Warren Buffett makes several key USA housing points in the annual Berkshire Hathaway Shareholder meeting, which are quite interesting for all foreign investors who are considering buying house in usa:
Housing completions have been at record lows.
1 ) There are currently more households being formed than new housing units completed, and this is decreasing the excess supply.
2 ) The excess supply will be “sopped up” at different rates across the country.
3 ) Housing is a key reason for the sluggish economy (not the only reason).

Housing will come back – you can be sure of that. Over time, the number of housing units necessarily matches the number of households (after allowing for a normal level of vacancies). For a period of years prior to 2008, however, America added more housing units than households. Inevitably, we ended up with far too many units and the bubble popped with a violence that shook the entire economy. That created still another problem for housing: Early in a recession, household formations slow, and in 2009 the decrease was dramatic.

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Reis Apartment Vacancy Rate (click to enlarge)

In the fourth quarter, the vacancy rate fell to 5.2% from 6.6% a year earlier and 5.6% at the end of the third quarter, according to Reis.

During the depths of the downturn, landlords had to offer incentives such as flat-screen TVs and months with no rent to attract tenants. However, in the fourth quarter of 2011, landlords in 71 of the 82 of the markets that Reis follows were able to raise rents. Nationwide, landlords raised asking rents an average of 0.4% in the fourth quarter, to $1,064 a month. That’s up from $1,026 in 2009.

A few key points we’ve been talking about in throughout 2011:

• Vacancy Rates are falling
• Rents are rising
• A record low number of multi-family units (apartments) were completed in 2011
• Multi-family starts are increasing, and that is helping both GDP and employment growth this year. These new starts will not be completed until 2012 or 2013, so vacancy rates will probably continue to decline.

Read the original Wall Street Journal Article.

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An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the second quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide. The new report also shows that nearly three-quarters of homeowners in negative equity situations are also paying higher, above-market interest on their mortgages.

Negative Equity By State (click to enlarge)

From CoreLogic: Nevada had the highest negative equity percentage with 60 percent of all of its mortgaged properties underwater, followed by Arizona (49 percent), Florida (45 percent), Michigan (36 percent) and California (30 percent).

The negative equity share in the hardest hit states has improved. Over the past year, the average negative equity share for the top five states has declined from 41 percent to 38 percent.

Original article from Core Logic

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Real House Prices

Below are two graphs showing real prices and price-to-rent ratios for residential homes in the USA. Real prices are back to 1999/2000 levels, and the price-to-rent ratio is also back to 2000 levels  in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.  In real terms, the National index is back to Q4 1999 levels, the Composite 20 index is back to August 2000, and the CoreLogic index back to March 2000.

Price-to-rent

This graph shows the price to rent ratio (January 1998 = 1.0). On a price-to-rent basis, the Composite 20 index is back to October 2000 levels, and the CoreLogic index is back to March 2000.  Note: the measure of Owners’ Equivalent Rent (OER) was mostly flat for two years – so the price-to-rent ratio mostly followed changes in nominal house prices. In recent months, OER has been increasing – lowering the price-to-rent ratio.

Read original article here.

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Vacancies … fell in 72 of the 82 markets during the second-quarter vacancy rate to 6%, the lowest since 2008 and compared with 7.8% a year earlier, according to Reis. [...]

The average effective rent, the amount paid after discounting, was $997 in the second quarter of the year, up from $974 a year earlier  [...]

Landlords filled a net 33,000 units in the second quarter, a slowdown from the 45,000 units they filled in the first quarter.  [...]

Meanwhile, supply remains constrained. Roughly 8,700 new apartment units opened during the second quarter, the second-lowest quarterly tally for new completions since Reis began collecting data in 1999.

A few key points:

• Vacancy rates are falling fast (the excess supply is being absorbed). Note: The excess housing supply includes both apartments and single family homes.
• A record low number of multi-family units will be completed this year (2011). Only 8,700 apartments came on the market in Q1 (in the Reis survey area). This is the second lowest quarter since Reis has been tracking completions – the lowest was 6,000 last quarter.
• The falling vacancy rate is pushing push up effective rents. This also pulls down the price-to-rent ratio for house prices.

Wall Street Journal Article Link

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On the image below (click to enlarge) you can see the sample table:

The columns are quite clear:

• Date
• Number (my internal numbering of receipts and records)
• Company (name of the business)
• Text (type of the income or expense)
• Income amount
• Expense amount
• Foreign amount (if you purchased something in other currencies)
• Paper receipt (if I have a paper receipt, I mark it here and I write the number of the record on the receipt – ie. 66 and store all the receipts for each year together)
• PDF (if I don’t have a paper receipt, I usually have some pdf invoice or screenshot from my internet banking – as proof of the expense or income). These are then saved in a separate folder and I send them to my CPA as well with this file.
• Notes – my notes regarding the expenses, these can help me in the future to remember who I exactly had the lunch with, or where I went for the business trip. Also it helps the CPA to figure these out.

You can download the sample file here: tax_data_sample.xls

And that’s it. It’s pretty simple, as long as you don’t forget to keep track of things. The best way is to put all expenses from receipts and incomes from statements in the spreadsheet every 3 months or so. When you wait longer, it will make it really difficult to remember everything. I have done this mistake the first year and it took me much longer to put everything together – to find the receipts and invoices etc.

Hope this helps all of you guys, buying a house in USA and using LLC for this matter.

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According to Q1 2011 Zillow® Real Estate Market Reports, here are the declines in 25 largest metro areas.

http://www.buyingpropertyinusa.net/market-research/price-to-rent-ratio-and-gross-rental-yield-in-usa

About Zillow, Inc.

Zillow is a real estate information marketplace providing vital information about homes, real estate listings and mortgages through its website and mobile applications, enabling homeowners, buyers, sellers and renters to connect with real estate and mortgage professionals best suited to meet their needs. Zillow, Inc. operates Zillow.com®, Zillow Mortgage Marketplace and Zillow Mobile. With 20 million unique users of its website and mobile applications during April 2011, Zillow’s goal is to help people make intelligent decisions about homes in every stage of their lives — home buying, selling, renting, remodeling and financing. The company is headquartered in Seattle.

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As you can see, I already started with some rehabs in October 2009, but since it was from the middle of the month, I counted November as the first month. Therefore the official first year of operation is ending by the end of October 2010 the same as my Las Vegas property. You can see again, that I was charged initially for the property management fee by RPM Phoenix Metro. This property however was in worse shape than the one in Las Vegas. We needed to put new windows in, change a couple of doors, cabinets and paint the whole place. This rehab project was, in the end, quite expensive and you can see these expenses in the repairs column. The property was then rented in December. The tenants found out right away, that the fridge didn’t work. The property manager told me that they couldn’t check it, because electricity wasn’t working. They offered getting them a new fridge for $300. I fast checked craigslist, and found a guy who had refurbished and used fridges for $100, including delivery. So I arranged that, and the tenant paid for the fridge, and then sent me $100 less for January. Other than that, everything was going quite smoothly. Twice during the year, the tenants didn’t pay the full rent, but always just by a couple of dollars. This will be either paid later, or taken out of their deposit in the end. Another good reason for having this spreadsheet, is so I can easily tell how much is missing in the end.

The good thing about these tenants is that they signed a 2-year lease, so I won’t have any vacancy in 2010.

Below is the table with the full year totals:

You can see that the Net Operating Income (Net Operating Income definition) is in fact in red numbers. The reason is the initial rehabs obviously. In the second row, you can see the NOI when counted without the initial rehab. That is something I can count on probably for the second year of the lease. Still, the HOA fees and Taxes are pretty high, and rents lower – making the Operating Expense Ratio really high, even in the “best case scenario”.

Returns: Let’s calculate again the expected cash on cash return (the same way we did for the Las Vegas property). I have expected getting around $4000 NOI or cash flow before taxes and the purchase price was $32,000. That makes the cash on cash return of 12.5%.

In reality, the cash flow (or NOI) was negative, and that makes 0 cash on cash return (or negative in fact). We can use the numbers without rehab at least, where the NOI (same as cash flow in this case) $1574 brings us to 4.9%, what is something I can at least expect in the future.

Result: Again, I have borrowed part of the money, so it makes the returns a little bit better in reality, but still it’s much worse than what I was hoping for. In Phoenix, the main problem is the huge inventory of houses and vacancy rates. This brings the HOA fees and taxes really high and the average rent low. Similar as in Las Vegas, now I would probably rather look for a single family house or even multifamily, because it’s much easier to rent them out, there aren’t HOA fees and this will make the returns better.

Strategy: I bought the property very cheap (bank owned) and in the low of the market. It will obviously barely provide any positive cash flow, and therefore it doesn’t work that well with my initial strategy. The best I can hope for will be speculating on appreciation now, and just holding onto the property for a few years. 1031 also a possibility or options is to exchange for a single family house.

Overall, you can see that both of my properties have at least some positive cash flow after the first year, but definitely it’s much worse than what I was expecting 2 years ago. I have learned a lot though, and that is the most important part. I am not losing money on them, just not making as much as I expected. This is however hugely improving my strategy for the future investments. As you can see, I am now selecting the markets in a different way, I am choosing different types of properties and just carrying on – and enjoying every minute of it! ;o) This year I will focus mainly on my new investment property in Topeka, KS, because this one can be the game changer!

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Why? Because, now I will be able to do an exact comparison of the returns I was expecting more than a year ago (when I went to the US and purchased the 2 properties) and the actual REAL results, after one year of ownership – the real incomes, real expenses and maybe the not so glorious TRUTH.

Las Vegas

So let’s start with my first property, Condominium located on E Sahara Ave in Las Vegas. Below you can see the table for the first year of operation (click to zoom in):

The closing was in the end of October 2009, so I counted November as the first month of operation. There were some “repairs” in November, but basically it was just carpet cleaning, a few fixes and touch up paint for $400. Otherwise the unit was ready to be rented out.

I didn’t count the initial set up fee for the Nicklin property management, because in the end I had to fire them after more than a month of not doing anything (see my post: Nicklin Property Management). After that I changed to RPM Las Vegas, and the set up fees are included in December 2009. After that, everything went quite smoothly and just a couple of repairs ware done throughout the year, including weather stripping and replacing a hot water heater.

The total values for the first year of operation of my Las Vegas condo are in the table below:

The total net operating income was $2,134.64 (it means 68% Operating Expense ratio – see definition: Operating Expense ratio definition ).

I also did a calculation, were I excluded the initial rehabs (in this case only the $400 for initial carpet cleaning and touch-up paint). This is just something I could possibly expect for the next year of operation, if the tenants will stay (which they hopefully will).

Now let’s calculate the true return on investment and compare it with the one I was hoping for in the beginning. For simplicity, we will just compare basic cash-on-cash return, without considering external financing (cash only deal).

I originally expected annual cash flow before taxes around $6000 and the price of the property was $46,000. Cash on cash return is CFBT divided by Initial investment, which in this case was: 13%.

In the end the real cash flow was only $2135 and so the cash on cash return was only 4,6%. That is much less, and makes the investment quite less attractive, right?!

Well, what makes it at least a little bit better, I was able to use a private financing (borrowed money from somebody), which makes the return a little bit better, and also in cash on cash return, we don’t calculate with appreciation, which in the long term holding strategy will change the result in the end quite a bit. For now, I will just have to hold on and hope for the appreciation. Unfortunately, from the statistics in Las Vegas, the prices didn’t rise at all between 2009 and 2010. In fact, they went even little lower.

Result: Obviously the property isn’t such a cash flow cow as I was hoping, before going to the USA a year ago. The main problem is that I didn’t count with so high HOA fees, which create a huge expense for the property. They have in fact even risen during the time and are now $160 per month. That is why I am now looking more for single and multi family houses, rather than condominiums. I am paying the property management anyway, and they actually take care of the same things as the HOA does.

Strategy for the future: I will be holding this property for a few years, hoping to make money on appreciation in the end. Obviously cash flow won’t make me rich in this case. ;o) Possibly do a 1031 exchange for a single/multi family house in the future.

The next post will be about my second property – in Phoenix, Arizona. Get ready for an even worse reality check!

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1.  The first thing I always want to know is how many properties (units is a better measure) are they managing.  This is followed up with how many employees are managing these units.  Here is what I have found based on our experience building our property management capability internally and then handing the entire portfolio over to property managers: a trained employee with the right tools and proven processes can manage between 30 and 40 units – assuming the accounting function is not included.  So, if you are qualifying a property manager and they have no employees and are currently managing 37 units and you want to hand them 7 more, how good do you think their service to your portfolio will be?

2.  Do they own any rental properties themselves?  For me this can be a deal breaker!  Here is what I have experienced: while it may seem like a benefit for a manager to own properties because they can better relate to what an investor experiences, I see it differently.  The way I see it is my properties and my tenants are in constant competition with the managers and their properties.  If the manager has a vacancy at the same time you do, how can you know that your property will be filled first?  You don’t!

3.  A critical component in managing both properties and tenants is getting into those properties on a routine basis.  As part of your discussions with prospective managers, you want to get a commitment from them how often they will conduct formal inspections of your properties.  In some cases, managers will be very accommodating. In most, however, they will balk at this requirement or use it as a way to increase the fee they will be charging.  I am not too impressed with property managers who believe that conducting routine property inspections is an extra – not part of their normal package of services.  I would be very leery of this type of property manager.

Continue reading here:

http://www.biggerpockets.com/renewsblog/2011/02/25/hiring-best-property-managers/

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