-note distraction with just a few phone calls. My attention was redirected back to the new 10plex so that it too can be stabilized and integrated into the system.
In my REI journey, I overcome obstacles through good communication, networking, and refining management systems and processes. Sergio has been equally successful with his out-of-state property management systems and processes. Together, we provide education and guidance through this newsletter by highlighting critical thinking points and current trends.
There are only two basic concepts of REI: cash flow and equity growth. Your income, capital, energy, and phase of life will dictate which one you should focus on to meet your personal REI goals. For investors that prefer passive income with high returns on their capital through leverage, REI is the path. Hedgehog Capital can help investors reap the benefits of REI and spend their free time on other life experiences while their capital is working passively.
Tuesday was busy, but my family and I had seven hours that evening to celebrate an early Thanksgiving with a friend and his son. On Thursday, we spent Thanksgiving with my sister and her family in Las Vegas. My wife and I enjoyed a four-mile walk with our oldest son after lunch, taking the opportunity to teach him about finances as he develops into his own. The rest of the Thanksgiving evening was spent sharing laughs with the extended family. We went on a five-mile walk with our middle son on Friday afternoon. Saturday, my youngest gets to enjoy the walk as well. I look forward to the rest of the Holidays and to spending more time with the entire family. There is always room for improvement and growth in REI. There are always opportunities. The greatest benefit of REI is the time it affords you, the time to spend it your way.
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If you want additional information on what I am doing or would like to partner with Sam and me on a deal, email me at sergiosais14508@gmail.com. Have a great week.