Now is the time of year when our Texas clients should be receiving your proposed tax valuations for your January tax bill. Look for this in the mail. If you do not receive this then you should check with the county appraisal district to see if your mailing address is correct. I have included links to most of the Dallas area appraisal districts on the right hand side of this blog page. I will add our Austin counties soon. We see situations where the address of the owner is the actual property instead of the address where you receive your mail - it is very important that you resolve this issue! If your address on the tax roles is incorrect you need to contact the tax office and make the change.
Your appraisal is supposed to map to the retail market price of the home. If your home is overvalued you may want to take steps to contest your home valuation in order to reduce your tax burden. Last year we outsourced this to a company called NTPTS and they had success in reducing the taxes on 50% of the homes they reviewed. If you want have this review done for your home this year please contact Holland Brown of NTPTS at Holland@ntpts.com and request your property be reviewed. This year there is a flat fee of $150.00 for this service and this fee will be paid directly from your trust acount. Please make sure you tell Holland you are a Prime Properties client.
The average benefit gained last year was $189.00 for those clients where an adjustment was made. This may not seem significant, but it should get you at least two years at the lower rate.
If you purchased the home after January 1, 2007 and the price paid on your HUD-1 shows a lower price than what is on the tax valuation you should definitely seek a reduction.
There is a deadline. If you want to contest your taxes the tax board must be notified no later than May 31, 2008. You can file the intent to protest yourself or you can have NTPTS do this for you.
I hope this helps, let me know if you have any questions about this process.
Wednesday, April 30, 2008
Tuesday, April 29, 2008
New Blog Format (4/29/08)
I have switched to using an application called "Blogger" for the format of this blog. It will allow more frequent updates since this format is easier to use. Also, as many have requested a format which supports feeds so they can see when new information is made available. I have cut and pasted some of the more useful posts from last year. I hope you find this format to distribute information of value and we will work to provide additional avenues whenever possible.
HOA Issues - Very Important! (11/17/2007)
This message is regarding HOA dues and foreclosure. Over the past year I have had over one dozen of our clients have homes which were filed for foreclosure or actually foreclosed on by HOA’s because the dues were not paid. This is a tragic and avoidable situation, but if it happens it can cost you a tremendous amount of heartache and money. Please understand – they do not put a lien on the house, they foreclose on the house and you lose title!
1) Most important - know if the home is in an HOA and know if you paid dues in the last year
a. You should know if you are in an HOA by reviewing your closing documents from when you bought the house
b. If Prime Properties pays your HOA dues then check your statements from the December/January time frame
2) HOA dues are not paid from escrow, they are paid by you or by Prime Properties for you
a. We had one client who did not pay his HOA dues because he thought they were paid from escrow
i. The penalties and legal fees added up to over $5,000
ii. Even though he has recovered ownership he still has additional expenses including a lost tenant, vacancy and other expenses
3) If your home belongs to an HOA and you have not paid any dues in the last year you are at risk of foreclosure
4) If the HOA does not send a bill and it goes unpaid then the normal option for the HOA is foreclosure
a. The covenants usually say the bill is due and payable without demand, meaning you must pay it even if you never receive a bill
5) If the HOA sends the notice to the actual home in question then tenants normally throw the notices away
6) If the USPS knows you do not live there they will return to sender without the tenant even knowing what happened
a. When this happens the HOA may pay an attorney, at your expense to “track you”
b. If the HOA cannot find you to deliver the demand for payment they will foreclose on the house, take possession and evict your tenant
7) You have already given the right to foreclose to the HOA as part of the covenants you agreed to when you bought the house
8) Prime Properties pays all HOA dues in the December and January time frame, but we only pay dues for the bills we receive
a. If we do not receive a bill we do not pay the dues
b. If we are paying your dues, check your statement and if you do not see a payment by February 10 please call your property manager immediately
9) If the house goes to foreclosure you can generally recover during a cure period, but the attorney’s fees can be expensive
10) Here are some of the reasons we have seen why an HOA bill was not received:
a. The title company did not give the HOA your address or Prime’s address after closing
i. They just used the default address in their system which is the address of the physical property
b. The HOA received the correct information from the title company but did not use that information for their records (They just used the default address in their system which is the address of the physical property)
c. The HOA changed management companies and did not properly transfer all the records (They just used the default address in their system which is the address of the physical property)
d. The HOA management company changed computer systems and did not properly transfer all the records (They just used the default address in their system which is the address of the physical property)
e. You moved in the last year and your forwarding information from the USPS expired before the HOA sent out their annual bill
Address forwarding by the USPS is usually less than a year.
f. The tenant threw away the notices, went to the foreclosure and bought the house themselves
g. The tenant ignored the notice and threw them away
h. The tenant read the notice and then left the property fearing you were not paying your mortgage (All the tenant sees is “foreclosure”, they do not know why and assume the worst)
In order to avoid any of these problems please know and understand:
· Know if the property is in a required HOA
· Know when the dues are paid
· Know who is paying your dues
· Make a note on your calendar each year to insure this task is complete
Property Taxes (11/1/2007)
Property Tax time is here. If you do not have your taxes escrowed you should be receiving and paying your tax bills now. Please make sure you pay on time to avoid penalties. You get to deduct the expense in the year you pay, so pay by December 31 to claim the expense in the 2007 tax year.
About 15% of our clients took advantage of the service by NTPTS to review and contest their tax valuation. Some of the reviews reflected an accurate valuation so it did not make sense to contest. The average client savings of those who used the service was just under $200.00 with an average valuation of around $140,000. This may not seem like much, especially after paying NTPTS for the services but you need to look a little deeper to fully understand the benefit.
Your initial adjustment from 2007 should carry into future years. Resetting your valuation at a lower level should continue to benefit each year by a similar amount but you do not have to pay NTPTS for future years. $200.00 savings each year is like getting a 10% reduction in your management fees and over a 10-15 year time frame most clients hold their investments it adds up to $2,000-$3,000. This is a fine return for the average fee paid to NTPTS of $150.00.
If you own properties in Texas look for important information we will be sending you on special savings on your property insurance. We have worked to make Prime Properties a certified property managment company in the state of Texas which allows you to receive special discounts and higher coverage on your insurance through specific carriers. A professionally managed investment property is a lower risk to insure and we have worked to get certain insurance carriers to recognize this and pass the savings to you!
About 15% of our clients took advantage of the service by NTPTS to review and contest their tax valuation. Some of the reviews reflected an accurate valuation so it did not make sense to contest. The average client savings of those who used the service was just under $200.00 with an average valuation of around $140,000. This may not seem like much, especially after paying NTPTS for the services but you need to look a little deeper to fully understand the benefit.
Your initial adjustment from 2007 should carry into future years. Resetting your valuation at a lower level should continue to benefit each year by a similar amount but you do not have to pay NTPTS for future years. $200.00 savings each year is like getting a 10% reduction in your management fees and over a 10-15 year time frame most clients hold their investments it adds up to $2,000-$3,000. This is a fine return for the average fee paid to NTPTS of $150.00.
If you own properties in Texas look for important information we will be sending you on special savings on your property insurance. We have worked to make Prime Properties a certified property managment company in the state of Texas which allows you to receive special discounts and higher coverage on your insurance through specific carriers. A professionally managed investment property is a lower risk to insure and we have worked to get certain insurance carriers to recognize this and pass the savings to you!
Communication Issues (9/2/2007)
This is going to start out as a rant based on a problem we have in the management of single family homes, but it will end up tied directly to our core values of what we do for our clients. One of the big challenges facing us in our business are based on the facts that
1) The properties we manage are spread all over town and
2) Many of the questions that come up can only be answered by talking to the property manager who has visited the property.
This creates problems for our clients and their tenants because; when anyone has a question which needs to be answered the person who can best answer the question is almost always not available.
Tenants are particularly frustrated because they want the property manager of the single family home to be like the manager of an apartment, where they can walk into the office and talk to their property manager about a problem they have. Tenants walk into our office without an appointment and get mad because the property manager for their home is not there to help them. And I don’t mean frustrated, I am talking rip roaring, ready for Jerry Springer mad! It is very hard to explain to them the fact of why they cannot get immediate help without escalating the situation. When we tell them that the property manager is not available because the homes he manages are not here at the office, it is impossible to say it without sounding like a schmutz.
In the current world everybody wants everything NOW. We are spoiled by the fact that we have so much information available just by typing in a Google search; people don’t understand when they cannot get an instant answer. When we started putting a version of the owner’s monthly statement on-line the first thing we got was a complaint that the on-line version was simply a reflection of the monthly paper statement – everyone wanted the data up to the minute and real time. The reason why more information is not available more quickly in the property management business comes down to money, pure and simple. I should more appropriately say lack of money. The business of professionally managed single family homes is not large enough to provide funds to create the systems for the broad based real time technologies you get from your bank. It is only in the last 5 years that my utility providers all provide me with the ability to view and pay my bills online, and almost every single one of the 150 millions households in the United States has utility service. The high technology tools will come over time, but we need to wait for the technology costs to shrink much further.
One fact that will never change is the importance of the property manager who needs to put his eyes on the property and provide first hand factual accounts of the situations. One person needs to put their eyes on the property, record what they see, make trained and informed decisions. Property Management is not a situation where our answers are a piece of information that can be pulled up from a computer by anyone with a one week crash course in how to use a computer program. Again the costs of managing a single family home is higher then apartments because answers can take hours instead of minutes, simply because of the time it takes to travel to the product. Not only is the product spread out over town, but each product is unique. In an 800 unit apartment complex you may have 8-10 different variations of the same product, the same product assembled differently – and you always have back-up product which can provide raw materials to provide almost instant fixes. With 800 single family homes you have 800 different products. When we have tenants who have a need for any air-conditioning problem be solved within 24 hours we recommend they live in an apartment or a hotel.
One of the big accommodations we request from both clients and their tenants is time. Time is used to juggle our resources to solve problems in a cost effective manner. Neither the landlord nor the tenant wants quick answers if it becomes costly. Remember the piece of paper in cubicle world where it asks, your want it 1) Done Fast 2) Done Right and 3) Done Cheap? In any well managed situation you can usually get two out of three. This business is not usually life and death where speed can be more important than all else, so we usually sacrifice the immediacy in favor of costs reduction. There are exceptions to this rule, and it usually involves when lack of speed starts to impact revenue. It can make sense to spend slightly more if it reduces or eliminates the cost of a tenant turnover or can reduce a vacancy. The ability to solve problems more quickly will improve over time as the number of professionally managed homes increases and more large organizations like Prime Properties participate in this industry.
There will always be delays in this business as we apply critical thinking to the unique facts of each situation, but the application of technology to assist in the decision making, affect results and to communicate to all will continue to improve as we use the revenue stream to invest in better technology and training. Our current strategy is to use our current revenue stream and cost model to improve the technology without increasing costs to our clients. In order to make changes happen faster in our current business model we need a larger revenue stream. If you want us to get better faster then refer more clients and tenants to us! Another option on how to increase our technology spending is to increase our fees and that is the opposite of the direction we want to be. As we continue to increase our revenue stream we will be able to provide better service, faster service at a lower cost for all our clients. It’s not the size of the organization which will make these improvements happen, it will just allow the improvements to be available at a lower cost. We always sum up our three main goals as:
1) Be the best at matching the proper resident to a home as quickly as possible
2) Be the best at keeping the total cost of ownership low
3) Be the best at educating our clients and their tenants to help achieve a quality rental experience for both
Everything I spoke about today is based on items #2 and #3 above. Those of you who have been around Prime know that I am responsible for making items #2 and #3 happen. David Kadleck, my business partner, will go on his own rant about #1 at some point in the future as David is the king at figuring out ways to get the right tenant in a home in a timely manner.
1) The properties we manage are spread all over town and
2) Many of the questions that come up can only be answered by talking to the property manager who has visited the property.
This creates problems for our clients and their tenants because; when anyone has a question which needs to be answered the person who can best answer the question is almost always not available.
Tenants are particularly frustrated because they want the property manager of the single family home to be like the manager of an apartment, where they can walk into the office and talk to their property manager about a problem they have. Tenants walk into our office without an appointment and get mad because the property manager for their home is not there to help them. And I don’t mean frustrated, I am talking rip roaring, ready for Jerry Springer mad! It is very hard to explain to them the fact of why they cannot get immediate help without escalating the situation. When we tell them that the property manager is not available because the homes he manages are not here at the office, it is impossible to say it without sounding like a schmutz.
In the current world everybody wants everything NOW. We are spoiled by the fact that we have so much information available just by typing in a Google search; people don’t understand when they cannot get an instant answer. When we started putting a version of the owner’s monthly statement on-line the first thing we got was a complaint that the on-line version was simply a reflection of the monthly paper statement – everyone wanted the data up to the minute and real time. The reason why more information is not available more quickly in the property management business comes down to money, pure and simple. I should more appropriately say lack of money. The business of professionally managed single family homes is not large enough to provide funds to create the systems for the broad based real time technologies you get from your bank. It is only in the last 5 years that my utility providers all provide me with the ability to view and pay my bills online, and almost every single one of the 150 millions households in the United States has utility service. The high technology tools will come over time, but we need to wait for the technology costs to shrink much further.
One fact that will never change is the importance of the property manager who needs to put his eyes on the property and provide first hand factual accounts of the situations. One person needs to put their eyes on the property, record what they see, make trained and informed decisions. Property Management is not a situation where our answers are a piece of information that can be pulled up from a computer by anyone with a one week crash course in how to use a computer program. Again the costs of managing a single family home is higher then apartments because answers can take hours instead of minutes, simply because of the time it takes to travel to the product. Not only is the product spread out over town, but each product is unique. In an 800 unit apartment complex you may have 8-10 different variations of the same product, the same product assembled differently – and you always have back-up product which can provide raw materials to provide almost instant fixes. With 800 single family homes you have 800 different products. When we have tenants who have a need for any air-conditioning problem be solved within 24 hours we recommend they live in an apartment or a hotel.
One of the big accommodations we request from both clients and their tenants is time. Time is used to juggle our resources to solve problems in a cost effective manner. Neither the landlord nor the tenant wants quick answers if it becomes costly. Remember the piece of paper in cubicle world where it asks, your want it 1) Done Fast 2) Done Right and 3) Done Cheap? In any well managed situation you can usually get two out of three. This business is not usually life and death where speed can be more important than all else, so we usually sacrifice the immediacy in favor of costs reduction. There are exceptions to this rule, and it usually involves when lack of speed starts to impact revenue. It can make sense to spend slightly more if it reduces or eliminates the cost of a tenant turnover or can reduce a vacancy. The ability to solve problems more quickly will improve over time as the number of professionally managed homes increases and more large organizations like Prime Properties participate in this industry.
There will always be delays in this business as we apply critical thinking to the unique facts of each situation, but the application of technology to assist in the decision making, affect results and to communicate to all will continue to improve as we use the revenue stream to invest in better technology and training. Our current strategy is to use our current revenue stream and cost model to improve the technology without increasing costs to our clients. In order to make changes happen faster in our current business model we need a larger revenue stream. If you want us to get better faster then refer more clients and tenants to us! Another option on how to increase our technology spending is to increase our fees and that is the opposite of the direction we want to be. As we continue to increase our revenue stream we will be able to provide better service, faster service at a lower cost for all our clients. It’s not the size of the organization which will make these improvements happen, it will just allow the improvements to be available at a lower cost. We always sum up our three main goals as:
1) Be the best at matching the proper resident to a home as quickly as possible
2) Be the best at keeping the total cost of ownership low
3) Be the best at educating our clients and their tenants to help achieve a quality rental experience for both
Everything I spoke about today is based on items #2 and #3 above. Those of you who have been around Prime know that I am responsible for making items #2 and #3 happen. David Kadleck, my business partner, will go on his own rant about #1 at some point in the future as David is the king at figuring out ways to get the right tenant in a home in a timely manner.
Rental Market Overview (8/20/2007)
Here is my promised update on the rental markets and what I see as the potential impacts of the current macro-economic issues. The big issues everyone sees in the newspapers are 1) the Mortgage Crisis of 2007 and 2) the instability of the stock market, which is being blamed on the fear and uncertainty created by the Mortgage Crisis of 2007. I want to talk about the residential rental markets in the areas served by Prime Properties. The impact we have seen is that there is every reason to be upbeat about owning residential rental properties in our markets once you begin to understand the forces which impact us and our clients. What I will discuss is directly relevant to the Dallas/Forth Worth and the Tulsa markets. The Baton Rouge and Austin markets have additional influences which I will discuss at a later date, but much of what I discuss will also impact these markets as well.
I will jump into the middle of the issues first by stating that the markets we serve tend to be “buy and hold” markets, not “buy and flip” markets. If you want to “buy and flip” you should be in markets of low supply and extraordinary (>10%/year) appreciation. Right now it looks like buy and flip markets do not exist anywhere in the US. I am still buying rental properties and I am looking for additional buy and hold opportunities.
To understand our market for rental properties you should first understand the general economy in our markets and what economic engines drive the growth in our areas. Dallas and Fort Worth (when I refer to Dallas I include the whole metroplex area of 6,000,000 people) is business driven. Although Dallas was first settled in 1839, it became a young adult in 1873 when the city paid the Houston and Central Texas Railroad US $5,000 to shift its route 20 miles to the west and build its north-south tracks through Dallas, rather than through Corsicana as planned. A year later, Dallas leaders could not pay the Texas and Pacific Railroad to locate here, so they devised a way to trick the Railroad. Dallas had a rider attached to a state law which required the railroad to build its tracks through Browder Springs—which turned out to be just south of Dallas’ Main Street. If they had been honest, disclosing that Browder Springs was basically downtown Dallas, the verbiage in the law would probably not have passed. So in 1873, the major north-south and east-west Texas railroad routes intersected in Dallas, thus ensuring its future as a commercial center. Since that time and until now Dallas has made its mark on the world as a business center, growing to be the fourth largest metro area in the country, trailing only New York, Los Angeles and Chicago. We are not known for our beaches, our mountains, our mineral resources or much anything other then our business acumen.
Current business (and job) growth is based on an eager work force with a good work ethic, business friendly environment with minimal government interference and an active business recruitment effort, a lower wage environment which is partly attributable to a low cost of living (especially housing) and strong, consistent immigration. Our two natural resources we rely on are our eager workforce and low cost, easy to manipulate land. Curiously, until the recent Barnett shale natural gas finds there has been almost no oil & gas drawn from Dallas County. Even this natural gas field may not make it any further east than Tarrant County (Fort Worth). We leverage our easy to manipulate land by building a transportation and communication infrastructure in advance of needs. Few places in the country have the gumption, the land, the foresight and aggressiveness to plan and build an airport right in the very middle of their commercial centers. The DFW airport covers a land area larger than the island of Manhattan and the cities have used this asset to help grow the whole surrounding area.
Immigration into Dallas is another factor which makes the area attractive to business. Each year, for the past 20 years, the area has grown by around 100,000 people. This means an additional 50,000 households that need a place to live and heads of households who need work. This growth is forecasted to continue for the next 20 years. This expanding workforce helps keep employee costs competitive and the fact that the cost of living remains low means that the workforce can lead a comfortable life even at reduced wage levels.
Austin and Baton Rouge, with their major education emphasis have more of their economic growth from high-growth start ups. Dallas does not have a reputation as a high-tech business incubator even though such high-tech firms as Texas Instruments, EDS, Perot Systems and Broad.com had their start here. We are a tremendously attractive to more mature high-tech firms with companies such as Nortel, Ericsson, Microsoft and other major international firms using Dallas as a primary employment location. One of our shortcomings is the lack of the major higher education institutions relative to our population size. Dallas has more slow-growth start ups and a history of major corporation relocation. A slow-growth startup which requires a longer time to achieve traction can survive longer in the low cost environment of Dallas.
Dallas employers which want to keep their headquarters in high cost areas like New York, Boston and San Francisco can provide lower cost major back office support with large, employee intensive, operations here in Texas. A call center employee costing $80,000/year (burdened pay) in San Francisco and $24,000/year in Mumbai will cost a company about $40,000/year in Dallas, and this back office support is only three hours by plane from either coast without the cultural challenges of going to India.
Understanding these economic drivers is important in order to have proper expectations on where you make your money owning a rental home in Texas. Leverage is important, since the appreciation is slow. It will continue to be slow because it is relatively inexpensive to put up new homes and almost all our towns are for pro-growth. Too much leverage can hurt; if you buy a house with no money down you may not have enough cash flow to cover your expenses from rental income. I always buy with 20% down, in part because I do not want to cover expenses out of my personal income’s cash flow. A 20% down payment usually allows me to pay for all expenses out of cash flow and even take home some tax free income at the end of each year. I will say it again, this is a buy and hold market. This emphasis on the amount of the down payment is based on an understanding of proper cash flow to achieve your goals. At times I am willing to sacrifice cash flow for greater appreciation, but as I said earlier we have a track record of mild appreciation in most our markets.
After all the comments above - what impact has the current Mortgage Crisis had on rental properties? We started seeing the positive impacts in November of last year. That is when three things happened, 1) the majority of people who wanted to buy a house had made their way to the builders and bought a house (including many who should not have become homeowners) 2) the tightening of mortgage qualifications found people who wanted to buy houses could no longer qualify (meaning that if they wanted to live in a suburban lifestyle in a house instead of apartment then they needed to rent) and 3) interests rates kept creeping up until the costs of a monthly house payment sometimes surpassed the cost of rent. November of 2006 is when our vacancy rates dropped from the 12% range down to the current range of 5-7%. The job growth in Dallas has continued to be strong at this time and the unemployment rate has continued to drop. The combination of continued job growth and declining vacancies has led us to start pushing up rents for the first time in four years.
Will the current Mortgage Crisis harm the rental market? I believe the current situation could have that potential if it creates a declining employment market, but, because of the other market forces which impact Dallas, we may even have a chance for Dallas to defy a declining national job market. Remember that in the 1970’s when the country’s economy was failing across the board Dallas was growing. The reason for growth in Dallas was that as major corporations looked to cut costs one of the ways they did this was to relocate whole departments and sometime whole companies to locations where they could cut their overall expenses. The 1970’s saw some of Dallas greatest growth and its true emergence as a national and international player. As jobs became scarce elsewhere aggressive minded job seekers move to where the jobs are and they will move to Dallas. These types of employees are the go-getters who move here and make good lives for themselves by creating value for themselves and the companies they work for.
So here is what you need to watch. Immigration rates into Dallas, job growth in Dallas and unemployment rates in Dallas. If your homes are in Tulsa, Baton Rouge or Austin then you need to look for the same information for these towns. Another point to remember is that rents are a lagging indicator. What this means is that as the economy deteriorates, rents are one of the last things to turn down, as it goes up, rents are the last to catch up. If the Mortgage Crisis turns into a situation where prices in Dallas are declining, then I will be looking to aggressively buy in Dallas and I may even change my personal guidelines, going to a 10% down payment when purchasing a new home. I hope you have done a good job of protecting your credit - you should still have mortgage money available to you. If banks have money then they need to lend it out. Remember that banks view money as a liability; they need to find people who will borrow it.
As you can tell I am a fan of history and what it might tell us of what will happen going forward. I am sure this new period of changing economics will teach us additional lessons, but for now I believe the future looks bright for the investments I have in residential rental properties.
I will jump into the middle of the issues first by stating that the markets we serve tend to be “buy and hold” markets, not “buy and flip” markets. If you want to “buy and flip” you should be in markets of low supply and extraordinary (>10%/year) appreciation. Right now it looks like buy and flip markets do not exist anywhere in the US. I am still buying rental properties and I am looking for additional buy and hold opportunities.
To understand our market for rental properties you should first understand the general economy in our markets and what economic engines drive the growth in our areas. Dallas and Fort Worth (when I refer to Dallas I include the whole metroplex area of 6,000,000 people) is business driven. Although Dallas was first settled in 1839, it became a young adult in 1873 when the city paid the Houston and Central Texas Railroad US $5,000 to shift its route 20 miles to the west and build its north-south tracks through Dallas, rather than through Corsicana as planned. A year later, Dallas leaders could not pay the Texas and Pacific Railroad to locate here, so they devised a way to trick the Railroad. Dallas had a rider attached to a state law which required the railroad to build its tracks through Browder Springs—which turned out to be just south of Dallas’ Main Street. If they had been honest, disclosing that Browder Springs was basically downtown Dallas, the verbiage in the law would probably not have passed. So in 1873, the major north-south and east-west Texas railroad routes intersected in Dallas, thus ensuring its future as a commercial center. Since that time and until now Dallas has made its mark on the world as a business center, growing to be the fourth largest metro area in the country, trailing only New York, Los Angeles and Chicago. We are not known for our beaches, our mountains, our mineral resources or much anything other then our business acumen.
Current business (and job) growth is based on an eager work force with a good work ethic, business friendly environment with minimal government interference and an active business recruitment effort, a lower wage environment which is partly attributable to a low cost of living (especially housing) and strong, consistent immigration. Our two natural resources we rely on are our eager workforce and low cost, easy to manipulate land. Curiously, until the recent Barnett shale natural gas finds there has been almost no oil & gas drawn from Dallas County. Even this natural gas field may not make it any further east than Tarrant County (Fort Worth). We leverage our easy to manipulate land by building a transportation and communication infrastructure in advance of needs. Few places in the country have the gumption, the land, the foresight and aggressiveness to plan and build an airport right in the very middle of their commercial centers. The DFW airport covers a land area larger than the island of Manhattan and the cities have used this asset to help grow the whole surrounding area.
Immigration into Dallas is another factor which makes the area attractive to business. Each year, for the past 20 years, the area has grown by around 100,000 people. This means an additional 50,000 households that need a place to live and heads of households who need work. This growth is forecasted to continue for the next 20 years. This expanding workforce helps keep employee costs competitive and the fact that the cost of living remains low means that the workforce can lead a comfortable life even at reduced wage levels.
Austin and Baton Rouge, with their major education emphasis have more of their economic growth from high-growth start ups. Dallas does not have a reputation as a high-tech business incubator even though such high-tech firms as Texas Instruments, EDS, Perot Systems and Broad.com had their start here. We are a tremendously attractive to more mature high-tech firms with companies such as Nortel, Ericsson, Microsoft and other major international firms using Dallas as a primary employment location. One of our shortcomings is the lack of the major higher education institutions relative to our population size. Dallas has more slow-growth start ups and a history of major corporation relocation. A slow-growth startup which requires a longer time to achieve traction can survive longer in the low cost environment of Dallas.
Dallas employers which want to keep their headquarters in high cost areas like New York, Boston and San Francisco can provide lower cost major back office support with large, employee intensive, operations here in Texas. A call center employee costing $80,000/year (burdened pay) in San Francisco and $24,000/year in Mumbai will cost a company about $40,000/year in Dallas, and this back office support is only three hours by plane from either coast without the cultural challenges of going to India.
Understanding these economic drivers is important in order to have proper expectations on where you make your money owning a rental home in Texas. Leverage is important, since the appreciation is slow. It will continue to be slow because it is relatively inexpensive to put up new homes and almost all our towns are for pro-growth. Too much leverage can hurt; if you buy a house with no money down you may not have enough cash flow to cover your expenses from rental income. I always buy with 20% down, in part because I do not want to cover expenses out of my personal income’s cash flow. A 20% down payment usually allows me to pay for all expenses out of cash flow and even take home some tax free income at the end of each year. I will say it again, this is a buy and hold market. This emphasis on the amount of the down payment is based on an understanding of proper cash flow to achieve your goals. At times I am willing to sacrifice cash flow for greater appreciation, but as I said earlier we have a track record of mild appreciation in most our markets.
After all the comments above - what impact has the current Mortgage Crisis had on rental properties? We started seeing the positive impacts in November of last year. That is when three things happened, 1) the majority of people who wanted to buy a house had made their way to the builders and bought a house (including many who should not have become homeowners) 2) the tightening of mortgage qualifications found people who wanted to buy houses could no longer qualify (meaning that if they wanted to live in a suburban lifestyle in a house instead of apartment then they needed to rent) and 3) interests rates kept creeping up until the costs of a monthly house payment sometimes surpassed the cost of rent. November of 2006 is when our vacancy rates dropped from the 12% range down to the current range of 5-7%. The job growth in Dallas has continued to be strong at this time and the unemployment rate has continued to drop. The combination of continued job growth and declining vacancies has led us to start pushing up rents for the first time in four years.
Will the current Mortgage Crisis harm the rental market? I believe the current situation could have that potential if it creates a declining employment market, but, because of the other market forces which impact Dallas, we may even have a chance for Dallas to defy a declining national job market. Remember that in the 1970’s when the country’s economy was failing across the board Dallas was growing. The reason for growth in Dallas was that as major corporations looked to cut costs one of the ways they did this was to relocate whole departments and sometime whole companies to locations where they could cut their overall expenses. The 1970’s saw some of Dallas greatest growth and its true emergence as a national and international player. As jobs became scarce elsewhere aggressive minded job seekers move to where the jobs are and they will move to Dallas. These types of employees are the go-getters who move here and make good lives for themselves by creating value for themselves and the companies they work for.
So here is what you need to watch. Immigration rates into Dallas, job growth in Dallas and unemployment rates in Dallas. If your homes are in Tulsa, Baton Rouge or Austin then you need to look for the same information for these towns. Another point to remember is that rents are a lagging indicator. What this means is that as the economy deteriorates, rents are one of the last things to turn down, as it goes up, rents are the last to catch up. If the Mortgage Crisis turns into a situation where prices in Dallas are declining, then I will be looking to aggressively buy in Dallas and I may even change my personal guidelines, going to a 10% down payment when purchasing a new home. I hope you have done a good job of protecting your credit - you should still have mortgage money available to you. If banks have money then they need to lend it out. Remember that banks view money as a liability; they need to find people who will borrow it.
As you can tell I am a fan of history and what it might tell us of what will happen going forward. I am sure this new period of changing economics will teach us additional lessons, but for now I believe the future looks bright for the investments I have in residential rental properties.
Tulsa Update (8/17/2007)
I just returned from two days in Tulsa. I like this town! A combination of mid-America heartland and southern charm, the Tulsa area is the home to just under 1,000,000 people. Historical Route 66 runs through the middle of the downtown area and the history is evident in the art deco architectural style of the many buildings along this roadway. Oklahoma is a fairly new state: it will celebrate its centennial on November 16 of this year and it holds a youthfulness, freshness and energy. The town’s original growth surge was based on the local oil and gas industry and these industries still have a powerful impact. Oil and Gas are the old money in town. Tulsa’s current growth is from the many firms that choose the area for their regional headquarters and call centers. The travel giant Sabre is based here, American Airlines has a major maintenance facility here and Tulsa is the headquarters of Vanguard Rent-A-Car and the combined Thrifty/Dollar Rent-A-Car. One of the factors which provide a stable growing economy is the diversification when more then 80% of the jobs are from small businesses. What was once a single industry town dependant on the oil & gas industry is now a stable economy which is very recession resistant. What do we like about Tulsa from a rental property standpoint? Tulsa is providing our clients with strong rent/value ratios. The cost of ownership is kept low by the income tax. Since Oklahoma has a state income tax it does not need to heavily tax homes. This saves our typical client $2,000-$3,000 per year in taxes versus a comparably valued Texas home. If you are one of our clients with investment properties in Tulsa, you should get dialed into this exciting town with more information available at http://en.wikipedia.org/wiki/Tulsa,_Oklahoma .
Utility Expenses - Vacant Properties (8/14/2007)
Utility expenses are a burden (expense) when a home is empty. The best solution to relieve this burden is to put a tenant in the house as quickly as possible. How much does it cost for electricity on a vacant home? During the winter the costs are usually less than $50.00/month. During the summer the air conditioning unit uses up a much greater amount of electricity. Here is what you can expect to pay this summer for electricity. Take the square footage of the home and multiply by $0.20. So a 1,000 square foot home costs about $200.00/month. A 2,000 square foot home costs about $400.00/month. This is based on a home which has a 10 to 13 SEER air conditioning unit. The SEER is the energy efficiency rating of the unit. Until last year most rental homes had units rated at 10 SEER. In 2006 the minimum SEER rating was increased to 13 SEER. What is the impact of the SEER rating on your electric expense? A home with a 20 SEER unit should use only half the electricity to cool your home, meaning your cost per square foot goes down to $0.10/sq ft/month. Another point to consider is the cost to cool (or heat) a vacant home is higher then a furnished home. This does not answer the question of why have the utilities on in vacant houses. I will save the detailed answer for another time, but the answer includes a combination of marketing issues, infrastructure maintenance and special costs imposed by certain utilities when you totally terminate service to a house. Our experience shows that paying utility expenses on a vacant house is a burden, but less costly than the alternatives.
First Blog Post (8/12/2007)
Welcome to the first post on this page. First I want to thank all of our clients who allow us to serve and assist them with their investment properties. I too am a Landlord so I speak from experience as a Landlord as well as someone who is dealing with the issues we face each day managing over 2,000 tenants. It is my task and the task of everyone at Prime Properties to assist you to make your experience as a Landlord the best it can be. I will try to post notes here weekly on the issues we confront as Landlords. I will also try to answer questions you would like to see addressed, especially if you feel the questions may be of interest to a broader group of our clients. My first task is to ask you to email me with questions. Please send me an email with your question(s) to KMartin@PrimeProp.com. I will either answer your questions direct or I may post answers here on this web page.
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