3VALUE FACTORS THAT AFFECT YOUR BOTTOM LINE
TO SAVE ON FIX-AND-FLIP MATERIALS
RENOVATION ROCKSTARS: DOUBLE FEATURE "SURPRISE" MASTER BEDROOM & BUILDING UP FROM ASHES
ASSET PROTECTION KRYPTONITE REAL ESTATE STRATEGIES CAN PROTECT MORE THAN YOUR PORTFOLIO
SPECIAL SECTION: VALUE &APPRECIATION ADDING VALUE IN UNEXPECTED WAYS
Perfecting the Art of Anticipation
NAR CHIEF ECONOMIST LAWRENCE YUN TALKS HOMEOWNERSHIP, HOUSING POLICY, AND THE 2018 MARKETS
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TABLE OF CONTENTS
INSIDE THIS ISSUE
THINK REALTY 8 News & Events
SPECIAL FOCUS: ADDINGVALUE 40 How to Identify the Right Renovations for Your Investing Goals Different investing strategies require different property upgrades. by Susan Dupont 42 What the “Internet of Things” Means for Your Real Estate Returns Be smart when you install smart features in your properties. by Carole Ellis with expert insight from Tyler Van Winkle 46 10 Mistakes Property Owners Make When Writing their Property Listing Providing the information in your listing can dramatically improve your profits. by Kimberly Smith INDUSTRYVOICES 92 “Best States” Rankings Released for 2018 How states care for their residents may affect your investment strategy. by Roz Booker and Desiree Patno 94 Assessing the Value of a Real Estate Mentor ROI on mentoring is easier to predict and achieve than you might think. by Carole VanSickle Ellis
Dallas event focused on time, now emphasis shifts to wealth in Baltimore. 10 Member Benefits: Barnett 3 money-saving strategies hands-on investors miss.
NOMINATIONS NOW OPEN! Learn more on pg. 84
RENOVATION ROCK STARS 12 Bread-and-Butter House with a Surprise A standard Florida home takes a hit from a
hurricane & returns big profits. featured investors John and Corinne Tesh
16 Fire Recovery Rehab A Maryland investor skips the movies to find a hidden gem. featured investor Vernon Vaughan
HOUSING NEWS REPORT 30 Finding the Next Reno My Take article from ATTOM Data Solutions. by Sam Freshman 33 [ Infographic ] The Distressed Discounts Dozen
LAWRENCE YUN ’s unique position with the National Association of Realtors affords him exclusive access to data and housing policy information.
12 housing markets where distressed discounts are still deep and plentiful. by ATTOM Data Solutions
by Carole VanSickle Ellis :: photos by Doug Sanford
MINDSET 108 Travel Hacks from the Racetrack
34 How Blockchain Could Transform Property Record Transparency Splitting the Attom article from ATTOM Data Solutions. by Felix Tom 36 Pensacola: A Primer on Job Migration to Affordable Housing Markets Spotlight article from ATTOM Data Solutions. by Peter Miller
Think Realty’s NASCAR driver reveals how she keeps things together on the go. by Jennifer Jo Cobb
THE BIG PICTURE
SPECIAL SECTION 67 Information Management Network (IMN) Highlights on IMN's 6th Annual Single Family Rental Investment Forum (East)
PANEL IN PRINT: ADDING VALUE Think Realty Coaches discuss adding value to real estate.
MEMPHIS INVESTMENT PROPERTIES Turnkey real estate & new construction best fit for Memphis.
3 VALUE PLAYS TO CREATE COMMUNITY
CO-LIVING NO LONGER A WALL STREET CONCEPT What investors can take to the bank when it comes to “adult dorms.”
38 One-on-One with Daren Blomquist The art (and data) of effective flipping. by Carole VanSickle Ellis
Intangible assets can bring tangible returns.
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PUBLISHER R. Michael Wrenn
FROM THE EDI TOR- IN-CHI EF
PRESIDENT, AFFINITY WORLDWIDE Eddie Wilson | EWilson@AffinityWorldwide.com
The Real Value in Real Estate is You
EDITOR-IN-CHIEF Carole VanSickle Ellis CEllis@ThinkRealty.com
VICE PRESIDENT OF MEDIA SALES Rodney Halford RHalford@ThinkRealty.com 816-398-4111 x86122 NATIONAL SALES MANAGER Teresa Stanton TStanton@ThinkRealty.com 816-398-4111 x86224
s the editor of Think Realty Mag- azine , it is my great honor and
stabilize and bolster our communities.
Dissecting that process of adding value for Think Realty Magazine’s readership is my daily pursuit, my constant privilege, and my true delight.
pleasure to communicate with dozens of real estate investors and other indus- try professionals each week to identify the best strategies, the most innovative investment concepts, and the most insight- ful tactics for generating good results and great returns in real estate. My entire job revolves around discovery, research, and analysis of what is going on in our space and how real estate investors are adding value to their individual investments, their broader industry sectors, and their communities. It feels not just appropriate, but absolutely man- datory, then, that my letter to you to open this issue, which focuses on strategies for adding value across the real estate investing spectrum, start out with a personal message to each and every real estate investing reader, from the brand-new investor to the seasoned industry professional: The real estate investing space is so full of poten- tial and sheer, ongoing, daily brilliance. Not just in the traditional sense (as a way to make money), but in terms of who is doing the investing (that’s you!) You come from all professions and points across the educational spectrum, from academics with de- cades of experience in their respective fields to young parents right out of high school saving for their children’s future college educations. You are the epitome of adding value. Investors evolve with the market, support the economy, and
CONTENT DIRECTOR CariAnn Steward CSteward@ThinkRealty.com
In this issue, we’ve brought you the best in
practical strategies for adding value:
ASSISTANT EDITOR Heather Elwing
• We’ve bulked up our “Renovation Rockstar” features with more properties, more hard num- bers, and more lessons learned from investors in multiple markets around the country. • Our special “Value & Appreciation” section features strategies for implementing artificial intelligence (AI) and other high-tech solutions in your business regardless of its current scale, forcing appreciation through practical renovations, and a detailed, cause- and-effect, first-person analysis of how building up a community can improve your ROI in tangible ways. • Our cover feature this month, Lawrence Yun, has held his current position as chief economist with the National Association of Realtors (NAR) for nearly a decade and offers our readers unique insights into the 2018 housing market and asso- ciated, impactful trends. Real estate investors are among the most creative, the most innovative, and the most passionate, determined people on the planet. At Think Realty, it is our privilege to provide monthly fuel for your real estate fire. •
DESIGN CONSULTANTS Rivet | www.WeAreRivet.com
GRAPHIC DESIGNER Emily Bowers
CONTRIBUTING WRITERS Roz Booker, Jennifer Jo Cobb, Susan Dupont, Bryan Ellis, Pamela J. Goodwin, Blake Johnson, Linda Liberatore, Julie Ziglar Norman, Aaron Norris, Desiree Patno, Tammy Phelps, Rich Sarkis, Kimberly Smith, Teresa Stanton, John & Corinne Tesh, Vernon Vaughan, Tyler Van Winkle and Ingo Winzer.
JOIN THE CONVERSATION!
COVER PHOTOGRAPHY Doug Sanford
FOR ARTICLE REPRINTS :: Contact Jeremy Ellis at Reprint Pros, 949-702-5390. www.reprintpros.com. SUBSCRIPTIONS :: The annual subscription for Think Realty Magazine is $28.95 in the U.S. Order online at www.ThinkRealty.com or call 816-398-4085. Provide your full name, address and telephone number. DISCLAIMER :: Think Realty Magazine , its owners, contractors, distributors and their respective representatives do not provide tax, accounting, investment or legal advice and make no guarantee as to the effectiveness or success of any investment or tax strategies discussed herein. Please consult your own independent adviser as to any questions you have or decision you are contemplating. ABOUT THIS MAGAZINE :: ThinkRealtyMagazine isapublicationof AffinityRealEstateMediaLLC.Reproductionoruseofanyeditorial orgraphic,withoutpermission, isprohibited.Wearenotresponsible for thecontentofanypaidadvertisements.Forreprintrights; toob- tainadetailedstatementofourprivacypolicy;and forallsingle-copy requests,addresschangesandothersubscription inquiries:
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You asked for them, now they’re here! Think Realty Members can now network, exchange ideas, and learn from each other now on the forums at ThinkRealty.com. Whether you’re looking for information on RE investment strategies, have a hot tip to share, or just want to keep your finger on the pulse of our industry, Think Realty Forums is the place to go.
Start chatting today at ThinkRealty.com
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THINK REALTY EVENTS
ily investing to using artificial intelligence and seller psychology to improve line-item results. TheThink Realty coaching teamwas also in attendance. The group, comprised of experts in every sector of real estate, spent Sat- urday meeting attendees and offering personal, on-the-spot insights, and Sunday teaching and mentoringThink Realty members. “It was great to be a part of walkingThink Realty members and event attendees through the five phases of creating a thriving real es- tate business,” said Gary Harper, CEO of Sharper Business Solutions and aThink Realty coach. “I always enjoy laying the process out in detail in these Sunday sessions and really getting a chance to spend good time with the students,” added Abhi Golhar, who is aThink Realty coach, a managing partner at Atlanta-based investment firm Summit & Crowne, andThink Realty Radio’s full-time host. “Time is a daily gift, and that new start each day feels like a chance to have a ‘do-over’ if I wasn’t pleased with how I invested my time the previous day,” observed Julie Ziglar Norman, grand- daughter of famed motivational speaker Zig Ziglar and a DFW-area
investor who has attended the conference for the past two years. “The primary reason I love being a real estate investor is the choices I get to make about how I use my time.” Think Realty’s next event features two days of deal-making, wealth-building, networking, learning, and market exposure in Baltimore, Maryland, on April 14 & 15, 2018. The theme of this conference & expo is Think Wealth, and attendees will once again have the opportunity to focus on an integral part of their real estate investing business: the financial side. “The entire event is dedicated to the actionable process of building financial freedom through real estate,” observed coordinator Colleen Bay. “We’re putting the resources in place for you to come to one location and access the experiences of seasoned investors, the tools and discounts needed to maximize your ROI, and the insight on the local and national mar- ket you require to make good strategic decisions moving forward.” Learn more about all of Think Realty’s events at https://thinkrealty.com/tr-events . •
Dallas Event Focused on Time, Now Emphasis Shifts to Wealth in Baltimore
FIND OUTWHAT YOU'RE MISSING! Don't miss future events in your area. Learn more at www.thinkrealty.com/tr-events/
n Dallas, Texas, hundreds of real estate investors gathered at the Westin Galleria Dallas on the weekend of February 24 & 25, 2018, to learn from industry experts and be inspired by legends like former University of Texas Longhorns coach, Mack Brown (pictured above). The focus of the event was on Time and, by extension, business efficiency in real estate investing. “Real estate investing can be a double-edged sword when it comes to time,” explainedThink Realty president Eddie Wilson. “Often, entrepreneurial and independent investors start out in real estate to gain access to their own time, then find themselves tied up in hundreds of bits of minutia that consume their days. Keeping your eyes on the prize (your ROI) is essential.” Throughout the weekend, educators and exhibitors kept their focus firmly on helping attendees make the most of time in their real estate businesses and at the event. Panelists on the always-pop- ular local market panel helped attendees “fast forward” their market research in the Dallas-Fort Worth (DFW) area and pointed out routine mistakes that investors are currently making in that market along with the best strategies for fixing-and-flipping and acquiring the right properties to rent. Featured Speakers Carrie Cook (Ignite Funding), Gene Guarino (Residential Assisted Living Academy), and Robert Nickell (REIVA) all took a deep dive into their preferred strategies for generating returns and making the most of their time in real estate, and nine breakout sessions educated attendees on everything frommultifam-
April 14-15, 2018 | The Marriott Inner Harbor at Camden Yards THINK WEALTH - Financial Freedom BALTIMORE
July 14-15, 2018 | The Marriott Irvine Spectrum THINK RESOURCES - Tech & Innovation IRVINE
September 22-23, 2018 | The Westin Buckhead Atlanta THINK PURPOSE - Investing with Impact ATLANTA
Think Realty coach and CEO of Secure Pay One Linda Liberatore breaks down property management tactics in detail.
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THINK REALTY BENEFITS
You invest. We protect. THERE IS AGUARD FOR YOU
3 Money-Saving Strategies Hands-On Investors Miss
From landlords to lenders, flippers to
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THINK REALTY BENEFITS SUPPLIER BARNETT OFFERS INNOVATIVE INVENTORY SOLUTIONS.
funders, National Real Estate Insurance Group has real estate investors
hen you think about all the in’s and out’s of managing a fix-and-flip project or other renovation, you probably immediately leap to the processes of keeping the timeline on track, managing the inevitable budget adjustments as new issues come to light during the process, and building enough “cushion” into the deal that you know it will still yield a good return when the process is done. You are definitely thinking about management, but are you thinking about managing the inventory you use during the renovation process? Probably not. And that oversight is probably costing you. Although many real estate investors rely heavily on their contractors to handle the inventory and supply sides of the business, many also opt to stay hands-on and do a lot of repairs on their investment properties themselves or directly provide the materials needed. If you fall into this category, you are cost- ing yourself time and money if you are not carefully managing any supplies you keep on hand. If you don’t keep anything on hand, consider starting! An organized inventory of commonly needed items can save you countless hours of looking for just the right part you need for the job. Here are three tips from Think Realty benefits supplier Barnett, which offers, among other services customized to meet the needs of hands-on real estate investors, a vast array of inventory management options and organizational programs. MONEY-SAVING TIP #1 LET YOUR VENDOR HANDLE IT If you are a hands-on investor, you probably do not have a lot of help. Consider letting your local supplies vendor handle W
your inventory for you if they offer this option. These ser- vices usually range from online inventory itemization to help you identify what is available on-site at the vendor’s physical location to a full-time employee dedicated to managing your stock. The scale of your business will determine what type of program fits your needs. MONEY-SAVING TIP #2 KEEP THINGS SIMPLE It sounds too simple to be true, but believe it: Labeling your inventory can directly (and quickly) result in big savings of time and money. Most investors do not take the time to organize their various items or label them effectively, which means most hands-on investors often end up buying dupli- cates of things they already have, from tools to deadbolts, simply because they cannot find them or do not feel they have
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> Continued on :: PG 112
Stockwise Inventory Management Solutions from Barnett, a Home Depot Com- pany, offers a variety of programs designed to keep your real estate investing business moving forward, including organizational tools, full-service inventory management programs, and customized consultations with inventory man- agement specialists. Learn more about Barnett and how you can access these money-saving strategies and an exceptional selection of contractor products at https://thinkrealty.com/supplier-discounts/.
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thinkrealty . com | 11 National Real Estate Insurance Group is the nation’s leading agency offering coverage options for real estate investors across the country. Our lineup of products includes: REIGuard™, LandlordGuard, PMGuard, TurnkeyGuard, LenderGuard, and CommercialGuard.
10 | think realty magazine :: april 2018
Renovation Rock Stars: Bread-and- Butter Housewith a Surprise
hen Florida real estate investors John and Corinne Tesh first heard from the owners of this “bread-and-but- ter” Florida block house, they expected the property might be a challenge. Hurricane Irma had just swept through Florida, leaving devastation – and a lot of motivated sellers – in her wake. As it turned out, however, the surprises on W BREAD-AND-BUTTER HOUSE: A property that appeals to the vast majority of homeowners and renters. For example, in most markets, a bread-and-butter house has 3 bedrooms and two bathrooms, although the exact definition will vary from investor to investor and market to market. BLOCK HOUSE: A house constructed using mainly concrete blocks. Many Florida houses are block homes because they can be built to withstand 120 mph winds.
A STANDARD FLORIDA HOME TAKES A HIT FROM A HURRICANE, RETURNS BIG PROFITS.
(Below) The home has a large backyard that had been allowed to go “to seed” even before Hurricane Irma felled two trees and demolished an old, red shed. The sunporch (above and left) had also sustained damage from the hurricane and general neglect. The investors
repaired the roof and installed bright new flooring, paint, and light fixtures. They left the fireplace feature in place, since this amenity is popular in the area and adds to the attraction of the property.
Fortunately, the exterior of the house did not require a great deal of remodeling, although John and Corinne did apply fresh paint and clean up the landscaping. Note the bright color of the door on the remodel and the freshly shined light fixtures, both of which add to the home’s curb appeal. Corinne is a professional photographer, which is evident throughout the “after” photos. One easy tip for getting good images of your projects is to be sure to take your pictures in good light during good weather. Notice howmuch brighter the entire living environment looks in the “after” pictures compared to those taken before.
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LIVING ROOM AFTER
“The original owners installed a huge bookcase in the living room that had a doorway leading through it to the den. Corinne took out the unit, closed off the opening, and cut another doorway through the wall further down,” John said. “She then put up another wall to make a hallway with doors to the laundry room and added a newmaster bedroom. The addition of that bedroommeant we were able to sell for a much higher price than I originally predicted.”
The home’s existing bedrooms were painted in dark colors and had outdated flooring. Fresh carpet and paint (and clutter removal) appear to enlarge the rooms. “It just goes to show you can’t be too worried about how messy the house looks when you’re in it. Just focus on the vision of what it will be when you are finished,” John said.
LIVING ROOM BEFORE
OFFICE AREA BEFORE
KITCHEN AFTER Despite the dramatic changes to the home’s appearance and the addition of an entirely new master bedroom, John described this project as “a simple paint and flooring flip.” On the opposite page, you can see the dramatic changes achieved in the bathroom with new vinyl, fixtures, and paint. Above, the kitchen demonstrates just how much the same can do. “The kitchen was in great shape, so we basically just cleaned everything up,” John said.
and we had to replace part of the roof on the sun porch,” Tesh recalled. However, the big “surprise” was the payoff for adding the new master bedroom. “We sold at a much higher price than my original estimate thanks to adding that extra bedroom,” Tesh said. “We listed at $134,900 and sold in two days with multiple offers above asking.” Note: The bedroom payoff was not a surprise in the traditional sense because the Teshes ran the numbers on the addition before deciding to go forward with it. The surprise was simply that the option was so simple, relatively affordable, and quick to imple- ment in under two months. •
this project were a lot more positive than the two investors originally predicted. “The house had been passed down to the sons of the original owners, who had done very little maintenance on the home although they were living there. They were highly motivated sellers, and their mother
actually gave us a call when they received one of our yellow letters,” John recalled. When he went out to do his initial evaluation, he spent about an hour with the mother and signed a contract with her on the spot. “My comps in that neighborhood showed an ARV of $124,000, and we
bought it for $68,230,” he said. The renovation took about seven weeks and included the removal of a large custom bookcase, installation of new walls and doorways, and a new master bedroom. “Because of Hurricane Irma, there were two trees blown over in the backyard
John and Corinne Tesh are residential real estate investors based in Orlando, Florida, where they own CityGate Homes LLC. Reach John at firstname.lastname@example.org.
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Vaughan left the external structural components of the house largely intact. “A fresh coat of paint and a little fire- and smoke remediation will work wonders!” he said. The team did decide to install a playset in the backyard. Standard sets like this one can cost as little as $150 and make a backyard instantly attractive to young families.
Although the interior of the home was nearly gutted, the outside “could have been much worse,” said Vaughan. Given that most of his rehabs require extensive floorplan updates, the lack of walls inside did not seem like quite such a big deal. “It was still structurally sound,” he said.
Renovation Rockstar: Fire RecoveryRehab
A MARYLAND INVESTOR SKIPS THE MOVIES TO FIND A HIDDEN GEM.
hen Vernon Vaughan of FairAnd- FastHomebuyers.com first spotted the promising address on Hubzu.com, he believed he was investigating the purchase of a vacant lot. “I swung by the property on the way to the movies with my twin boys and was very surprised to find a house!” he recalled. “I made a deal with the boys that if we skipped the movie and went back home to get my screw gun so we could take the boards off the door, and if they went with me to check on the property during the rehab if we bought it, I’d make them equity W
partners,” he added. The crew did end up purchasing the property. “It had fire damage, but I’ve seen houses in much worse condition,” Vaughan said. His company specializes in rehab projects that he describes as “scary” to most investors because of the amount of work required to repair and renovate them. “We typically complete- ly redo both the interior and exterior of the home,” he explained. “Update the floor plans, modernize plumbing and electric, add bathrooms and finish basements, the whole nine yards.”
The dark, smoky, empty rooms in the home might have intimidated some investors. Vaughan, however, saw the bright, modern potential in the home.
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In this competitive
BEST UPDATES FOR THE MARYLAND MARKET REHAB
warned, “White walls just don’t get it done.” In this rehab, the team used shades of cool gray to keep things light and bright without being too stark.
V aughan noted that his Maryland rehabs are often heavily damaged or older properties, which means extensive renovations before a property goes to market. “With that older housing inventory, your renovation costs
are higher because you will have to replace, update, and upgrade infra- structure,” he said. Here are a few of the things Vaughan says will likely help your rehab proj- ect stand out from the rest, as well as a few things you cannot overlook for safety and code purposes: • Updated electrical systems • Updated plumbing and pipes • Modern (open) floor plan • Additional bathrooms • Finished basements • Recessed and LED lighting • Smart-Home tech like Bluetooth ceiling speakers • Outlets with USB ports • Granite or quartz countertops • Stainless steel appliances
Before Vaughan could install these gleaming appliances (above), the
modern island, and brushed nickel faucets and fixtures, he had to remove multiple dumpsters of trash and debris (right). You’d never know that this bright, modern kitchen was once a burned-out shell.
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(Above) Vaughan opened up the floorplan with little trouble since most of the interior walls had to be replaced anyway. (Left) Two new bathrooms with modern fixtures and design were a "must" for this renovation.
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Anticipation PERFECTING THE ART of
NAR Chief Economist Lawrence Yun Talks Homeownership, Housing Policy, and Market Turning Points in 2018
I FIRMLYBELIEVE THATREALESTATE OWNERSHIPBRINGS STABILITYBOTHTO THEHOMEOWNER, ONAPERSONAL LEVEL, ANDTOTHE LARGERECONOMY ANDTHE COUNTRY.”
BY CAROLE VANSICKLE ELLIS PHOTOS BY DOUG SANFORD
LAWRENCEYUN CHIEF ECONOMIST, NATIONAL ASSOCIATION OF REALTORS (NAR)
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economy that play a huge role in how the market acts at any given time.” He added, “We also monitor policy changes very carefully,” noting that real estate investors, far more than individual homeowners in many cases, have a deeply vested interest in pro-real-estate public policies that will protect investors’ interests and keep homeowners feeling positive about ownership. “Anything that affects the business affects the bottom line, and policy changes definitely impact the bottom line,” Yun said, citing tax reform policy as a recent example. “One thing that [the NAR] vigorously lobbied for was the preservation of the 1031 exchange,” he explained. 1031 exchanges (see sidebar on p. 24) permit investors to defer capital gains taxes on the sale of
the multifamily developments, new construction, and elite sectors.” Yun added real estate investors are integral to market stability just as he believes homeownership to be: “If you look at the deep downturn in the Great Recession during 2009 and 2010, when foreclosure rates were rising, there were a smaller than normal share of what we might refer to as ‘regular’ or ‘traditional’ buyers. It was the real estate investors who stabilized the markets as they came in and bought up excess inventory that was floating out there in the market.” SPOTTING (AND SPOTLIGHTING) MARKET TURNING POINTS Yun defines his role as NAR’s chief economist (he is also officially the association’s senior vice president of research) in terms of his role in tracking economic and housing market trends and then identifying how they will affect national and local real estate markets. These “turning points,” as he calls them, can take many forms. Identifying them and making accurate, informed predictions about how they might affect real estate markets, homeowners, homebuyers, and business owners reliant on real estate, requires him to evaluate many factors and economic indicators. Unlike many real estate analysts who rely solely on monthly, trackable, long-term numbers on employment, population, and home values, Yun considers a number of less traditional, for real estate at least, numbers as well. “The NAR has a great deal of proprietary data on the housing market that deals with overall consumer confidence, builder confidence, and homeowner, -buyer, and -seller psychology,” he explained. “There is a psychological variable involved in the mindset about real estate and the
ACross-Section of Lawrence Yun's Research Activity
• NAR Existing Home Sale statistics • NAR Affordability Index • NAR Home Buyers and Seller Profile Report • Blue Chip Council • Harvard University Industrial Economist Council
Learn more about Lawrence Yun at www.nar.realtor/lawrence-yun
A big part of Yun's job involves gathering, discussing, and analyzing data about the housing market.
WHEN LAWRENCE YUN TALKS about real estate, the discussion revolves around what he refers to as “turning points” in national and local markets. “My role, as chief economist at the National Association of Realtors (NAR), is to look at the economy, the housing market, to assess current conditions, and make projections about what real estate may look like down the line so that people in real estate can better anticipate some of the turning points [in the market] for their business planning,” he said. Yun went on to detail how real estate analysis cannot simply involve dozens of housing market variables, but must also include close
to disregard NAR commentary and membership as largely irrelevant to their businesses. Yun, himself, observed that to a significant degree, the real estate investing community is perceived externally as one comprised largely of landlords serving the population which cannot or chooses not to own. In reality, the role of the investor is far broader. “Real estate investors play a critical role throughout real estate,” Yun said. “The real topic should be whether a market affords opportunity for small-time investors, individuals, and husband-and-wife or family investment teams or is dominated by big corporations running the apartments,
examination of jobs, inflation, Federal Reserve activity, consumer confidence and psychology, and policy issues. “I firmly believe that real estate ownership brings stability to the homeowner, on a personal level, and to the larger economy and the country,” he said. “Of course, homeownership tends to coincide with personal financial stability, but it also contributes to personal security, a wider middle class, and, thanks to pride in ownership, a greater national interest in having input into policy-making decisions and participation in the U.S. democracy. This intense focus on homeownership sometimes leads real estate investors
Yun's access to proprietary real estate data derived from the NAR's many studies and surveys makes his housing analyses uniquely insightful.
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real estate investments if those gains are “rolled” into an investment similar to the previous one. Real estate investors and self-directed investors use these exchanges to legally avoid paying high percentages of their profits in capital gains taxes when they sell off assets, and, Yun noted, the loss of access to such a strategy would certainly negatively affect investors’ ability to engage actively in the real estate market. “We contributed to preserving that investment strategy and, as a result, contributed to community stability,” he said. Yun also pointed to the mortgage interest deduction (MID) as a tax-reform change that will likely affect real estate investors in some sectors and markets. While MID was not eliminated as part of tax reform (something many policy- makers viewed as a source of great concern), it was adjusted. Yun believes that this adjustment makes things slightly less stable in certain markets. “Because the traditional home-buying incentive of the mortgage interest and property tax deductions were diminished as part of the reform, it could lead, over the long-term to more households being renters for a longer period. For investors specifically, this could be a positive or a negative result. For households that truly wish to buy [and cannot], the outcome is certainly negative.” Yun added that the NAR works hard to make it easy for members and non-members to join with other real estate professionals when they believe an issue is important to their business. “We know people in this industry are very busy, so we try to make it very simple to click a button [online] and send a message to the right member of Congress,” he said, noting that while NAR members may receive more information and updates on these types of policy and legislative issues, non-
members can also participate.
A SHORT INTRODUCTION TO 1031 EXCHANGES
WHAT TOWATCH IN 2018 In 2018, Yun said, he expects the main housing issues affecting real estate investors to be inventory shortages and the emerging effects of late 2017’s tax reform bill (see sidebar on p. 27). “Of course, there are two indicators that drive every housing market: the jobs market and mortgage rates. My job is to determine how other factors will influence these two indicators and, by extension, consumer confidence and real estate activity,” he explained. “For example, rising interest rates lead to an eventual slow-down in home sales, and an increase in available jobs tends to lead to an increased need for housing. The other factors essentially operate on the margins of these two main issues and, depending on how they interact with each other, allow us to better understand trends and make predictions. For example,
1 031 exchanges are a common topic of discussion among real estate investors and self-directed investors (these two populations regularly overlap), but many investors do not really understand what a 1031 transaction entails. A 1031 exchange is a transaction in which you swap one investment for another in such a way as to push the tax “consequenc- es,” which is to say the capital gains taxes you would normally pay on the profits from the transaction,
but strict guidelines, buy $100,000 worth of real estate investments and skip the capital gains taxes entire- ly. You get to leverage your entire $100,000 toward new, profitable investments in real estate and you don’t have to shell out $25,000 (or more) in taxes. Many inves- tors repeat this process for years, meaning that over time you might turn that $100,000 into $200,000, then $400,000, and on indefinitely, never paying capital gains as long as you use your 1031 exchange correctly simple explanation affords. You should consult tax and legal pro- fessionals before attempting such a transaction. Real estate inves- tors in particular are very fond of these exchanges because real estate returns often come in large sums accompanied by heavy tax costs. Furthermore, although the IRS is constantly updating the rules on 1031 exchanges, in general, most types of real estate are considered interchangeable. This means that you could probably use the prof- its from flipping a 1940s home in Dallas to purchase two turnkey rentals in Birmingham, for example, assuming you followed all other guidelines and parameters. and are not actually cashing out of your investments. Of course, there is a lot more to 1031 exchanges than this
into the future by imme- diately leveraging your profits into another investment vehicle considered by the IRS to be like the first. For example, if you sell off an invest- ment property and
make a $100,000 profit and then simply deposit that $100,000 into your bank account, you will owe capital gains taxes that could cost you nearly 40 percent of your earnings. Assume that you end up paying a relatively “conservative” 25 percent in capital gains: That still leaves you with $75,000 instead of $100,000 to use on a future investment. Not a small sum, but wouldn’t it have been nicer to have the whole thing? That’s where the 1031 exchange comes in. By using a 1031 exchange while doing your deal, you can sell off your initial real estate investment for the $100,000 in profits and then, by following some fairly simple
CAPITAL GAINS TAX: A tax levied on the profit from the sale of a property or investments. These taxes may be nearly 30 percent or more of the total profits on the investment. 1031 EXCHANGE: An IRS structure intended to help investors avoid capital gains taxes by quickly leveraging the profits from the sale of one investment into the purchase of another, similar investment. MORTGAGE INTEREST DEDUCTION (MID): This IRS policy allows homeowners who meet certain requirements to deduct the cost of the interest on their mortgage loans from their taxable income. This can lower the amount of taxes an individual owes on their income and, indirectly, make owning a home more affordable since the home loan diminishes taxable income. 2017’s tax reform act limits the amount of mortgage interest that may be deducted and may make the purchase of relatively expensive homes more financially difficult.
(Above) This bookshelf in Lawrence Yun's office demonstrates his wide array of interests and deep love of family, art, and history. On the top shelf, a Korean figurine, masks used in the Korean Opera, and a Navajo dancer rest. His family takes a central place on the middle shelf, and at the bottom sit a thermal tile from the Columbia Space Shuttle, various globes, and a door hinge from the Texas Capitol Building.
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property taxes or finance multimillion-dollar homes, in a state like Connecticut, New York, or New Jersey, where property taxes are high and home prices are high as well, this change will affect about 10 to 20 percent of homeowners,” Yun said. He noted that California, in particular, will likely experience magnified effects from tax reform because home values are so elevated. Statewide, median California home values were more than half a million dollars in 2017.
FACING THE INVENTORY ISSUE HEAD-ON
“That will make the states surrounding California very interesting to watch this year,” Yun said. “California is very expensive, but the states surrounding it are much more affordable and their job growth is terrific.” He specifically mentioned Arizona, Nevada, Oregon, Washington, “and even Idaho and Utah” as states “where the housing market could continue to do very well or even accelerate in terms of more home sales at higher prices.”
As long as the demand for inventory continues in this housing cycle, housing inventory is going to continue to be an issue. According to NAR numbers, home prices hit new highs and inventory levels hit new lows in many U.S. markets during the first quarter of 2018. As a result, existing home sales volume continued to fall as affordability levels dropped.
EVERYHOUSING CYCLE ISUNIQUE.
THISHOUSINGCYCLE IS CHARACTERIZED BYASOLID FOUNDATIONWITH HISTORICALLY LOWFORECLOSURE
WHAT REAL ESTATE INVESTORS NEED TO KNOW ABOUT THE 2017 TAX REFORM BILL
O n December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into the law. TCJA was already being referred to simply as “the tax reform bill,” and advocates for the legislation pointed out that it would cut income tax rates, double standard deductions, and incentivize corpora- tions to pay employees more thanks to permanent corporate tax cuts. Critics of the bill expressed concern that the legislation eliminated most itemized de- ductions, limited the mortgage interest deduction (MID), and eliminated future borrowers using home equity lines of credit (HELOCs) from deducting that interest from their taxable income. The bill also requires taxpayers to choose between deducting local property taxes (up to $10,000) and taking income- or sales-tax deductions. National Association of Realtors (NAR) chief economist Lawrence Yun has been cautious in his predictions about the effects of the tax reform bill on the housing market. “Certainly, tax reform shaved some of the historical real estate benefits off the tax code,” he commented, but added, “There were some positive outcomes related to small businesses (of which many real estate
investors are a part).” Yun recommended withholding judgment on the bill until it has had more time to settle into U.S. tax practices and analysts like himself have had more time to identify how it will affect homeownership, which he believes is the crux of the matter. “Homeownership and real estate ownership bring stability on a personal level and on an economic level,” he said. “Real estate investors, maybe even more than homeowners, are active participants in their communities because they own their own homes and they offer options to others who may choose not to own their own homes (and rent) or who seek homeownership through unconventional means because they may not be able to purchase a home using traditional meth- ods like 30-year mortgages. “What I will try to monitor [in terms of the effects of tax reform] in 2018 is whether there is buckling or wobbliness in the upper end markets in high-tax states like Illinois, Connecticut, and New York. In some states, they will feel the pinch, and it remains to be seen if and how that will affect their real estate markets,” he said. Yun also noted that the NAR lobbied against changing both the 1031 ex-
change system (see sidebar on p. 24) and reducing the mortgage interest deduction (MID), both of which are considered to be standard, highly attractive advantages of homeownership that many feared were “on the chopping block” as part of the tax reform bill. “The 1031 exchange was preserved, in my opinion, because we [the NAR] were able to indicate just how important it is for [real estate] commu- nity stability,” he said. “Unfortunately, the traditional home-buying incentive of MID and property tax deductions have been diminished with the tax reform bill, so we will have to see if that leads to more renting households, to households renting longer before buying, or to a diminished interest in or ability to purchase property over the long term,” he added. “All of this will have an implication for real estate investors and the real estate industry.” The National Association of REAL- TORS® is America's largest trade associ- ation, representing 1.3 million members, including NAR's institutes, societies, and councils, involved in all aspects of the residential and commercial real estate industries. Learn more about the NAR’s political advocacy at www.nar.realtor/ political-advocacy.
RATESAND HEALTHIER HOMEOWNERS.”
he suspects will experience more fallout from the legislation than others: the high- end real estate markets in high-tax states. “Part of the tax reform included limiting mortgage interest deductions to $750,000 or less, meaning that if someone has a $2 million home with most of that value financed, there will be far less deduction available to them than there was before. Also, the property tax deduction has been limited to $10,000,” he noted. Note.: Homeowners who already own a property with MID higher than the new bill permits are grandfathered into the new law, but when they sell the new owner will be held to the lower MID limits. “Although relatively affordable states, such as those in the southern region of the U.S., have fairly few homeowners even at the upper end of the market who pay $10,000 in
consumers across the country, asking simple questions like, ‘Is it a good time to buy?’ and ‘Do you think home prices have further room to grow?’” Yun observed. Consumer sentiment and confidence in their local markets and the national market play a huge role in home-buying patterns just as overall consumer confidence and sentiment directly affect the national retail sector. Yun looks to these “marginal” factors to gain clarity about national trends to great effect and, as a result, is a frequent speaker at real estate conferences throughout the United States, has testified before Congress, and regularly appears as a guest on CSPAN and as a Forbes columnist. When it comes to the effects of 2017’s tax reform bill, Yun has adopted a careful wait-and-see attitude. However, he was willing to pinpoint one market sector
information about foot traffic in an area, how often a lockbox is opened on a property, or straightforward, large-scale consumer confidence surveys all enable us to assess the strength of demand for housing in an area and align that sentiment with those two primary indicators.” Consumer confidence plays a huge role in NAR evaluations of the national housing market. Yun’s analyses on this topic often stand out from other economists’ because he is willing to make specific projections on a national scale. The NAR’s dedication to tracking consumer sentiment plays a big role in his ability to make these predictions accurately and with informed, specific reasoning that he regularly spells out, in detail, across a variety of media. “We are constantly taking surveys of
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LIVE EVENT May 18-19, 2018 Memphis, TN
“There are really two things that will help on the inventory side of things,” Yun said. “One is for builders to just build more, which could enable more renters to purchase homes or enable more homeowners to sell their existing homes and trade in their current equity for a larger home, or ‘trade up.’ When that happens, current existing homeowners will release their home onto the market, providing the inventory that is needed in the starter- home layer of housing inventory. “The second thing that will likely start to happen in 2018 that will assist with the inventory issue is that real estate investors may start to unload some of their large rental portfolios,” he went on. “It is not a measurable trend as yet, but it’s quite possible rent growth will begin to slow down in the coming months [while appreciation continues to rise] and investors will benefit from selling off some of their portfolios. That would certainly be a welcome development.” Yun said despite popular opinion stating that the only solution to expanding the housing inventory is to build at the most affordable level of housing, conventionally referred to as “starter homes,” to him, the issue is one of price points. “Builders will do their due diligence, look at market conditions, and build what they can sell for a profit that buyers will buy,” he said. “When builders do their due diligence, they fill those missing gaps. Where land is plentiful and more affordable, there will be opportunity at entry-level homes and in other sectors.” Yun added areas with less regulation on building allow developers to gain confidence, fund projects, purchase land, and increase inventory. “Local governments can also play a critical role in getting builders into a market in this way,” he said.
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Lawrence Yun joined the NAR as a senior economist in 2000, then took on the chief economist position in 2008.
Friday, May 18 Education and BBQ
Saturday, May19 Bus Tour
LOOKING FORWARD TO A “NEWNORMAL” Lastly, Yun discussed a common term cropping up in housing market discussions lately: the “new normal.” The term itself is not new, but it became ubiquitous in the wake of the housing and financial meltdowns in the mid-2000s and during the resulting global recession. Notably, some economists have begun to speculate that U.S. housing might be entering a positive “new normal” because lending requirements are relatively conservative, the mortgage market seems largely insulated from catastrophes such as the flood of foreclosures involved in the last national housing crash, and the U.S. economy is trending in a positive, growth-oriented direction. Some analysts have gone so far as to say housing might, in fact, become less cyclical than has been the conventional norm thanks to these stabilizing trends. Yun, however, stated that the conclusions cannot be quite so simple. “First, every housing cycle is unique,” he said. “The subprime bubble and crash was unique in terms of lenders not checking credit scores. Clearly that will not be repeated, at least we would hope,
in the foreseeable future and hopefully never. But the current cycle is also unique. Underwriting standards remain, in my perspective, overly stringent. The price increases we have been observing so far are not anything resembling a bubble and are also fundamentally different from what happened in 2005 and 2006. “However, home builders have not been building the way they were for the 10 consecutive years leading up to the last crash during this cycle. That is impacting the market with consistently low inventory. Is that a ‘new normal?’ Yes, as of now, but it will change as the year progresses. There could be policy changes with Fannie Mae and Freddie Mac that change the accessibility of mortgage loans for homebuyers. There could be more new construction. You could characterize this is a new normal, or you could say that this housing cycle is characterized by a solid foundation with historically low foreclosure rates and healthier homeowners.” •
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Carole VanSickle Ellis is the editor of Think Realty Magazine. She can be reached at email@example.com.
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