I thought I’d link to my recent mention in the Wall Street Journal (print and online) this weekend in the Money and Investing section.  The article was about how alternative investments are booming from outflows of capital in the equities market.

“Thinking Outside the Stocks“

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In February the average sales price of a home was $112,035 up slightly from January’s $111,598 according to the Memphis Area Association of Realtors.  This reflects some demand from 1st-time home buyers executing on the soon to expire tax credit.

While this number is good, it’s still down 5.5% over February 2009 as home prices struggle to recover.  Also inventories increased slightly as foreclosure pace picks up.

I’m seeing inventories increase more in the lower end where I think investors will continue to see prices drop.  The strong sales activity seems to be near the average sales price.   That $100,000-125,000 range is hot right now for first time buyers,  people moving up from smaller homes and those downsizing to lower their cost of living.

Of course I’m slightly biased as that also is the average value of the investment homes Investor Nation offers for sale here in Memphis.  I’m a huge proponent of investing in what is the highest in demand and average sales price is that product.

With the lack of new homes being built it, foreclosure inventory will be absorbed quickly in 2010.  Unfortunately that doesn’t mean someone who wanted to build a new home in the $125,000 range isn’t going to purchase a $30,000 home in place of it.  My strong belief is that the inventory swell will be in highest on the low end and lowest near the middle.  The people in the middle will buy near the average sales price when they can’t build a home.

You’ll see appreciation this year in Memphis near this average sales price and slightly higher.  So target investments with multiple exit strategies that have appraised values $90,000 and higher.  This should catch the bottom of the owner occupant contingent.  If long term value is not on your list, then take a closer look at the lower end.  Keep in mind the equity on the lower end can be false as the exit strategy is usually to another investor versus an owner occupant.   You also need to pay attention to socio-economic factors such as crime, unemployment, schools, and education levels.  These can impact your cash flow significantly.  Analyzing the numbers along isn’t enough.

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In my latest post on the Bigger Pockets real estate blog, I discuss reformatting your mindset due to the latest economic real estate conditions.  Also I discuss emerging trends over the next 12 months.

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My latest post on the Bigger Pockets real estate investment blog answers the questions about where interest rates are headed when the Fed stops buying Mortgage Backed Securities.

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In case you missed my February postings on the Bigger Pockets Blog:

February 1st, 2010:

Last Week’s Ugly Economic News Reveals Bright Spots

February 8th, 2010:

Fed Leaving Door Open to Extend Mortgage Backed Security Purchases

February 15th, 2010:

Real Estate Economist Sees Opportunity Until 2014

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As a landlord, enterepreneur, and real estate investor since 2000, for 10 years, there has been a significant evolution in the real estate investment industry. Given the current financial climate of 2009 and likely the next few years, many real estate investors are following the US trend of a more conservative approach to investing. People are now focused on less on speculative plays and more on real estate investments that actually pencil from the cash flow perspective. People can no longer secure investments with no money down strategies which will rise to inconceivable heights.

I am seeing a return to safety particularily in emerging markets within the US. These markets have been safehavens, typically out of the spotlight, in less exciting areas than coastal markets. These markets include areas within the South and Midwest which didn’t see massive price appreciate during the economic boom and therefore have fallen less, and are quickest to recover. This includes cities like Indianapolis, Birmingham, Charlotte, Memphis, Dallas, Kansas City, and others in this geographic south and central area of the US. Many of thes cities are highly affordable for buyers, have low price to rent ratios allowing real estate investors to easily enter these markets at affordable price points and receive good cash on cash returns, providing them a safe alternative to other investments. These markets felt the current economic downturn and many of them overcorrected on price. Economic principles have proven that markets which overcorrect don’t require job growth to see price appreciation. This is being overlooked by many investors who are looking only at unemployment levels.

I’ve been quietly building my portfolio with properties in areas like these as rents have been holding steady and prices are well below market levels due to high foreclosure rates. While these emerging cities are less glamorous than traditional investment markets like California, Arizona, and Florida, these areas are relatively stable and have solid long term growth prospects.

Upon choosing a market, a new investor will need to identify which properties within those markets are offering the best opportunities. My suggestion? Focus on quality. Quality deals are available in these markets at ridicoulously low prices. I’m focusing primarily on 3 bedroom, 2 bathroom homes, preferably with car storage. Also a new investor should zero in on areas which solid employment numbers within the cities. These areas will have less vacancy and lower crime rates. A quick way to evaluate neighborhoods are ones which have big box retailers near them. If Home Depot, Lowes, and Target have determined these are good areas to put stores, then you can piggy-back off their due-diligence.

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In this post I’m giving you a demo of our new Investor Nation promo vid.  Check it out and give me your opinion.  Hopefully you don’t think I’ve wasted 37 seconds of your life.

Investors Rock Promo Video from Investor Nation on Vimeo.

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I recently sketched out a quick graph of how real estate as an investment behaves over the long term. This is from an income property only perspective.  Think of it as your real estate version of the dividend stock. There are many ways to analyze real estate as a hedge against inflation but I only really care about one; its ability to produce income.  In order to do this we need to toss aside the appreciation aspect and look strictly at rents.

Income Property as an Inflation Hedge

The fact of the matter is rents rise over time and always have.  If you are smart you are getting fixed 15-30 year mortgages (I admit I have a few on 5, 7, 10 year ARM’s but those were more speculative real estate investments). Side note, my CPA recommends getting only 30 year mortgages to keep payments as low as possible.   By locking in for 30 years, your mortgage payment will be fixed.  Some of your other costs will rise like taxes, insurance, cost of maintenance, and property management fees.  But on average your mortgage payment of Principle & Interest will make up the majority of your costs of owing income property.Simply put as rents rise and your mortgage note stays the same, your cash flow increases until ultimately the mortgage pays off.  At which point you are left with taxes, insurance, property management fees, and maintenance.   All which when kept under control will yield a large net cash flow.

This is why income property can be seen as a great inflationary hedge.

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Is it possible for a real estate company to exist where its customers have an emotional connection to the brand?  For a while this has been an unanswered question in my mind.  At first you might be quick to answer, “No”.  I beg to differ.   Many companies exist with brands customers evangelize.  Off hand I can’t think of any in the real estate business.   Usually the agent is the brand.  The industry for much time has been very real estate agent centric.  Cheesy slogans like, “Everything I touch turns to sold!” immediately come to mind.  This trend is starting to shift away from the agent and towards the consumer.   My company, Investor Nation, has built a very customer centric model.   The company puts the investor buyer’s needs before its own and even has an in-house mantra:  ”Client > Company > Commission”.  This keeps us focused on ensuring customers are happy instead of focusing on real estate commissions.   But recently we decided to take this part of our culture a step further.

We really wanted to do something different.  This something, we agreed on, would be entirely about the real estate investor.  We decided that above all our customer, the real estate investor, was a special person who decides to create opportunities for themselves and build wealth through buying investment homes.  As we looked over our client base we realized there wasn’t a certain profile for the average real estate investor.  In fact no real estate investor or customer of ours is average.  These folks are wake-boarding, risk-taking, traveling, band-playing individuals.  The idea blossomed into what we thought would be better as a stand alone place to house this idea.   The idea is all about evangelizing the real estate investor.  Notice I didn’t say our customers.  Real estate investors  need to be evangelized because they rock!

So this weekend we’ll officially unveil Investors Rock! This site will focus entirely on the real estate investor.  Many investors have already shared stories which we’ll be publishing on the site to celebrate these great individuals.  Because anyone who is willing to become a landlord to grow their wealth, ROCKS!  Also the site will feature interesting content that we hope will be shared around the web.  The goal of all of this is to create a movement behind real estate investing.  All the industry has made some pretty big strides, it has room to grow.  We think we are helping push it more mainstream and making it more science than art.  But changing the world in an industry as big as real estate investment isn’t easy.  It is going to take a movement.  We’re going to need YOUR help.

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Finding the right investment home is often a daunting task.  Where would one start?  Zillow, Trulia, Realtor.com?  While these big real estate portals are garnering tons of attention and traffic, many people are using Google search to find smaller companies selling FSBO.  I should know, I started one of them.

While some of our lead generation comes from the larger real estate portals, much of it is organically grown via search or referral business.   Both are largely important in a internet world which is fragmented.   Taking this a step further, companies like ours have become full service filters.  And there are many of them out there.   These types of companies are often selling their own properties instead of listing other sellers’ homes.   In doing so they usually have filtered through many properties to arrive at the batch they are advertising.

This idea of filtering in the past has been called “wholesaling” because the theory was the homes were available at wholesale prices.  The idea of a wholesale price usually means you can buy the home cheaper than retail, but in the real estate investment industry this is often not the case.   Companies offering properties by filtering them are usually offering similar homes available on the search portals and often at prices slightly higher than available via a traditional real estate purchase.  It’s hard to think of this as a “wholesale” transaction.

Some of these transactions merit the premium prices they are often marketed at (which by the way is still discounted from appraised value).  With the premium price should always come premium services.  Investor Nation offers select homes by filtering out homes that don’t meet specific criteria.  The company than zeros in on homes which make an idea purchase for an investor.  Here’s what a filter usually does;

• The investment home sales company combs through many sources including REO’s, auctions, tax sales, online portals, banks, and motivated sellers.
• Home which meet specific criteria are purchased ie: 3 bed, 2 bath, 2 car garage in certain neighborhoods, school districts, etc.
• Due-diligence is then performed in the case of Investor Nation this includes; appraisal, home inspection, construction bids, rental analysis, cash flow analysis, photos, video
• The home is then prepped for sale by pricing it according to methods allowing both the new investor buyer and the company to reach goals
• The home is then marketed usually by digital means

In addition the filter, in this case Investor Nation, offers post sale service to include renovation, renting, and financing.  In doing so the filter company has provided a premium service which increases the probability the investor buyer will have a successful experience and thus repeat purchase.  The companies or filters provide a concierge or white-glove service which is atypical of a normal real estate transaction.

With technology advancing many people ask my thoughts on the future of business like these (like mine).  My thoughts are that businesses focused on consumer needs will thrive in the knowledge age.   I’ve found that leveraging technology and new social platforms allows customers to spread the word more easily.   Also we’ve found the new property portals and advancement in Google Maps to be a benefit to give our listings more exposure than we could get by traditional MLS methods.

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