Home Radio Segments Real Estate Round-up Considering Diversifying Into Real Estate? Know The Risks First

Considering Diversifying Into Real Estate? Know The Risks First

Terry Story, Diversifying into Real Estate

With Terry Story, 29-year veteran Real Estate Agent with Keller Williams in Boca Raton, FL

A Developer’s Dilemma

Steve kicks-off Real Estate Round-Up by asking Terry Story if developers can please both boomers and millennials, two generations that don’t always agree on what they want in a home, and Terry puts him to the test.

  1. A) Do you favor fireplaces, crown molding, space for hobbies and leisure activities, home offices, close proximity to parks and exclusivity, sophistication, doormen, valet parking, private lounges, limo services, driving ranges and fitness centers?
  2. B) Or do you lead with lifestyle, more centered around activity, diversity, inclusiveness, affordable access to transportation and, say, indoor rock climbing?

Turns out, boomers are more inclined to A and millennials to B, but tastes in both demographics also cut across both, with Steve not all that keen on valet parking or private lounges, and Terry inclined to indoor rock climbing, driving ranges, and inspired happy hours.

In short, developers need to analyze their buyers fairly closely so they can build homes and communities that resonate with a majority of their target audience.

A Neighbor’s Privacy Rights

Moving on, how would you feel if your neighbor pointed a camera at your front door or across his fence into your backyard?  Turns out, pointing a security directionally is not illegal.  What is illegal is whether the video is being misused to spy on you or look into the privacy of your bedroom or bathroom. So, if a security camera over your front door happens to also take in your neighbor’s front door, you’re fine; but if it points at someone’s bathroom, that’s not okay.

Moreover, hidden cameras pointing at a neighbor’s property are typically an indicator of ill-intent and could land you in trouble. So, while security cameras are almost a necessity in most homes today, use them to legitimately protect yourself and do not cross the line into misusing this tool to spy on your neighbors.

Diversifying Into Real Estate Investments

With tremendous stock market gains over the past eight years, investors are increasingly looking at locking in their gains and diversifying into assets such as rental real estate.  But being a landlord comes with its own set of positives and negatives.

On the plus side, well-thought real estate investments can give you positive cash flow with renters paying your mortgage every month and with potential price appreciation upside.  Terry says it’s all about the yield—the return you’ll get on your 20% down investment, be it cash or a mortgage-financed property—after factoring in all your expenses such as property taxes, home improvements due to routine wear-and-tear, etc.

Real estate investors should set money aside every year for a depreciation fund to cover major expenses such as replacing appliances, roofing, HVAC, etc., that might go bad after 10-20 years, and to cover mortgage payments through gaps in rental income, such as 1-3 month vacancies between old and new tenants.

On the flip side, real estate does not always pay off, and many amateur investors barely break even.

With real estate, Terry recommends taking out a 15-year mortgage with 20% down and buying a property that at least breaks even on rental income. Real estate prices typically keep pace with inflation, so your real cash flow kicks in long-term, after you’ve paid off the mortgage over a 15-year period.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: It’s time for Real Estate Roundup. This is the time every single week we get together with noted real estate agent Terry Story. Terry is a 29-year veteran with Keller-Williams located in Boca Raton, Florida. Welcome back to the show, Terry.

Terry Story: Thanks for having me, Steve.

Steve Pomeranz: So here’s a thing. Can developers please both boomers and millennials? The two generations don’t always agree on what they want in a home. So, you have a little test for me, don’t you?

Terry Story: I’m laughing at that because I’m a baby boomer and I have millennial children, so I can see how they don’t agree or they could agree.

Steve Pomeranz: I think you have some millennial traits though. I noticed in our talk off air. I want you to list some of these characteristics that some of these groups are looking for. Let our listeners decide what category they think they belong in. Go ahead.

Terry Story: Let’s start off with traditional design such as fireplaces, crown molding, space for hobbies and leisure activities, home offices, close proximity to parks and exclusivity, sophistication, traditional markers, quality that include doormen, valet parking, private lounges, limo services, driving ranges, fitness centers.

Steve Pomeranz: Okay. Alright. What about the other group?

Terry Story: The other group, they lead with lifestyle, more centered around activity, they like diversity, inclusiveness, they prefer sleep designs that’ll give them greater affordability to access major transportation, indoor rock climbing.

Steve Pomeranz: That’s it. I think we know now what the two different groups are. When I read this before, I saw fireplaces, molding, space for hobbies and leisure activities. I was like, yeah, I like that. For me, the valet is a little too much. Elegant private lounges and all of that, that kind of went a little way beyond me, but when you got to the rock climbing, I realized …

Terry Story: That’s where I pick up, Steve.

Steve Pomeranz: Okay.

Terry Story: I like the indoor rock climbing, the driving ranges, the inspired happy hours.

Steve Pomeranz: That’s what you particularly like that, I know. Shared car services, you don’t need that.

Terry Story: Naw, no.

Steve Pomeranz: Okay. Workstation and common areas like you’re sitting in Starbucks or something like that.

Terry Story: Right.

Steve Pomeranz: Not so much.

Terry Story: No.

Steve Pomeranz: The question then is how can developers serve both communities and what are they doing, what kind of communities are they building in order to serve them. That is the big question. I guess we’re going to have to leave that for another time. Let’s go to another topic which is, is it legal for a neighbor to point a camera at my front door?

Terry Story: Wow. Yes, and it also just depends. Unless they’re misusing the video, being recorded, it’s not illegal for them to have a camera at their front door for security purposes. They can’t help it if you’re across the hall and their camera is capturing your door.

Steve Pomeranz: Yeah.

Terry Story: It’s all about the intent is of the use of that camera. Are they really trying to spy on you? Is it a peeping tom camera looking through doors, into bathrooms, that sort of thing.

Steve Pomeranz: I guess if you have a camera, let’s say at your front door or over your garage and it’s looking down at your driveway and it happens to capture the front door of the person across the street, that’s not going to be an issue.

Terry Story: That’s right.

Steve Pomeranz: If it’s a camera that’s pointing into one of your bathrooms or something like that, that’s an issue.

Terry Story: And it’s a hidden camera.

Steve Pomeranz: Yeah, yeah gotcha. Alright, so property owners have the right to place cameras in and around their homes for security reasons, but it should not be used to record neighbors or anyone where they have a reasonable expectation of privacy like their house, changing room or any place, maybe their backyard or something. They can’t do that. Alright so have a few minutes left. I want to talk about what it takes if you’re thinking about becoming a landlord. There’s a lot of people out there who have accumulated some money and they’ve got a lot of money in the stock market. They’re thinking, “I’d like to diversify my holdings. I think I would like to own some income-producing real estate.” So, Terry, what are some of the positives and negatives in that?

Terry Story: Sure. Well, first of all, positives, if you’re going to start this is you have to have a strategy and the positive part to it is you’re really looking for cash flow.

Steve Pomeranz: So price isn’t that important because it’s price relative to the amount that you can get for rent.

Terry Story: It’s all about the yield. How much you’re going to get. How much is your return? You shouldn’t really pay attention to the price. There’s so many variables, Steve, are you paying cash for the property? Are you getting a mortgage for the property? All that needs to be factored in. A lot of people don’t even realize how to calculate rate of return.

Steve Pomeranz: Yeah.

Terry Story: You have to factor in all your expenses, your property taxes, your improvements that need to be done.

Steve Pomeranz: You have to have a pot aside for replacing appliances, what we call a depreciation fund because as time goes on, the roof eventually will need replacing and that’s going to be one really large outlay. Theoretically, you should be saving for that a little bit every year and put that aside.

Terry Story: That’s right. Anticipate vacancies.

Steve Pomeranz: Yeah yeah.

Terry Story: When the tenant leaves, it may take a month, six weeks, two months to get it re-rented, so that needs to be factored in.

Steve Pomeranz: So many people come into my office and they have real estate of this nature. It just has not been successful for them. They tell me they are breaking even. That’s kind of it. Now look, if real estate had proved itself to be a long-term growth investment, you may say, “Well, if you break even, that’s fine.” Real estate really isn’t, especially residential real estate. It grows at the rate of inflation, net, net, net. To keep pace with inflation and to break even on the cash flow, that dog won’t hunt.

Terry Story: Yeah, and what’s really important, it is a long-term investment. It’s not a short-term gain. If you’re going to take out a mortgage, take out a 15 year mortgage so at the end of 15 years, now you have a cash cow.

Steve Pomeranz: So now, you’ve lowered your internal expenses and therefore, you have excess cash flow and that can take you into retirement with some benefit, right?

Terry Story: Right. You don’t want to start this at 90. You need to start it when you’re younger and you can afford the investment. A 15-year mortgage, you’ve got to put 20% down as a minimum ,,,

Steve Pomeranz: Yes.

Terry Story: I would tell you to take a 15-year mortgage out.

Steve Pomeranz: That’s good advice. Good advice from Terry Story, as always. We are in our real estate segment. Terry can be found at TerryStory.com.

Terry Story: Thanks, Terry.

Steve Pomeranz: Thanks for having me, Steve.