The years since the 2007 housing market crash have been full of valuable lessons not only for real estate investors, but for the average person looking to invest in real estate. While the market is starting to make its way back, it might be some time before it reaches the heights it saw in the years prior to the 2007 bubble. In the meantime, David Kinas, the manager of 881 Home, LLC and a collection of other businesses, looks back on those years and the lessons that he and his company learned, offering tips for investors of all calibers.
These lessons have helped the company to regain and build market share in the years since the bubble burst. “Although we are nowhere near that momentum of 2006. It’s possible today to make smarter investing decisions – Forecasting the future is another story!” Kinas notes.
Cash Flow is King
“Cash flow was and still is king,” Kinas states. During the boom years it was all about the flip. Everyone was counting on a min. 10-15% annual price increase! After quickly realizing that would not continue, the 881 Home Team met regularly to brainstorm solutions to produce income on empty homes. Often, the most reliable way to do so is to rent it out, as that allows an investor to receive a monthly income from the property until the markets adjusts and the investor is able to sell it off. Some homes got converted to care facilities, others to vacation rentals, while others (too expensive to revive) got bull-dozed for new construction later.
The City Metro Rules
Location is critical when it comes to developing and maintaining cash flow. The classic aphorism, “location, location, location” was proved doubly true in the years after the housing crash. Homes in a less-than-desirable location tend to languish and sit empty, which does nothing for the investor who bought them. After living in Tucson for 30 years, knowing which areas are safe and have good demographics is key.
For 881 Home, professionals at the company have seen demand for infill houses, quality remodeled homes on the upswing. “Families started to complain that the long drives to work combined with the costs to do so were making the homes in the outskirts just too costly,”They also didn’t like the stringent HOA rules, combined with much smaller lots, notes Kinas. Foreclosures displaced many former homeowners, hence boosting demand for rental homes near central Tucson.
Kinas’s company was forced to adjust as demand for city housing increased. He describes that properties his company owned that were “more than 30-40 minutes from Tucson” as “marked. Vacant land initially was identified; hence property tax payments got halted. Housing that was occupied, or within a small budget to recon and had a decent chance to either rent or sell was kept. Houses which were bought sight-unseen at the courthouse steps that had ridiculous recon budgets got sold as Fix-ups. Others less fortunate were returned to their lender,” he says. Be ready to roll with the punches when it comes to fluctuations in real estate demand in your target area. Look for pockets of developments that have established schools, shopping, entertainment and sustainability for starters.
Minimize Recon Costs
Another key to survival in a crash was to keep the lion’s share of the remodeling in-house. Finding local talent at affordable wage rates was critical. In attempts to keep the best talent, we have many Company- sponsored programs to retain good help. In excess of 90% of our field crew has affordable housing through the firm. Most have vehicles as well. For those able to work evenings and weekends we regularly offered bid work to help them payoff company debt. When attacking jumbo projects the first support calls went to staff family members, then friends and friends of friends.
Whether it was painting, tile, plumbing, or yard work we are very big on cross training of all field personnel. In times where we had questions, we sometimes went to U-Tube U, more recently known as U-Tube University where regular professional and amateurs load video of their favorite steps of home remodeling. Since our foremen are daily users at Home Depot, we also got free advice from the “old timers” on duty at the time.
Horse Trading Revisits
Our shop is known locally for thinking outside the box in many areas. One of these spots was in how to absorb a new customer that has no or very little cash? For the tradesmen group we made deals to accept trade-out services on empty properties. This included plumbers, electricians, framers, and the like. Typically when their account reached a credit balance in excess of $3,500. they qualified for a home with us. Most chose our Rent to Own Program to build equity vs. just renting a place.
Many folks came with equity in their cars and trucks and offered these as deposits. I recall back in the abyss years of ‘09-2011 the vast majority of our deals involved some form of trading to make a deal! I’m still sitting on a ’64 Chevy Impala that was taken as partial down payment, but luckily I like occasionally driving that car.
Buildings are Better Than Raw Land
Although much of the Midwest and western parts of the country were settled by people who were drawn by the promise of ample land, these days, undeveloped land tends to be unwanted by many investors.
Looking back on the time of the housing crisis, Kinas notes that 881 Home had to quickly identify the “keepers list” and begin plans for letting the other investments go. “Without any guidance on this, we decided that land would be too costly to keep until the next upswing in the market,” he says. He describes his company’s move as “a lucky and wise decision,” as “raw land quickly turned virtually worthless.”
Lots that had power, water, and sewer only needed a development plan and permit to add a mobile home or R.V. in order to create new income.
“To this day, many local landowners are still stuck with properties that just are not selling,” he adds, “mostly because what it costs to build a new home is almost twice what you can pick up a bank repo property for. There’s just too much risk today when it comes to investing in new building projects on undeveloped land.
Leverage Dried Up
You would think that after seven long years of correction, the Lending environment towards investors would have recovered: Not so. The rules and underwriting guidelines are so restrictive that very few investors are able to use leverage. On top of that a week doesn’t go by when we get another statement from a lender stating that the property taxes are delinquent (they are supposed to be paying from our PITI payments). I’ve witnessed firsthand how the large loan servicers would regularly sell and transfer their rights to the next firm. The rules used to create this paper in the first place never imagined a correction of this historic measure.
BOND WITH A Turtle Pet
The people that end up defaulting love to poke fun of the investors that have stuck their necks out to make a reasonable profit, pay taxes, and never miss a staff payroll! This also applies to your local media who formerly adorned you as an Expert. The people that cannot pay (or chose not to pay), for whatever reason will turn to haters and will bond with whatever anonymous social media allows them to. Until the U.S. follows Europe’s lead, the Google’s of the world are still allowing unfair native ranking in searches for property owners and managers. Hence, if you are dabbling in this market, be aware of the possibility of some goofy press coverage!
At the height of the housing bubble, “house flipping,” or, buying a house, renovating or rehabbing it and then selling it for more than the investor paid, was incredibly popular. House flipping entered the lexicon of the average person, and there were even television shows featuring flippers who had earned a fortune with the practice. Oddly enough, house flipping is back in sink as a result of Q.E. but will probably be short lived.
Nowadays, the focus of investors likes David Kinas is stability. Kinas points out that he’s learned what size of home offers the best chance of a stable rent income: “I’ve shied away from under 2-bedroom homes since these are typically transitory, resulting in higher turnovers,” which means more work and less money for the investor. In the Tucson area, he’s found the greatest success with three- or four-bedroom homes, which tend to “command rental income between $918-$1,310 monthly.” Keep your occupancy rates very high to maximize returns, while minimizing vandalism on an empty unit. To help accomplish that, we’ve regularly taken partial payments to aid customers having financial troubles. This in turn helps us from lower costs associated with another recon, if it had gone empty.