Unless you've been under a rock for the past several months, you're keenly aware that interest rates have risen and done so drastically. This rate hike is the federal reserve's strategy to get supply and demand back in balance and begins to curb this inflationary cycle that we're currently in. 

This move has caused a dramatic effect on buying pressure, so in one sense, it's beginning to work. This rise in interest rates has halted buyers from continuing their search because they see buying a home as a "more expensive' endeavor than it was before. I guess, in a sense, that is correct, but I would argue that you have to see this market from various perspectives. 

I believe and can prove with actual data that waiting for interest rates to fall can ultimately cost you more money than buying while they're up. Let me explain. 

When purchasing a home, there are several factors to consider. 

1. What do I qualify to buy?
2. What are the interest rates?
3. How competitive is the market?
4. What will be the appreciation rate, both now and moving forward?
5. How much upfront cash will I need to purchase the home I want?

These are not all the questions that need to be answered, but enough for us to dive in and see why waiting for rates to fall could potentially cost us thousands. 

One of the fundamental advantages of owning real estate is not just having a roof over our heads or a place to call home. It is creating wealth. The bulk of our wealth lies in our real estate investment. It is, by far, the largest asset class you can own. And by virtue of appreciation, owning real estate offers the best potential to grow your wealth. 

Let's take some actual numbers and work them out in a scenario to see if buying now, even with higher mortgage rates, might be the best decision you can make. I have been in the real estate industry for almost two decades now. I have weathered the crash of 07’-09' and watched it rebound to a place I've never witnessed. These last few years have been the most robust in history. More people understand the value of owning real estate and have the capacity to buy a home, and that's precisely what they're doing. This clarity flux on home ownership has created a competitive market unlike anything I've ever seen. Most analysts would argue we are in new territory related to home valuation and appreciation increases. 

Supply and demand are basic economics and drive prices in every asset class. I will speak of the real estate market locally because I know it intimately. Montgomery County is a hotspot for owning real estate. Virginia Tech is the economic driver, but when you add in the VT Corporate Research Center, the Montgomery County school system, and the vast amount of tech startups MontCo has given birth to, you can quickly see why people are flocking to live in the area. 

Over the last few years, the asking price of a home has just been the starting point. We have seen most home sales escalate well above the asking price. Not only have the selling prices been well north of asking, but contracts have been void of any and all contingencies. Buyers haven't been able to negotiate home inspections or the cost of potentially low appraisals. These offers have been squeaky clean because let's be honest, it's the only shot you have of landing an executed contract. Contracts cannot have one small hole in them, or guess what? You lose! I have ratified contracts as high as $83,000 over the asking price. You read that correctly. And that's because someone else offered $81,000 over, and we had no cap on our offer. 

The average home has had escalation clauses between 5%-10%, and as much as 20% over the asking price. This scenario might be possible for some, but many buyers simply cannot afford that level of exposure. One of the caveats to escalating that high is that you have to cover the appraisal gap in cash. That cash-to-close can get really large in certain situations. I had one engineering client that landed the 16th offer we wrote! If you are currently in the market for a home, you understand well how difficult it is the find ONE home that you're willing to go after, let alone 16. Buyers have found themselves in positions where they are writing offers on homes that checked almost no boxes just to land an abode to call "home."

It has been a devastating market for many homebuyers, and with interest rates skyrocketing, many have bowed out and decided to rent for the next two or three years as they wait for rates to creep back down. 

OK, that was a mouthful, but I felt I needed you to know that I understand what you're going through. I just bought a home myself and closed on it a few months back. Were rates higher? Yes! Here is my justification, and I think this will be true for many of you as well. 

I had two options. Either I could buy a home with higher rates and less buying pressure and not have to escalate or offer my first-born to get into the house. Yeah, my rate will be higher, but not forever. Rates WILL COME BACK DOWN. It's the cyclical nature of how the federal reserve exercises its power to stimulate or slow down the economy. When they come back down, I will refinance. But looking at the numbers, it clearly made more sense to move forward now instead of waiting for rates to fall. 

We are now seeing homes sit on the market when they wouldn't have lasted two days three months ago. What does this mean for you? You may be able to buy the home you want, negotiate a home inspection, keep the appraisal contingency in place, and possibly negotiate DOWN from the asking price. Here's the dollar value of that decision compared to what we've seen over the last few years. 

I'm going to use a $400K purchase price for the sake of this example. It's close to the median home price in Blacksburg, so it makes sense. If you wait for rates to fall two percentage points before you buy, and you have to escalate 10% over the asking price because of the resurgence of buyers doing precisely what you've done, you'll have to pay $440K for the same home. 

If you buy now at a rate of 5.5%, your monthly principal and interest payment will be $2044.00 per month. With 10% down and including closing costs, your Out-of-pocket expenses will be roughly $50K. 

If you wait for rates to fall to 3.5%, and let's say it takes two years for that to happen, and you have to escalate 10% to compete, you'll be bringing $90,000 cash to close. Your payment will be $428.00 per month cheaper. If you divide the difference of your cash to close by that $428.00, it will take you 93 months or 7.7 years to make up the difference. But to buy that home now and refinance in two years when rates fall will only cost you an additional $10,272. That's almost a 75% savings. But wait, you need to consider a few more IMPORTANT things. 

That $400,000 house in two years will no longer be $400,000. Let's be conservative and say that home prices will appreciate a meager 5% per year for the next few years until rates come back down; that $400K house is now $441,000. That means your payment will be $1782.00 per month, which is only $262.00 per month less than buying it now. The principal amount is now $41,000 higher; you cannot adjust that. Not to mention, you just gave up $41,000 in appreciation that YOU could've realized had you bought sooner rather than later. Add that to your additional cash-to-close, and now you're in the hole $81,000. 

Many buyers will understand the binary choice of buy now or wait and its overall effect on their wealth generation. Those armed with the knowledge of each decision will undoubtedly stay in the market and refinance down the road. Buying now and refinancing in two years will leave you with a smaller fixed mortgage than waiting it out. I know on its face, waiting to purchase with lower rates sounds like a better plan, but the numbers tell a different story. 

Don't wait! Even with a slowing housing economy, prices will still push north, and it WILL cost you more money down the road. I'll be happy to help you navigate the waters and find the home you've been dreaming of, and in the end, you'll be the one smiling. 

Brian McHone 

540-239-5901

Realtor CFS/SRES

REMAX 8

1344 N Main St Blacksburg, VA

Sellers Are Returning to the Housing Market

   As I sit here at my computer, drinking my coffee, I wonder what today might look like compared to a week ago. I'm consistently up between 4:45 and 5:30 every day-even weekends. I drink my coffee, engage in some devotionals, get some of my busy work done before I head off to the gym. Then it's home to shower and 100 mph for the remainder of the day: numerous stops, appointments, and face to face meetings are typical for me almost daily.

But today, it will be different. It will be different for everyone. Today I stay home unless I absolutely have to go out, and if I do go out, I am incredibly aware of how close I get to people, what I touch, what I don't touch, where I go, and so on. I live and work in a college town. Well, we used to be a college town filled with the buzz of students, faculty, and the necessary thousands of support staff who all call Blacksburg home. Usually, it's challenging to get a parking spot if I want to grab some Greene's for takeout in the evenings. On a typical day, I would have to make reservations to The Black Hen or Goucho's if my wife and I want dinner and a cocktail. I used to have to drive defensively because there are numerous crosswalks up and down Main Street, and if you aren't observant, someone will get hurt. I am a Realtor by trade, and I am also fortunate to be the chaplain for the VT baseball team. I miss my guys, by the way. That role requires that I be on campus almost daily, but now no one is there. The spring semester is over, and the baseball season has been canceled; the university is a literal ghost town.

 

This is the new normal, no one likes it, but it's where we are. I have my opinions about how slowly we reacted to this dreadful virus that we knew existed in December. How early response and preparation would have made a HUGE difference to the impact on both the financial markets and the lives of people being harmed by this. Of how releasing the full power of the military to coordinate, build, and manage is one of the biggest no-brainers, but that's not what this blog is about. Most states and local governments have put restrictions on what we can and cannot do as citizens. Some of you may be upset about this, but here are my thoughts. If we would use a spattering of common sense, which we all know isn't common, we could govern ourselves, and there would be no need for direction from government. Sadly, we've proven that we cannot do that and that we need oversight and mandates.

 

People are, to this day, carrying on as though the virus doesn't exist. They travel in groups, pay zero attention to cleanliness, and do it all on the reasoning of "I don't have any symptoms!" Watching just a bit of news would teach you that you don't have to be symptomatic to carry the virus and spread it to those of us who are trying our best to stay healthy. Therefore, the state and local government has to put bans in place and restrict our activities because we don't possess the ability of good common sense to act accordingly on our own. 

 

So what does life look like for us moving forward? Who knows. What I do know is it will be unlike anything I have ever been privy to in my 45 years on this celestial ball. We have halted the economy by choice to prevent the further spread of the virus, so we possess the capacity to turn it back on when the coast is clear. However, in that time period, there will be a massive blow dealt to those in the service industry, supply chain industries, restaurants, hotels, travel, and on and on I could go. 

 

Today, I reluctantly am going to close on a condo I bought downtown to use for Air BnB. Two weeks ago, I was excited about the purchase, but now it's just going to bleed cash. Everything has changed for everyone. This situation will have a trickle-up effect, and if we do not get this under control, we are in for a long and deep recession that could take years to recover from. 

 

If this situation has taught us anything, and it should have, it has taught us that we are interconnected. What you do affects me and vice versa. This isn't anything new. We are just getting a front-row seat to the reality that has always been. You cannot live with only yourself in mind. What you do and what you say affects those around you. It's an immutable truth. 

 

Hopefully, this "new normal" may teach us some things. It may instruct us to slow down and enjoy the pace. It can show us that there are varying levels of value that we place on "things" in our lives. Honestly, we could all use some introspection in that department. I believe with the right lenses on; we will clearly see that we may have neglected some important people and or things and have held in high esteem things that have no real value. 

 

Let's allow this "new normal" to make us better in some way. Figure out how to give away something you have an abundance of to someone who needs it. Make a phone call to encourage a friend or relative, read a good book, allow the situation we are in to challenge you in some way to become more like the person you want to be. We will get through this. We will be back to the busyness that was the life we knew in the not-so-distant past, but if we don't learn something from this pandemic, I think we've missed an excellent opportunity to grow. 

 

Be well, stay safe, please think about the vulnerable when you decide to go out in public. They need us to be on top of our game. Their lives depend on it!




-Brian

Let's face it, the real estate market, in general, slows down this time of year. Listings become a bit more scarce; the pool of buyers tends to wane as the holidays near, and the weather turns less than favorable. But why? Are there good reasons that sellers wait until spring to list their homes? Is there any evidence that waiting to purchase in a spring market will generate more buying opportunities or better results? I want to tackle this topic because I believe that most people in the market are uninformed. 

Let's look at selling a home in the off-peak season. One of the biggest misnomers in the real estate industry is that selling in the off-peak season will significantly decrease the "odds of selling." Sellers believe that putting their home on the market this time of year will not produce the number of buyers they want and allow the listing to become stagnant. If you look at the chart below, as an example, you will see something interesting.  On average, the month with the highest odds of selling compared to the month with the lowest odds is only three percent different. So why do we wait until spring to list? There is less competition in the fall and winter months; interest rates are typically lower, allowing buyers more borrowing power.

You can have success listing your home in the off-peak season for sure. Understanding the market for buyers, however, can pay the most significant dividends. Let me show you that by cultivating a sense of urgency as a buyer, you can save thousands both now and long term.

Let's look at reasons to buy now instead of waiting.

• Economic factors the point o action now- With the economy continuing to improve, grow, and expand, there is a window of opportunity to secure a better deal before consumers have more income to push housing prices up further. 

• Cyclical nature of real estate- Real estate runs in cycles over periods of years. The market will go up and down, but over time, it increases. We had a down cycle from 2007 – 2011. We are clearly in an up-cycle currently. Because of that, there is safety in the marketplace for buyers in our cycle.

• Value of homeownership- There is real value in homeownership, both in the short and long run. For most people, 80% of their retirement income will be funded through the real estate they own. To miss or delay in establishing such an essential tool in wealth could be a grave error for you and your family.

• The satisfaction of homeownership- The American dream of homeownership where you can enjoy your home and have pride in ownership is still part of success. Being one of the 65% of Americans that own their own home opens doors and opportunities that are not available to renters. There is nothing like the pride of homeownership.

• Tax benefits of ownership- There is a significant tax benefit to homeownership. The ability to utilize more than the basic write-offs on your taxes moves you to a whole new level in lowering the taxes you pay.

• Interest rate advantages of today- The interest rate or the cost to borrow money is at an unbelievably low level historically. When I first started my real estate career 16 years ago, interest rates were roughly 6%. The difference in that compared to where rates are now is massive in terms of qualifying for a specific loan amount, the payment made, and the time it takes to note pay down the note. Taking advantage of these low rates will save you multiplied thousands over the life of the loan.

• Equity build-up through mortgage pay down- One of the benefits of long-term homeownership is the building of wealth called equity through paying your mortgage each month. You can work towards paying the home off and not having that monthly burden, or you can leverage the equity you build to invest in other real estate products. Investing is my niche, and I'd be happy to show you how you can leverage your equity to grow your wealth.

• Supply and Demand: Supply exceeds Demand = motivated sellers with significant choices, and great prices / Demand exceeds supply = motivated buyers who must be aggressive to win offers. Because we have a high demand for homes, the seller has more control of the market than most buyers like. We have fewer homes with more people who want to buy. While that might seem like a negative to buyers, it does show a healthy marketplace that has more safety for the buyer. The reason why is appreciation happens when demand is higher than supply. By becoming an active buyer and purchasing a property, you will gain the appreciation over time rather than paying the seller in the future for it.

• Inflation protection- For all of us, the increase in price for gas, food, clothing, and electricity is caused by inflation. Real estate is one of the best hedges to inflation because its value tends to go up in alignment with inflation.

• Ownership costs dropping below rental costs- Due to the nature of living in a college town, rental demand is skyrocketing. This means that becoming a homeowner will significantly affect your wealth position. Rising rents raise home values (tongue twister). As the demand for rental units increases, the value of any home goes up because of the potential for more rental income if purchased for that specific purpose. That's why a townhome I bought in Blacksburg in January of 2018 for $160,000 is now worth $240,000. As rents rise, so does the value of the real estate used to supply those rents. Mortgaging a home is less expensive per month than owning that same home. 

• Forced savings- I know for me, something like a home that forces me to save is positive. Because I am paying down on my mortgage every month, it’s forcing me to pay toward something that is financially beneficial.

• Affordability of homes- When we look back at this moment in time, say five years or ten years from now, are you going to have regrets? Are you going to say, “I wish I had”?

Don't let the cold months keep you from home shopping. The benefits of buying this time of the year are real, and the savings could be substantial. 

In a robust spring/summer/fall market, buying hot properties could have you paying 5% over list price just to be competitive. When the competition lessons, you may pay full price but ask for 2-3% in concessions to pay for closing costs or other upgrades. That's a 7-8% reduction in price by acting now instead of waiting. 

Knowledge is power and could lead to money. Real, actual savings put in your pocket.

I'd love to offer my expertise and help you find the home you're looking for.

Good luck!

~Brian

Doing This One Thing Before Putting Your Home on the Market Can Help Sell It Faster

You’ve lived in your home for years and haven't exactly been on top of regular maintenance tasks. Now, your windows are covered in plastic wrap to cut down on the cold drafts, your ceiling seems to be leaking, and those shrubs you planted to conceal a few small cracks in the foundation just aren’t cutting it anymore.

Hey, we’re not judging! But if you’re ready to put your home up for sale, know this: Buyers and their agents are going to zero in on all those things that need doing—as well as some things you hadn't even noticed yourself.

So why not get ahead of the curve by hiring a licensed home inspector who can pinpoint what needs fixing?

Of course, most sellers don’t get their homes inspected before listing them, because the buyer usually orders an inspection during escrow, and who wants to pay for something they don't have to?

But if you're willing to invest the time and money, a thorough inspection before listing your property can make it easier to price your home, manage repairs, and even help sell it faster—and for more money.

So what are the some of the reasons why a pre-listing inspection makes sense? Let's take a look.

It can save you if you've neglected home maintenance

If you have a busy life—or maybe even if you don't—chances are that obsessing over regular home maintenance might not be your No. 1 priority during downtime. Trouble is, letting painting, roof repairs, and other routine chores slide can lead to bigger issues down the road.

In a lot of cases, people think, "I've been here for 30 years; the house is fine. There's nothing wrong with it." But they’re looking at it with rose-colored glasses.

Instead of worrying what a buyer’s inspector will uncover—and which could potentially kill the sale—be proactive with a pre-listing inspection. This way, rather than being blindsided, you can then decide whether to make the necessary repairs or to account for that deferred maintenance by reducing the list price. Which leads to…

You can make a bigger profit on your sale

Sure, a home inspection that you don't have to do is going to cost money. (An inspection for a 1,200- to a 1,500-square-foot house in an average market, for instance, will cost between $350 and $400.) But as the saying goes: Sometimes you have to spend money to make money.

After all, if you invest a little more to repair and spruce up anything the pre-inspection reveals, you can justify listing your home at a higher price. Plus, in most states, home improvement repairs you carry out before selling your house are deductible from the profit you make from the sale.

Sometimes, just knowing that a pro has given the house a proper once-over can persuade a buyer to make a bid (assuming that you actually follow the inspector’s recommendations).

It minimizes surprises for a buyer and can give a buyer more confidence in the property.

You won't have to scramble to fix things at the last minute... this is a biggie

Once a buyer’s inspector submits a report, sellers are usually faced with two choices: If problems are found with the house, they can then either slash money from the sale price or opt to carry out repairs before the closing date. That often leaves sellers in the lurch, having to get work done pronto—and sometimes paying a premium for the rush work.

After a pre-listing inspection, sellers can research contractors and make the necessary repairs within a time frame of their choosing, so that everything is ready before potential buyers even visit the property.

It'll minimize back-and-forth negotiation...another biggie

Buyers often use their home inspection as leverage, asking the seller (that's you!) for steep discounts based on what their inspector’s report reveals. Not surprisingly, the buyer’s inspection is often where the deal falls apart.

If you’ve already uncovered the issues and addressed them, you can raise the price of your home accordingly. That gives the buyer less leverage in the request for the repair process.

Also, in red-hot markets like Blacksburg, where multiple bids come fast and furious, there's always a chance that buyers might accept your pre-listing inspection without insisting on doing their own. This can make for a quicker sale.

But make sure a pre-inspection doesn’t work against you

As advantageous as a pre-inspection can be, don’t forget that the inspector’s report could be a double-edged sword: Once you know about a problem, you can’t ignore it.

Sellers are legally obligated to disclose any problems that a home inspection unearths. For sellers unwilling to do repairs, their own inspection could be used as leverage to negotiate on price and in the request-for-repair process.

Before committing to a pre-inspection, find out what other sellers in your area are doing. Your agent can help guide you on whether it's necessary to sell for more, or if there's a better—and more affordable—strategy for getting your home sold. If you’re interested in selling your home, I’d be happy to help you. 

Virginia Tech Expects Its Largest Freshman Class This Fall

Virginia Tech expects to welcome its largest freshman class this fall.

The danger of one's home catching fire is without a doubt,  a concern that most homeowners have. We often feel that angst when we are away from home, and our four-legged children are left alone. I worry far less about my possessions than I do their lives. With this in mind, we do everything we can to safeguard our home from every potential threat of a fire. 

We install smoke detectors, double check all appliances, and turn off most lights. Some have their security systems tied into the local fire department which can monitor and get help there even if you are away. 

There is one potential threat of fire lurking in your home, and you may be completely unaware. A brand of panel boxes by the name of Federal Pacific was constructed and installed in homes from the 1960s through 1980s. They used a proprietary breaker called "Stab-Lok". The name was indicative of the way the breakers would seat on the buss bar. The design is less important than the risk this breaker system imposes on unsuspecting homeowners. 

This picture gives you an idea of what can happen when the breaker fails to trip and causes a surge in power. These panels are widely regarded as a fire, and electrical safety hazard, dangerous for a number of reasons. Over the years I’ve personally seen Federal Pacific breakers fail to trip when they had a solid short circuit, and I’ve seen handles in the off position and found the breaker was actually on, with the circuit live. Either condition can kill a person or start a house fire.

It’s hard to overstate how serious a problem these panels and breakers can be. If you own one, replacing it is likely one of the biggest safety improvements you can make.

The cost to replace these boxes with all new breakers will vary depending on the location of the breaker box relative to the service coming into the home. Most run between $1000-$2000.

If you see this in your home, do not delay in getting it replaced. If you need help finding a local electrical contractor to do the work, I'd be happy to provide you some references.

Investing in Real Estate

Buying real estate is one of the oldest forms of investing, having been around since the early days of human civilization. Investing in real estate predates modern stock markets, real estate is one of the five basic asset classes that every investor should seriously consider adding to his or her portfolio for the unique cash flow, liquidity, profitability, tax, and diversification benefits it offers. In this introductory guide, we'll walk you through the basics of real estate investing, and discuss the different ways you might acquire or take ownership in real estate investments.

First, let's start with the basics: What is real estate investing?

What Is Real Estate Investing?

Real estate investing is a broad category of operating, investing, and financial activities centered around making money from tangible property or cash flows somehow tied to tangible property.

There are four main ways to make money in real estate:

1. Real Estate Appreciation: This is when the property increases in value. This may be due to a change in the real estate market that increases demand for property in your area. It could use be due to upgrades you put into your real estate investment to make it more attractive to potential buyers or renters. Real estate appreciation is a tricky game, though.
2. Cash Flow Income (Rent): This type of real estate investment focuses on buying a real estate property, such as an apartment building, and operating it, so you collect a stream of cash from rent. Cash flow income can be generated from apartment buildings, office buildings, rental houses, and more.
3. Real Estate Related Income: This is income generated by brokers and other industry specialists who make money through commissions from buying and selling property. It also includes real estate management companies who get to keep a percentage of rents in exchange for running the day-to-day operations of a property.

1. Ancillary Real Estate Investment Income: For some real estate investments, this can be a considerable source of profit. Ancillary real estate investment income includes things like vending machines in office buildings or laundry facilities in low-rent apartments. In effect, they serve as mini-businesses within a more significant real estate investment, letting you make money from a semi-captive collection of customers.

The purest, simplest form of real estate investing is all about cash flow from rents rather than appreciation. Real estate investing occurs when the investor, also known as the landlord, acquires a piece of tangible property, whether that's raw farmland, land with a house on it, land with an office building on it, land with an industrial warehouse on it, or an apartment.

He or she then finds someone who wants to use this property, known as a tenant, and they enter into an agreement. The tenant is granted access to the real estate, to use it under certain terms, for a specific length of time, and with certain restrictions -- some of which are laid out in Federal, state, and local law, and others of which are agreed upon in the lease contract or rental agreement. In exchange, the tenant pays for the ability to use the real estate. The payment he or she sends to the landlord is known as "rent."

For many investors, rental income from real estate investments has a huge psychological advantage over dividends and interest from investing in stocks and bonds. They can drive by the property, see it, and touch it with their hands. They can paint it their favorite color or hire an architect and construction company to modify it. They can use their negotiation skills to determine the rental rate, allowing a savvy operator to generate higher capitalization rates, or "cap rates."

From time to time, real estate investors become as misguided as stock investors during stock market bubbles, insisting that capitalization rates don't matter. Don't fall for it. If you price your rental rates appropriately, you should enjoy a satisfactory rate of return on your capital after accounting for the cost of the property, including reasonable depreciation reserves, property and income taxes, maintenance, insurance, and other related expenditures. Additionally, you should measure the amount of time required to deal with the investment, as your time is the most valuable asset you have -- it's the reason investors so cherish passive income. (Once your holdings are large enough, you can establish or hire a real estate property management company to handle the day-to-day operations of your real estate portfolio in exchange for a percentage of the rental revenue, transforming real estate investments that were once actively managed into passive investments.)

What Are Some of the Most Popular Ways for a Person to Begin Investing in Real Estate?

There is a myriad of different types of real estate investments a person might consider for his or her portfolio.

It's easier to think in terms of the major categories into which real estate investments fall based on the unique benefits and drawbacks, economic characteristics and rent cycles, common lease terms, and brokerage practices of the property type. Real estate properties are ordinarily categorized into one of the following groups:

• Residential real estate investing - These are properties that involve investing in real estate tied to houses or apartments in which individuals or families live. Sometimes, real estate investments of this type have a service business component, such as assisted living facilities for seniors or full-service buildings for tenants who want a luxury experience. Leases usually run for 12 months, give or take six months on either side, leading to a much more rapid adjustment to market conditions than certain other types of real estate investments.
• Commercial real estate investing - Commercial real estate investments primarily consist of office buildings. These leases can be locked in for many years, resulting in a double-edged sword. When a commercial real estate investment is fully leased with long-term tenants who agreed to high lease rates, the cash flow continues even if the lease rates on comparable properties fall (provided the tenant doesn't go bankrupt). On the other hand, the opposite is true - you could find yourself earning significantly below-market lease rates on an office building because you signed long-term leases before lease rates increased.

• Industrial real estate investing - Properties that fall under the industrial real estate umbrella can include warehouses and distribution centers, storage units, manufacturing facilities, and assembly plants.
• Retail real estate investing - Some investors want to own properties such as shopping centers, strip malls, or traditional malls. Tenants can include retail shops, hair salons, restaurants, and similar enterprises. In some cases, rental rates include a percentage of a store's retail sales to create an incentive for the landlord to do as much as he, she, or it can to make the retail property attractive to shoppers.
• Mixed-use real estate investing - This is a catch-all category for when an investor develops or acquires a property that includes multiple types of the aforementioned real estate investments. For example, you might build a multi-story building that has retail and restaurants on the ground floor, office space on the next few floors, and residential apartments on the remaining floors.

You can also get involved on the lending side of real estate investing by:

• Owning a bank that underwrites mortgages and commercial real estate loans. This can include public ownership of stocks. When an institutional or individual investor is analyzing bank stocks, it pays to pay attention to the real estate exposure of the bank loans.
• Underwriting private mortgages for individuals, often at higher interest rates to compensate you for the additional risk, perhaps including a lease-to-own credit provision.
• Investing in mezzanine securities, which allows you to lend money to a real estate project that you can then convert into equity ownership if it isn't repaid. These are sometimes used in the development of hotel franchises.

There are sub-specialties of real estate investing including:

• Leasing a space, so you have little capital tied up in it, improving it, then sub-leasing that same space to others for much higher rates, creating incredible returns on capital. An example is a well-run flexible office business in a major city where smaller or mobile workers can buy office time or rent specific offices.
• Acquiring tax-lien certificates. These are an esoteric area of real estate investing and not appropriate for hands-off or inexperienced investors but which -- under the right circumstances, at the right time, and with the right sort of person -- generate high returns to compensate for the headaches and risks involved.

Real Estate Investment Trusts (REITs)

On top of all of this, you can invest in real estate through something known as a real estate investment trust or REIT. An investor can buy REITs through a brokerage account, Roth IRA, or another custody account of some sort. REITs are unique because the tax structure under which they are operated was created back during the Eisenhower administration to encourage smaller investors to invest in real estate projects they otherwise wouldn't be able to afford, such as building shopping centers or hotels. Corporations that have opted for REIT treatment pay no Federal income tax on their corporate earnings as long as they follow a few rules, including a requirement to distribute 90% or more of profits to shareholders as dividends.

One downside of investing in REITs is that, unlike common stocks, the dividends paid out on them are not "qualified dividends," meaning the owner can't take advantage of the low tax rates available for most dividends. Instead, dividends from real estate investment trusts are taxed at the investor's personal rate. On the upside, the IRS has subsequently ruled that REIT dividends generated within a tax shelter such as a Rollover IRA are largely not subject to the unrelated business income tax so you might be able to hold them in a retirement account without much worry of tax complexity, unlike a master limited partnership.

(If you're interested in learning more about these unique securities, start by checking out Real Estate Investing Through REITs, which covers REIT liquidity, equity, how to use REITs to your real estate investing advantage, and much more.)

Investing in Real Estate Through Home Ownership

For all the real estate investing options available to investors, the average person is going to get his or her first real estate ownership experience the traditional way: By purchasing a home.

I've never viewed the acquisition of a home quite the same way most of society does. Instead, I prefer to think of a person's primary residence as a blend of personal utility and financial valuation, and not necessarily an investment. To be more direct, a home isn't an investment in the same way an apartment building is. At its very best, and under the most ideal of circumstances, the safest strategy is to think of a home as a type of forced savings account that gives you a lot of personal use and joy while you reside in it.

On the other hand, as you approach retirement, if you take a holistic view of your personal wealth, outright ownership of a home (without any debt against it) is one of the best investments a person can make. Not only can the equity be tapped through the use of certain transactions, including reverse mortgages, but the cash flow saved from not having to rent generally results in net savings -- the profit component that would have gone to the landlord effectively stays in the homeowner's pocket. This effect is so powerful that even back in the 1920s economists were trying to figure out a way for the Federal government to tax the cash savings over renting for debt-free homeowners, considering it a source of income.

This is a different type of investment, though -- something known as a "strategic investment." Were the economy to collapse, as long as you could pay the property taxes and basic upkeep, no one could evict you from your home. Even if you had to grow your food in a garden, there's a level of personal safety there that matters. There are times when financial returns are secondary to other, more practical considerations. Whatever you do, though, don't sacrifice your liquidity to try and build equity in your real estate investments too quickly, as that can lead to disaster (including bankruptcy).

If you are saving to acquire a home, one of the big mistakes I see is new investors putting their money into the stock market, either through individual stocks or index funds. If you have any chance of needing to tap your money within five years or less, you have no business being anywhere near the stock market. Instead, you should be following an investment mandate known as capital preservation. Here are the best places to invest money you're saving for a down payment.

Which Is Better - Real Estate Investing or Investing in Stocks?

One of the most common questions I encounter involves the relative attractiveness of investing in stocks versus investing in real estate. The short version is that it's somewhat akin to comparing vanilla and chocolate ice cream. They are different, and as your net worth grows, you may even find that both have a role to play in your overall portfolio. Your personality will also drive your decision, as some people are more temperamentally geared toward stock ownership or real estate ownership, respectively.

Risks of Real Estate Investing

A substantial percentage of real estate returns are generated due to the use of leverage. A real estate property is acquired with a percentage of equity, the remainder financed with debt. This results in higher returns on equity for the real estate investor; but if things go poorly, it can result in ruin far more quickly than a portfolio of fully-paid common stocks. (That's true even if the latter declined by 90% in a Great Depression scenario, as no one could force you to liquidate).

That's why the most conservative real estate investors insist upon a 50% debt-to-equity ratio or, in extreme cases, 100% equity capital structures, which can still produce good returns if the real estate assets have been chosen wisely. Billionaire Charlie Munger talks about a friend of his prior to the 2007-2009 real estate collapse. This friend, a very rich landlord in California, looked around at the high valuations on his properties and said to himself: "I'm wealthier than I would ever need to be. There's no reason for me to take risks for the sake of more." This friend sold many of his properties and used the proceeds to pay off the debt on the remaining ones that he thought the most attractive. As a result, when the economy collapsed, the real estate markets were in turmoil, people were losing their properties to foreclosure, and bank stocks were collapsing -- he didn't have to worry about any of it. Even as rents dropped due to tenant financial difficulties, it was all still surplus cash, and he was armed with funds that kept replenishing themselves, letting him take advantage of buying up the assets everyone else was forced to sell.

Stop trying to get rich so quickly, and be content to do it the right way. You'll have much less stress in your life, and it can be a lot of fun.

Some Final Thoughts on Real Estate Investing

Of course, this is only the beginning of your journey to understanding the topic, as we've barely scratched the surface. Real estate investing takes years of practice, experience, and exposure to appreciate, understand, and master.

Written 3/14/2019                                                                         Author: Brian McHone

Simply put, investing in real estate is one of the best ways to grow your wealth. Knowing what to buy, when to buy it, what to pay, and what return to expect are just some of the considerations that you must make before investing in the real estate market. 

I would venture to say that becoming a real estate investor is simple, but not easy. That may sound tongue and cheek, but it's true. With the right help, the right approach, a clear understanding of the process, and adequately managed expectations, investing in real estate is simple. Why I say not "easy" is because there are inherent risks involved when you put your hard-earned money on the line. 

Just like the real estate market itself, investing is highly, and I mean HIGHLY localized. The metrics we consider when investing in a college town like Blacksburg WILL NOT BE TRUE for everyone reading this article. However, the vast majority of my audience will be parking their cash in Montgomery County. 

I'll keep it simple and provide a roadmap for growing your wealth. Now bear in mind, there are details, and you know what they say about "the devil being in the details," but let's look at this from a thirty-thousand-foot view if you will. 

Step one is to locate an income-producing property with meager vacancy rates. Generally, anything found within a 24060 zip code will fit neatly into this category.  Next, we need to determine the potential cash flow by multiplying the gross monthly income by twelve months. Then we subtract all annual expenses such as taxes, insurance, HOA dues if applicable, any utilities paid by the owner, management fees if you're not going to self manage, and routine maintenance. You should use 5% as a margin to build a coffer for repairs as well. 

Once you have this number figured out, we can then begin to determine a value using the cash flow. Most single unit properties in and around the Blacksburg area will have cash-on-cash ROI margins in the 10%-13% range. That's not a total return on your investment, that's just the liquid return weighed against your out of pocket expenses to purchase the property. The total return when you consider property appreciation and principal pay-down is substantially higher. 

I'll give you an example, one of the townhomes I purchased last year in January of 2018; I bought it for $160K. Those same units are now selling for $220K. That's a 37% increase in 14 months. That's not the norm for sure, but to expect an appreciation in value is a given. That $60K increase in value is real. You can realize that margin by either selling the unit or tapping into the equity to purchase more properties. I chose the latter.

So let's take the above example and relate that to wealth generation. If you buy that same townhome today at $220K, you will need roughly $50K down. That should cover your 20% down payment and closing costs. If the investment is earning $6000 per year in positive cash flow ( $1800 rent minus PITI and HOA fees leaves $500 mo.), it will take 8.3 years to earn back your $50K upfront investment. That's a 12% cash return on your investment. Not too shabby, eh?

Now let's look at some ancillary benefits. In those 8.3 years, the property should increase in value by $85K at a conservative rate, and the payoff will be roughly $150,000. So let's add all that up. 

$50,000 in positive cash flow + $26,000 in principal paid down by tenants + $85K in appreciation....drumroll please! ----------------------------------------------------------------

That equates to $161,000 in wealth generated. That's staggering when you consider it costs you $50K to do it. That's more than tripling your money in 8 years. 

Another exciting aspect of buying investments in a college town is rental demand and how it affects ongoing rent increases. Right now, there are more students to shelter than we have bedrooms to put them. This imbalance puts supply/demand upside down and creates upward pressure on rental rates. Where do they stop? Who knows. As long as VT continues to increase its student population, this problem will remain intact. One might not consider it a problem when you own the properties that are growing in value because of the increase in housing demand. That's a perspective issue, and this article is bent towards the investor. 

Again, there are more details to consider, and I'd be happy to tease them all out for you, but blog posts are supposed to be short and informative.

Investing in your future is a must, and in my honest opinion, there's no better place to do it than Blacksburg, VA.

If you're interested in learning more,  please give me a call.

Be well,

Update: As of December 2019, that $160K townhome is now selling at $265K. That's a 65% increase in value!

 Brian McHone, author. Investments - I write about the real estate market in Blacksburg and  Montgomery County. I intend to give the reader some insight into the investment world and offer resources to help.         

Most people enjoy talking about real estate; whether they own any or not, it always brings about debate, education, inclusion, and in some cases starry eyes. Why? Because everyone old enough to rent or buy a home plays a vital part in the real estate market. 

Let me explain what I mean: If you rent a home, you affect the way investors look at potential rental properties as you continue to bolster their wealth by creating a positive return on their investment. If you own a home, regardless of the size, and are thinking of upsizing or downsizing, your decision effects supply/demand which in turns weighs heavily on how values are determined. If you own a home and never plan to sell, your rigidity plays a crucial role in the supply/demand chain. If you want to leverage your assets to buy rental properties, you can easily see how you play a large part in market conditions. What will you pay for the investment creating a comparable sale? What return will you expect? How much rent will you charge for the unit? 

Almost everyone will find themselves inside one or more of these scenarios. That’s why having discussions about real estate around the dinner table, office break room, or reading about the endless possibilities of growing your wealth through investments, elicit such an emotional response. It’s a significant endeavor to buy into the market, or not! No matter how you lean, the decision bears considerable weight.

However you slice it, and wherever you land, the topic is exciting for most. I’m an advocate for buying real estate, not only buying a home to occupy but buying as much of it as you can. Wealth building is essential for everyone, regardless of your age. It will directly impact how you live and how you retire. There's always a degree of angst when you stroke a check for the down payment of an investment property, but I’ve never regretted the decision to do so. 

Every market is a bit different. The real estate market is HIGHLY localized. I cannot express with enough emphasis how vital this immutable truth is. Every town, city, county, region, state,  is different and for different reasons. The real estate market is, and will forever be, tethered directly to the ability of the people who live in a given area, to generate income. That can look as different as the people who occupy the space but make no mistake, a “good” real estate market will sit directly in the epicenter of a town, region, or county where jobs are plentiful, and the residents do and will continue to generate a paycheck. The further you get from this reality the more volatility the market will produce. 

Let’s take Blacksburg as an example. After all, I live, work, and invest here so I feel I can speak with some experiential knowledge about the local market. 

Blacksburg is a thriving little town bustling with entrepreneurs, and academia for in the heart of Blacksburg VA lies the “Virginia Polytechnical Institute and State University.” Also known as Virginia Tech or even shorter, VT. 

VT has been cited as one of the top six technical schools in the country and offers a plethora of engineering degrees, both under and postgraduate studies. It provides a robust veterinary program with a teaching hospital, a nationally known medical school churning out DO’s at VCOM, an agriculture program that is celebrated and much more. The school has numerous sports programs which offer world-class facilities and coaching. These programs provide endless opportunities for student-athletes to go to the next level if they possess the ability and desire to do so.

Attached to campus is the Virginia Tech Corporate Research Center. This vast land mass is brimming with startup companies as well as companies who are mature and growing like wildfire. 1901 Group located in the CRC is a trusted provider of IT services for the public and private sector. They just announced in the last quarter of 2018 that they plan to hire over 500 new employees in the next year and a half. That’s a big deal, and that’s just one employer in the area.

Here's my point, Blacksburg is growing. VT is growing, companies already here want to enlarge, and other companies look at the area and recognize that we churn out valuable employees every semester. The environment is rife with opportunity, and that’s where people want to be. The community is diverse, professional, and very welcoming to outsiders. It’s like they “get it.” What is it they get? They get the fact that diversity is the breeding grounds for creativity, growth (both personal and professional), introspection, self-reflection, and human harmony. Existing inside this fair little hamlet are people from every corner of the globe, and you know what’s special? They do it effortlessly and with great pride in who they are and the different experiences they bring that make Blacksburg great. They acknowledge that our differences are to be celebrated and that no one is better than his or her neighbor. If you are alive, you are intrinsically valuable. No one stands above another. We are all just people who were designed to love and have the desire to be loved and valued. 

This diversity is a vital part of any community, and it’s rich here in Blacksburg. Having said all of that, the conclusion to the matter is that the real estate market here is stellar. Let’s consider some of the metrics.

• The median home sale price has grown over 14% in the past 24 months. 
• Inventory is down 
• Days on the market are down 
• Listing volume is down 
• Months supply is down 
• Sales prices are up
• The average price per square foot is up
• Percentage of list price/sales price is up, and the number of people who are moving to the area is more significant than those who are leaving. 

What does all of this mean? It means that if you are considering Montgomery County as a place to “buy in” to the real estate market, then you’re making a wise decision. Not based on feeling but based on fact. I just laid out a list of compelling reasons why investing here would be a good idea.

What do I buy? How much can I afford? What are the current interest rate trends? How do I time the market? What's the rate of return on single-family homes versus student rentals? What are the carry costs of owning rental properties? Do banks look at a condo differently than a townhome?


These are a few questions that you SHOULD have, and I can answer them for you. Not only can I answer them but I love to watch my client’s eyes widen as they learn about real estate on a different level. 

When it comes to determining ROI (return on investment), I have provided a simple calculator to help guide you. This calculator is just going to factor cash on cash return and will not include appreciation as it relates to the real property or rental rates. It will not factor in principle pay down or mortgage interest deductions if you cross the standard deduction threshold. 

It will, however, give you an idea of what return you can expect and arm you with enough information to decide whether to leave your money in a volatile stock market or pull some out and invest in something more stable yielding better returns. 

If after reading this you have questions, please call me. I love what I do, and I’d like to add you to my pipeline of clients I’ve helped achieve their real estate goals. 

Thanks for stopping by!

                                                                                                                                                                        ~Brian McHone