Nov 30

In 2006

Everyone: “The market is high, aren’t you going to sell and make a killing?

Me: “Nope, don’t know where I would put the money if I did sell.

In 2009

Everyone: “Wow! you must have lost a lot of money due to the real estate crash!

Me: “Nope, I did not sell, I’m not selling, occupancy rates are the highest I’ve seen and rents are going up.

If you are in this for appreciation or flipping, the fluctuations in real estate values directly impact you. If you are a buy and hold owner, then the market does not impact you as much.

My buddies who sold out in 06, 07 and thought they made a killing, lost a lot when the stock market corrected, plus paid taxes on the sales. Those of us that stayed in the rental game did okay.

Property values and rental returns do not move in unison.

In forty years I’ve seen the worst housing markets being the best rental markets, as long as you bought right and financed right. In 05 and 06, when anyone who could fog a mirror was given a mortgage, we saw double digit vacancy rates.

So strong housing markets can actually be bad for the rental market.

Jan 20
Note, this began as a discussion between myself and another well known Milwaukee investor.
 
I have been an investor in Milwaukee real estate since the seventies. I have seen the market roller coaster many times. My belief for the coming months is:
 
In the next 12-18 months, we will get to near 2008 levels of correction both the mid-upper end of the market and the lower end, with the middle being less affected. Trump could make it worse, or Trump could make it better. It is not in Trump’s nature to not be involved an issue of this potential magnitude.
 
Mid-upper, 350k-1.5M range depending on the location, valued home sales will suffer as interest rates rise and the limits on tax and interest deductibility make them less affordable for those who are currently, marginally able to have such a home. In some markets, such as south FL and NYC, we’ve already seen discounting in the upper segment. It will get worse. Not many people, including politicians, feel sorry for the overextended Yuppie with the leased BMW in the drive of his McMansion that is filled with furniture bought on credit while working at a job he got with his degree that came with a significant college loan debt.
 
Low value (sub 100k) homes will take the hit as wages have remained static and interest are rising. We have been returning to “soft” underwriting. This is a segment where homeowners are more likely to quit when it gets hard. Those owners will fail. Unfortunately, no one in power truly cares when a poor family loses their home. The Dems say they care, but many secretly rejoice as each failure allows them to increase their political base by verbalizing outrage and empty promises of help. The Reps loyalty is more to the bankers than the homeowners. Rand Paul cannot change the world by himself.
 
Learning from the 2008 debacle, the government will prevent the full-on implosion of the middle. Too much economic and political damage if the voting class loses their homes again. But I still expect a 10-20% discount when owners must sell.
 
Throughout my career, when owner-occupied housing has suffered, rents and/or occupancy rise. Beginning in 2008 and continuing to this day, we’ve seen the most robust rental market of my career. In 2005-2007 we had our worst vacancy rates as every good tenant was suddenly, and temporarily, a homeowner.
 
When the economy is terrible opportunities abound.
 
In Carter’s 1980, prime rate was 21% at one point. Nobody was buying, well nobody but me and a few of others. I bought a hundred fifty units in the ten years between 79 and 89 when owner-occupied mortgage rates were consistently over 10% and rental mortgages near impossible to obtain.
 
In 79-89 we bought properties that worked at the 10-12% interest we were paying. I structured my buys so that I survived and made enough to support my family. When rates fell, values increased. Interest rate chart.
 
The longer the downturn goes on, the higher number of tired landlords, or their estates, will be seriously motivated to sell. They will create ways to make to make sales happen. Much of my purchases in 79-89 were owner financed because banks were not even enthusiastic about lending to owner-occupants at the time.
 
The combination of Amazon and remote working arrangements killed most commercial property value. My daughter does something important for AT&T corporate. She has worked from her living room for the past five years, and AT&T sold her former office.
 
The Chinese are selling off their US holdings.  WSJ: Chinese Dumped $1 Billion of U.S. Real Estate in Third Quarter, Extending Recent Retreat (Dec. 4, 2018)
 
Millennials don’t buy homes. They live in mom’s basement, or they rent. 
 
My three-year view:
 
I have good feelings about residential rentals across most segments. This will only hold true if:
• You have fixed rate financing; or
• You structured your purchases so that they still cash flow at 12% interest.
 
I think flipping will be a flipping foolish thing to do for the foreseeable future. Even if you are buying well today, you are buying higher on the price curve than you will be selling at three to six months from now.
 
Keep your powder dry for the next six to twelve months, i.e., hoard cash. Opportunities will abound.
 
Warren Buffet: “Be fearful when others are greedy, and be greedy when others are fearful.”
 
Jimmy Buffet: “If life gives you limes, make margaritas.”
 
Further reading: (A lot of WSJ pay-walled articles, but they do some of the best research.)
 
 
 
 
 
 
Oct 29

Earlier today a person asked about rent to own contracts.  I pointed them to my prior post on  2010 WI Safe Mortgage Licensing Act, which restricted most seller financed deals inclusive of many rent to own contracts.

Later in the day, I received the following message from Deb Conrad, Senior Attorney for the Wisconsin Realtors®.  Great news for sellers and Brokers alike.

Hi Tim,

Changes to Wis. Stat. §§ 224.71-224.77 have been made to attempt to remove many of the prior seller financing limitations on real estate agents working with seller financing offers as well as sellers providing seller financing opportunities when selling their own properties. It appears that there is now an exemption for sellers not regularly engaged in the business of a loan originator and who occasionally offer seller financing on five or fewer transactions per calendar year. The same would be true for a real estate broker writing offers on five or fewer transactions where seller financing is offered.

2013 Wis. Act 360: https://docs.legis.wisconsin.gov/2013/related/acts/360.pdf

Wis. Stat. Chapter 224: https://docs.legis.wisconsin.gov/statutes/statutes/224.pdf

Debbi Conrad
Senior Attorney and Director of Legal Affairs
Wisconsin REALTORS® Association (www.wra.org)

Feb 27

Governor Walker is scheduled to sign AB568 into law on Monday 2/29/16.  Link to the text of the new 2016 Wisconsin Landlord Tenant  law, ACT 176   This is the third major revision to WI Landlord Tenant Law in three years.

It will take a while to digest all the implications of the new bill, even for those of us who watched it go through the legislative process over the last six months or so.

Some of the highlights:

  • The new law allows the termination of a tenancy for criminal activity. Drug dealing is one of the crimes you can evict for, but simple possession or use of drugs is not. Politically, allowing possession was necessary. But it is still disappointing that owners that wish to, still cannot expect drug free housing.  With this new tool to address problems  year leases are practical in more situations than they are today. An advantage of leases is less turn over and that should make neighborhoods more stable. Keep in mind that the Wisconsin protections for domestic abuse victims remain in place.
  • Another change affects month to month tenancies – The ability to use 5 Day notices for breaches.  Now when the tenant shows up with a pit bull you can respond with a 5 Day instead of a 14 Day.  An advantage to the tenant is they can correct their mistake and not lose their home.  This may also permit the including of late fees and other charges that the tenant owes on a 5 Day notice.  I will get clarification on this.

There are a bunch of changes that should help keep local governments a bit more in check.  This legislation:

  • Prohibits  rental property inspections except upon a complaint or as part of a program of regularly scheduled inspections conducted in compliance with state or federal law.  Think fire inspections.
  • Dramatically changes “Reinspection Fee” by limiting the the escalating fee scheme as well as allowing fees only when there was an actual, physical inspection of  the property.  Currently these fees double every 30 Days until they are six times the original fee, plus often there is no actual inspection associated with the fee. This is important as many of the abandoned and foreclosed homes in my neighborhoods appear to have ended up in that state in part due to fees imposed by Milwaukee.  The fees imposed these properties also make it harder for someone to come in, buy the property and put it back in service.
  • Prohibits rental property certification or licensing  schemes unless the requirement applies uniformly to all residential rental property owners, including owners of owner-occupied rental property.
  • The law still allows for programs such as Milwaukee’s Property Recording Ordinance, but most likely they will no longer be able to charge a fee.
  • Prohibits an occupancy or transfer of tenancy fee on a rental unit.

Time of Sale protections

  •  The bill prohibist local regulations with respect to taking title to or occupancy of property.

The new law also changes things with regards to sprinklers, historical buildings, trespass and towing.

Stay tuned as we get more information on what these changes mean to us and what lease language will be updated.

Apr 26

This post is being written for a couple of  purposes.

Those of us with any significant amount of real estate need to plan better for what will happen if you suddenly die.  Your spouse and kids probably will not enjoy landlording as much as you.  Wait, few people “enjoy” landlording, so let’s use the word tolerate instead.  You need to have a list of people in the industry that you trust. Keep that list handy for your family so they can get their hands on it if they need to.

My other purpose is to acknowledge real estate broker Graig Goldman who pulled off what many thought would be the impossible. He sold over 100 properties at a good price in less than two months.  If you attended the March Apartment Association meeting, Graig was the presenter on buying foreclosures.

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Mar 07

A buddy of mine is attempting to sell a couple of his Milwaukee  multi-families.   He listed it with a broker, but was frustrated when he did not receive any reasonable offers or much interest.  This despite the sale would have generated a $70,000 commission.

Years ago the two of us owned a small carpet store, primarily to get wholesale carpet for our properties, but we did some marketing for the store that turned out pretty well.  So we decided to try our hand at some self marketing of his property.

Short version: Basically for a few hundred dollars he got listed on the largest commercial listing site in the nation,  printed material was mailed to potential buyers and a website with pictures and a video walk through was put up (www.630Hawley.com)

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