An Inspection Can Make or Break Your Return on a Real Estate Investment

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

This article is based on the episode of the Building Equity podcast “How to INSPECT a PROPERTY BEFORE BUYING + MISTAKES to AVOID for New Real Estate Investors” with guest Josh Jensen, Co-Founder of Inspectify. Click here to watch the episode. Click here to head over to Inspectify, where you can book an inspection anywhere in the country in just a few minutes.

When it comes to buying real estate property, it’s critical for new investors to be informed on the many facets that go into ensuring a viable investment. One of the most crucial tools for assessing a property’s potential return is the home inspection. Recommended for not just investors in real estate but also anyone looking to purchase a home, whether it’s for financial gain or as a residence, the home inspection can provide insight into the possible principal loss or gain on a property, forecasting extra costs for fixes that may be required down the road.

While an inspection should be a major step in the transaction process and play a major factor in determining whether a property is worth purchasing, it’s easy for investors to make mistakes when it comes to the specifics surrounding the inspection.

The 3 Biggest Mistakes Investors Make When It Comes to the Inspection

While inspections can be the single largest source of stress and anxiety when it comes completing a real estate transaction, an inspection report can provide critical information about your real estate investment, becoming one of the most significant aspects of the entire buying process.

Let’s look at the 3 biggest mistakes investors are making with inspections:

1. Not Getting an Inspection– Without completing an inspection on a property, investors are taking an incredibly big risk with their money. Not having any sort of insight into the condition of a roof, foundation, electrical components, major appliances, and so much more could turn an investment into a liability and a potential money pit. Having an inspection completed by a licensed inspector will ensure there’s no conflict of interest and provide all the information investors will need to know when it comes to estimating how much they can stand to make or lose on a property, factoring in the necessary repairs they’ll have to make immediately and in the long term.

2. Underestimating the Costs- After completing an inspection and reviewing the data, it’s imperative for investors to understand the severity of costs for fixes/repairs. Some repairs can be trivial and super easy to complete while others, like replacing old knob and tube wiring to ensure safe electrical outfitting, may require additional spending to remedy. Smart investors should take notes on the recommended repairs and their priorities while also calculating the estimated costs associated with completing them to see if the costs are manageable.

3. Spending Too Much- While having an inspection completed is extremely important prior to purchasing, it’s also smart to ensure investors aren’t spending too much too soon or purchasing extraneous specialty inspections. It’s recommended to delay the inspection until you’re further along into the transaction process, at least until a written contract has been created or a Purchase and Sale Agreement is received because if an investor is converting 50% of the time on deals and they’re spending $400 an inspection, they’ll be spending more money than needed, and possibly wasting cash. It’s also smart to utilize the initial inspection as a filtering process for the specialty inspections. Instead of conducting additional mold, sewer, roof, and, etc. inspections, first see what has been identified as a possible concern in the initial inspection before shelling out more money for inspections that may not be necessary. For example, if you notice a foundation issue during the first inspection, then it would be smart to pay for a specialist to come take a deeper look.

Using Your Inspection as a Guide for Negotiation

Besides using the inspection as a catalog to assess the projected life spans of major appliances, structural elements, and other mechanical systems, it’s also a great report to determine what your concessions will be to finalize your purchase contract. If you’ve discovered major issues, like serious plumbing problems, electrical elements that could lead to a fire, or other legacy mechanical system concerns, you’ll know right away what needs to be addressed and negotiated on if you still want to proceed with the purchase.

While inspections are a valuable tool in calculating imminent costs and negotiating factors, they’re also proving to be an extremely helpful metric on assessing whether an investment will overall be profitable or not, which is why it’s essential all investors conduct an inspection on a property before finalizing any real estate transaction. An inspection is the best option for determining whether your real estate investment will be worthwhile or not.

Protecting Your Rental Property with Move-Out Inspections

Not only are pre-purchase inspections becoming critical, but the industry is also seeing a rise in the number of move-out inspections as well. As a property manager or investor owning a rental property, having an inspection completed before the tenant moves out is extremely helpful in determining accurate damages that may have occurred during occupancy and what other concessions can be made from the deposit. Whether it’s new holes in the drywall or an appliance that’s been destroyed, the quickest way to hold a tenant accountable is during this inspection.

Having a licensed third-party inspector conduct the inspection to ensure there is no conflict of interest makes it much easier for property managers and investors to catch potential issues that could become major concerns down the road. Whether it’s a water heater on the fritz or the early stages of mold development, the best way to stay on top of property maintenance to ensure the longevity of the unit and the reduction of possible long-term costs for bigger repairs is to complete a move-out inspection after your tenant leaves. This will also ensure the property is ready to be rented by new tenants.

Make Inspections a Staple in Your Buying or Owning Real Estate Journey

If you’re in the process of buying real estate or currently own a rental property, it’s more important than ever to use an inspection service you can trust. The cost of not having an accredited inspection could be disastrous, not only resulting in significant loss on your investment but also the overall deterioration of your unit over its life span.

Investors in need of an inspection are encouraged to check out Inspectify. Trusted by leading real estate brokerages and investment institutions, Inspectify is a platform dedicated to helping anyone with their inspection needs. With a click of a button, this ultra-convenient, streamlined service lets users instantly book an inspection with a licensed professional.

If you’re looking to begin your investment journey into real estate using your self-directed IRA, IRA Title Pro is here to make it easier for investors to navigate through the entire closing process, from the property purchase contract to the inspection and closing. Users can expect to close 11 days faster than any other service out there, giving investors an edge on the competition.

Make the smart decision to invest; get started today on your next real estate transaction.

 

The Truth About the 2023 Housing Market; Is a Crash Imminent?

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

This article is based on the episode of the Building Equity podcast “Economist Explains the TRUTH about 2023 Housing Market Crash! | US Economy + Real Estate Break Down” with guest Simon Caron of the Uneducated Economist YouTube Channel, available on YouTube right now. Click here to watch the episode. Check out Simon Caron’s channel here.

For 2023, there are many questions surrounding the housing market. Pundits and economic experts range in their suggestions; factors such as inflation and low housing inventory are used liberally to espouse either an anticipated crash or correction. While the industry is shrouded in uncertainty and worried investors continue to sit on the sidelines, it’s also important to consider that a record high number of investors who bought properties from 2009 to 2015 with self-directed IRAs have sold those properties in the last several months.

This means that while many have missed out on opportunities, there’s also a substantial number of investors who have capitalized, harvesting profits that have flowed back into their tax-free self-directed retirement plans. As we navigate through a high-inflationary environment, it’s more imperative than ever for investors to deploy their capital in meaningful ways. 

Looking at the Price of Lumber to Predict What’s Next for the Housing Market 

To get a better understanding of micro- and macroeconomics and its impact on the housing market as well as foresight on the upcoming year, perhaps one of the best examples of a commodity experiencing similar unpredictable fluctuations in recent years is lumber. Starting with a rise prior to the 2020 pandemic, the price of lumber peaked at $1,700 per thousand board feet in May of 2021, surging over 50% in a year. While there were indications in late 2019 of an impending rise in price with mill closures, mill curtailments, and overall inventory depletions, all signs pointed to a supply chain breakdown as the major impetus and not so much the Fed printing more money, even though they went from $850 billion on their balance sheet to $4.3 trillion.  

Entering the pandemic, we saw the price of lumber start to shoot up. After people started spending their stimulus checks on lumber to build new decks, fences, and remodel their homes, there was a sharp depletion in inventory, very much like the low inventory rates seen in the housing market. As a response to the sharp decline in lumber inventory, mills began firing up, pumping out loads of lumber, only to see the price dip back down to $400 per thousand and then back up to $800 as the industry attempted to keep up with supply and demand. With lumber production being a multi-faceted operation, it’s difficult to see where the demand should be according to the inventory levels.  

Areas across the U.S. are seeing inconsistency with lumber inventory as some pockets are adequately supplied while others are not. Until inventory can be fulfilled evenly across the country, it’s expected that these fluctuations in prices will continue before an equilibrium is found. 

Now juxtaposing the housing market with the lumber industry, you’ll see a similar trajectory as the demand for homes increased; we witnessed a huge jump in home prices, which also started climbing as the 2020 pandemic ensued, reaching epic rates into 2022. But as mortgage rates continue to rise and builder sentiment falls, just as the price of lumber starts to come down, the cost of homes will follow, creating a more opportunistic landscape for investors in the real estate industry.  

Signs of a Housing Correction, Not a Crash 

With builder sentiment falling and existing home sales down around 15% compared to last year, there’s major concern regarding the future of the housing market. Many builders do not wish to get stuck on a project that will result in selling for less as construction costs rise, which can then contribute to low inventory rates. Most speculate that this overall disposition indicates a looming crash, but the most critical component of a pending crash is an increase in foreclosures. For foreclosures to take place, the economy would have to see a rise in unemployment, which would be a major catalyst for people being unable to make mortgage payments. But even in the current economy with talk of a pending recession, we are not seeing a rise in unemployment, which is currently at 3.5%, nor are we experiencing a jump in foreclosures. Foreclosures in general are still relatively low. 

A more realistic outcome for the future of the housing market would be a downturn in home prices. Homes that saw an increase in price of over $100,000 this past year could see their purchase tag reduced by $60-$70,000, which theoretically wouldn’t be a crash but more of a return to normal. Even with a third of homes being purchased by all cash buyers, as mortgage rates teeter around 7%, it’s reasonable to believe buyers will be deterred, resulting in the eventual reduction in home prices. Especially since mortgage rates are no longer increasing at the exponential rate as they were before, it’s more likely to estimate that a reduction in house prices is inevitable, pointing to an eventual housing market correction. 

The Federal Reserve’s Role in the Housing Market 

One of the key strategies implemented during the financial crisis of 2007 to 2009 and the start of the 2020 pandemic was called quantitative easing. The Fed purchased longer-term securities on the open market, including U.S. Treasuries and mortgage-back bonds. The perfect metaphor for a mortgage-backed security is if a bunch of mortgages are thrown into a box and that box is sold off to an investor; everybody’s paying their mortgages and the investor receives the capital investment back plus interest. Because this practice nets significant profits, the Fed created a huge demand in the market for these types of securities, given that it’s guaranteed a buyer and there aren’t concerns about who to sell to. This results in the mortgage rates climbing, security prices falling, and the yields rising, which increases overall mortgage payments due to the interest rate jump. 

These mortgage-backed securities (MBS) are not the toxic asset that they once were; there was a time when people received these mortgages when they really shouldn’t have: either they didn’t have a job, any viable income, or they owned more than one property. Today, these borrowers are much more qualified, making these types of investments much safer. 

The Federal Reserve’s Impact on Inflation 

As the Fed influences interest rates, they also seek to control inflation by raising rates to slow the economy and bring inflation down. Beginning in 2018, the Fed began looking to set an average inflation rate. The biggest misconception surrounds the 2% target; many confuse the 2% average inflation rate with a 2% target rate. It’s anticipated that we will see interest rates low when they shouldn’t be, and we will also see them high when they probably shouldn’t be as well. But it’s a 2% target inflation rate over time, meaning that monetary policy can be adjusted to a lower or higher rate, but over time, the Fed is still aiming for that 2% average inflation rate.  

Interest rates were artificially low for a significant amount of time, causing asset prices to rise dramatically, like the housing prices. This practice is carried out so when prices do drop or when interest rates rise, the Fed can bring those asset prices back down to where they should have been prior to the artificially restricted interest rates to control inflation. 

Based on this information, it’s plausible to believe we’re going to see interest rates stay elevated for a longer than anticipated amount of time. Even after the inflation comes down, the interest rates will stay high to achieve the average inflation rate of 2%. 

Smart Investing in a High Inflationary Environment

As interest rates continue to tick upwards and inflation weighs on the economy, the pressure is on investors to make heathy, safe investments. Many people are still cautious, waiting for a good opportunity to deploy their capital, whether it’s in stocks or real estate. The most challenging aspect for investors is knowing when to engage, finding the right entry point into any market. It may seem like the safest option is to save your dollars, especially since the U.S Dollar Index is the highest it has been in 20 years, but holding onto money over time results in erosion, reducing purchasing power. It’s not unreasonable to predict a deflation scenario as the demand for dollars could explode. On the contrary, it’s also not irrational to predict that over time the dollar could completely lose its value; either way, investing right now is the smartest thing to do.  

One of the benefits of a real estate investment over others, like a stock at $100, is having control of your investment strategy. With real estate, chances are if you have a good tenant, you’ll be getting paid over the next few months. And even if you purchased recently, over time, you’ll be able to increase rent which changes the financials of your return on investment, allowing you to stretch your money even further. Whether it’s high yield mortgage-backed securities or simply a rental property, it’s more imperative than ever for investors to get into the game and deploy their money for long-term gains. 

Explore Resources, Gain Insight, and Make a Better Investment

Whether it’s understanding markets, intrinsic value metrics, or the ins and outs of the real estate industry, smart investors are turning to IRA Title Pro for all their needs. If you’re using your self-directed IRA to buy and sell real estate, then you NEED to know about IRA Title Pro and their countless programs, tools, and educational sources that can help take your investing to the next level. 

Our amazing closing team and national title company provide incredible resources for investors every step of their journey, whether they’re buying, selling, or lending. Our title company caters to self-directed IRA transactors so they can close real estate transactions faster in a streamlined fashion. 

Get in touch with us today if you’re serious about getting off the sidelines and making smarter investment decisions. 

The Latest Real Estate Guide to Investing in the U.S. Housing Market

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

This article is based on the episode of the Building Equity podcast “What’s ACTUALLY Happening in the US Housing Market | A New Real Estate Investors Guide in 2023” with guest Jason Hartman, CEO of Empowered Investor and Real Estate Tools, available on YouTube right now. Click here to watch the episode. Check out Jason Hartman’s work here.

Investing in real estate may be tough for some to consider with asset prices being so high. It can be extremely discouraging when potential investors see the costs associated with completing a real estate transaction, so much so that it may deter people and they miss out on an incredible opportunity to generate long-term profits.

It’s crucial to understand the metrics behind real estate investing when looking at both cash flow and asset prices versus other hard assets, like investing in gold and silver as well as notes and mortgages that are secured by real property investments in private businesses. It’s tough to grasp the worth of an asset without getting perspective on how valuable it actually is when compared to others.

Understanding the Current Economic Climate as it Relates to Real Estate Investing

Recent data suggests that we are on the cusp of a recession. While the Federal Reserve is trying the best they can to stop inflation for our centrally planned economy, had they raised interest rates sooner and at a more gradual pace, the idea of a soft landing might have been more plausible.

While inventory in the housing market is higher than it was before, it is still historically low. As of February 2023, there’s about 625,875 homes for sale in the United States. Experts suggest that a normal market would contain anywhere from 2 to 2.5 times that amount, leaving the current market with approximately 6 months left of inventory at current absorption rates. This isn’t the only deviation; we’re also seeing current property owners with incredibly cheap mortgage rates.

Many homeowners with mortgages have rates far below today’s level, and recent data reveals that 37% of all homes in the United States are paid off, meaning overall, people are not under financial duress with mortgage obligations. To technically have a “crash”, there should be both distressed owners and distressed sellers.

Note: At the time of this writing, we are seeing consumer credit card debt and subprime auto loan delinquencies surge. How this affects the 37% of homes that are free and clear we don’t know, but figured it worthwhile to include as it seems likely we are transitioning.

Based on current data and trends, it’s safe to assume that the rest of the country also has relatively low existing mortgage rates, so there is no evidence or indicators of an imminent crash as of right now.

The Biggest Mistake Investors Make

The first mistake that most investors make is that they don’t invest. People find all types of justifications and reasons to avoid investing in real estate, whether it’s overall hesitancy or attempting to time the market. However, as with any asset class, market timing has historically been proven to be an ineffective strategy. The most successful investors are those that make smart, value-oriented decisions, buying and holding their assets.

A perfect example of this is the great recession of 2008: this was an anomalous instance, an occurrence that happened once in seven decades, and as the economy rebounded, prices began to rise and people began to worry, thinking the metaphorical “bubble” was on the verge of bursting any minute. As many people anticipated this being the peak of the market, they waited for a cool off period, preserving their cash for a “right time” to invest, creating even more doubt and missed opportunities. Had people remembered that we are in a centrally planned economy, they would have had more confidence to capitalize.

As the central planners react to the market, it’s not just a matter of supply and demand or basic economic fundamentals. When things get bad, the Fed makes changes and specific adjustments while the government does the same. During the COVID-19 pandemic, when many chose not to invest or change their current investment strategy, some lost out on appreciation. And that’s the thing about investing, you actually need to invest if you want to reap the benefits.

Furthermore, research has shown if people hold onto their money without investing, it is guaranteed they will lose 9% a year just to inflation.

Using the Right Measuring Stick to Understanding Intrinsic Value

Many people may have trouble assessing value because they’re using the wrong measuring gauge; they compare the price and the value of real estate to one thing: the U.S. dollar. The U.S. dollar is a moving target, meaning it’s constantly being debased by inflation, which makes this metric a huge mistake in terms of determining value. It’s smarter to compare with other commodities and asset prices to understand the concept of intrinsic value.

In November 2022, the National Association of Realtors is claimed valuations could rise, year over year by 1%. Yet larger institutions like Morgan Stanley and Goldman Sachs  are predicting 5-10%, claiming over 2023, we’ll be seeing a 5-10% drop in valuations.

Looking at a country as large and diverse as the United States is, there are almost 400 MSAs (Metropolitan Statistical Areas). There are 50 states with over 3,100 counties and 9,000 cities, meaning lumping these all together is not the correct metric for an accurate assessment.

To get a more precise estimate, the Hartman Comparison Index (HCI) was created by Jason Hartman. This tool compares the price of real estate over the last 52 years to other commodities with intrinsic value that people need to live that are not attached to any one currency.

Commodities such as lumber, concrete, copper, and petroleum products all have intrinsic value, meaning it doesn’t matter what currency they’re being traded in because they’re traded worldwide. They’re needed by everybody.

Hartman Comparison Index (priced in gold)

This HCI example compares the prices of homes to gold. Billions of people consider gold to be money, and up until 1971, the United States operated on a gold standard. But let’s look back to 1970 for some insight when the median price house was $23,000 and gold was $35 an ounce. If you wanted to buy the median price house, you would need 654 ounces of gold. Just 10 years later, as we experienced inflation from the 80s, the median price house tripled to almost $63,000. The gold price went way up to $653, and it would only take 97 ounces of gold to buy the median price house.

Fast forward to 2010 as the country is coming out of the Great Recession; the median house price for a home is $171,000, and gold is almost at $1,100 an ounce. It would take 158 ounces of gold to buy the median price house. Today, the median price of a house is $390,000, and gold is about $1700 an ounce. It would take 227 ounces of gold to buy the median price house.

Priced in gold, housing is certainly not the cheapest it’s ever been, but it’s also not the most expensive it’s ever been either.

Hartman Comparison Index (priced in oil)

Looking at oil, arguably one of the world’s most important commodities, back in 1970, the $23,000 median price house priced in oil was at $4 a barrel, so it would’ve cost 6,400 barrels of oil to buy the median price house. Ten years later in 1980, the house prices almost tripled, and oil was up to $37 a barrel, meaning it would’ve taken 1700 barrels of oil to buy a house.

Looking at today, the median price of a house is $390,000, and oil is at approximately $94 a barrel, meaning it would require 4,100 barrels of oil to buy the median price house.

When assessing whether housing in oil is cheaper or more expensive, it’s clear that it’s not the cheapest it’s ever been but certainly not the most expensive either.

Hartman Comparison Index (priced in rice)

We can look at other popular commodities like rice, which is the food stock of more than half the world, and priced in rice, housing is rather cheap today. And we can keep going.

Hartman Comparison Index (priced in shares of S&P)

We can price it in shares of the S&P 500 index. Priced in the S&P, housing is relatively cheap; it’s only 98 shares of the S&P to buy the median price house. According to the chart, back in 1970, it cost 249 shares of the S&P to buy the median price house, and in 2010, it was 136 shares, meaning price in shares of the S&P for housing is rather cheap, not the cheapest it’s ever been but still affordable.

The best way to comprehend the measurement of what an asset is worth is by comparison/relation to other hard assets. Understandably, most people don’t denominate their lives in gold or oil or any other commodities in the Hartman Comparison Index, but they have a choice, a major one that involves their money and, essentially, their future wealth. When people get paid every two weeks or every month, they do something with their extra money; they either put it in the bank or in a savings account, or they buy stocks or commodities, and they decide on a way to store their wealth until they save enough for a down payment on a house. If people save it in dollars, they can expect that over time because of inflation, they will lose money. Based on these revelations and empirical data, it’s clearly smarter to have money invested in things rather than currency units to maximize their IRA potential.

For more information on the Hartman Comparison Index or any of Jason Hartman’s teachings/strategies, visit his YouTube channel(https://www.youtube.com/@JasonHartmanRealEstate), JasonHartman.com, or listen to his podcast Creating Wealth(https://www.jasonhartman.com/tag/creating-wealth-show/). Investors are also encouraged to check out his Empowered Investor Pro membership(link) and his formal coaching program(link) for further guidance.

Start Getting Serious About Investing Before It’s Too Late

Whether it’s understanding markets, intrinsic value metrics, or the ins and outs of the real estate industry, smart investors are turning to IRA Title Pro for all their needs. If you’re using your self-directed IRA to buy and sell real estate, then you should know about IRA Title Pro and their countless programs, tools, and educational sources that can help take your investing to the next level.

Our closing team and multi-state title company provide incredible resources for investors every step of their journey, whether they’re buying, selling, or lending; we can close up to 11 days faster than any other service out there. Get in touch with us today if you’re serious about getting off the sidelines and making smarter investment decisions.