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Regional Spotlight: Pittsburgh, Pennsylvania

The Steel City’s innovative spirit keeps the market hot under duress. Pittsburgh, Pennsylvania, has not historically been a city of extremes. During the housing boom, the subsequent housing crash and the Great Recession of the early 2000s, property values remained largely flat relative to the dramatic swings in the rest of the country. During the last 30 years, unemployment rates have never ventured into double-digit territory. Instead, they have remained firmly between 4% and 7%, with the notable exception being 8.3% in March 2010. When it comes to population, the city has little to offer in the way of fireworks either. In fact, Pittsburgh’s population has been in a long, slow decline since the 1980s when the steel mills closed en masse. However, even that usually troubling metric has not created a terrible furor in the local economy. Pittsburgh has boasted substantially higher per-capita incomes than national averages since 2010, thanks to a thriving STEM (science, technology, engineering, math) economy and a supportive environment for oil and gas and natural gas businesses. For real estate investors, investing in Pittsburgh can be an extremely rewarding experience if they take the time to understand the unique dynamics of the metro area’s economy. Pittsburgh’s relatively steady metrics, both positive and negative, have created enormous opportunity in the market over the years. For example, in early 2007, Pittsburgh home values seemed to lag far behind the rest of the country; nearly a third of the city’s homes were decreasing in value while the rest of the country’s real estate values soared. Then, when the housing market crashed, the nearly flat growth created enormous opportunity for developers who purchased entire portfolios of homes in the Steel City, renovated them and sold them over the next decade as the local housing market heated up. “That is where I started,” said local developer Al DePasquale, who purchased an 18-property single-family portfolio in 2007 for $360,000. Today, those properties sell for about $475,000. Many economists and analysts believe that Pittsburgh’s slow population decline is beingoffset by the growth potential created by STEM jobs through local universities such as Carnegie Mellon and the University of Pittsburgh. Both schools sponsor tech incubators dedicated to keeping graduates in the local area by helping them start companies in Pittsburgh rather than moving to Silicon Valley or San Francisco. According to Pew Charitable Trusts data, about 7% of all jobs in Pittsburgh are STEM jobs. Along with business, management, and arts and media jobs, those STEM positions have contributed to productivity and income growth in the city even as the population continues to decline. Thanks to the presence of fracking company Marcellus Shale, which made Pennsylvania a top producer of natural gas in the U. S. after moving operations near Pittsburgh in the mid-2000s, the Pittsburgh economy may still be considered healthy even in light of its population decline. “Chilling” Uncertainty One possible cloud (or silver lining of opportunity) for Pittsburgh investors is declining new construction. Despite 2020’s rising home values and skyrocketing listing prices, the Pittsburgh market is facing a potentially troubling 2021 if construction starts do not catch up to projections. Local developer Jeff Burd, owner of the Tall Timber Group and a local publisher focusing on development and construction, initially estimated project starts in the area would reach $4.8 billion this year. However, the tally was only about a third of the way there as of June 2020. “It’s the economic uncertainty that is chilling construction,” Burd observed. Another potential fly in the ointment for the Pittsburgh economy could be the presidential election. Democrat presidential nominee Joe Biden made the city his first official campaign stop following his acceptance of his party’s nomination in August, but not everyone was happy to see him. Biden is well known as an “anti-fracking, anti-oil and -gas” candidate, explained Jon O’Brien, executive director of the General Contractors Association of Pennsylvania in a Pittsburgh Post-Gazette interview published in mid-August. Although Biden has said he does not want to ban fracking outright, his current climate proposal would ban new oil and gas permits in certain scenarios, and many believe his administration would seek to go farther once in office. O’Brien cited concerns over COVID-19 resurgence in the fall and a “wait-and-see” attitude about the presidential election for much of the construction slowdown in the area. “I think little by little, it [construction] is picking up more and more,” he said. Burd noted single-family construction is up in the area by about 5% for the year so far, although that is about 2.9% lower than this time in 2019. Pittsburgh has a shortage of available lots for single-family housing, however, so residents may have to turn to multifamily options. Either way, there is still pent-up demand in the region simply because inventory is so limited. Resistant Industry Sectors One of the reasons Pittsburgh has survived and even thrived in situations that mighthave sent other cities into a long decline is the inherent resilience of its diverse jobs market. Although the metro area lost more than 202,000 jobs in February, March and April 2020, the city had made up more than half of those positions by the end of August. “What helps us is our concentration in professional services, financial services, education and health care … industries that are rebounding quicker and will helpstabilize the economy,” said Jim Futrell, vice president of market research for the Allegheny Conference on Community Development (ACCD). He noted that many large financial employers in the area, such as PNC Bank and BNY Mellon, maintained almost all their employment base by converting to a remote-working environment. However, like most other trends in Pittsburgh, it is unlikely the recovery or economic turnaround will be particularly striking or expedient. According to a report the ACCD released in August, unemployment is dropping fast in Pittsburgh and surrounding areas, but the ongoing loss of state and municipal revenues “will likely offset some of the [economic] gains” in the area. The education sector represents another bright spot

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A History of Commitment to Growth in Real Estate

Radian combines strategy, innovation to support the American Dream Single-family rental real estate is an institution that arguably dates to feudal times, and the single-family rental has existed in various forms in the U.S. since the founding of Jamestown. Radian may not date to colonial days, but the company does boast more than four decades in the mortgage insurance and SFR services space. The roots of Radian run deep, and they’ve grown even deeper due to the efforts of corporate leaders dedicated to reimagining real estate whenever necessary. “We looked very different back in 1977, when we first established ourselves in the mortgage industry as Commonwealth Mortgage Assurance Company (CMAC),” said Tim Reilly, executive vice president of asset management operations. Reilly, like most Radian employees, has a long history with the company and in the real estate industry. “At Radian, we have tremendous experience and expertise. On average, our management team has more than 25 years’ experience each in real estate, and we are the longest-standing REO asset management provider with a launch date of 2003,” Reilly said. This long tenure in the industry and with the company means that Radian brings serious horsepower to the table. And it shows when it comes to both working with investors and evolving as the industry changes. For example, the com-pany was the first to be involved with valuation of single-family rental securitizations in 2013 when the asset class debuted, and it has been involved with every subsequent issuance in that sector as well. Radian also provided due diligence and valuation guidance when government-sponsored enterprises launched a pilot program for financing SFR securitizations (see timeline). “We have a broad reach across capital markets in the single-family space,” Reilly said. “We try to stay ahead of where the industry is going, so we can anticipate what our clients may need.” Building Upward and Outward for Decades Radian’s roots are in the mortgage industry. Its predecessor company, CMAC, was founded in 1977. After CMAC went public in 1992, the company spent another seven years focused on growth before merging with three Amerin companies to form Radian. “We have always been focused on the power offered by data-informed technology,” Reilly said. “Our business revolves around delivering new and better ways for our clients to conduct real estate transactions and manage risk.” To that end, the company debuted the first-ever mortgage insurance rate-quote app, Radian Rates, in 2012 and acquired established REO asset management provider Green River Capital in 2014. The evolution continued with the 2015 acquisitions of Red Bell Real Estate LLC and ValuAmerica, both of which contributed to streamlining client workload via centralized title and closing services. The company also obtained “cutting-edge vendor management technology” and new machine-learning and artificial intelligence resources via acquisitions in 2018 and 2019. “One thing we have learned over this journey of building up Radian as a business serving real estate investors and the real estate industry is the importance of listening carefully to investors and the industry,” Reilly said. “We are always watching and listening to determine what will best serve our clients next and what will better serve them at this moment.” Radian’s most recent acquisition of Five Bridges Advisors LLC, which was recently rebranded as Radian Technology Services, is one such forward-thinking move. “Five Bridges brought powerful tools to our arsenal, including strengthening our ability to reduce risk using data analytics, artificial intelligence, machine learning and more traditional econometric techniques,” Reilly said. Keeping Core Values Close to the Heart and Near the Surface With a company as big and varied as Radian, investors sometimes may fear getting lost in the shuffle—even really big clients managing massive SFR portfolios. Radian encompasses more than a dozen unique companies under its umbrella. But, Reilly explained, Radian’s core values and Code of Conduct and Ethics, usually referred to as “The Code” in company vernacular, spans all aspects of the Radian family and keeps the focus on “acting with integrity…and making good decisions.” It keeps focus squarely on clients across the board. “Our employees espouse and breathe these core values every day because they define who we are as an enterprise,” Reilly said. “Our people are our difference. We rely on that difference to enable us to successfully create shareholder value, partner to win and always do what’s right. That is all part of ensuring the American Dream, which we have been doing since 1977.” Those values, in conjunction with the company’s extended track record in the industry, played a significant role in Radian’s evaluation of a brand-new, industry-altering product in 2013. “It was a brand-new [for the time] type of securitization that a large bank was forming to take to the market with a new institutional sponsor,” Reilly said. Radian was involved in the due diligence on that very first SFR securitization and has been involved with every single subsequent single-borrower issuance since—about 52 deals over the last seven years. Because Radian SFR clients may own upward of 85,000 properties, the company has been able to leverage its relationships and experience serving clients at all portfolio volumes. “We use that experience to apply the appropriate levels of technology and evaluation strategies to all our clients, be they huge institutions or regional players with fewer than 10,000 properties in their portfolios,” Reilly said. Because many Radian clients are borrowers, aggregators and sponsors in the SFR space, the company feels it serves an essential role in the juxtaposition of lending and borrowing in the industry. A Powerful Team Putting Client Success First While humility is not mentioned specifically in The Code, Reilly said it is one of the things he is proudest of about his own asset management services team. “Many of my team members are recognized as subject-matter experts in the industry. They have industry accolades dating back to 2014 when the SFR space really took shape, and they still are laser-focused not on those accolades but on the success of our clients,” Reilly said. “It might sound strange to say,

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The Importance of Including HOAs in Your Due Diligence

Your real estate due diligence checklist isn’t complete if it doesn’t include homeowners’ associations. The need for due diligence in real estate transactions should go without saying, but many buyers fast-track through some important areas of the process. Whether you’re a first-time homebuyer or an investment institution, ensuring your due diligence stage is thorough and complete is nonnegotiable. Most, if not all, real estate transactions have similar pathways to closing day. General due diligence items include inspections, appraisals, insurance verification and title searches. These items are essential to making appropriate homebuying decisions, and they often must be carried out within 10-17 days from acceptance of the offer. Homeowner Association Due Diligence For most transactions, the process can seem straightforward, but for the more than 53% of properties belonging to a homeowner association, the task list can grow long quickly. According to HOA USA, there are more than 351,000 homeowner associations governing homes across America. Buyers purchasing in a condominium, cooperative or planned community must look at several aspects of that association before signing on the dotted line. Homeowner associations can affect several aspects of your investment, including your resale value, rental cash flow and overall marketability. So, what must you do during the due diligence stage to make a sound investment? Homeowner associations are governing bodies, controlled by a homeowner-elected board of directors, to carry out the daily business of the community. Whether for a townhome, condominium or single-family home, homeowner associations are in place to create a standard, maintain communities and enforce rules. Directors can use their governing documents to carry out those functions and establish the standard each new member must abide by. These documents are referred to as CC&Rs—covenants, conditions and restrictions. Covenants, Conditions and Restrictions Requesting the governing documents and reviewing them is vital in the due diligence efforts, particularly for investors evaluating a property’s ROI. The CC&Rs will dictate whether a property has: 1)  Rental restrictions 2)  Pet restrictions 3)  Resident Behavior standards Visitor hours Community access Common area manners Vehicle registration Exterior storage Noise-level compliance Holiday decoration Architectural modification requirements While most of the information needed will be in the governing documents, it is not the only set of documents that should be evaluated. Other documents that can provide a better sense of how the association is run, what repairs or projects are upcoming and an overall sense of the community are the board meeting minutes and community newsletter. Financial Statements and Budgets Homeowner associations run like businesses. As such, they have financial components that need to be reviewed to ensure financial stability. Assess-ment of the association’s financial statements and budgets can provide better insight as to how effective the association is running the community and the impact it could have on the property’s value. Items represented as bad debts and misallocation of capital expenses should be of utmost interest. These are indications of the association’s financial distress or mismanagement. Ensure the association has sufficient reserves. A reserve study provides insight into the association’s ability to use assessment funds for both operating expenses and long-term repairs. Insufficient assessment dues collection and lean budgets can often lead to HOA-imposed special assessments, leaving owners to cover a portion of large repairs. According to an article in Investopedia, “a good standing association will have 25% gross income in reserves for emergencies and repairs.” Insurance Master Policy It is important that the association’s master policy has coverage that can extend to the individual unit or home. Review the policy carefully, noting what is or is not covered and whether additional insurance for the property is required. It is important to understand what insurance coverage is available and provided through your assessment dues. Statement of Account Known throughout the U.S. as a demand letter, paid assessment letter, resale document, etc., the statement of account gives you the breakdown of all the association’s fees and charges to the homeowner. Additionally, it will provide you with an overview of where the account currently stands and an opportunity to review any violations that should be corrected before closing. This includes potential fees for nonpayment and violations. Board Litigation History Homeowner associations can find themselves in various litigation matters. These matters can affect both the seller and the buyer. While disclosure laws exist for each state, requesting information regarding any litigation issues is important when determining if a property is a good investment. Some common litigation issues for associations can be tax issues, contractor liens and owner unpaid dues. An article on Investopedia states that “some condo and homeowner associations have been forcedinto bankruptcy for unpaid HOA dues.” This can have implications on the property’s earning potential, resale value and rental property return. Purchasing Property Within an HOA Regardless of where the property you may purchase is located or how the property is governed (homeowner association or not), due diligence is a key component in real estate transactions. When purchasing a property, it is important to ask yourself questions that will shape your decision. For investors, it is important to ask: 1)  How can the HOA’s rules be modified or amended? 2)  How is the HOA board elected (or removed)? 3)  What ownership does the HOA board hold? 4)  How are HOA meetings called? 5)  What are the consequences of any violations of the HOA’s rules? 6)  What is the renter’s application and approval process? Buying a home is a major decision, and due diligence should always be part of the equation. For those purchasing to live in a property, you want to know your property is free of any major issues or damages and that there will not be any surprises. If you are purchasing as an investment, ensuring it will make money even before buying it is crucial. And, while due diligence may look different for individual homebuyers and investors, ensuring proper time and effort is allocated remains the same.

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Tapping into Trillions

Using self-directed IRAs for private funding Whether you are a first-time homebuyer, an experienced fix-and-flipper or an expert in rentals, there is always a need for funds. Investors will always need money for deals, and sometimes traditional bank loans aren’t available to everyone. Or others just prefer the flexibility of setting their own terms on a deal. Although there are plenty of options available for private financing, many investors prefer self-directed IRAs (SDIRAs) to fund their deals time and time again. Did you know you can easily create your own private financing source when you establish a relationship with a private money lender that utilizes an SDIRA? The potential to have the funding within days is just one of the many exciting possibilities afforded by the money-borrowing aspect of self-directed IRAs. Best of all, SDIRA loaning allows the SDIRA lender and the borrower to decide on the terms of the investment together. According to a recent study from Investment Company Institute, $28 trillion are in retirement assets. Of that, $9.2 trillion was reported to be in IRAs alone. With that much money available for use in IRAs, it’s nearly impossible not to be curious about how to use those funds for private funding. For lenders and borrowers alike, private loans with SDIRAs have provided opportunities for successful deals and have given investors options outside traditional bank loans. So, whether you’re looking to borrow private funds or loan out your own, here is everything you need to consider. Why Use a Self-Directed IRA for Private Funding? As mentioned, sometimes a traditional loan from a bank or hard money lender just doesn’t work for unique funding situations. Especially in a market like real estate, in which investors seek creative strategies, having a private financing option is almost necessary. With a self-directed IRA, investors can loan out their retirement funds on their terms, as decided and agreed upon with the borrower. These agreements are usually more customizable than regulated bank loans, and typically the interest rate works out in favor of both parties, making it a great investment for a lender and their SDIRA. Decisions about everything from the principal amount, interest rate, time period, collateral and frequency can be made together, between the lender and the borrower. Flexibility is a huge benefit when using private funding from an SDIRA. The time frame to have a private loan funded is one of the many advantages that draws investors to this outlet of private financing. Whereas applying for a traditional loan can be a lengthy process, getting funds from an SDIRA lender can take less than a week, depending on the IRA custodian. Another advantage is being able to pool IRAs and individuals together for a loan if one party does not have sufficient funds to meet the loan amount. The flexibility of a private agreement makes it possible for two or more IRAs or people to come together to supply the total amount to loan out. A benefit for lenders is they get a tax benefit and possibly higher returns than traditional investments when loaning with their SDIRAs. Due to the simplicity and ease of private loans, they have become one of the most common SDIRA investments. This means private funding is not projected to ever be in short supply. Considerations When Private Lending and Borrowing With Self-Directed IRAs Just as banks have a certain set of criteria when vetting someone for a loan, private lenders typically will as well, although the requirements are usually different and fewer. Factors a private lender may consider are the borrower’s credit scores, the investment loan to value ratios, the amount of time the investment may last and, in the event the money is not paid back, whether the investment is something the lender would want to own. These are just a few considerations a lender may have. As a borrower, it is wise to have a success book (if applicable) and be able to properly present your investment. Usually there is a higher approval rate for borrowers seeking a private loan versus a traditional loan. How to Get Private Funding From a Self-Directed IRA The first step is to find a lender that has an SDIRA established or is willing to go through the steps to establish a retirement account with an SDIRA custodian. Once the lender and borrower have agreed upon the terms of the investments, investment documents such as the promissory note are drafted and submitted to the IRA custodian. Custodians will differ on their steps to fund the loan, but generally once the investment documents are reviewed and signed, the custodian will issue the funds to the borrower from the IRA. The borrower will then make payments, according to the frequency and amounts agreed upon in the loan, back to the IRA. It is important to remember that an SDIRA is its own legal financial entity, which makes the SDIRA the lender, not the account holder. All the income goes back into the SDIRA. Borrowing from a bank can be time-consuming and stressful, but private lending doesn’t have to be. Private loans with an SDIRA are great investments proven to benefit all parties, from those seeking private funds for their deals to the SDIRA lenders themselves. If you have questions about how SDIRAs can be a source of private financing, be sure to give an IRA specialist a call at an SDIRA custodian you trust.  

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Trends in Interior Paint

Just in time for fall—out with the warm and in with the cool! In today’s real estate market, there is a trend that many sellers are overlooking. It is one of the most basic and cost-effective ways to increase the values of their homes—interior paint. What the studies are saying about millennial homebuyers as it pertains to preferences in real estate are true. Millennials are not looking to put sweat equity into their homes. They are looking for something move-in ready. End of story. Millennial homebuyers do not have the slightest desire to paint even one room, much less an entire house. Millennials are continuing to flood the market for both rentals and purchases, and they are willing to pay a premium for homes whose previous owners have made wise paint choices. Cool is Cool Cool light colors (greens and blues) can brighten a space that may have limited natural lighting—or even make a smaller room feel larger. The trend toward cool doesn’t stop at the cool light colors; the experts are projecting a big comeback in bolder cool colors too. According to HGTV’s Trend Forecast: 2020 Colors of the Year, Classic Blue was voted their color of the year. And millennials love all things HGTV. This is what Pantone has to say: “We are living in a time that requires trust and faith. It is this kind of constancy and confidence that is expressed by Pantone 19-4052 Classic Blue, a solid and dependable blue hue we can always rely on.” In these historic times, who couldn’t use a color that is reflective and tranquil? Not Just for Walls The use of bold or light colors that venture off the “neutral” path of the past 10 years does not just stop at full wall paint either. A good rule of thumb is to choose a color two shades darker than the other walls in the room. Bold, cool colors can be used for an accent wall or trey ceiling to create an accent island for a bold contrast in an otherwise boring kitchen. Or, consider painting bottom or upper cabinets a bold or cool color paired with a neutral white or light gray. You can also paint a tired old bathroom vanity and mirrors. Jazz up the exterior of your home by painting your garage doors, front door and shutters—or a combination. In the end, not only does a fresh coat of paint have the potential to make the room look and feel new, it can easily increase your demographic, foot traffic and the price a buyer is willing to pay for your home.  

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The Great Migration

What does the urban center exodus and work-from-home evolution mean for real estate investors? The COVID-19 pandemic has disrupted many things about our lives, and these changes run much deeper than wearing masks and social distancing. In the housing market, the pandemic has renewed a trend away from densely populated urban centers and toward more spacious dwellings in the suburbs. This trend is so significant that it is driving headlines in the industry and beyond. Zillow released research in August showing that rent prices are increasing in suburban areas while stagnating in urban centers. Researchers hypothesized that “suburban rentals may now be more appealing for renters who no longer need to commute or are temporarily unable to enjoy some of the amenities of urban living.” A Zillow survey from a few months earlier indicated that renters started considering moves based on the work-from-home freedom from commutes as well as requirements of a designated room to serve as an office. Those trends have certainly expanded through the third quarter of 2020. When you add the fuel of working from home to kids doing virtual learning, it’s no wonder that The New York Times is touting an unprecedented “surge that is unlike any in recent memory” out of New York City and into the suburbs. But this isn’t just a New York trend—it’s happening in big cities nationwide. Despite double-digit unemployment rates, the stock market has fully rebounded and continues to flirt with all-time highs. Both existing and new home sales have shown us what a true V-shaped recovery looks like. While we are still in the thralls of a pandemic, housing is one of the brightest segments of the economy, with incredibly low interest rates and buyer preferences demanding far more single-family properties than are currently on market. As we’ve seen many times before, just because the rules of the game change, it doesn’t mean real estate investors stop playing. They adapt to the new game and compete. Here’s what we’re seeing right now  with single-family rentals, new construction and fix-and-flip properties. Single-Family Rentals Inventory for single-family homes was tight before the pandemic, and the increase in demand from those fleeing to the suburbs—combined with record-low interest rates for homebuyers—means that demand far outstrips supply. According to the National Association of Realtors in August, housing inventory in the top 50 U.S. metros declined 38% year over year. This means investors will need to be more creative than ever in finding good investment properties. Investors are pros at using creative marketing strategies to uncover potential buying opportunities before they reach the MLS. Currently, we’re hearing of investors going back to grassroots door-to-door canvassing to network and learn who might be interested in selling their homes. Investors must not only be creative to expand their targets but also consider rehab-to-rent properties or even build-to-rent projects instead of simply buying existing housing stock. The good news for SFR investors is that if they can acquire a good property, the trend toward the suburbs and rental homes means that rent rates should remain solid for a long time. Despite eviction moratoriums being extended in many markets, investors are still buying properties where available. This is an area to watch though. As these eviction moratoriums expire and unemployment remains high, it’s important to conduct thorough application screenings to ensure tenants’ ability to make monthly rent. Investors need to move quickly when they find the right property to add to their portfolios, which means knowing they have the cash or available debt exposure to make a deal as soon as they’re confident the numbers pencil out. Ask your lender if they have a pre-approval program or line of credit you can get qualified for to ensure you have ready access to capital when needed. Fix-and-Flip Properties The tight housing market means that the need for affordable housing is stronger than ever. Fix-and-flip projects can help revitalize distressed properties and turn them into sought-after homes for sale or rent. Investors who find these properties and rehab them appropriately for the area will see after-repair values in a tight market remain strong. Investors who focus on fix-and-flip rehabs must understand trends that are driving buyer demand. As mentioned earlier, parents who are working from home or have kids learning virtually have a renewed interest in larger homes that include a dedicated home office and room for homeschooling. These features can differentiate one investor’s house over another and offer increased margin opportunity on larger projects. Whether these are separate dedicated spaces, finished attics or basements, or added ADUs and she-sheds, such rooms will drive up construction budgets. Still, they should provide a return on investment that is worth the initial outlay. The fix-and-flip and fix-to-rent investment strategy boomed out of the 2008 financial crisis. Many veteran investors are poised to capitalize if a similar surge of foreclosures happens in the coming months. This means many investors who believe the end of mortgage deferments and prolonged unemployment could open buying opportunities in the months ahead are keeping powder dry to be ready. But with home prices continuing to climb, demand at all-time highs, and under 4% of mortgaged properties with negative equity, the prospects of a buying opportunity like we saw for investors in 2008 seems unlikely at the moment. A September report from CoreLogic shows, however, a significant spike in delinquent mortgages. So, depending on the duration of the pandemic and prolonged unemployment for many millions, it’s certainly possible that distressed sale increases could follow. New Construction In a normal year, fall typically means a slowing trend of new home starts and sales, but 2020 bucks the normal trend. According to the National Association of Realtors, “the strong summer sales are an indication that the pandemic merely delayed rather thanobliterated the spring market. … There are no indications that contract activity will wane in the immediate future, particularly in the suburbs.” Land, labor and lumber prices continue to soar and are certainly adding to the cost of a newly

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