TR_Nov-Dec_2022-LR

TM INFORM. INSPIRE. EDUCATE. EMPOWER.

FUNDING Inflation Reduction Act Impact

MARKET TRENDS Quarterly Rent Trends

Transitioning Generational Wealth INVESTMENT STRATEGY

Special Sponsored Magazine Insert ALSO IN THIS ISSUE

INVEST R A Think Realty Publication SPONSORED CONTENT

GRC’s Day on the Hill Update

NOV-DEC 2022 | THINKREALTY.COM

LUKE BABICH Clever Real Estate

GARY PINKERTON Wealth Strategist

PAGE 16

AARON RUDENSTINE ButterflyMX

Determining Your Loan Amount ERIC STEWART, ATLANTIC INVESTMENT CAPITAL, INC.

LOGAN FREEMAN FTW Investments

NOV-DEC 2022 $5.95 U.S. :: $6.95 CAN

thinkrealty . com | 47

Will your LLC or corporation protect you? In 50% of all cases the veil is pierced and personal assets are lost.

Garrett Sutton’s NEW BOOK teaches you to: ▶ Recognize pitfalls and avoid the mistakes so many people make ▶ Keep your corporate veil strong and protective ▶ Use state laws and strategies to your advantage ▶ Pierce someone else’s veil to collect payment ▶ Follow the easy corporate formalities for maximum protection

2 | think realty magazine :: november – december 2022 Call 800-600-1760 for a free 15-minute consultation with an Incorporating Specialist Learn more at CorporateDirect.com Garrett’s company, Corporate Direct , is the best provider of real estate asset protection. ◆ LLC and Corporation Formation in All 50 States ◆ Entity Maintenance and Compliance ◆ Registered Agent Services in All 50 States

HELP US rescue the children Operation Underground Railroad (O.U.R.) has made a significant impact in the fight to end sex trafficking and sexual exploitation by rescuing and supporting thousands of survivors in 28 countries and 26 U.S. states. We are honored to provide our support for this important initiative by donating $50 for every mortgage loan we close. Join in the fight today by visiting aaronchapman.com. Scroll down and click donate.

conventional financing

PUBLISHER & CEO Eddie Wilson

MANAGING DIRECTOR Linda Hyde

MANAGING EDITOR Carmen Fields

SALES MANAGER Rodney Halford RHalford@ThinkRealty.com

FULFILLMENT COORDINATOR Blair Pierce

DESIGNER David Rodriguez

CONTRIBUTORS Luke Babich Lorraine Beato Daren Blomquist Michaela Boahlke Jenifer Calandra Grant Cardone Kurt Coleman Kori Covrigaru Mackenzie Felt Logan Freeman Suni Goff David Jacobs Will Keyser Zack Lemaster Derreck Long Ben Lyons Susan Naftulin Romney Navarro Kevin Ortner

HEY! LET’S BE FRIENDS! GET SOCIAL. STAY CONNECTED.

Like, Follow & Share for the Latest Real Estate News, Trends and Insights from Think Realty

Gary Pinkerton Chris Ragland Jeff Roth Aaron Rudenstine Eric Stewart Steve Streetman Garrett Sutton Michele Van Der Veen Ingo Winzer

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!

SUBSCRIPTIONS :: The annual subscription for Think Realty Magazine is $39.99 in the U.S. Order online at www.ThinkRealty.com or call 816-398-4130. 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 :: Think Realty Magazine is a publication of Affinity Real Estate Media LLC. Reproduction or use of any editorial or graphic, without permission, is prohibited. We are not responsible for the content of any paid advertisements. For reprint rights; to ob- tain a detailed statement of our privacy policy; and for all single-copy requests, address changes and other subscription inquiries:

@WeThinkRealty

Think Realty

/ThinkRealty

4 | think realty magazine :: november – december 2022

FROM THE EDITOR

Collaboration Begins with Conversation

he real estate investing space is vast. During my years in this industry, I’ve T

housing and essentially represent “housing providers.” It’s a great way to encourage collaboration. On Sept. 20, Think Realty and the American Association of Private Lenders (AAPL) held their annual

discovered that people who don’t participate in it day to day often misrepresent it with no malicious intent. Simply put, they don’t know what they don’t know. Because of these misconceptions (as well as other reasons), it became clear that the real estate investing industry needed advocates, especially for smaller, non-institutional investors. In response, Think Realty created a designated arm that focuses on legislative efforts to support our industry. Think Realty is a place to be part of the solution rather than the problem. Let your voice be heard through collaboration and education. Together, we can create a movement for positive impact in the real estate investing space, a space where we collectively create housing for those who need it. As a passionate advocate myself, I can assure you that we cannot simply talk about what the problem is over and over again. Instead, we must educate those in positions of power about the positive impact of real estate investing on

Day on the Hill. The purpose of Day on the Hill is to explain what housing providers and private lenders do for the real estate industry and to voice the impacts proposed legislation would impose. GRC members from both organizations met with members of the Senate and House committees to talk through some of the issues we feel misrepresent the real estate investing space. Overall, we considered it a successful day. We fostered numerous relationships and have scheduled additional follow-up. To learn more about the issues we addressed and our proposed next steps, turn to page 16. Think Realty and AAPL is committed to continuing these conver - sations with legislative officials about issues that can directly impact our businesses. Together, we can—and will—continue to raise the standards in our industry. Here’s to your investing! •

CARMEN FIELDS, MANAGING EDITOR

thinkrealty . com | 5

CONTENTS

INSIDE THIS ISSUE

COVER FEATURE

GRC PUSHES TWO ISSUES DURING DAY ON THE HILL

6 | think realty magazine :: november – december 2022

FUNDING

34 Follow the Money These 12 markets saw a big increase in total income during the past three years. by Ingo Winzer 36 Quarterly Rent Trends in 10 Major U.S. Metros

58 What It Really Means to Be a Real Estate Advocate

8 The Effects of the Inflation Reduction Act on Real Estate Investment Strategy It is best to be on alert and prepare as you consider your next real estate investment. by Susan Naftulin 10 What Does the Cooling Real Estate Market Mean for BRRRR Investors? by Ben Lyons

Only you can decide the real estate investing path that’s the easiest, requires the least amount of time and energy, and gives you the most freedom.

Due diligence and assessment of current market conditions is critical to making successful real estate decisions. by Will Keyser

by Grant Cardone

60 Generating More Than Wealth Education and investment are key to building and transitioning generational wealth.

OPERATIONS

by Kurt Coleman

DESIGN

38 What the Heck Is Lead Generation, Anyway? … and how should investors really use it? by Suni Goff 42 How to Leverage Social Media to Promote Rental Properties Curate a professional online presence to attract quality tenants. by Jenifer Calandra

62 Trends Impacting Single-Family Rental Here’s what the changes in the housing market mean for investors.

12 Extreme Makeover: Creativity Is a Must! Although everyone loves an extreme home makeover, there are real tricks to completing

by Kevin Ortner

one successfully. by Michele Van Der Veen

64 Millennial and Senior Trends: Why Renting Is a Lifestyle Choice The reasons for major home-buying shifts among these generations extends beyond high home prices and limited housing supply.

MANAGEMENT

24 Empathy As Advocacy Empathy plays a role in business success and in achieving positive outcomes for the people you serve and work with. by Jeff Roth

44 Property Manager Due Diligence

by Kori Covrigaru

Make sure you understand the role of a PM and how to select a reliable one. by Zach Lemaster

66 Needed: Women Real Estate Investors Women must get a seat at the table—even if it means bringing their own chair!

MARKET & TRENDS

INVESTOR REVIEW

40-page Special Insert

by Lorraine Beato

28 Sizing and Timing the Pandemic Backlog of Foreclosures Sizing the backlog and when it will hit the housing market is important because those distressed sales represent both opportunity and potential risk for real estate investors. by Daren Blomquist 32 Local Connections Aid Successful Development It is always wise to reach out to those with local knowledge and connections to effectively set yourself up for success, no matter the size of your development project. by David Jacobs

INVESTMENT STRATEGY

68 Four Methods You Can Use to Beat Rising Mortgage Rates You can still make a profit investing in a rising rate environment.

50 A Relevant Cliché for a Changing Market If you are tough, you need to get going in the current market. by Romney Navarro 54 Investing in Real Estate During a Recession Real estate investing can be a smart play when the market cools. by Luke Babich 56 The Government Can Pierce Your Veil Follow the corporate formalities to stay protected. by Garrett Sutton

by Mackenzie Felt

70 Emerging from Crisis What will the next stage in our history bring— and how will real estate investors shape it?

by Steve Streetman

thinkrealty . com | 7

FUNDING

INFLATION REDUCTION ACT

SPONSORED CONTENT

What Does the Cooling Real Estate Market Mean for BRRRR Investors?

of Business Development Jarrod Ellis. “This demand creates opportunity for real estate investors looking to grow their rental portfolios. And, while relaxing modestly month over month, single-family rent prices remain at record annual highs.” According to CoreLogic, the national Single-Family Rent Index (SFRI) is up more than 13% from a year ago (compared to the 2%-4% annual average maintained for the prior decade). THE UPSIDE TO RENOVATING RENTAL PROPERTIES Aiming to acquire distressed homes to fix up, investors focused on renovating typically are not competing directly with traditional home buyers or potential renters looking for move-in ready housing. Given that two-thirds of existing homes across the country are at least 30 years old and 40% exceed half a century, those with an appetite to rehab properties in need of improvement have the numbers on their side. As LYNK Capital CFO Matt Brothers explained, “Even with increased borrowing and supply costs, rent returns on updated homes can realize positive cash flow more quickly than in prior market cycles. The imbalance between supply and demand would indicate little chance of a dramatic dip in rental prices for the near future. This paired with the slow rate of housing starts, the current opportunity to capitalize on improving distressed housing cannot be understated.”

by Ben Lyons

nvestors looking to build value beyond simply purchasing

PENT-UP DEMAND FOR HOUSING Even as the pace of real estate price growth slows and home sales are impacted by affordability concerns, a fundamental lack of housing inventory remains. Freddie Mac estimates a shortage of 3.8 million homes (including both rental and ownership) across the United States, and the Department of Housing and Urban Develop- ment’s August report indicates single-family housing starts in July were more than 10% below the June figure. Although the Fed is expected to initiate additional rate increases and mortgage applications recently reached the lowest levels this millennium, the fundamentals of the real estate market are very different from the dislocation that occurred in 2008, because mortgage lending standards are now more robust. Given the pent-up demand and slowing supply, few expect real estate prices will fall by any significant amount.

turnkey properties (i.e., those already rehabbed, tenant occupied, and generating positive cash flow) can be rewarded with significantly higher cash-on-cash returns. And, as a renovated property becomes a seasoned rental, investors repeat the process with a cash-out refinance, building a high-return residential rental portfolio with low to no out-of-pocket expense. Considering the recent and significant market shift away from historically low interest rates, the frenzied flow of home sales, and ever-increasing property values, a question is on the minds of many real estate investors: “Is there still opportunity for BRRRR investors in the cooling real estate market?” In a word, yes. Professional real estate investors continue to Buy, Rehab, Rent, Refinance, and Repeat. Although real estate investors always face challenges, the current environment can hold promise for experienced professionals looking to build a rental portfolio by renovating distressed or undervalued homes. The leaders of LYNK Capital share some important market indices and trends that support the potential upside and ongoing need for renovations-to-rentals in the housing industry.

RISING COST OF HOME OWNERSHIP CREATES OPPORTUNITY

“As the cost of home ownership continues to rise, many Americans are choosing to rent rather than buy a home,” noted LYNK head

10 | think realty magazine :: november – december 2022

THE BASICS OF BRRRR (BUY, REHAB, RENT, REFINANCE, REPEAT)

• BUY BRRRR investors are not seeking a property that has already been fully renovated; instead, their goal is locating the right value-add property that checks all the boxes: an attractive location for future tenants and requires enough improvements to bring out its value. Accurately calculating the After Repair Value (ARV) is a critical step in determining how successful the process will be. When evaluating properties to renovate, investors have the option to buy properties that don’t qualify for traditional financing (i.e., major roof damage, inoperable kitchen, damaged drywall) or those that are less appealing than the local inventory (either too small, not enough bedrooms, or lacking expected amenities such as upgraded bathrooms). These can provide opportunity to update a home and outfit it with specific features to attract and retain an ideal tenant, providing the investor doesn’t bite off more than they can chew. • REHAB Beyond making a home habitable and considering wishes of future tenants, numerous considerations should be factored when developing a renovation plan—from cost and availability of materials, access to and affordability of skilled labor, and timeline to complete the property. Experienced real estate investors, even those who have strong connections to suppliers and tradesmen, will readily acknowledge every plan should have some contingencies built in for cost and time overruns. Projected rental value is important in deciding which improvements to make, but if you’re planning to rent the renovated property, it’s important to factor in the after-repair value (ARV) the home will reasonably sell for following rehab. • RENT A properly rehabbed home will attract strong tenants and typically require fewer expenditures for future maintenance. Rental properties are long-term investments. Although some investors gain early equity through their improvements, and some realize positive cash flow from the get-go, most rental properties see the bulk of their profit over time.

Ben Lyons is the co-founder of LYNK Capital, a private equity fund providing capital to real estate investors and builders, and leads the LYNK Capital Mortgage Fund. With nearly 40 years in the mortgage banking and real estate industries, Lyons’ experience includes the founding, building, and selling of several mortgage banking platforms. Having been a founder or co-founder of a commercial bank, a title company, a consumer finance company, and several mortgage banks, Lyons has sponsored countless residential and commercial real estate projects. An avid supporter of education, Lyons has served on multiple school boards and currently sits on the board of a private leadership and college preparatory school. He volunteers teaching personal finance and has authored “Be the Bank” and “From Worry to Wealth.” • REPEAT Leveraging the learnings and equity earned through the process, investors can re, building a portfolio of properties and wealth. Experienced real estate investors often find that repetition offers advantages. Knowing which contractors to count on, how to navigate local processes such as permitting, and projecting potential pitfalls and windfalls. • Typically, projected cash flow is simply what’s projected at present and doesn’t account for future rent increases, appreciation, demand, and inflation. If financed with a fixed-rate loan, cash flow spread will continue to grow over the life of the rental property. • REFINANCE Once a rehab project is complete, investors looking to retain the property can often secure a rental property loan from the private lender who financed the renovation. Debt Service Coverage Ratio (DSCR) loans are qualified using the property’s income (rent) rather than Debt to Income (DTI) loans, which require proof of employment income and borrower’s tax returns. Investors looking to repeat the process by reinvesting a portion of the property’s equity will refinance the property with a long-term fully amortized loan that can provide a cash-out option. Although there is often a required seasoning period in which rentals need to have tenants before being eligible to refinance for a long-term rental loan, a short-term bridge loan with a cash-out option can be an optimal solution through the seasoning period.

thinkrealty . com | 11

DESIGN

CREATIVITY

After

Extreme Makeover: Creativity Is a Must! ALTHOUGH EVERYONE LOVES AN EXTREME HOME MAKEOVER, THERE ARE REAL TRICKS TO COMPLETING ONE SUCCESSFULLY.

by Michele Van Der Veen

lmost all extreme makeovers require one thing: creativity. How creative you can ultimately be determines whether you can pull off a project as large and as complex as an extreme makeover! Getting creative means more than coming up with great designs, however. It also means being able to work outside your comfort zone, which some people may not be able to tolerate. But, if you can push yourself through A

and stay creative, you’ll inevitably realize a greater profit. Let’s look at the particulars of one extreme makeover.

homes. You could say it was a diamond in the rough. But with only two bedrooms

and one bathroom, the first issue that needed to be addressed was the square footage. Adding more bedrooms and more bathrooms would help justify investing large sums of money to make the home pencil out on paper for a profit. The home’s construction materials sent up some definite red flags as

ADDRESSING THE GLARING ISSUES

This home was a drug house for more than 10 years. On the positive side, it was located in a neighborhood of newer custom-built

12 | think realty magazine :: november – december 2022

well. Because the house was built out of cinder block, making changes to it would be difficult and more costly. Then there was the overall appear- ance of the home. It had absolutely no curb appeal and lacked style of any kind. It was going to take some serious creativity to overcome this hurdle. Houses with as many issues as this one are perfect for an extreme makeover. Because of their many issues, these homes sit on the market longer and offer an opportunity to be purchased for a much lower price. Given the number of things wrong with the home, buyers and investors stayed away from purchasing it. PUT YOUR IDEAS ON PAPER FIRST Taking on any extreme makeover almost always starts on paper. Seeing the additions on paper first will help you visualize the possibilities. It is much easier to erase a bad idea on paper than it is to stand back, see it in full form, and realize you really just made an expensive mistake! By putting your ideas on paper, you’ll be able to better determine whether you can realistically carry them out. Your creative juices will flow as you apply your ideas to paper. Seeing them in front of you will help you in the overall creative process. The more hands on and involved you are, the better chance you’ll have of turning out a beautiful product. Don’t worry that you’re not a drafter or a talented artist. You just have to be able to play with and get creative with some ideas on paper. Once you come up with a floor plan you think will work, you can have it professionally drafted and engineered, if needed.

During

areas had ample square footage for adding a large laundry room and an extra-large master suite with a giant master bathroom and walk-in closet. Because the home sits on more than two acres, there was plenty of room to add a separate garage to the side of the house. Working around the cinder blocks. With the square footage problem solved, the cinder block issue need- ed to be addressed—there’s always concern when renovating a home built out of cinder block. There’s an even greater concern if you’re planning to do an extreme makeover on the home. Every kind of work you need to do to renovate a home built out of cinder block is much harder. Think about adding new electrical, new plumbing, drywall, moving walls, or adding a window with cinder blocks as your walls. Even hanging a picture becomes that much harder! Anything is possible with a little ingenuity, and this is where creativity plays a role. Working around and through all these hurdles takes thinking outside

BRINGING THE IDEAS TO LIFE With extreme makeovers there is no cutting corners. If you are not all in, you shouldn’t take the project on. Increasing the square footage. A big part of getting a return on your investment on a property like this rests with increasing the home’s square footage. Increasing the size, even if it’s only 500 square feet, will benefit you. To bring in more buyers to justify the work and effort for this project, the home needed at least three bedrooms with two bathrooms. It also needed a laundry room to compete with other homes for sale in the area. Trying to find this additional square footage required some creativity. A large walk-through breezeway connected the garage to the house and led to a creative solution. The garage was on the smaller side and the breezeway served no real purpose, so they were the perfect areas to rework. The two

thinkrealty . com | 13

During

the box to do the renovation and to keep costs down. Being creative is not just about coming up with a good design, it’s about finding a way to make that design work within reason. Creating curb appeal. Curb appeal has a big impact on buyers these days. An extreme makeover such as this one needed to be eye-catching, memorable, and a must see! This home had a low-pitched roof, cinder block walls, and outdated aspects all around. Real creativity was needed to come up with an exte- rior to entice people to want to come visit this home in person. With a new higher-pitched roof and a porch, this lifeless, styleless cinder block home quickly became a country chic dream home. The higher-pitched roof added interest and made a more distinct statement. The porch gave the home a welcoming, country feel. The paint’s brownish-red tones made the home memorable and warm, lending it an almost barn-type feel. Defining the style of a home in this way helps give it an identity buyers can relate to and fall in love with! Batt and board siding was used to address the cinder block on the exterior, enhance the overall look and feel, and play up the “country

opportunity for any home renovator willing to face those challenges, brave the unknown, and sacrifice sleepless nights to pull off the project! An extreme home makeover will take you on an incredibly rewarding and creative ride—one you’re sure to never forget! •

chic.” Because of the cinder block, there was no way to attach the siding in the typical way, nearly creating a dead end to the whole design idea. However, where there’s a will there’s a way. With some ingenuity and help from a local hardware store, the contractors were able to apply the siding quickly and with no struggle at all! Remember, getting creative comes in different forms, not just with design. Adding shutters and exterior lighting added detail and helped to create a designer look and highlighted the “country chic” look even more. Not all homes are candidates for an extreme makeover. Finding the perfect house that checks all the boxes is not as easy as it seems. But taking on such a project is a thrilling adventure for anyone willing to let themselves go and be creative! From beginning to end, every step of the way, an extreme makeover is a creative adventure with a new challenge every day. It offers a grand

Michele Van Der Veen is host of Good Day segments, including Flip It, Decorate Like a Designer, and Stage to Sell. She started her career in real estate

investing more than 30 years ago. A published author, Van Der Veen has been recognized and featured in international magazines for her unique approach to interior design. Acquiring a formal education from the Interior Designers Institute of California, her experience stems from building custom homes to flipping more than 100 homes and working in commercial real estate development alongside her father at a young age. Not afraid to push the limit on her own designs and investments, Van Der Veen will often be heard reassuring her team about her decisions by saying “Don’t worry, we are the comps!” For more on Van Der Veen’s work or to contact her, visit iHeartHomescorp.com.

14 | think realty magazine :: november – december 2022

FIX & FLIP LOANS

48 Fund Your Deal In Hours

8.99% Lock In Interest Rate

Required APPRAISAL

ADDITIONAL PROGRAM HIGHLIGHTS: Fund up to 90% of the purchase, 100% rehab cost, 70% ARV No deal required, get pre-approved in advance so you can make offers with confidence No appraisal is required, we will underwrite your deal in- house and get you a loan commitment within 24 hours

Available in 49 states & D.C. (all except for NV) Flexible loan options to suit any size project

CALL (410) 883-8493 TO GET PRE-APPROVED

thinkrealty . com | 15 Dominion Financial Services LLC. NMLS ID # 898795, 1029 N Calvert St Baltimore MD 21202. Dominion Financial Services LLC is not currently licensed in NV. Dominion Financial Services, LLC is licensed or exempt from licensing in all other states. Dominion Financial Services, LLC is licensed in Minnesota as a Mortgage Originator (License No. MN-MO-898795). Dominion Financial Services, LLC is licensed in Arizona as a Mortgage Banker (License No. 0950308). Dominion Financial Services, LLC is licensed as a California Finance Lender and Broker under Department of Business Oversight (License No. 60DBO 91679). Dominion Financial Services, LLC is licensed in South Dakota as a Mortgage Lender (License No. ML-05220). Dominion Financial Services, LLC is licensed in North Dakota as a Money Broker (License No. MB103364). Dominion Financial Services, LLC is licensed in Vermont as a Commercial Lender (License No. 898795 CLL). Dominion Financial Services, LLC is licensed in Oregon as a Mortgage Lender (License No. ML-5763). Dominion Financial Services, LLC is licensed in Idaho as a Mortgage Broker/Lender (License No. MBL-2080898795). Dominion Financial Services, LLC | NMLS# 898795 | 32 South St, Baltimore, MD 21202 | DominionFinancialServices.com

COVER STORY

DAY ON THE HILL

16 | think realty magazine :: november – december 2022

GRC PUSHES TWO ISSUES DURING DAY ON THE HILL The committee focused on eviction moratoriums and HOA oversight.

hink Realty’s Government Relations Committee (GRC) advocates on behalf of real estate investors, professionals,

on the Hill campaign, meeting with staff members from the offices of congresswomen Maxine Waters, current chairperson of the House Financial Services Committee, and Nydia Velazquez, chairperson of the Small Business Committee. Each meeting allowed GRC members to express concerns and build awareness for the real estate investment community, particularly for investors and housing providers. The group exchanged ideas and positions, and several GRC members were invited to share additional feedback and perspective. Future input from the Think Realty and AAPL committees on these issues was recognized to be beneficial for all stakeholders.

and associated service providers. This year the committee focused primarily on these two topics: eviction moratoriums and homeowners association (HOA) oversight. The committee paid particular attention to instances in which those in power exercised new or rarely utilized authority to exert control or limit powers of an individual or business. The committee was joined by members of the GRC from the American Association of Private Lenders (AAPL), an affiliated organization. Together, the committees participated in their annual Day

EVICTION MORATORIUM Representatives from Congresswoman Velazquez’ office were eager to hear feedback on the unintended consequences of the eviction moratoriums, particularly how they led to increased costs of housing for tenants. They quickly agreed and asked if there were other ways we could work together, particularly to support small businesses owners. They recognized that real estate investors are small business owners and agreed to discuss our interests in the future.

HOMEOWNER OVERSIGHT Representatives from Congresswoman Waters office were amenable to the challenges facing real estate professionals, particularly with what we felt was overreach on behalf of HOAs and their recent interest in restricting investors and housing providers from purchasing homes in certain neighborhoods. After several ideas were discussed, the representatives steered the conversation to housing vouchers, one of Representative Waters’ current priorities.

thinkrealty . com | 17

The Unintended Consequences of the Eviction Moratorium EVICTION MORATORIUMS ULTIMATELY LEAD TO LESS AFFORDABLE HOUSING FOR RENTERS.

by Chris Ragland

18 | think realty magazine :: november – december 2022

CASE STUDY

n March 2020, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act to

alleviate burdens caused by the pandemic. One of those measures was to issue a 120-day eviction moratorium. When Congress did not extend the ban, the Centers for Disease Control and Prevention (CDC) took measures to do so. Ultimately, the Supreme Court struck down the measure, saying the CDC lacked the authority to issue the injunction and invited Congress to enact eviction moratoriums through proper legislation. UNINTENDED CONSEQUENCES OF THE EVICTION MORATORIUM Although Congress and the CDC were quick to protect renters, there was little to no discussion about the impact of eviction moratoriums on housing providers. The consequences of the moratoriums have led to increased costs, more burdensome processes, and often an untenable environment to conduct business, especially for small business owners. Here are some specific issues facing housing providers during an eviction moratorium: 1 RENTAL ASSISTANCE PASSED DIRECTLY TO THE RENTER. Rental assistance often went directly to the renter. In many cases, that assistance never made its way to the housing provider and was instead pocketed by the renter. 2 BURDENSOME DOCUMENTATION AND PROCESSES. Governing authorities’ processes created significant friction between renters and housing providers. These processes often led to the renter refusing to communicate or participate in the process altogether. 3 HOUSING PROVIDER CARRYING COSTS CONTINUED, DESPITE MORATORIUMS. Housing providers are still paying insurance, taxes, management, maintenance, and often mortgages. These costs are substantial, especially for small business owners who may have only one or two properties. 4 LACK OF DUE CARE BY THE RENTER. Armed with an eviction moratorium, many renters refused to make repairs for damages they created or even notify the housing provider about issues that needed to be resolved on the property.

To illustrate the micro-margins small business owner housing providers face, let’s look at an example of a single-family home investment property with a cost basis of $140,000. Note the expenses that continue through an eviction moratorium. For this example, we have also removed any vacancy assumptions.

Annual Income (Rent): Property Tax (0.67%)

$18,000

($938)

Insurance (0.95%) Maintenance (3%)

($1,330) ($4,200) ($1,400) ($1,260) ($9,120)

Improvements (1%) Management Fee (7%)

Mortgage

Annual Net Income

($248)

In this example, the housing provider is losing $248 per year and is counting on long-term appreciation. This is a poor investment, but one that is too common. To make ends meet, this housing provider may cut back where possible, typically on capital improvements or maintenance. This obviously has a long-term negative impact on the property and, therefore, the renter’s experience. Or, the housing provider may choose to self-manage the property. But if the provider is not equipped to do so properly, the renter may have a poor experience. The housing provider cannot choose to forego property tax, insurance, or the mortgage (the largest expense). Any interruption in the income stream (rent) is devastating and often results in the turnover of the property (at a discounted price) to another investor who increases rents and passes the expense to the renter. Eviction Moratoriums interrupt this income stream, putting the housing provider in a position to exit the business and sell the property. This action results in housing stock that is less affordable for the next renter. Eviction moratoriums increase the costs for housing providers and raise the cost for renters.

thinkrealty . com | 19

Chris Ragland has managed real estate-related businesses for the past 20 years. Ragland has exposure to all aspects of real estate, including brokerage, disposition, insurance, management, finance, and development, but his favorite role to play is investment mentor. An active investor and principal in several real estate-related ventures, Ragland continues his mentoring mission through his investment firm, Ragland. In addition to real estate, he serves on several nonprofit boards and is active in the startup community in Austin, Texas. NEXT STEPS The Government Relations Committee will meet at its next quarterly meeting to discuss ways we can take advantage of recent inroads created with representatives from Congresswoman Velazquez’ office. Real estate investors and housing providers are indeed often small businesses, and these connections with members of Congress will act as a solid foundation for discussions in providers need renters. Our mission is to provide a safe and healthy home for our customers, while operating a successful business for ourselves. If we work together, we can protect renters without placing an undue burden on housing providers. In the end, we can prevent costs from being passed to renters. Here’s how: 1 RENTAL ASSISTANCE SHOULD GO TO PAY RENTS. Housing providers should be able to apply for and receive rental payments directly. The renter should not be burdened with the process. 2 SIMPLIFY THE DOCUMENTATION AND APPLICATION PROCESS. The process to obtain rental assistance was and is incredibly burdensome. This process should be simplified and streamlined. 3 EXTEND RELIEF TO HOUSING PROVIDERS IN THE FORM OF TAX INCENTIVES. Housing providers cannot shoulder the entire cost burden. That is not an equitable solution. Maintenance, insurance, management—these are all services that must continue even during a pandemic. Tax incentives should be provided to housing providers facing an eviction moratorium. Housing providers are often small business owners doing their best on small margins. They provide a valuable service for the American people and should be supported in any way possible so that more housing stock can be preserved, expanded, and serviced properly for renters who deserve a safe and affordable place to call home.

THE REAL IMPACT OF THE EVICTION MORATORIUM Here are some of the “consequences” of the eviction moratoriums: 1 PUT SMALL BUSINESS OWNERS OUT OF BUSINESS. Perhaps the biggest impact of the eviction moratorium in the housing market was its direct hit on small business owners. The eviction moratorium caused many small business owners to rethink the business and exit. The homes in their portfolios were often acquired not by homeowners but by larger institutional hedge funds that do not improve the home but seek to maximize rents. Eviction moratoriums put small business owners out of business and increase costs for renters. 2 INCREASED ADMINISTRATIVE EXPENSES. For housing providers able to stay in business, it became more expensive to operate. Those expenses are repackaged and passed to the renter. Eviction moratoriums make it more difficult to provide housing, and they raise the cost for renters. 3 INCREASED REPAIR COSTS. For some renters, destroying property was an emotional outlet against housing providers during the pandemic. Now that housing providers are gaining access to these units again, they are incurring additional expenses to repair the unit. These costs are passed to the next renter. Eviction moratoriums remove the incentive of due care by the renter and raise the cost for renters. 4 COSTS OF REFINANCING AND RECAPITALIZING. For housing providers who needed to make repairs, pay late mortgages or other fees, or even cash out their equity to make ends meet, refinancing a mortgage on the property may have been the only choice. This leads to mortgage fees, higher interest rates, and additional carry costs that are passed on to the renter. Eviction moratoriums increase the costs for Housing Providers and raise the cost for renters.

OUR ASK IS SIMPLE Please engage with housing providers to create better ways to help renters in the future. Housing

20 | think realty magazine :: november – december 2022

Is the HOA Against Real Estate Investors? WE SHOULD NOT BE PUTTING SMALL INVESTORS IN THE SAME CATEGORY AS INSTITUTIONAL INVESTORS.

by Derreck Long

the future. ecently, a prestigious outlet published an article that made claims about disputes between the Homeowners’ Association and investors buying property in their neighborhood. Unfortunately, while there is some truth to the claims, the article lacked the proper nuance about the reality of the situation. This incident was not between the HOA and all real estate investors; rather, HOAs are battling hedge funds. R

The problem stems from massive hedge funds with billions of dollars in capital coming into these residential neighborhoods and buying out as many properties as they can get their hands on. The original article did use the term “hedge fund,” but a later edit changed the term to “real estate investor.” This change may have been for the sake of accessibility, because the average non-investor might not fully understand the difference between a hedge

thinkrealty . com | 21

If investors are unable to purchase properties in certain areas, then ultimately you could see the decline of the “small business” in the area.

the undesirable “eye sore” properties in order to rebuild and make them better, which ultimately increases the value of the overall neighborhood.

PROPERTY INVESTORS BOLSTER OLDER NEIGHBORHOODS

Time takes a toll on all things. As neighborhoods age, more improvements are needed to maintain a proper standard of living. Situations like these usually cause a mass exodus of current residents into newer developments because the average homeowner lacks the resources and the desire to revitalize aging property. Additionally, these houses will remain vacant— prospective homeowners will not waste their money on properties that will cost them extra due to repairs and maintenance. Investors are the ones that ultimately pump life back into these neighborhoods. Rehabbing old properties is not the only perk investor-owned property provides: Investors also possess the ability to provide unique sources of financing to people who otherwise could not afford to become a homeowner. SMALL BUSINESS THREATENED If investors are unable to purchase properties in certain areas, then ultimately you could see the decline of the “small business” in the area. Real estate investors go above and beyond to find, improve, and maintain these properties through small businesses in the local community that know the area. Consider how many lending companies or property management companies are out there. Remember all the contractors and construction-related companies too. These industries are dependent on investors, and without them, all of these industries would be drastically changed forever. HOA REVENUE According to the Greater Houston Partnership, 8,730 new homes have been added to the Houston market alone since the beginning of July. Remember, more than 94% of all properties located in Houston fall under HOA jurisdiction. If investors own only 50% of those homes (most likely they own more), investors would be bringing to HOA neighborhoods 4,400 new people a month that will be paying HOA fees. That’s more money in their pocket. HOAs run on the capital they receive from

fund and a regular property investor. But by using the broader term, they have inspired homeowners’ associations across the country to pass provisions to limit investment into their communities. One HOA group took this to the extreme, attempting to pass provisions so that no investors could buy any properties in their neighborhood. They seemed to be leading the charge and were able to get an interview published with the Wall Street Journal a second time, which was also rereleased on realtor.com. This ultimately led to other HOAs trying to follow suit. The HOA communities believe non-homeowners will not maintain the property as well as a homeowner, directly decreasing the values of the homes as a result. This is truly their only concern. You can see this in multiple articles written on these topics. Frankly, this information is misleading. Today we are here to debunk some of the current myths and provide more insight on what is actually taking place. WHERE IT STARTED The issue stems from hedge funds buying vast amounts of properties in neighborhoods. Given their immense capital, hedge funds have a unique ability to buy hundreds, if not thousands, of homes. Although they have the leverage to buy all these properties, they do not have the resources to maintain them sufficiently. They profit off the sheer number of properties they can turn over, not the value they create by rehabbing. For the average investor, the intent is different. Average investors see properties as individual projects, extracting value from these investment homes so they can either sell it at a higher value or keep good tenants in there and build passive income. Historically, HOAs welcome these types of investors because they will buy

22 | think realty magazine :: november – december 2022

homeowners. If an investor can bring in new people to buy or rent any of these homes, that is more money in their pocket directly. This means more capital for things like parks in the neighborhoods, group activities, pools, etc. From the right perspective, those HOA groups should want investors in there to help increase their capital. CAPITOL HILL EVENT Given all of the information provided here, it comes as a shock to some to hear that Congress still does not see the problem at hand. As a member of the Government Relations Committee, Quest Trust Company spoke to Congress on Sept. 21, 2022, at the recent Day on the Hill event in Washington, D.C. When we met with Congresswoman Maxine Waters of California and her staff, their team expressed they felt no need to act on any of these topics. This might be a reflection of a short-term desire to help their campaign. Needless to say, the meeting did not prove successful, and opposing stances remained. However, Quest representatives also had the chance to meet with Senator Sherrod Brown of Ohio and his staff, finding they were much more receptive to the information. As we spoke about problems that could arise in the near future, Brown’s staff asked our opinion on possible solutions, providing a unique opportunity to work with staff members that are trying to be proactive in their community. As Self-Directed IRA investors, we can help improve neighborhoods by increasing property values for everyone, driving up business for small business owners, and keeping the money in our communities where it belongs. It is clear that the harm stems from the giant hedge funds that are buying up properties in bulk, and it isn’t fair to put “the little guy” in the same category. It’s crucial that each one of us does what we can to protect our investing freedoms and our wealth, so consider how you can get involved in making a difference. • Derreck Long, senior IRA Specialist CISP at Quest Trust Company, served in the military from 2010 to 2014. He then attended Northern Arizona University, where he received a degree in global marketing. After graduating college, Long worked with the FBI but quickly started looking for additional ways to make money. He discovered note investing and has been a private lender ever since. Long has experience with a large range of notes, ranging from equity appreciation tosecond-lien notes to the traditional first lien, and more. Long is a member of Think Realty’s Government Relations Committee, where he researches tax code, new bills, and law changes at the congressional level.

thinkrealty . com | 23

Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42 Page 43 Page 44 Page 45 Page 46 Page 47 Page 48 Page 49 Page 50 Page 51 Page 52 Page 53 Page 54 Page 55 Page 56 Page 57 Page 58 Page 59 Page 60 Page 61 Page 62 Page 63 Page 64 Page 65 Page 66 Page 67 Page 68 Page 69 Page 70 Page 71 Page 72 Page 73 Page 74 Page 75 Page 76 Page 77 Page 78 Page 79 Page 80 Page 81 Page 82 Page 83 Page 84 Page 85 Page 86 Page 87 Page 88 Page 89 Page 90 Page 91 Page 92 Page 93 Page 94 Page 95 Page 96 Page 97 Page 98 Page 99 Page 100 Page 101 Page 102 Page 103 Page 104 Page 105 Page 106 Page 107 Page 108 Page 109 Page 110 Page 111 Page 112

Made with FlippingBook Online newsletter