We all remember the international crashing market a few years ago but how many are talking about the markets that have rebounded well past the previous highs in both rental rates and sales prices. Of the top 5 fastest growing markets, 2 are in Northern California; San Jose and San Francisco. Contributing to this is the fact that California ranks 1st with the most fortune 500 companies in the U.S. Companies like Chevron, Apple, HP, Wells Fargo, Google, Intel, Cisco, Oracle, Ebay, GAP, VISA, Facebook, Yahoo and Intuit are just a few firms headquartered in the San Francisco Bay Area. The executive staff of these companies lives in affluent towns outside of San Jose and San Francisco like Atherton, Menlo Park, Palo Alto, Hillsborough Los Altos, Mountain View & Burlingame along with a number of other small communities on the peninsula. So who is buying and selling these properties? The educated investor is! Every time the market goes through these ups and downs the educated investor follows 1 of 2 basic formulas. They either ensure they get in and out of the market maximizing both profits in rental return and equity gain or buy at a leveraged level to withstand the down markets. At Property Force we manage our San Francisco rental properties like a money manager manages a financial portfolio ensuring you’re one of those successful stories. Like a money manager watches certain market indicators we also focus on market indicators. Some of these indicators include rental rates, location, neighborhood trends, city’s master plan, lending programs (LTV limits) and interest rates, property types, foreclosure and late payment ratios, new real estate backed investment funds, mortgage backed security sales and REIT (real estate investment trusts). These indicators and others represent how the big money is trending allowing us to advise our clients individually as it relates to their own short and long term strategies. Ask yourself this question. If the big money is using these indicators to make buying and managing decisions why aren’t you!!! The simple answer is it’s just too hard for the smaller investor to stay on top of all the information on a monthly basis. In this series of blogs we will attempt to give you some real estate investment guidance along with an interactive Excel spreadsheet helping you (the investor) apply all the carrying costs associated with the management of investment property. Let’s now talk about these indicators in more detail.
Rental Rates are increasing at an astounding rate once again with no end in sight. The trick is watching the rate at which rental rates raise. When the market begins to see rental rate increases slow or stabilize its time to sell or look for a long term tenant who is working in a stable sector (not a startup). A six month lease may be a better idea in a market beginning to see signs of rebounding. Having the right renter at the right time is a great way to manage part of the investment risk factor as it relates to the return on investment.
Location and neighborhood trends – As important as finding the right tenant it is also important to ensure your investment dollars are located in the right location with the best neighborhood trends. To put it simply, the better neighborhoods with the best amenities hold rental rates higher longer and are the first to rebound. The better neighborhoods take less time to rent keeping days off the market at a minimum.
Lending programs and interest rates – LTV (loan to value), DTI (debt to income ratio), interest rates, programs. When lenders increase LTV’s from 75% to 80% it’s due to the secondary market demanding more of that product as their customers, insurance funds, retirement pensions etc. are looking to move larger portions of their portfolio into real estate backed securities providing those increased rates of return to their shareholders. Requiring less money down or increasing the DTI from 44 to 47 are both ways to put more buyers in the market increasing the amount each buyer can borrow in turn supplying the secondary market. Remember the 80/20 100% purchase loans and the 125% refinance loans? They are both indicators to watch as that type of lending is not sustainable. For example, you may want to sell the property or put more money down decreasing your monthly carrying costs in anticipation of a tightening market.
Property Type – The best example of this is the San Francisco market with rent control. Single family residences are not subject to rent control rules so if the market rental rates increase 10-30% you can also raise your rent accordingly. Property type could also mean a 4 unit instead of a single unit allowing you to spread your risk and expenses over multiple properties. How about maintenance? What type of roof? How old is the home? If a home is built prior to 1978, there may be additional expenses when remodeling due to asbestos and lead based paint. Older homes are also harder to sell unless they are completely updated. When in a tight market savvy investors want to focus their investment dollars on simple, easy to rent, middle of the road properties. When the market is rebounding some of those “on the edge” or slightly risky products can provide huge rates of return. These types of properties are not something we would advise to a client living off their monthly owner draw.
Understanding a Cities Master Plan – is a good way to gain an understanding of what the city council plans on doing from an economic level over the short and long term. Each city, township, county etc… has its own set of fees and tax rates for both business and residences. In most cases it is clear what the city is focused on by understanding how it taxes its residents and businesses. If it is not a residential focused community you can expect less approved building permits for a Trader Joe's and more approvals for an office complex.