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Fewer First-Time Home Buyers Threaten the Market
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INSIDE THIS ISSUE
THINK REALTY 8 News & Events
36 The Wholesaler's Dilemma When to say “sayonara” to your day job and “hello” to full-time wholesaling. by David Lecko 39 The Key to Investing Success: Financing BUSINESS FUNDAMENTALS Exploring the different lending options so you’re ready to buy. Sponsored content provided by David Yarborough, Investor Lending 40 National Trends and Regional Investing
55 Co-Everything in Commercial Real Estate Collaboration is key in this REI space. by Pamela J. Goodwin 56 Buying Real Estate with Cryptocurrency How can this “new money” work for you? by Steve Streetman 58 Living Well with Others Co-living: a possible housing solution for the urban-affordability crisis. by Peter Stuart 60 Five Uncomfortable Truths REI provides financial rewards but be aware of what could hold you back. by Michael Zuber 62 iBuyers: Investor Friend or Foe? What it means for investors if iBuying is the bridge between Main Street and Wall Street. by Aaron Norris 64 Become The Bank TM Staying on the road to wealth with non-performing notes. Sponsored content provided by Ray Urrutia, Pull the Trigger Enterprises 65 Sponsored Content: Investor Review Technology Edition 82 A Top Trend in Turnkey
Updates from around the industry.
10 Floor Trends: Vinyl Plank
Keep properties looking fresh with this smart flooring choice. Content provided by Sherwin-Williams
INVESTOR STORIES 20 Presidents' Circle Featured Investor: Marco Santarelli 22 Service Before Self
A look at how real estate trends are impacting the Washington, D.C. area. by Sam Jacknin and Charlie Einsmann
Veterans buying real estate boosts America one house at a time. by Jeff Edwards
STRATEGY 42 Buy and Hold for Cashflow
Keeping your eye on the prize is key for this long-term investment strategy. by Deborah Razo 46 The 3 P’s of Real Estate Note Investing How to analyze the paper, property, and payor in real estate transactions. by W.J. Mencarow 48 Online Travel Agencies
BUSINESS FUNDAMENTALS 24 High-Quality Investing Methods Finding your right way to make money in real estate. by Vanessa Engineer, M.D. 26 A Different Way to Diversify Why investors should be geographically agnostic when buying rental properties. Sponsored content by Stacy Brown, Real Property Management 29 A Legal View
Compare “iBooking” options for your short-term stayers. by Elizabeth Maora Sickels
How the BRRRR method can transform the turnkey space. by Thomas Rozkowski and Oliver Somoza
Tips from an attorney to protect yourself and your investment. by Michael Johnston
HOWFEWER FIRST-TIMEHOME BUYERS THREATENTHEMARKET
51 Flipping Trends Why investor demand is picking up even as home-flipping profits dry up. by Daren Blomquist
30 Rehab vs. Prehab Which renovation method is best for retail sale? by Gaylene Rogers Lonergan 32 The Daunting Default
DESIGN POINT 84 Design Guide: Charming Exterior Featured Designer: Lorraine Beato
by Peter G. Miller
Understanding types of foreclosures to protect yourself in the process. by Bruce Kellogg 33 Mobile Home Millions
MARKET & TRENDS 86 By the Numbers
MARKET & TRENDS
Sometimes it's best to just go where the numbers take you. by Ingo Winzer 93 Creative Investing for Passive Returns Exploring the single-family rental sector in a potential economic downturn. by Gary Beasley
The mobile-home enthusiast’s guide to talking to naysayers. Sponsored content by Chimene Van Gundy, Mobile Home Millions 34 Top Tips to Grow What to do when your real estate business is slow. Sponsored content provided by Kamyar Zargari, National Association of Residential Property Managers ® (NARPM)
THE RENTAL STRATEGY
SPOTLIGHT: PACIFIC NORTHWEST
THE LAW OF RECIPROCITY How helping others can help you.
STRENGTHEN YOUR STRENGTHS
Prospecting for opportunity in Boise, Portland, and Seattle.
Three tips you must follow when buying a rental property.
How to use strategic partnerships to complement your weaknesses.
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PUBLISHER & CEO Eddie Wilson EDITOR-IN-CHIEF Kelli White
SALES MANAGER Rodney Halford RHalford@ThinkRealty.com 816-398-4111 x86122 FULFILLMENT COORDINATOR Blair Pierce
FROM THE CEO
Resiliency in Real Estate
ART DIRECTOR Emily Bowers
CONTRIBUTING WRITERS Gary Beasley Daren Blomquist Stacy Brown Joel Cone Jeff Edwards Charlie Einsmann Vanessa Engineer Pamela J. Goodwin Sam Jacknin Andre Johnson Michael Johnston Bruce Kellogg Gaylene Rogers Lonergan Aaron Norris Deborah Razo Thomas Rozkowski Elizabeth Maora Sickels Oliver Somoza Steve Streetman W.J. Mencarow Peter G. Miller
s CEO of Think Realty, I want to welcome you to Think
As you consider your position and monitor your investments, stay focused on the potential of decreasing interest rates. They always affect the consumer
Realty’s Housing News Report , a publication designed to blend data-driven content with inspira- tional industry trends. Speaking of trends, this month we’ve tried to cover the trendy bases in Real Es-
first, and watch the stock prices of the big home builders. Because they do so much inventory, their movement in the market makes an impact. As we shift from summer to fall, Think Realty is preparing for our final event of 2019 in Atlanta. Be sure to register online soon to save your spot and get ready to learn and leverage that knowledge to ex- pand your portfolio. I hope you enjoy and benefit from Think Realty’s platform of trusted content as you continue your journey. We are excited to keep you apprised of real estate trends as they come along, but one thing never goes out of style — resiliency. Keep learning, keep growing, and stay focused. •
tate investing. In an industry with so many avenues to pursue, sometimes it might feel like a struggle to keep up. But, that’s the thing about real estate investors — we are resilient. And, the great thing about real estate is there is always opportunity. What a promising blend for success — resilience and opportunity! The sophisticated investor can make money in a down market or a rising market. By defi- nition, sophistication indicates an investor has more than one mode of investing. Is it time for a shift? Is it time to navigate another trend in the real estate investment space?
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Are you following Think Realty on social media? Things move pretty fast in real estate. Don’t miss out on the latest trends, tips, insights and news from your trusted resource for all things real estate investing! Follow. Like. Love. Share. Comment. You can do it all with Think Realty’s social media channels. Join the conversations in Think Realty social communities and connect with like-minded members who range from first-time to seasoned investors. Check out all of our social media channels and connect with us - and other investors - today!
FOR ARTICLE REPRINTS :: Contact Jeremy Ellis at Reprint Pros, 949-702-5390. www.reprintpros.com. SUBSCRIPTIONS :: The annual subscription for Think Realty Magazine is $36.00 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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Think Realty's Core Focus is to be the trusted source in the Real Estate Investment Industry by providing products and services focused on serving the Real Estate Investor.
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f you consider yourself a real estate entrepreneur, this event is for you. Learn about tools, tips and resources, and how to manage your real estate business. Meanwhile, you will also connect with pros, exhibitors, and educators that will help you earn more return on your real estate investments. Space is limited and we expect to sell out! On Saturday, there will be more than 40 exhibitors who can provide Think Realty Conference and Expo Returns to Atlanta IT’S THE BEST OPPORTUNITY TO INVEST IN YOURSELF! I
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you with various tools and services strictly focused on helping you achieve the most you can as a real estate en- trepreneur. Saturday will also feature presentations from keynote speakers, educational sessions including a local market panel, and lunch. Sunday we give prominence to the Think Realty Resident Experts, who will deliver educational sessions on topics such as Wealth Building, Establishing Your Business and Brand, Residential Investing, Risk Management, and Com- mercial Investing. There will also be educational workshops hosted by valued partners. Your event ticket includes:
Keep reading our weekly newsletter and check the website often for more information.
Think Realty Podcasts Now you can add Think Realty Podcasts to your playlist options. Whether you watch the video or listen to the audio, our podcasts deliver even more of the hard-hitting real estate investment insights you expect from Think Realty. Our phenomenal host and resident expert, Abhi Golhar, is one of the most dynamic personalities in the industry. He interviews investors from all corners of the REI space.
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Visit ThinkRealty.com/Podcast to learn what these investors are sharing!
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A New Think Group Think Realty and AAPL are excited to announce the new Presidents’ Circle! Perks for Presidents’ Circle members include one-day events packed with expert strategy sessions, widespread exposure opportunities, VIP attendance at AAPL and Think Realty events, discounts, and much more! Visit PresidentCircle.com for more information and turn to page 20 in this issue for the first investor story featuring Presidents' Circle member, Marco Santarelli.
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The exhibit hall will be filled with more than 40 vendors from 8:30 a.m. - 5:00 p.m. on Saturday and there will be a plethora of tools, resources, and services directed at helping you achieve your real estate investment goals.
AMY RANSDELL Southeastern Home Team Featured Speaker
AUGUST 21-23, 2019 Captivate
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The Cosmopolitan Las Vegas, Nevada Learn more at geracicon.com/ conference/captivate-2019/
To learn more about the Think Realty Conference & Expo - Atlanta and to buy tickets, visit ThinkRealty.com/Events
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inyl plank has quickly become a mainstay in the flooring industry. By providing a combination of key features, it has gained popularity to become a dominant flooring option. “One major trend we see is the shift from soft-sur- face goods like carpet into the realm of hard-surface throughout a space,” said Justin Brazie, director of marketing-applicators and decorative products at Sherwin-Williams. Why vinyl plank? IMPROVING TECHNOLOGY Since becoming a household fixture following Chicago’s Century of Progress Exposition in 1933, vinyl flooring technology has improved drastically. Today’s vinyl plank options are much higher quality than even what was available five years ago. Modern vinyl plank stands up to heavier traffic volumes and is easier to maintain than its predecessors. Addition- ally, water-resistant finishes are becoming more sophis- ticated, with many manufacturers now selling 100 percent waterproof vinyl plank. LONGER LIFETIME One of the biggest benefits of vinyl plank is its longev- ity — the average life of vinyl plank is 10 or more years. This enables a better return on investment for property owners than many other flooring options and is why around half of the top real estate investment trusts in the country are installing vinyl plank at properties in varying scales. In fact, in 2017 carpet accounted for only 51 percent of flooring in residential units compared to 2006, when it made up 62 percent. “For homes that are frequently replacing carpet Floor Trends: Vinyl Plank KEEP PROPERTIES LOOKING FRESH WITH THIS SMART FLOORING CHOICE. V Content provided by Sherwin-Williams
during resident turnover, vinyl plank may be a good option,” said Brazie. Sherwin-Williams is fielding more requests from homeowners and property managers that want to tran- sition away from carpet. From an ownership perspective, the long-term cost savings with vinyl plank creates an appealing option despite upfront costs that can be up to three times greater in comparison to carpet. STYLISH, TRENDY LOOK Another significant benefit of vinyl plank is the wide variety of colors, finishes and textures, with many high- end styles offering the look and feel of stone, wood and ceramic tile. Currently, gray is the color of choice for many, with natural, wood-colored options not far behind. This product variety helps to provide an even better investment for property owners as occupants look for stylish, trendy options that also help to justify higher selling prices. •
More than 130 Sherwin-Williams Floorcovering Centers offer a complete selection of brand-name options of vinyl plank and sheeting, wood and ceramic flooring and carpeting, plus reliable installation and fast turns. Call 888-375-5902 to reach the Floorcovering Center nearest you. Learn more about savings available to Think Realty members at ThinkRealty.com/supplier-discounts.
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holds. Delaying homeownership thus will have long-run, negative impacts on the wealth of typical families. For example, Federal Reserve data show that homeown- ers, on average, have 40 times the wealth of renters.” As it turns out, first-timers generate a lot of demand and the owners who benefit most are at the base of the market. “Owners of the country’s most af- fordable homes are gaining equity the fastest, because demand for entry-level homes continues to grow faster than supply,” reported Zillow in a 2018 study. Over the past five years, it added, “people who own the most affordable homes have seen their equity grow by 44.4 percent, while owners of top-tier homes have gained 26.6 percent.” “In today’s mortgage market,” Mike Fratantoni, chief economist with the Mortgage Bankers As- sociation (MBA) told the Housing News Report, “loans to buy a home comprise about 75% of the total, much higher than in recent years when we were in a refi boom. In a purchase-dominated market, first- time buyers become even more important.” But as good as first-timers are for the housing sector, a lot of po- tential sales are never made. “While the first-time homebuyer market has grown by close to 40 percent since 2014,” said Tian Liu, chief economist at Genworth Mort- gage Insurance, “there are still 2.7 million missing first-time homebuy- ers. They represent vast, largely un- tapped opportunities for the housing industry over the coming years.” The big question, of course, is whether purchases by first-time buyers can be increased.
FIRST-TIME BUYER MARKET SHARE EXISTING HOME SALES
YEAR 2018 2017 2016 2015 2014 2013 2012 2011 2010* 2009* 2008 2007 2006 2005 2004 2003**
33% 34% 35% 32% 33% 38% 39% 37% 50% 47% 41% 39% 36% 40% 40% 40% 42% 42% 42% 42% 41% 38% 30% 37% 44%
How Fewer First-Time Home Buyers Threaten the Real Estate Market
“First-time homebuyers help determine the health of the overall housing market,” explains Rob Chrane, CEO at Down Payment Resource. “New buyers often purchase the entry level housing stock, allowing repeat buyers to move up to a new home.” According to Robert Dietz, chief economist with the National Asso- ciation of Home Builders (NAHB), “first-time buyers have a strong long-run impact because they lift the homeownership rate, which up until the first quarter of 2019 had posted two-plus years of gains. Additionally, economic research shows that housing wealth is a ma- jor component of the savings and wealth of typical American house-
2001 1999 1997 1995 1993 1989 1987 1985 1981
by Peter G. Miller
ou can’t have home sales without buyers and the most
solution for millions of owners now trapped in underwater properties?
nately, first-timers are a vanishing species and as a result, millions of transactions are missing from the real estate marketplace. Why has ownership become less interesting to potential first-time pur- chasers and what can be done about it? Could first-time buyers become the
important buyers of all are first- time purchasers. While it might seem that a sale is a sale, that’s not the case. The chain of transactions that powers the housing sector be- gins with first-time buyers. Unfortu-
THE FIRST-TIMER PARADOX First-time buyers are important because they represent additional demand.
Source: National Association of Realtors *Special tax break for first-time buyers **Survey taken irregularly prior to 2003
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national income have been trans- ferred from the bottom 50% to the top 1%. The top 1% income share has made gains large enough to more than compensate the fall in the bottom 50% share, a group de- mographically 50 times larger.” Debts. While income has stalled for large segments of the popula- tion debts have soared. For home- owners, the news is good. Mort- gage debt went from $9.85 trillion in the first quarter of 2009 to $9.65 trillion ten years later, a drop of $20 billion despite soaring home prices according to the Federal Re- serve Bank of New York (NY Fed). But, during the past ten years, non-mortgage debt – borrowing for student loans, auto purchases and credit card bills – increased from $2.68 trillion to $4.02 trillion. According to Robert Dietz, the NAHB’s chief economist, “we are watching two sources of debt that are delaying home buying: student loans and auto loans. Student loan growth has been significant over the last decade, and now totals more than $1.5 trillion. Auto loan growth has picked up since 2013. While student loans can often lead to higher lifetime income (in the form of a college degree), there are too many students attending college, accumulating student loans, and now attaining a degree. This is a social policy failure, and a Federal Reserve study indicates that such student loan burdens are responsible for about 20 percent of the ‘missing homeownership’ among younger households. Auto loan debt is also a concern because of recent trends in terms of longer loans and smaller down payments.” For just credit cards alone, says Axios, “U.S. card holders are expected to pay $122 billion in in- terest charges in 2019. That's 12%
THE MISSING BUYERS It used to be that first-time buyers routinely represented 40 percent of all existing home purchases, if not more. Part of the problem, according to the Urban Institute (UI), is that mortgage standards have hardened. The Institute estimates that if we stuck with 2001 qualifying requirements, an additional 6.3 million loans could have been originated be- tween 2009 and 2015. If we figure that 42% of those mortgages might have gone to first-time buyers (the first-time buyer percentage for 2001) then an additional 2.6 million sales might have been produced, a figure similar to Genworth’s. Or maybe not. The economy has radically changed during the past few decades and quaint notions of em- ployment, affordability and borrowing capacity need to be re-thought. Income. According to the Census Bureau, median household income reached $61,372 in 2017 – up 1.8 percent in a year. In 2017, the infla- tion rate was 2.1%. In other words, in 2017, people had more cash in- come, but those dollars lost buying power, or they bought a touch less than the smaller incomes earned in 2017. Corrected for inflation, the median household income was $58,609 in 2001, meaning that over a period of 16 years there has been very little income growth. However, general figures don’t tell the whole story. According to a 2016 study by economists Thomas Piketty, Emmanuel Saez and Gabri- el Zucman, not everyone is sharing higher incomes. “The top 1%,” they write, “used to earn 11% of national income in the late 1960s and now earns slightly over 20% while the bottom 50% used to get slightly over 20% and now gets 12%. Eight points of
more than what they paid in 2017 and 50% more than what they paid as recently as 2014.” Such credit card charges, of course, represent dollars that could have been used to bulk up savings, pay down debts, or fund the down payment on a home. For lenders, the increasing- ly-bleak combination of stalled incomes and soaring debts make loan approvals enormously diffi- cult. How can first-time borrowers with massive debts qualify for financing under traditional stan- dards? In many cases the answer is that they can’t unless underwriting norms are stretched. HUD says almost a quarter of the new FHA mortgages it insures now have debt-to-income (DTI) ratios above 50%. On average, the DTI for FHA purchase mortgages in FY2001 was 37.68% versus 43.09% in FY2018. Freddie Mac, through its Home Possible program, will now accept DTI ratios “generally up to 50%,” a standard which, it acknowledg- es, exposes the organization “to increased mortgage credit risk.” In 2017, Fannie Mae updated its Desktop Underwriter (DU) system to accept certain loans with debt-to- income ratios of as much as 50%. Subsequently, in 2018, Fannie Mae established additional stan- dards to limit its acceptance of riskier loans, those with high LTVs, multiple delinquencies, debt-to- income ratios above 45% and small or nonexistent reserves. The Gig Economy. The quickie definition for a “job” used to be 40 hours a week plus benefits. That definition is no longer so certain. The government explains that for its purposes "people are classified as employed if they did any work at all as paid employees during the
reference week; worked in their own business, profession, or on their own farm; or worked without pay at least 15 hours in a family business or farm." The gig economy is here and the key benefit, according to the Society for Human Resource Management (SHRM), is that workers “have greater control over their schedule and they can avoid routine annoy- ances such as bad managers, office politics and interminable staff meetings. They also might learn new skills and gain valuable experi- ence at a temporary stint, ultimately giving them the tools to advance in other gigs or in staff jobs.” Employers also get benefits. They have the ability to hire workers when and where they want without the need to pay for unemployment insur- ance, Social Security, health insur- ance, vacation time, or retirement. We have mortgage lending expe- rience with gig workers, what we used to call the self-employed. Any number of fields traditionally have large numbers of sole-practitioners – think of locksmiths, plumbers and lawyers as well as the old-standbys such as freelance writers, design- ers, and photographers. What’s different now is that we don’t know where a wider gig econ- omy might lead. Will gig employ- ment produce steady wages and bigger incomes? Or less money? So far the results are mixed. The JPMorgan Chase Institute re- ports that between 2013 and 2017, that monthly income went up for non-transport work (+1.9%), selling (+9.4%) and leasing (+69%), but fell for transport workers such as part- time drivers (-53%). A related issue concerns income stability. Both an employee and a gig worker might earn $60,000 a year. However, while the employ-
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Second, renting is often cheaper than buying. A study from ATTOM Data Solutions found that “renting a three-bedroom property is more af- fordable than buying a median-priced home in 442 of 755 U.S. counties analyzed for the report – 59%.” “With rental affordability out- pacing home affordability in the majority of U.S. housing markets, and home prices rising faster than rental rates, the American dream of owning a home, may be just that — a dream,” said ATTOM spokes- person Jennifer von Pohlmann. Can the trends now in place change? Possibly. Less price ap- preciation, lower mortgage rates and rising household incomes could make ownership attractive for many potential first-time buy- ers. At least part of this formula is now in place. Mortgage rates for 30-year fixed-rate financing reached 3.99% at the end of May, down from 4.56% a year earlier according to Freddie Mac. IS OWNERSHIPWORTH IT? For many potential first-time buyers the issue is not cost, it’s value. Simply put, many believe ownership is a possible disad- vantage. After all, if you rent or live with Mom and Dad, there’s someone else to do repairs. You can spend on the things you really want. If you suddenly get a job on the other side of the country, there’s no home to sell. A recent ValueInsured Modern Homebuyer Survey finds that “only 43% of millennials believe buying a home today is a secure financial investment, down 16 points from 59% in Q1 2017. In other words, millennials today find homeowner- ship to be less attainable, require more sacrifices, and riskier. It is
ee is paid $5,000 each month, the gig worker might earn $6,000 in one month and $4,000 in anoth- er. Monthly income swings make budgeting – and required mortgage payments – difficult for first-time buyers without adequate reserves. Mortgage Rates. There’s no question that mortgage rates impact affordability, there’s even a number to show how much. Lawrence Yun, chief economist with the National Association of Real- tors, estimates that each .1% rate increase results in 35,000 fewer home sales. We don’t know where interest rates will go, whether they will continue at bargain-basement levels or not. What we do know is that the rate environment for the past decade has been exceptional- Millennials,” according to the Urban Institute, “prefer living in high-cost cities, where housing supply is inelastic. Within a city, millennials prefer living in counties with a more urban environment, where the house prices have increased more than in the surrounding areas. The shift in geographic preference is mostly observed among highly- educated millennials.” URBAN INSTITUTE
ly-positive. Looking at weekly Fred- die Mac interest levels between April 1971 and March 2019, the average mortgage rate was 8.08%. That compares with an annual rate of 4.54% in 2018 and just 4.31% for the first four months of 2019. Prices vs Payments. The catch is that the central concern for many first-time buyers is not the mortgage rate, but the size of the monthly payment. The Nation- al Association of Realtors (NAR) says median home prices in April reached $267,300, “the 86th straight month of year-over-year gains.” The “median” national price, however, is not the typical price found everywhere. A just-released study by the Brookings Institute shows that two- thirds of the nation’s employment growth and three-quarters of its GDP growth can be found in just 490 counties. Little is left over to be divided among the remaining 2,622 counties. Most geographic areas
have numerous affordable housing options for first-time buyers, but not the chic metro cores where most of the jobs, dollars and op- portunities are found. If you’re a first-time buyer with 5% down how much income do you need to purchase? Across the country, says the National Asso- ciation of Realtors, purchasers need $60,143 but the real answer depends on where you buy. The NAR study shows that you need a big income to purchase in metro areas which include such cities as Anaheim, CA ($188,832), Boston ($108,862), Boulder, CO ($142,474), Denver ($105,415), Los Angeles ($129,492), Naples, FL ($101,261), San Diego ($146,345), San Fran- cisco ($219,517), San Jose, CA ($287,969), and Seattle ($117,312). Alternatively, there are plac- es where a modest income can readily result in ownership, loca- tions where typical home prices are less than the cost of many
SUVs. Think of metro areas that include Akron, OH ($32,739), Am- arillo, TX ($37,200), Binghamton, NY ($25,303), Cumberland, MD ($23,439), Davenport, IA ($29,741), Decatur, GA ($19,072), Peoria, AZ ($25,587) Waterloo-Cedar Falls, IA ($28,372), and Youngstown, OH ($21,055). Even where prices appear attractive there’s some question as to how many renters are interested in ownership. “Millennials,” according to the Ur- ban Institute, “prefer living in high- cost cities, where housing supply is inelastic. Within a city, millennials prefer living in counties with a more urban environment, where the house prices have increased more than in the surrounding areas. The shift in geographic preference is mostly observed among highly-edu- cated millennials.” While everyone has their likes, the reality is that housing costs are a huge weight for many potential first-time purchasers.
A recent home affordability report from ATTOM Data Solutions showed that leading metro areas are largely off-limits to most wage earners. A review of 473 counties found that 335 — 71% — “were not affordable for average wage earn- ers” even with just 3% down. For many first-timers the lack of affordability is visible in two ways. First, many potential buyers simply do not have the dollars needed for the purchase of a home. According to the Federal Reserve, “relatively small, unexpected expenses, such as a car repair or replacing a broken appliance, can be a hardship for many families without adequate savings. When faced with a hypothetical expense of $400, 61% of adults in 2018 say they would cover it, using cash, savings, or a credit card paid off at the next statement.” Translation: 39% cannot readily finance a small emergency with cash on hand or credit.
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not a surprise that their desire for homeownership dropped during the same period.” Among those who make the leap from renter to owner, a relatively large percentage have qualms about their decision. According to Zillow, 4% of those aged 55 and above regret their decision to buy rather than rent, while 17% between the ages of 18 and 34 have misgivings. Many households will not buy a home because they believe future values will decline. A just-issued survey by the NY Fed shows that in five years, 29% of the households surveyed expect home values to fall. And, importantly for first-time buy- ers, “younger respondents – those under 50 — perceive more downside risk compared to those over 50.” TAX REFORM With the passage of tax reform in 2017, the rules for residential real estate changed significantly. At first this may not seem right. Such things as mortgage interest and property taxes remain potentially deductible. However, the new rules are constructed in such a way that most people will not take tradition- al real estate write-offs. The Tax Policy Center estimates that just 4 percent of all households will claim the mortgage interest deduction under tax reform, down from 21 percent under the old rules. Taxpayers can take either the standard deduction or itemized de- ductions. Under the new rules many taxpayers will elect not to take shel- ter write-offs because they can get a bigger benefit with the standard deduction, as much as $24,000 for a married couple. Other taxpayers will be forced to take the standard de- duction because itemized write-offs are limited. For instance, there’s a
now essentially zero for many pro- spective first-time purchasers. The visible tax incentive to own – once a huge selling point for the housing sector – is largely gone. HOWTO GET MORE FIRST- TIME BUYERS INTO THE MARKETPLACE Given the litany of problems and woes faced by first-time buyers, is there anything that can be done to increase their numbers? Steps which do not materially enlarge marketplace risk? The reality is that we have in place a number of options which can be used today to increase first- time buyer activity. STEP 1 Make better use of what we have. “The biggest barrier facing most first-time buyers is saving up for the down payment,” according to Mike Fratantoni with the Mortgage Bankers Association. “Lenders need to be active in FHA, be up to speed on Fannie and Freddie’s HomePossible and HomeReady programs, and be in contact with their local housing finance agencies and other potential sources of downpayment assistance.” Mortgages backed through the FHA, VA and USDA are available with little or nothing down, and offer liberal underwriting standards. These programs are designed to serve first-time buyers. For instance, more than 80 percent of all purchase mortgages endorsed through the FHA in FY2018 went to first-timers. We know that government-backed programs work for first-time pur- chasers. We have decades of evidence to prove it. What we need is more program marketing. There are more than 26,500 state and federal licensed mortgage entities. If they each did one additional first-time buyer loan
$10,000 cap for state and local tax (SALT) deductions such as property taxes and income taxes regardless of how much you actually pay. These changes are not an acci- dent. They are a way for the federal government to increase revenues. The tax reform legislation itself says the “repeal of itemized deductions for taxes not paid or accrued in a trade or business (except for up to $10,000 in State and local taxes), interest on mortgage debt in excess of $750K, interest on home equity debt, non-disaster casualty losses, and certain miscellaneous expens- es” will generate an additional $668.4 billion in new tax revenue. Under the old rules, homeown- ers had substantial tax advantag- es when compared with renters. If a renter paid $1,500 a month for housing, there was nothing to deduct. If an owner had a $1,200 a month mortgage payment for principal and interest, and paid $200 for property taxes and $100 a month for property insurance, a total of $1,500, the tax implications were very different. The owner could write off $2,400 for property taxes. At 4.25% over 30 years, the mortgage had a starting balance of $243,932. The interest write-off in the first year was $10,288. In total, the owner would have at least $12,688 in write-offs unavailable to the renter ($10,288 + $2,400). In the 22% bracket, that’s a tax savings of $2,791. In addition, the owner will accumulate $4,112 in mortgage amortization in the first year, a form of forced savings. Now the rules have changed. The new standard deduction — as much as $24,000 — is equally available to both homeowners and renters. Since most owners will no longer itemize deductions, the tax advan- tage between owning and renting is
per month, that would be almost 320,000 extra sales per year, enough to significantly impact the market. STEP 2 Introduce borrowers to down payment assistance plans. There are thousands of potential down payment assistance sources, such things as grants, loans, mortgage credit certificates and lower-cost mortgage insurance. There are special programs for teachers, first responders, healthcare workers, veterans and surviving spouses of veterans. There are also programs for energy-efficient homes and visible properties – homes with easy wheelchair access and other accommodations. Rob Chrane, with DownPaymen- tResource.com, explains that “more debt and other rising costs directly impact potential buyers' ability to save money for the down payment on their home. The down payment has long-been the first-time buyer's biggest challenge because they don't have the proceeds of another home sale to help fund their down payment and closing costs. Chrane – whose site allows buy- ers to search through thousands of down payment assistance pro- grams by location – adds that “it's important for buyers to research all their home financing options in ad- vance. The average down payment help found by the Urban Institute's report was more than $9,000. That can be the difference between buy- ing a home today or remaining on the sidelines for a few more years.” STEP 3 Change the tax code. The tax rules are full of special benefits for every business and industry you can name – thousands of pages filled with exceptions, preferences and carve outs. If we really want more first-time buyers, then we can achieve that result almost
balance of debt was due at closing. Sure enough, first-time buyer ac- tivity rose from 41% of the market in 2008 to 47% in 2009. This was a good result, but not good enough given the dire condition of the economy. So what did the govern- ment do? It changed the rules. Under the American Recovery and Reinvestment Act of 2009, first-time buyers – those who bought before the deadline and had not owned for at least the past three years – could now get a tax credit of as much as $8,000. Not only was the benefit size increased but, more important- ly, the credit did not have to be paid back. (A tax “credit” means your tax bill is lowered by a certain amount, say $8,000 in this example, while a tax “deduction” reduces only a portion of your tax bill, perhaps 22% of $8,000 or $1,760.) Housing is a large portion of the overall economy. If the goal is to re-charge the economy on a widespread basis, then a tax credit for first-time buyers works. Buyers – and markets – in both rural areas and metro cores would be helped. Local tax collections would increase as a result of more transactions and generally higher prices. And – importantly – some of the homes currently underwater would become salable as property prices rise. Don’t believe that a new first- time tax break would energize the real estate marketplace? In 2010, fully 50% of the real estate mar- ket was represented by first-time buyers – far more than the 33% percent seen in 2018. •
instantly by changing the tax code. We’ve done it before. When the housing market and much of the economy were teeter- ing on the brink of collapse, the government created special bene- fits for first time buyers. Under the Housing and Economic Recovery Act of 2008, first-time buyers could receive a benefit equal to as much as $7,500 for a married couple, $3,750 for a single filer. The term “first-time home- buyer” was defined to mean some- one who had not held title to real estate for at least three years and earned less than $150,000 for joint filers and $75,000 for singles. This was described as a “first- time homebuyer credit” but in the fine print said the government would “re-capture” the money ad- vanced. In other words, it was really an interest-free loan that had to be repaid over 15 years. If the property was sold in less than 15 years, the More debt and other rising costs directly impact potential buyers' ability to save money for the down payment on their home. The down payment has long-been the first-time buyer's biggest challenge because they don't have the proceeds of another home sale to help fund their down payment and closing costs.” ROB CHRANE
Peter G. Miller is a nationally-syndicated newspaper columnist, the author of seven books published originally by Harper & Row (one with a co-author), and for many years a Washington- based journalist.
18 | think realty housing news report :: august / september 2019
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“Investors wanted me to help find them deals. That was the genesis of the business,” he said. Santarelli’s mission has evolved from that of making money to helping one million people achieve financial freedom. “Even though we help a lot of people invest in turnkey rental properties, if I can reach one million people through my podcast and other educational ways, that would be very gratifying.” Santarelli said he often gets emails of gratitude from those whom he has influenced. “I love those emails!” As Santarelli’s real estate mission has evolved, so has the industry. And, while some changes excite him, others bring concern. “The evolution of the industry is exciting. With the help of the inter- net, we can provide personalized services with access to data and knowledge. With the right people combined with the right informa-
tion, you can invest anywhere from virtually anywhere. I want to help empower the real estate investor with more intelligence about their investments,” Santarelli said. His concern lies in situations where investors fall prey to pur- chasing “$50,000” properties from other turnkey companies. “They feel like they’re making a sound investment, but often they are not. The numbers look attrac- tive on paper, and the property could appear newly renovated, but often the neighborhood is problem- atic. The bottom line with low- priced properties is unless they’re in a gentrified area, they’ll remain at that price. Investors of these properties cannot expect equity growth over time, and they become more of a headache and hassle,” Santarelli said. No matter the type of day he’s having — even those full of hassles — Santarelli consistently works on his goals to keep him on a success- ful track. Santarelli’s approach to setting goals is a five-step process: 1. Think big. Set an exciting goal geared toward professional development.
You are a true pioneer of turnkey real estate and a generous thought leader in the REI ecosystem. Without turnkey, my first property, I'd still be mulling over the idea of rentals instead of taking action and creating a plan for financial
Marco Santarelli (center) earns Think Realty’s Master Investor Award in 2017.
Featured Investor: Marco Santarelli THIS INVESTOR’S MISSION WENT FROM MAKING MONEY TO HELPING ONE MILLION PEOPLE ACHIEVE FINANCIAL FREEDOM.
freedom. You are literally changing peoples’ lives!
NORADAREAL ESTATE INVESTMENTS CLIENT
by Kelli White
Get to KnowMarco Santarelli
ith a last name like Santarelli, it’s no surprise this inves-
Armed with an entrepreneurial spirit, Santarelli bought his first rental property when he was 18. He had heard success stories of rental property owners who were set up well financially, and he wanted that financial independence. “I wanted to make money, even though I was young and naïve. Back then I just felt I needed to do [real estate.] I did it sporadically. At that time, it was more about being an entrepreneur than a full-time real estate investor,” Santarelli said. In 2003, Santarelli decided to invest in himself and make real estate investing his full-time career. He took his experience and the knowledge he gained in real estate courses and bought 84 doors in nine months. “You didn’t need as much back then,” Santarelli explained. “I had some capital, but not what you’d need
today. Lending has changed. It was easy to qualify, and you could pur- chase properties with little or nothing down. It was easy but dangerous, and we saw how that played out.” Financial advice has also changed. And Santarelli believes financial education is sorely lacking. “Long ago, the ‘good’ advice from my grandparents was to save — to save nearly everything you made. But if you save for the sake of saving, you lose money. The pur- chasing power of money disappears with inflation. So, you must invest in income-producing assets. You can go broke by simply saving whatever you earn,” Santarelli said. This changed mindset has served Santarelli well. In 2004, Marco’s company, Norada Real Estate In- vestments, was born because inves- tors were coming to him for advice.
tor’s favorite travel spot is Italy and favorite fare is Italian. But Marco Santarelli grew up far from his an- cestors’ roots — in Calgary, Canada. His first job as a young teen was delivering newspapers, and in the early morning Canada climate, that was no easy task. Perhaps born with powers of persuasion, San- tarelli somehow convinced his only brother to deliver papers with him. “I guess you could say that was an early sign of my desire to build a business, by hiring my brother,” Santarelli joked. From Calgary to California — where he has resided for over 20 years — Santarelli has moved on from delivering papers to owning and operating a successful turnkey real estate investment business.
We chatted with Marco about more than real estate investing. Here are a few tidbits from this turnkey specialist.
2. Write it down.
What do you hope to accomplish before the year is over? • Release my upcoming book: Passive Real Estate Investing , named after my podcast. • Rebuild our entire website (in progress). • Vacation to Europe
3. Review regularly – every year, three years, five years. The time may change.
4. Dream about it.
What is a TV show you “can’t miss”? Shark Tank & Family Guy
5. Take action on a regular basis to work toward it.
Which business-related books have you found most helpful? • The E-Myth by Michael Gerber • The Millionaire Real Estate Investor by Gary Keller • Rich Dad, Poor Dad by Robert Kiyosaki
“No one is born an investor,” Santarelli said. “I’ve gone from a conscious incompetent investor to a conscious competent investor. Gain experience — actually do it — and invest time to learn. Even if you fail, dust yourself off and do it.” •
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VETERANS BUY AMERICA
This content is brought to you by Recon Realty and AndyWilliams
Service Before Self NAVY VETERAN SERGIO BAZAN UNLEASHED THE POWER OF REAL ESTATE.
Veterans have a natural tendency to put others before themselves as our service has always required that of us.
by Jeff Edwards
ilitary service requires every individual who takes
However, when Sergio’s time came to pursue life after high school, there was no more money to send another kid to college. Rather than burden his family with undue debts, Sergio decided he would begin his path to independence courtesy of the United States Navy. He enlisted in 1988, both to serve his country and his family. Serving as a Boatswain’s Mate aboard the USS White Plains operating out of Guam, his life of service had begun. After Saddam Hussein launched his ill-fated invasion of Kuwait, the USS White Plains headed to the Persian Gulf with Bazan aboard. Though he was slated to exit the service soon, Bazan’s time with the Navy was extended as a result of the conflict that required him, once again, to place service over self. In 1992, Bazan exited the mil- itary and immediately began to pursue the dreams he had put on hold. Starting off with community college and then graduating from the University of Houston, Bazan landed a job as a webmaster for a real estate developer building luxury, high-rise apartments. While not originally set on a job in real estate, this experience opened his eyes to the possibilities real estate afforded someone with the capital to make big purchases. BREACHING THEWORLD OF REAL ESTATE
the oath a certain willingness to embrace service and sacrifice self. For many, dreams of a college education are put on hold while they embrace the rigors of life in uniform. Others postpone entre- preneurial aspirations in exchange for low pay, mediocre food, and barracks life in order to be serve their country. Service before self is a common theme among military circles and such was the case with Navy veteran Sergio Bazan. Bazan joined the Navy at the height of the Gulf War and put his dreams on hold for his fellow citi- zens. However, through the power of real estate and an inspiration to finally build real transformational wealth for his own family, Bazan has amassed a $2 million real estate empire. After decades of making other people rich, Bazan decided it was time to buy a piece of America himself and build real life-changing wealth for the future of his family through the power of real estate. SERVICE BEFORE SELF Sergio Bazan was born into a large Texas family as one of nine siblings. Working hard to provide for their family, his parents were beaming with pride as the first four brothers attended the University of Texas to pursue their degrees.
ica was a more sustainable path to wealth. After purchasing seven rental properties and a vision to own another 40 more over the next decade, Bazan now boasts a $2 million portfolio that serves as an example of what’s possi- ble through the power of real estate. Real estate thought leader and fellow veteran Andy Williams points to Bazan’s success as another example of what happens when veterans buy America. Andy says, “Veterans have a natural tendency to put others before themselves as our service has always required that of us.” However, Andy empha- sizes that veterans deserve the opportunity to own the very land for which they fought. They deserve to build real trans- formational wealth for their families. Sergio Bazan is a real example of the power and purpose that exists with real estate. As long as veterans buy America, the future of the nation and those who fought to defend it looks as promising as ever. •
Bazan’s brother, who was work- ing in real estate, reached out for Sergio to join him. That’s when Sergio furthered his knowledge in the real estate industry through becoming a loan officer. He eventu- ally got his own real estate license and in another act of service, he became a short sale specialist to help families prevent the financial disaster of foreclosure. Quickly becoming one of the top real estate agents in Texas, an investor reached out to Bazan with a $5 million deal to purchase over 800 distressed properties on his behalf. Bazan did so with amazing success and was listed as one of the top 250 Latino real estate agents in the nation. Despite his unprecedented success with Remax New Horizon, it dawned on him that while he had done well for
Kitchen after renovation
himself, he had mostly built wealth for others up to this point in his career. Recently married, Bazan had visions of building wealth for himself and his new family after a decade of doing so for others.
Jeff Edwards is a Marine veteran and contributing writer for Veterans Buy America. Find out more about the initiative and stories of transition at
investment property and flipped for a profit in excess of $100,000. Despite this taste of success, he was deter- mined that owning pieces of Amer-
VETERANS BUYAMERICA In 2015, Bazan bought his first
22 | think realty housing news report :: august / september 2019
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