OPENING REMARKS
I remember learning to read when I was about four or five years old. I loved reading. It taught me something new every day. One of my favorite books started like this: “See Bill make a funny face.” “Jane saw Bill’s funny face.” “Jane laughed at Bill’s funny face.” This sounded like it was going to be a great story. However, I had a problem with one of the words. The third sentence had a word I did not recognize. I knew how to sound out words. However, when I got to the word “laughed,” it did not make sense when I sounded it out.
I went to my mother and asked her what the word was. We immigrated to California when I was three years old. We moved into the Rampart neighborhood near downtown Los Angeles. Back in the early 60s, it was still a quiet residential neighborhood. The drug-infested neighborhood it turned into was still ten years away. My mother’s English was not the best; but she looked at the word for a few seconds and then said, “That word is “lawged.” I remember asking her what that meant. She told me she did not know, but that it was pronounced lawged.
A few days later, I saw Mrs. Smith, our next-door neighbor, sitting on her rocking chair on her porch. I remember thinking, she’ll know what lawged means. So I went to my room, found my book, and took it to her. As I pointed to the word, I asked her, “Mrs. Smith, what does this word mean?” She looked at the word and said, “Oh, that word is laughed.” As I walked away, I remember thinking, “She must think I’m stupid. There is no “f” in that word. At least my mom knows how to pronounce it.”
Understanding words, what they mean, how they are used, and the context is crucial to communication. Each profession has its jargon. Unless you know what the words mean, you can get lost quickly. For example, police officers have their language. What does it mean when one Los Angeles police officer tells another one, “We went Code 6, on a Code 6 Charles. Shortly after that, we put out a Code 4.” Allow me to translate: We stopped to investigate a felon. There were no issues, everything is ok.
In the same way, real estate investing has its language. There are words and concepts you need to be familiar with if you are going to work with commercial realtors, investors, lenders, and other professionals who are part of making real estate deals happen.
Words, such as: cap rate, return on investment, cash on cash return, internal rate of return, underwrite, operating budget, debt service, debt service ratio, are used by real estate professionals. These are just some of the words you need to know to operate in this world. You may not know what some of these terms mean. That’s ok. We started this newsletter to help people learn what these terms mean and how to apply them when trying to figure out if a deal is good or not. In many ways, the Real Estate Hedgehog Newsletter is to the new investor what Mrs. Smith was to a five-year-old boy.
THIS WEEK IN REAL ESTATE
MORTGAGE INTEREST RATES – GOING UP OR DOWN
Mortgage rates inched up one basis point (0.01%) last week, as Omicron Covid variant concerns and a lackluster jobs report counterbalanced inflation growth.
If positive infection cases spike — especially as people gather around the holidays — it could lead to declining interest rates amid market uncertainty.
Meanwhile, the Federal Reserve recently indicated it would speed up the tapering of bond purchases, which would signal rising inflation and, in turn, mortgage rates.
This push and pull should keep rates somewhat stable in the near term.
Right now, mortgage rates are in constant flux; a little up one day, a little down the next. And It seems likely those mortgage rate trends will continue in December.
“Economic data continues to show struggles in the supply chain that indicate higher inflation may be more persistent than previously expected,” according to Zillow Capital Markets VP Paul Thomas. “The big wildcard for markets – and mortgage rates – will be the impact the omicron variant may have on economic recovery.”
Still, most housing experts are expecting an overall upward trend through the end of 2021 and into 2022. And that’s because the forces pushing mortgage rates higher aren’t going away:
- Inflation — Higher inflation typically leads to higher rates. And the annual U.S. inflation rate was at a 30-year high in October (the latest reading)
- Economic recovery — Retail sales increased by a wider margin than expected in October. And unemployment claims fell to their lowest level since March 2020. Both are strong indicators of an improving economy, which should lead to increased rates
- Fed policy changes — As the Federal Reserve continues to pull back on its Covid-era stimulus, mortgage rates should continue to rise
But there are other forces working to pull rates down, which is why we’ve seen spikes and drops over the past few weeks.
As has been the case since 2020, Covid trends are one of the biggest indicators for mortgage rates right now.
If we see widespread Covid surges throughout the winter, U.S. and international economies could face stronger headwinds. And that could mean lower mortgage rates.
But, provided we stay on an overall path to recovery, rates should rise in the long term.
What does that mean for you as a borrower? It means you should take low rates as they come. Whether you’re buying a home or refinancing, today’s lowest rates represent a great deal — one not worth passing up in hopes of slightly lower rates later on.
TIM LUCAS – THE MORTGAGE REPORTS EDITOR
REAL ESTATE TIPS
When you’re a rental property owner, it’s easy to make a mistake here or there. And you’re juggling a lot of responsibilities: making sure your tenants are happy, maintaining and upgrading the property, and looking for ways to improve the bottom line. Fortunately, a lot of mistakes can be easily rectified. Then there are others which could put you in the red for a long time. In no particular order, here are the five biggest mistakes that property owners need to avoid.
1. Buying a Property Without Cash Flow
My biggest number one warning is to never buy a property that doesn’t cashflow. Of course, you would never do that. After all, you’re diligently plugging in your numbers when you’re evaluating a property. But let me ask, where did you get those figures? Sometimes, people will “run the numbers” on a property, but they could be figures that the property’s current owner provides. Sometimes a property owner will try to entice you with numbers that are either overly optimistic or just plain wrong. After all, they’re selling this property, so it’s possible that they never had a good handle on how much they were bringing in and how much was going out every month. If you’re in negotiations to buy a rental property, it’s your right to look at their expenses and their rent rolls to verify their income. If the seller balks at providing that information, that’s a big red flag.
Another way that people can unwittingly buy a property that doesn’t cashflow is because they’re not factoring in realistic numbers for maintenance and upkeep. When you’re evaluating a property’s cashflow potential, there’s a temptation to “make the numbers work.” This totally defeats the purpose of running the numbers. You want to discover if the property will actually cashflow.
2. Not Getting an Appraisal or Inspection
Is the property actually worth what you’ve agreed to buy it for? The appraisal and inspection will help determine that. In the appraisal process, an appraiser will evaluate aspects of your house that are plainly visible: the square footage of the house, the lot size, the number of rooms, and numerous other aspects that will determine if the price is in line with what other comparable homes, or “comps” are selling for. With the current housing market, where all-cash offers and bidding wars have become common, it’s easy to think that waiving the appraisal is a good idea. And truly, if you’re in a hyper competitive market, waiving the appraisal may work in your favor, but there’s still a risk. If you do waive your appraisal and then decide to sell in a few years in a less frenzied market, you could discover that you overpaid by so much that you’ve canceled out any potential appreciation.
The inspection is the other major fact-finding part of the buying process. This goes beyond the appraisal to look at a home’s infrastructure. Does the house need a new roof, a new HVAC system, or a new foundation? Any of these could be very pricey repairs. If you’ve waived the inspection, you have no idea if the property is worth what you’re paying. I couldn’t imagine a more disappointing or easily preventable scenario than discovering that a property I just bought needs lots of costly repairs.
3. Investing Based on Appreciation
We are in a hot market right now, but we don’t know how long that will last. If your investment strategy is to only hold onto a property with the expectation that it will appreciate, you’re entering into a speculative area where you’re at the mercy of the market. You don’t know when the market can take a dip. Even if the overall economic landscape looks strong, that doesn’t necessarily mean that your submarket will remain strong. A major employer could move or an industry in your community could take a hit, either of which would drive down demand for housing. Rather than relying on your property to appreciate, it’s better to stick to a long-term cash flowing strategy.
4. Hiring Bad Property Management
It’s impossible to overstate the importance of good property management. When you’re looking for a company to manage your property, make sure to ask for references and talk to their current clients. If possible, you should also talk to some tenants at these properties. Ultimately, it’s the tenants’ satisfaction level that will matter. A good management company will be able to retain residents. A bad property management company will ignore tenants’ needs and cause them to move out at the first opportunity. Also, be sure when you’re hiring a property management company that their payment is tied to actual occupancy, not the number of units in a building. If a management company has a financial incentive to keep your property occupied, you’ll be more likely to get the results you want.
5. Making Decisions Based on Emotion
Don’t ever fall in love with a property while you’re still in the negotiating phrase. And definitely don’t tell yourself that a certain property “feels meant to be.” You can fall in love with your property once it’s yours. With real estate, it’s especially easy to get emotional. A certain property may remind you of your childhood home. Or you may get your heart set on a property because you’ve been driving by it for years and always loved it. But always bear in mind that you won’t be living there; your tenants will be. The main factor for whether a property is right for you is if it cashflows.
OPPORTUNITY ZONE
Since we started the Opportunity Zone, we have been focused on residential multifamily (duplexes, triplexes, and fourplexes). We are going to change our focus to commercial multifamily buildings. We believe that people can leverage their money better, and get better rates of return by investing in larger multifamily apartments (five units or more). We will be providing you more information in the coming weeks and inviting you to invest with us as we take advantage of what the market is giving us.
MY JOURNEY (Sergio Sais)
We are in the midst of December and that means that Christmas is coming. For us Christians, it means we celebrate the birth of Jesus Christ – Lord and Savior. For non-Christians, it means you get a few days off from work, which is not a bad thing. For most of us, it means we get together with family and friends, eat, drink, and hopefully have a good time.
This past Saturday, my wife and I drove out to Beaumont, California to visit our niece Lauren and her family to celebrate her four-year-old son’s birthday.
My niece and her family moved to Beaumont a couple of years ago. She grew up in a small town called Wildomar just north of Temecula, in Riverside County, a few miles north of the San Diego County border. Temecula is a thriving city. It is a city I wished I had invested in real estate 20 years ago.
While chit-chatting with her, she mentioned something interesting, she stated that Beaumont is where Temecula was 20 years ago. That perked up my ears.
We had a great time with family and made new friends at the party. When we got home, I googled Beaumont, and here is what I found:
Beaumont is a city located in Riverside County California. Its population based on the 2020 Census is 54,937. It is the 166th largest city in California and the 711th largest city in the United States. Beaumont is growing at a rate of 3.65% annually, and its population has increased by 48.97% since the most recent census, which recorded a population of 36,877 in 2010. Spanning over 30 miles, Beaumont has a population density of 1,812 people per square mile.
The average household income in Beaumont is $93,472. It has a poverty rate of 10.54%. The median rental costs in recent years come to $1,320 per month, and the median house value is $320,500. The median age in Beaumont is 34.5 years, 34 years for males, and 35 years for females.
I called my partner Sam and asked him if he was familiar with Beaumont. He stated he was and thought it would be a great market to explore.
Do not be surprised if you read more about Beaumont in future newsletters. I hope some of you are able to join us in our real estate journey.
MY JOURNEY (Sam Yin)
When I open up to some people about REI, I frequently get this reaction, “You can’t take it all with you when you die!” At face value, that is true. However, this is where work/life balance comes in, and everyone has a different work/life balance equation. From experience, I have learned that people are diverse in their mindsets. It is an uphill battle to try to convince people out of their core beliefs. Some people strictly do not believe in taking any risk. To that respect, those people are happy and content in their lives and do not crave anything different. When I receive that reaction, I oftentimes move on to a different topic altogether.
In our society, some people live to work; some live to save; some live to play; or some combination of these three factors. Some live to work and never save, playing with every penny they earn or more and then wonder how they can get out of the rat race when their work energy dwindles with time. Others live to work and save all their earning for that rainy day that may or may not come, never taking the time to play and enjoy their earnings at all. There are calculated risk-takers, and those that subscribe to the “YOLO” (You Only Live Once) ideal. There is no one perfect formula for everyone, but if you want to have the time to do more of what you enjoy, then REI is a sure path.
This past week was uneventful, and that was awesome in my book. On Wednesday morning, I met with a new tenant and signed him to a lease. Government housing coordinators were there to check on the unit and fully furnish it for the tenant. I met with the coordinators to reinforce our relationship and prepare them for other units that will be available in the near future. That was a valuable hour spent. The coordinators now have a partner to fill their housing program needs. At the same time, I can extract hidden value from future acquisitions. Our symbiotic relationship made a difference for this tenant.
Shortly after the lease signing, I received a call from my son’s school, stating his entire class was put under quarantine due to Covid-19 exposure on campus. I have two kids attending this school, and another attending a school nearby. Because we are one household, I pulled all three kids from school to quarantine until I could get them tested on Saturday. Although these are precautionary measures, this is the new reality for parents. It is at that moment that the benefits of REI shine. REI provided the freedom to personally care for the family and spend quality time with them during these uncertain times. It allows me to make a difference in my children’s lives.
The rest of my week consisted of sporadic bookkeeping as rents came in for December. Each time they pop up, they are automatically recorded, and I visually spot-check my system for accuracy. This gives me more time to do what I love, with the people I love to work with. I was able to underwrite several more deals to determine if it was a good fit for investors.
Sergio and I have also been preparing to launch a YouTube podcast to allow our investors to see how we operate. It will also allow us to review the current affairs in the REI space as well as provide transparency into our investment strategy. One of our missions is to help investors reach their goals faster, develop and flourish in their passive income stream, and create freedom. That is how Hedgehog capital makes a difference. That is how we add value for people.
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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.