Archives for June 2013

Property Investor Alert– Beware The Latest Mortgage Rate Trend

Rates are on their way up…

Cash flows for property investors are about to take a hit in the coming months – and into the foreseeable future. As The Fed has recently indicated, their stimulus package has an expiration date, and it’s coming soon – possibly as early as this September. So kiss goodbye to the approximately $85 billion a month of stimulus The Fed has been effectuating of late, by purchasing Treasury bills and mortgage-backed securities in order to help keep interest rates low. And that’s just some of the sobering news property investors need to stay alert to in order to plan your investment strategies intelligently. Add to this the fact that 30 year mortgage interest rates have been slowing ticking upwards over the last several weeks, and you’ll soon realize the bottom was reached on the interest rate front – and it doesn’t look like it’s going to return any time soon. Many national economists are predicting overall mortgage rates to increase on a steady trajectory through the end of this year.

Rates are going up for several reasons

I have reported here in recent articles that the current housing rebound is due mainly to property investors, especially a few incredibly large hedge funds that specialize in property investment. And I have noted that consumer confidence remains not altogether strong, as the jobless rate limps along, barely creating the necessary rebound to seriously improve job confidence. This yields a static situation where people are still fearful about their employment – at least the ones that have jobs. It still remains quite difficult placing job hunters in available positions nationwide. And this ultimately continues to erode consumer confidence, and keeps many potential homebuyers on the sidelines. Thus, it’s still a great position to be a landlord to provide housing for all the fence-sitters who continue to rent, thus pushing rental prices up.

Banks are flexing their muscles

So it is property investors who continue to prop up the housing market and mortgage industry – investors comprise more than 20% of all home sales in the past year. With all this activity, and with unemployment remaining at least steady, lenders are now flexing their muscles, figuring it’s finally time to start ratcheting interest rates up. After all, they see the numbers: the average time homes are on the market nationally have dropped considerably this year – from 100 days down to 60 days on average. And nationally, home inventories have been dropping from about a six month supply down to about four and a half months. So it would be wise for any property investor who was considering making their new-buys later in the year, to heed this news – interest rates will only be considerably higher by winter. Best to lock your deals up sooner rather than later if you’re going to be financing with an investment property mortgage loan. Your cash flows will thank you.

photos courtesy of realtypin.com, kstp.com, realtybiznews.com, forbes.com

Insanity

A tale of WHOA!!!

Let’s say you purchase a piece of commercial property. You then find a tenant for it, sign your lease, and start collecting rental income that will produce the intended positive cash flow on your commercial building.

Sometime down the road, you then find out that there is suspected criminal activity going on in your building by your tenant. You find this out by criminal charges being filed against you by the local district attorney. Now you have to fight – not simply for your right to make an income on your investment property – but to stay out of jail.

Sound impossible here in the U.S.? Think again.

A chilling story…

Recently, this story about a local commercial landlord was reported in the Burlington (Vermont) Free Press:

“Chittenden County’s top prosecutor said filing criminal charges against landlords that host spas that mask as prostitution sites is the latest effort by the state in helping local communities combat the problem. State’s Attorney T.J. Donovan admitted state and federal investigators have had little luck in the past 10 years pursuing prostitution at the spas. “We can do better in this community than what we’ve done. And frankly our approach to this problem in the past hasn’t worked. We need a new approach.” Donovan made the comments minutes after a Burlington man pleaded not guilty to a charge permitting his building in Williston to be used for prostitution.

Lunacy? You bet!

But wait – there’s more:

Once the landlord “received a warning letter last week from Donovan, the property owner took action to get the tenants to leave. He said they vacated the building, and the business is closed and in search of a new tenant…Donovan is trying to send a message to the community so landlords are on notice. Donovan said going after the landlord is a new philosophy in trying to battle prostitution.”

Kind of makes you want to see if Mr. Donovan owns any rental property, then rent it out, set up an illegal lemonade stand in front of it, then get him to charge himself with illegal activity….Oh, that’s right – that would be a conflict of interest…

Goose stepping ramifications

Imagine the ramifications of this particular case for property investors. Any landlord leasing out rental office space would be liable for the actions of their tenant. Let’s say you’re renting to a hedge fund company that absconds with their investors’ money, a la Bernie Madoff, for example. You get arrested. Let’s say your tenant leases warehouse space from you. To store their ( place your preferred name of contraband here). You get arrested. Let’s say you’re renting out an apartment – maybe it’s your vacant apartment upstairs in a building you happen to also live in. The tenant sets up a meth lab. You get arrested. Or puts in more unrelated “tenants” than your lease allows. Again, you’re on the hook to be arrested.

To paraphrase Mel Brooks, “what in the wide world of sports is going on here?”

Simple. Zealous prosecutors in a judicial system that is by definition political, and requires district attorneys to be elected to their office, create an environment of absolute insanity in a free market capitalist system for property investors.

A simple solution

What can be done? Again, simple solution. Vote against these zealots. Get them out of office. If you have one in your area, and they are clearly taking a broad stroke approach to fighting crime by going after landlords, then fight back! Get your friends and family to vote them out of office. Spread the word, write letters to the editor of your local paper…voice your opposition to Gestapo-like tactics by overzealous local prosecutors.

Besides our basic capitalist system being threatened, it’s your investment property dollars that are at stake. And that’s the bottom line.

photos courtesy of magnoliaforever.wordpress.com, thegreatestrealestateblog.com, clickpropertymanagement.co.nz, brookdale-pms.co.uk, tenantscreeningblog.com, futurity.org

The Riskiest Property Investments

Caveat Emptor, baby

There are so many ways to earn positive cash flows in the real estate investment world. So why entertain the notion of taking on huge property investment risks with non-performing, no-cash flow or negative cash flow investments? If you are wealthy enough, and a negative cash flow or extremely risky speculative property investment makes financial sense for you – strictly due to potential tax savings – then this article is not for you.

For all other property investors, then absolutely be aware of several real estate pitfalls that you should steer clear of in order to protect yourself. Again, always do your homework to ascertain the positive cash flow potential of any piece of rental property before moving forward to the actual acquisition phase.

Be wary of these investments

There are several real estate investments the basic or novice investor should be wary of, and stay away from like the plague. Chief among them are any rental property that throws of a negative cash flow. Certainly avoid second homes and investments in strictly land for speculative development. Unless you have totally concrete plans for a parcel of land, have gotten your feet wet developing a piece of land before, and know all the intricacies and local laws entailed in local land development, just steer clear of this form of property investing.

Likewise, investing in negative cash flow properties, as mentioned above, should only be done by those wealthy enough to yield a net positive return on their investment, by offsetting other earned income (and a lot of it at that) to make the losses worthwhile.

Avoiding time shares

Also to be avoided are vacation time shares as investments. They have some of the greatest property investment risks assigned to them.. They’re simply too risky because it’s so difficult to accurately predict what, if any, value will accrue as you continue to hold them. They are highly sensitive to overall market fluctuations, and can drop in value precipitously when you least expect it. They are also extremely difficult to predict future cash flows and rental income based on past performance. In addition, they ultimately can be very hard to unload should you need to resell them quickly. You could end up taking a really large haircut on them.

Foreign real estate dangers

Finally, be aware of the inherent risks involved in buying foreign real estate for investment purposes. As I have advocated in numerous articles here, try to stay close to home in your investing. You’ll get to know your local area a whole lot better than property bought farther away, or as an absentee property owner. This concept becomes heightened (as do the risks) when you consider buying foreign properties to rent out.

Risks inherent in foreign purchases include fluctuating currencies, wildly varying real estate laws from country to country, as well as the kind of real estate protection laws afforded here in the U.S. relative to other countries. So be very wary of all these property investment risks when evaluating your next set of real estate rental properties.

photos courtesy of wealthasia.net, theatlanticcities.com, rebiccharlotte.wordpress.com, sellworldmarktimeshares.com, foreclosure-support.com

Locating Investment Property: The Walk Score

An important measuring device

When evaluating a set of potential money-making buildings while locating investment property, one factor seriously tied to the building’s ultimate cash flow will be its “Walk Score.” This is a relative measure, compiled by the web site WalkScore.com. The score is a ranking between 1 to 100. It takes into account the proximity of shopping, transportation, schools and recreational facilities in relation to the actual walking distance from any particular rental property. So you can use it when evaluating potential rental properties to see which ones offer the greater possibility for rental profits.

Comparing Walk Scores

Thus, for a rental unit in a large, central city location that has a close walking distance to all local shops, buses, trains, parks, playgrounds, etc., a Walk Score could be in the high 90’s, for example. A good suburban setting, while still close to shops and transportation and other recreational amenities, would usually garner a Walk Score in the 70’s. And on the other end of the spectrum, a rural rental property, which requires a car to get to any local shopping, public transportation, downtown area, parks and schools, would probably yield a score close to zero.

There have been studies that have shown a high correlation between greater Walk Scores and a higher valuation on a similar property (same size, square footage, bedrooms, baths and amenities) than those rental units with much lower Walk Scores.

In monetary terms…

It has been estimated that for every point increase in a Walk Score, there could be a possible increase in overall property market value for a like property by as much as $3,000. The reason for this is simple: the rental housing arena places a much higher value on units that are located within an easy walking distance to public transportation, schools, recreation and other services, like shopping.

If renters don’t have to use their car for everyday chores and/or commuting to work, then they attach a much higher value to the rental unit. And this translates into greater overall demand for the unit based on its better locale. And ultimately, that demand pushes rental prices (and cash flows for investors) up.

The bottom line

To sum up, any rental property with a higher Walk Score will produce greater overall rents. They’ll produce a higher rate of cash flow, as well as have greater demand. And this will ultimately yield fewer overall vacancies, and down the road, when it comes time to sell the asset, will yield a greater overall sales price in a faster selling time than a comparably-sized property in a lesser Walk Score locale. So it’s always a good bet to check any location’s cash flow potential by utilizing their Walk Score as part of your overall evaluation process.

photos courtesy of bs757.com,livesimplyenough.com, usatoday.com, davegi.com, nakedphilly.com