Real Estate Questions

Without getting overly political, development costs are outrageously high in California due to excessive regulation, high labor costs, high worker’s comp costs, and out of control spending by local governments. Let’s say a lot costs $100,000 and the cost to build is $125 a sqft with a typical 1800 sqft home. That would come to about $225,000. Add the $100,000 land cost to the $225,000 building costs, but it doesn’t stop there. When you add the building permits (which in many local cities are running about $50,000 or more), and in some cases additional utility tie in fees, schools fees, Etc, Etc. You can quickly see why affordable housing is not practical. In the above example the house would be at least $375,000. Then there is financing costs, holding costs, Real Estate commissions, Title and Escrow fees, and transfer taxes too.

I have said for years that local governments could increase affordable housing by waiving the permits costs for a builder who would put a deed restriction for 10 years that only people with an income of 80% of the median local income or less could buy the home. This would eliminate a big peace of the development costs in the short run and limit the increase in value of the home to keep up with local wages for a reasonable time to allow for affordable housing.

Local governments like to complain about a lack of affordable housing, but in fact they are a big part of the problem.

For someone who wants to be very passive or does not have a traditional down payment this can be a good option. However, I have never invested in one Myself. I like the control of owning the property myself. I have heard from many clients that have been burnt and lost their entire investment in Securitized real estate investments.

Most of the big REIT’s are fairly safe, but there are many small companies running around with securities backed investments that are pretty risky.

Unless it is a big REIT, I would be very careful about investing in any securitized real estate investments without some serious research into who you are dealing with.

These are some basic items to keep in mind:

Property management, vacancy factor, ongoing maintenance, water, sewer, garbage, property taxes, yard maintenance, The cost to get a property rent ready after a vacancy, rent up fee if using a property manager. In Multifamily properties many times there is a common hot water heater that the seller pays for. HOA if applicable.

A good broker can tell you what you are missing if you show them your proforma cash flow statement.

We all assume that with lower birth rates the population will start to shrink. I am optimistic that this will never happen for several reasons. The first and foremost reason is that systems like Social Security need an increasing population to remain viable. If birth rates continue to go down the government will likely loosen immigration standards to keep the population curve on track.

So what will happen when all the baby boomers start to downsize? I am predicting that there will be an over supply of the McMansions in the suburbs. This will lead to smaller homes appreciating very well and larger homes not doing quite as well if family size trends continue. If people are having no kids or 1 to 2 kids they will not need a 5 bedroom home in the suburbs.