Most of you financially savvy folks out there learned early on that homeownership is an important step in achieving long-term financial security. This, generally speaking, is a truism that is pretty accurate. In the process of keeping a roof over our heads, homeowners, with each mortgage payment, are investing in our financial future. Fiscal discipline is a virtue that is often lacking in our society (just look at how our federal government has behaved for the past eight years) so this kind of automatic equity-building is a good thing.

But before you build that McMansion consider this: like aspirin and fine wine, more of a good thing will not necessarily lead to a superior outcome. Yes you should own your own home, but if you supersize it then you’ll be paying a cost.

Consider a buyer trying to decide between buying a $600k house and a $300k house (you can either double or halve these numbers depending on property values in your neighborhood). There are some that will argue that by splashing out on fancier digs that they’re investing in their future. But not so fast…buying an $600k pad is certainly better than renting a $600k pad (under most market conditions) but it doesn’t beat buying a $300k pad. Follow the numbers…

Assumptions:

• 6.5% fixed rate mortgage
• 0.75% property tax
• 4.5% property appreciation rate
• 9% stock market return. All excess cash (from tax deductions and lower mortgage payments) are reinvested at this rate.

The more expensive house generates a big gain through property appreciation – over $330k in ten years - assuming the market behaves roughly in line with the long term historical average of 4.5% per annum gains. Adding the pay-down of the loan balance and income tax deductions from interest and property taxes (which are continuously invested in the stock market), the $600k house creates around $500k in wealth over ten years.  Not too shabby.

Compare this to the option of buying the cheaper house.

The $300k house generates considerably less in terms of property appreciation over ten years vs. the more expensive home. But compare the two mortgage payments: around $46k per year for the larger house vs. $23k for the smaller one. This is an extra $23k that can be invested in other vehicles, plus savings in property taxes. When these funds are reinvested on a yearly basis then they can generate dramatic returns.

Result:

• $300k House: $506k of value created in ten years
• $600k House: $590k of value created in ten years

Extend the anaylsis out to fifteen years then the results are even wider.  And if you take that extra cash and put in into income generating real estate instead of the stock market - now you're really cookin' with gas.   

Is this an argument against the flahsier house? Well…maybe so, but maybe not. Perhaps ten years spent living in the nicer home is worth that $84k in foregone wealth. Fair enough.  Just don’t convince yourself that you’re making a strategic investment by going big. The house you’re living in doesn’t generate income – it only generates expenses. Living large is nice, but there’s a cost.

Back in December I wrote a post on the impact that immigration reform would have on real estate investors. In that article I mentioned a nasty negative local campaign for State Representative that was being waged between Talmadge Heflin(R) and Hubert Vo (D). At the time I skewered Hefflin, the Republican, for a spamming our neighborhood with a particularly stupid mailing in which he implicitly accused Vo of issuing a Texas driver’s license to Osama Bin Ladin.

Vo won the election. But now it’s Vo who finds himself in the news. And this falls squarely into the “what was he thinking?” category. Vo, as it turns out, is a genuine card carrying slumlord.

Vo is a wealthy public figure. The four apartment complexes that he owns are public places. His ownership is a matter of public record. Real, live people live there; they raise families and hold jobs. But they’re living with broken and boarded-up windows, an algae-filled swimming pool, overflowing dumpsters, and other hazards – all documented in a recent article in the Houston Chronicle.

Remember, as landlords, we’re just behind oil company executives and sub-prime lenders as people that the media loves to hate. That’s too bad, because the vast majority of us are committed to providing safe, affordable housing to the public. That’s not because we’re altruists – it’s because providing safe, affordable housing is good business. And as State Representative Vo is now finding out, running an ugly, dangerous, violation-filled property is not a good way to make a profit.

We’ve been reading about how farmers and scientists are worried about our country’s vanishing supply of honey bees. Well I don’t know about you, but here in Houston those honey bees are finding my properties just fine.

For the third time in as many years I’m having to hire a guy in a bee suit to pull a hive out of an investment property. This is a pain. Bees aren’t like other garden variety insects. You can’t just throw some spray around and call it a day. You have to find the hive, get rid of the queen, and caulk the living daylights out of the opening so the next wandering swarm doesn’t take up residence a week later.

And as an added bonus: honey bees will freak out your tenants.

So when you get a call about bees, just accept the fact that you’ve drawn the short straw. You’ll save yourself some grief by being doing it right. Meaning:

• Call a professional. Don’t try to get rid of the colony yourself. DIY will NOT save you any money.  Suck it up and pull out your checkbook.  You've budgeted for this sort of thing, right?
• Bees can be ornery. If your tenant gets attacked by a swarm of bees that you’ve neglected then you’re gonna end up in court. Even if you show up wearing your sunday best suit you're still not going to cut a sympathetic figure.
• Make sure you get rid of the honeycomb itself, not just the bees. This is for three reasons. First: a rotting hive will attract the next swarm of bees. Second: a rotting hive stinks. Third: a rotting hive will attract other critters.
• Caulk up the scene of the crime. Bees have some sort of chemical, collective memory thing going. They’ll be back, so don’t make it easy for ‘em.

It’s no surprise that the current real estate crunch is hitting some markets harder than others. Wobbling prices and sales volumes have sent a lagging shock to the rental markets, but it has been interesting to note that supply and demand have pushed different markets in different directions.

The conventional wisdom has it that foreclosed owners will be scurrying for somewhere to live, pushing up demand and, therefore, rental rates. In some areas this is exactly what has happened.  Landlords in these areas are sitting pretty.

In other areas, however, the situation is the reverse. Tightness in the financial markets has pushed many first-time buyers out of the market. Sellers, unable to find buyers, have converted low end houses into rental. Voila – supply goes up, and the glut of properties pushes rental rates down.

Some aggressive pricing and judicious screening will land a tenant for my vacancy. And as I get a good feel for where the rental market really is I’ll be looking for buying opportunities. Cycles, by definition, don’t last forever. Just when everyone is starting to feel squeezed is the time when you want to think about getting out your checkbook.

So how's the rental market in your region?