When property values spike up into the clouds: Lufos

My Grandfather used to say that there was only one time when real estate was a lousy investment, and that was when it was standing still. With no momentum up or down there was no point of insertion and accordingly the speculator could only stand and watch.

Once again we find ourselves in a sharp up surge with prices in the single and multi dwelling properties soaring away like a balloon off the string. Of course the requests for rental payments have


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also increased and the two figures are chasing each other higher and higher.

As leases terminate and come up for renewal the landlord requests have in many instances doubled. The poor tenant trying to hold his housing expense at the traditional 25% of total income is finding that he cannot afford proper housing, the increases put his finances in jeapordy. Any little bobble in employment or job change and the tenant is upside down.

Example: Tenant with family has been renting a small 2 br and 1 ba for $900 a month. Comes end of yearly lease and the landlord informs him that he will not be releasing as he wishes to sell the property to take advantage of the increase in value. This property which used to be worth about $125,000 has now increased to $325,000 and buyers que up to buy.

the tenant goes out and searches for a new little house and there is nothing. The only item available is for rent at $1,450 a month. 1st and last months rent and a $2,000 deposit. Almost $5,000 plus moving expenses. The tenants income around $4,000 a month. He is now upside down and a very good possibility that he will default on his rental payments.

A wave begins and ripples through the rental market. For some reason only known to Landlords they increase the rental rate as high as they can. Ignoring the economic level of the average tenant in their area of operation. If the normal income level is $4,000 a month, and the proper housing payment is 25% which is about $1,000 a month, they ignore and go for higher. Of course it is short sighted and leads to future failures and spasms in rent payment. The urge to increase the rents is endemic.

This coupled with the fact that many many present owners of single family rentals have bought these rentals after double and triple flip/flops after foreclosure. One property a few blocks away was bought prior to foreclosure by a young speculator. He cured the foreclosure, spent a hot $500 on a new door lock and a knocker of brass, painted the door and sold the property. The new owner being unable to qualify for a loan, kept the existing loan current and made a downpayment of $6,000 and executed a small second for $15,000. In one months time a nice speculator recently arrived from Israel bought the property. New loan went on 10% down and he has now invested a total of $345,000.To make an income in proper porportion is impossible but even so he wants $1,600 a month. This is a lower income area. As of now it is vacant. But a nice man newly arrived from Central America is gathering four other families to help him rent and splitting the rent up so that each family pays $400 a month. They will live in relays. Overflowing into the garage and toolshed. It will not be a pleasant occasion. I am sure when the new landlord discovers this state of affairs he will try to correct with an eviction. And the beat goes on.

Now that is the situation. What can we the highly evolved super experienced Real Estate Investors do to correct this situation and at the same time make a profit.

The obvious answer is to obtain the property with no money or a token sum down payment. Perhaps an offer to purchase should be made that enables the existing owner to recover some of his funds and at the same time reduce the monthly payment on the property. lst step bargain for possession of the property. and adjustment of monthly payments.

2nd step, examine the property to see what necessary developments or physical changers to the structure can be made to increase the income or create a proper division of the property into divided rental units so that the existing families do not have to take turns using kitchen and bathrooms.
Examine the placement of the house. Is there enough room at the rear of the lot or at the side to implace another structure. If such a structure were added, could advantage be taken of new forms of construction so that perhaps a more advanced efficient type of house could be added.

Example. House existing 785 sq. ft. 2 br 1 ba. The Zoning of the lot is R-3 which is a limited multiple dwelling. Thus an additional house could be added.

If this housing would take the form of a four unit structure formed from steel shipping containers and erected at a cost of about $150,000. Each unit rented for $800 this would produce a rental income of $3,200.

The existing house could be modified turning it into a super efficiency of 4 units at a cost of $62,000. This also producing a rental income of $800 a unit total $3,200 for structure and the two structures now throw off an income of $6,400 a month.

The rental rate is once more within the grasp of the renters in that area. The income gnerated can more then service the mortgage debt. You have made a contribution to the area housing and what is most important you have turned a bad investment into one that is now positive. So you let your investment grind away.

I saw a house yesterday that was purchased way high it was a two bedroom one bath and about 800 Sq. Ft. It was imediately converted into four sleeping areas and this was accomplished by the utilization of Soji screens dividing each of the two bedrooms into very small bedrooms but capable of holding two adults which gives you sleeping room for 8 persons. My god I thought I was back in Japan. The best part is the additional bathroom which was added at the back so it can service two of the sleeping areas. It also was super efficient in that the shower was over a soaking tub just big enough for two persons at a time to sit in it facing each other. Yes it is a Japanese solution. But necessity is the mother of modification. It works and in time you adjust. The rear patio is going to be enclosed and that gives just enough room to modify it into an additional great room complete with a little Acme efficiency kitchen unit.

What you are doing is modifying existing single family dwelling into multiples. Trying to work with what you have and add the necessary additions as cheaply and as efficiently as posssible.

Given another six months, steel shipping containers utilized in construction of up to 4 units the cost of additional structure on lot will be as quoted above. That solves the problem. Of course there will never be enough to really solve the problem but it is a start.

So here we are Real Estate Investors at function during one of the steepest spikes that has ever been observed. The end result housing that is affordable and is also super attractive and the units so created are at profit.

A secret to erection of container housing is that the financing is going to be performed by the construction company itself. If this can be done (without government support) then price corrections can be accomplished both in the rental market throughout suburbia but also in the erection of new advanced efficient 21st century Modern housing.

We might also consider the offer of long term lease (99 years) on properties which are experiencing problems where the purchase price has gone so high as to be unaffordable to the population within the area. If a long term lease can be made with no money down to speak of, and the payments reflective of reduced interest on the loans outstanding. Or perhaps an excuse of interest during the first five years of the lease in consideration of bringing the properties back into an income stream. A reduction in taxes might also be obtained on an appeal of tax rate. At which hearing evidence is introduced which shows that purchase price of real estate is not truly reflective of true value of the properties as the income to support such values is not forthcoming. This has been done but not since the 1930's.

So fear not the Spike in Price, it is but an opportunity to negotiate with those who bought high in a high market. Many of which are now ready to take losses. Interesting situation and a fun one to negotiate.

Lucius

Busy in the vineyard of Real Estate for the past 50 years. Sometimes profitably and sometimes not. But always interesting

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When property values spike up into the clouds

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