Archives for April 2012

Exploding The F Bomb

Flipping out

Why is the word “flipping” such a huge pejorative in our society? How did turning over properties for profit earn such a bad reputation in the investment property search process? Why is the small investor blamed for the downfall of the housing market? (The very same set of investors whose presence helps communities increase their tax rolls. And in so doing, help increase the overall viability and well-being of communities.)

My guess is that all the consternation and negativity thrown at property investors are the byproducts of what we see in the media. This includes all the half-hour infomercials that are on late-night television and have been running for many, many years, making it seem so easy to get rich quick by easily investing in real estate. If you buy their course, that is. In addition, over the last 10 years or so home shows have sprung up across the cable dial that also make it look, if not challenging, relatively simple to find fix-up properties for profit. And then of course there’s the slant the news media puts on any story involving our current economic downturn due to the housing crisis. A housing crisis which the media tends to report in a very slanted way – that gives the impression that not only banks, but greedy investors too are to blame for the mess that we’re currently in.

Lax oversight

This couldn’t be further from the truth. Blame rests solely with the lending institutions and our government for their lax oversight of these institutions. It was lending institutions – some much worse than others – who created this mess. They did it through allowing lending standards to become so lax as to invite fraud across the board on any application for a mortgage.

And now we see what that has wrought: we have an incredibly tight credit market where a score of 720 in your FICO may not qualify you for a loan. And only the best scores can get loans these days. Clearly, about half of all loans being applied for in the United States today are being turned down.

I think it’s interesting that the very same news media spend very little time on describing the path of destruction that hit honest investors who got caught in the middle. Not simply homeowners, but also homeowners who also invested in investment properties – and multiple investment properties at that. As the housing market collapsed their net worth dropped substantially, sometimes by as much as 50%, in a very short period of time. These were all hard-working investors who had nothing to do with creating the crisis in the current downturn.

Restoring the residential housing market

So it’s quite ironic that the very same set of mom-and-pop investors are helping to restore the housing market today, as they perform their own regimen of investment property searches. And in so doing, they are helping to build a foundation for the entire United States economy. These investors are pouring large sums of their own cash, with usually low leverage nowadays, into purchasing more properties to hold and rent out for the short term.

Some investors are still taking greater risks by flipping properties. It is these flippers who are the real cowboys of the property investing world right now. They see the opportunities – especially in foreclosures and short sales – where properties are extremely damaged and need a tremendous amount of renovation work. And they’re going about, in a nice formulaic way, giving buyers what they want. Running investment property searches, picking up houses very inexpensively, fixing them up and then putting them on the market – making them look dazzling in the process.

Risk taking

In so doing, homeowners with not so dazzling homes that are currently on the market have been suffering. Because, by and large, those homes get bought after the newly refurbished houses are sold. But it is the property investor that takes the greatest risk of all, because it’s not their home that they’re living in that they are fixing up. So they are not getting any enjoyment out of the property in the process. Rather, they’re doing it in the hope that they will be able to sell the property in a reasonable amount of time for a profit. After all, to hold onto the property each day costs the property investor even more, cutting into their overall profit margin That is, if there is to be one. Which in the current real estate market is certainly not a given – and a huge risk for all property investors who are flipping right now.

Giving buyers what they want

But for investors who know their geographic area very well, and who stay close to home, run frequent investment property searches, have a reliable crew that they’ve worked with before, and who buy property at a great discount, there is a chance to make money on a flip. ( Flipping should produce yields in at least the 10-20% range, otherwise, they’re not worth the risk.) Flippers know that they have to give buyers what they want. And they have to feel quite confident that they are buying in areas that, while maybe not the tops in location, will become better in the near future, owing to increased gentrification.

Early adopters

Once they renovate these properties, they will be marketing them to “early adopters” types of buyers. This is a market segment that values not only the look and feel of the house that they’re buying, but the neighborhood is valued just as much as the property. These buyers like to feel that they are onto something special and that the neighborhood that they are buying into will become a lovely one in short order, even if it isn’t right now. Thus there is a special cache attributed by these early adopters to buying in neighborhoods that are coming up in value.

The maverick flipper

So what about these maverick flippers? Why are they the heroes of the investment property world? Simple. Not only are they the greatest risk takers, but they’re the ones that truly help to stabilize neighborhoods all over this country. Instead of foreclosed homes sitting idle with banks doing nothing to keep them up over time, investors who run daily investment property searches, locate the best buys, then purchase and renovate downtrodden homes, instantly start to renovate their properties, thereby adding value quickly to the community that the property is located.

Communities look better, and they can then attract the better buyer to the neighborhood – and in turn, the neighborhood swells. Shops spring up as communities grow while population increases, and more retail business means more types of business overall for the community. Assessments go up – residential as well as business, and tax revenues increase. In addition, new businesses that come into the community aid in higher revenues for local governments through greater sales tax revenues. The whole cycle is so American – the free market system working at its best.

Exploding the F Bomb will take time

Unfortunately, it will still take some time before the word “flipper” has a positive connotation in our society. As more investors add value to properties through sinking a great deal of hard work and money in to transform them, thereby increasing the value of local communities across our country, I think flippers collectively will develop a much better standing in our society. And “flipping” as a word will not be employed as the exploding F bomb that exists today.

photos courtesy of onlyhdwallpapers.com, hookedonhouses.net, dealmakersblog.com, tmgnorthwest.blogspot.com, home.howstuffworks.com, flipproperty.org, realestate.msn.com, moneycrashers.com, metrosdrealty.com, foreclosuredatabank.com

Buy Investment Properties Wisely

Make sure to follow the right trail…

Property investing can sometimes be like following a lovely wide trail on a hike, only to find the trail degrade into a very unused section. Then you have to make a choice: Attempt to follow the vanishing trail, or turn back. Or worse – follow another good-looking branch of the trail. Decisions, decisions…But what basic guidelines can you use when looking to buy investment properties?

Income first, capital gains second

In the current down real estate market, it’s always advisable to look for investments that will throw off the greatest rental income. Any increase in the value of the property that yields a capital gain should be considered an extra performance boost. Key ingredients to creating a sure-fire winning formula when you buy investment properties is to research, crunch your numbers and then negotiate well when searching for new properties to acquire.

Yes, location IS everything

As mentioned in prior articles here, location cannot be underestimated in determining the future viability and performance of your investment. The location should be near easy transportation, as well as near to a thriving work force. Obviously, central cities and commuter suburbs are prime locations for all investors.

Easy maintenance is important

You’ll also want to find a property that will be easy to maintain in coming years. The newer the building, the better. And if you’re trying to be a relatively hands-off style of investor, new is definitely the way to go when you buy investment property. Naturally, for those that want to spend more time and money on their projects, then fixer-uppers are also viable. And you’ll be adding value to the property in the entire renovation process.

Apartments vs. single family houses

When looking to buy investment properties with the greatest rental returns, you’ll want to consider apartments first, rather than single family houses. Remember that financing can be more costly and difficult if you are considering purchasing an apartment building over 6 units. Standard mortgage financing for residential rental property stops at 5 unit buildings. Over 5, it’s considered commercial financing, with concomitant higher rates and more onerous lending standards.

Hold for the long term

Since rental rates have been steadily climbing over the last few years, net rental yields have also been going up on average. So it’s a good idea to think holding longer term right now, to help maximize your yearly yield. No sense selling a winning property when the returns are so worthwhile right now. Wait for the market to at least stabilize and start showing an upward trend before considering unloading a money-making property.

photos courtesy of yaymicro.com, smilingpond.blogspot.com, homes.com, usatoday.com, blog.deeperquestions.com, lincolntrustco.com

A New Type Of Investment Property Loan

A unique wraparound loan

For many years now investors have had only one choice when it comes to investment property loans that allowed for renovation cost wraparound financing. These types of loans are used so you can incorporate the fix up costs to renovate the property into the total mortgage for the house. This type of loan is called the FHA 203K renovation loan. The problem in the past with this form of loan is that you had to occupy at least one of the units in the building you were purchasing.

Homestyle Renovation Loan

Therefore, for most investors, if you were not going to live in the investment property, this type of loan would not be available to you. In addition even if you were purchasing a multi-family house under five units, and if you were not going to live there, this type of loan would not be for you. It would only work if you’re going to live in one of the units. Now Fannie Mae has come out with their Homestyle Renovation loan. This loan is a sign of the times, as the federal government tries to help banks lessen their inventory of foreclosed properties. Now as an investor, you can purchase a property and wrap the renovation costs in with the total mortgage. And you don’t have to live there.

Increasing your leverage

This type of loan is great news for investors who really want to leverage properties. Instead of sinking a great deal of your available cash into renovation costs, you can now wrap a large portion of those renovation costs into the mortgage. This frees up your other capital for purchasing other properties. This Fannie Mae Homestyle Renovation loan can be used to purchase basically any house, condo or townhome, or multifamily property,. And the property can be in any condition, and loans will typically carry loan to value ratios in the 50 to 75% range, depending on the property.

Licensed contractors

Like the FHA 203K type of renovation and purchase loan, you’ll need to use a licensed contractor. The contractor will have to be familiar with what Fannie Mae requires, It will be helpful to use a contractor who has had a great deal of experience dealing with the FHA and its paperwork requirements. Ultimately the contractor is responsible for generating all the paperwork as to the renovation work to be performed, in order to get the loan approved. Just like the 203K, you’ll need to use a contractor that’s been approved by Fannie Mae.

Nevertheless, this is still an exciting proposition for property investors. Now you’ll be able to truly leverage multiple properties at a time using this type of loan. Again the only caveat is that you will ultimately have to bring a tenant to the table in order to get the loan. As with the 203K type loan, you’ll have a window of time in which to get the unit occupied, after the renovation work has been completed.

Types of repairs

Some of the repairs usually done in loans like these include major work like roof repairs or replacements, new heating units, new air-conditioning , as well as complete kitchen and bath remodeling. Unlike the old FHA 203K loan however, where only one property could be financed at a time. This new Homestyle Renovation loan can be used to finance multiple properties. This makes it a gold mine for investors looking for new investment property loans.

Create a team

Before looking for more investment properties, you really want to create a team to help you buy these kinds of distressed properties. You want to find real estate professionals with experience dealing with foreclosures and short sales. You’ll also want to get recommendations for mortgage loan people who are familiar with this new style of loan from Fannie Mae. It’s very important that these mortgage people can close on a loan like this in the shortest time possible.

You want to find mortgage loan officers who can put you at ease that a loan can close within 30 to 45 days, much like the time it takes for most average non-FHA loans to close. Otherwise you’re going to have a big problem on your hands if the loan takes forever to get approved, and you can’t close on time. It’s also a good idea to have your contractor on board as you look at properties that need a lot of work. If your contractor has done work with the FHA 203K type loan before, all the better.

Searching for distressed properties using investment property loans

So if you go out searching for investment properties these days, and if you look at a lot of distressed and or foreclosed properties or short sales, make sure you have your team all set to go: your contractor, your mortgage person, as well as your real estate agent. Make sure they’re all familiar with this new Fannie Mae Homestyle Renovation loan. Because once you see something you like, you’ll really want to jump on it as quickly as possible and put in a bid on it immediately.

And after a bid has been accepted and a contract executed, you want to get the paperwork rolling as quickly as possible for this type of investment property loan. That way the whole process will run smoothly, and you can then concentrate on your next project.

photos courtesy of 203konline.com, lendersoup.com, 203krehabnow.com, moneypress.com, workaway.info, brokersbestmtg.com, buildingmoxie.com

Holding For The Long Run

A new type of business model

Much attention has been paid in the news recently to a new wave of companies that have been more than just dabbling in rentals, as they try to corner the market when they buy investment properties. These companies have been actively creating an assembly line of purchasing foreclosed properties, fixing them up and then putting them on the market as strictly rentals. These firms then seek tenants for all their recently bought properties.

Some of these companies are based in the hardest hit real estate areas of the country over the past few years, most notably California and Florida. They utilize seed money from large investor firms that bankroll them with multimillion dollars in funding. Thus, these firms do not have to rely on traditional mortgage financing for all their acquisitions.

Fine tuning how they buy investment properties

Apparently these companies have fine tuned the buying process to such a keen degree that they use a veritable minion of inspectors to go evaluate up to 20 homes a day. The firms then decide, based on the raw data the inspectors provide, whether to make actual bids on a property. These inspectors will spend approximately 15 to 20 minutes in each house, then plug into their iPads the data about the condition of each house. Proprietary software, created by each specific firm, then interprets the data based upon revenue parameters that each company is expecting.

Items such as the condition of the kitchen, appliances, floors, roofing and landscaping are all covered, to name just a few pieces of raw data collected. Then, a highly sophisticated algorithm contained in the software is used to determine what repair costs would be required to bring the property up to snuff for renting out in each particular area.

Coming up with a bid price when they buy investment properties

Once those costs are figured out, a number is produced representing the total repair cost along with what the house should be worth in today’s market in it’s current condition. The combined total yields an estimated price range the company will offer as their bid on the house. And this is done hundreds of times a day, as each firm makes bids all over their respective states. So mom-and-pop investors are not only competing against themselves now, but they’re also competing against these large companies that deal in such large amounts of distressed and foreclosed properties.

But let’s consider one thing that the mom-and-pop operator has over these large assembly line style operations. These large companies have only been in existence for a very short time, and even though they are creating a huge market for the purchase of distressed properties, they have yet to show a long-range track record for actually doing the hard work – that is, holding onto properties for the long run.

The holding process

This is where the truly difficult part of being a rental property owner comes in. As I have advocated in previous articles here, you really want to stay local when you’re managing your own properties. Large-scale companies that are buying in many disparate areas and municipalities have a tough road ahead of them. Finding good tenants, dealing with delinquent tenants, emergency repairs – these are all difficult things to manage, even with a professional property manager in place.

Different municipalities each have their own set of unique tenant/landlord laws. The company that’s doing this type of assembly line purchasing of properties will also have to be able to deal with these different municipalities and their local laws. The amount of time, energy and most probably, attorney power will be staggering for companies like this.

Figuring in for delinquencies

Imagine a situation where you have a 5% delinquency rate on all your properties. But as a mom-and-pop operator your properties are in one or two local municipalities. And you know you’re going to have to use an attorney to evict anyone that does not willingly want to leave. Now imagine doing that in a large-scale way. Try 5% on several thousand properties in many different locales. Attorney costs alone will be staggering for a company like this. I’m not sure how investment companies are putting money up for companies like this to exist, but they’ll soon find out that the purchasing of the properties was the easy part. In a few years, holding onto these houses will prove to be very difficult.

When it comes time to sell investment properties

In addition, when it comes time to sell off some of these properties, as I’ve already mentioned in a prior article about jettisoning your worst performing properties, there’s going to be a major hurdle in front of them. Even in a few years, there will still be a huge glut on the market of distressed properties and other rental houses, and these large companies may not be able to even get back what they paid for the properties if they sell them too soon. I’m also not a big believer in cookie-cutter approaches to fixing up houses for rent. I believe when you purchase a property to rent and to hold long-term, you’re going to be putting your own personal stamp on it. So while you are making basic repairs and fixing up properties in a very simple way, you’re still doing it in your own style. Not so with a large company that’s doing hundreds, if not thousands, of properties.

Assembly line as a way to buy investment property – a bad idea

So only time will tell how long these assembly line investment property companies will exist, but I think they are in for a very difficult awakening process in the next few years. As they try to find good, qualified tenants, hold onto these tenants and manage the properties in each of these different locales, they’re going to encounter a whole host of headaches. They’ll find out, painfully, what mom and pop investors already know – that holding rental property for the long run is really hard work. And that purchasing property, while time consuming and difficult as well, pales in comparison to the workload ahead of them after the purchase.

photos courtesy of chambanamoms.com, nanowerk.com, homeinspectors.com, appraiserjobs.com, tenantscreeningblog.com,

tenantverificationscreening.com, forsalefortcollins.com,

bestlongislandhomeinspectors.com