Archives for August 2013

Reading The Rental Property Tea Leaves

Turn Back, O’ Man?

So the residential housing market is hot. Mortgage rates are on the rise (we’ve known this for a couple months now, haven’t we?). It’s now more affordable to buy than to rent. A lot of stories littering the national headlines both in and out of print of late give any property investor pause for concern. And what concern would that be? Well, check out some of the latest stories – here’s a brief sampling – and we’ll discuss the important ramifications for property investors later in this article. Consider these latest stories all part of a change in direction about to hit the residential property marketplace in the coming months…

The so-called “hot” housing market. Really?

A report from CNBC on August 26th, 2013 entitled “Home prices across the US defy gravity,” by John W. Schoen notes that “home prices are going up, up, up, but it’s not a bubble just yet. The surge in home prices over the past year may have some home buyers wondering if the market has gotten ahead of itself. Rising interest rates aside, housing prices in most parts of the country appear to have plenty of room to move higher if the wider economic recovery remains intact.” He goes on to say that “home prices have room to rise. A recent rise in mortgage rates is also spurring buyers to lock in rates before they climb further. “When start you see interest rates rise, people are going to want to jump in,” said Beth Ann Bovino, deputy chief economist at Standard & Poor’s. “All those people on the fence come back into the market. But that’s a good thing.”

Mr. Schoen also goes on to note that “higher borrowing costs could eventually price some buyers out of the market and slow the pace of home sales. Sales of new single-family homes dropped sharply in July to their lowest level in nine months, the Commerce Department reported Friday. Sales dropped 13.4 percent to an annual rate of 394,000 units, and the government also revised sharply lower its estimate for home sales in June.”

Summing up…

So what was the conclusion of this particular article? Mr. Schoen summed it up by saying “the continued pickup in the pace of home sales and prices will depend heavily on whether the job market continues its slow recovery and incomes continue to rise. That disposable income represents the buying power required to fuel the housing market’s continued recovery. And despite the recent jump in prices, homes in most local markets remain affordable by historical standards.” He goes on to note that “the cost of buying a house is still cheap in relation to the cost of renting, suggesting prices haven’t yet reached a point where they will cool demand, according to housing Capital Economics housing economist Paul Diggle. “The most reliable measure still suggests that housing is undervalued,” he said. Even if rising prices and rates don’t scare away potential home buyers, the continued housing recovery will depend on the availability of credit, which tightened considerably following the wave of rogue lending that fueled the mid-2000s housing bubble. Lenders are much choosier than they were six years ago, but there are signs they’ve begun to ease up a bit on credit standards as they compete for new borrowers. And after paring down a large pile of debt accumulated during the credit boom, those potential buyers are better able to take on a new mortgage payment.”

A hedge fund hedges its bets

Another headline in the Bloomberg News from August 23^rd, 2013, blares out the following headline: “American Homes 4 Rent Said to Fire Workers After Reporting Loss.” This tale of future woes for the residential property market goes on to report about the recent misfortune to befall the property investing company American Homes 4 Rent. The article notes that “American Homes 4 Rent fired a group of workers, with a focus on acquisition and construction staff, after the housing landlord reported a fiscal second-quarter loss, according to a person with knowledge of the terminations. The company, owner of almost 20,000 single-family homes, has cut about 15 percent of its workforce this year, including an earlier round of terminations before its initial public offering last month, said the person, who asked not to be identified because the information is private…Single-family landlords have struggled to turn a profit while acquiring homes faster than they can fill them with tenants. Hedge funds, private-equity firms and real estate investment trusts have raised more than $18 billion to purchase more than 100,000 rental houses in the past two years.” The article goes on to report that “single-family landlords are seeking to take advantage of prices that fell as much as 35 percent from their 2006 peak and increased demand for rentals. The U.S. homeownership rate is at its lowest level in 18 years, and more than 7 million homes have been sold for a loss or lost to foreclosure since 2007, according to RealtyTrac.”

Slowing things down…

The upshot from this report is made very clear in the last part of the article, where it is noted that American Homes 4 Rent “ is slowing its property purchases, with plans to spend as much as $100 million a month on 800 to 1,000 additional homes…the company’s chief operating officer, said on an Aug. 21 earnings conference call. “As far as being able to put money to work, I mean we could easily ramp back up to $300 million-a-month pace if we have clarity that we would have that capital available,” he said. “But we don’t want to get too far out over our skis.” I think that euphemism for being cautious should be used by all property investors…I mean, you’d hate to fall face first down a steep, snowy cliff of rental property negative cash flow, would you?

The writing’s on the proverbial wall

And yet another sobering story comes from the article “Signs This Real Estate Class is Set to Roll … Over” by Steve Mauzy’s blog of June 14, 2013. In it he notes “Axiometrics – an apartment data and research firm – reports rent growth slowed to a 3.1% rate in April, the slowest pace of the past 32 months. Falling rent growth is nothing new, though. Axiometrics reports rent growth has been moderating since July 2011. Rising property prices coupled with falling rent growth is hardly a recipe for real-estate investing success. Unfortunately, any fallout in the investment market won’t be contained to investors. Innocents are at risk as well. In many markets, investors are involved in up to 30% of residential real estate transactions, thus helping to elevate home prices – rental and owner-occupied alike. If the latter buys into an unsustainable trend, he could find himself underwater a few years later should investors start exiting en masse if the numbers no longer work.” This is quite the splash in the face of the average property investor in the U.S. But a cautionary tale nevertheless. It is time to take heed of all of these warning signs.

Hold ’em or fold ’em?

And lastly, a recent article entitled “Why I Sold My Rental Property” by Wyatt Investment Research, in their blog of August 23, 2013 notes that the current “hot market can offer both opportunity for profit and opportunity to get burned. The opportunity to profit arises when there are lots of buyers who think prices will continue soaring. And the opportunity to get burned happens by following the crowd, and assuming that the bubble will never burst. Once again, residential rental real estate is a hot market. Vacancies are low and rents are high. What’s more, vacancies have been falling and rents have been rising for some time. According to data from Reis Inc., a property-research firm, unrelenting rental-price increases have pushed national apartment rents to their highest level since 2007. Concurrently, national vacancy rates are now at a 12-year low of 4.3%.” They go on to say that “the residential rental market includes both apartments and single-family homes. Investors – landlords and property flippers – have been a driving force behind the housing rebound. Today they account for up to 25% of purchases. And their buying spree has helped lift the national median existing-home price 13.7% in the last year. Single-family homes have also been swamped with institutional money.” Get the picture? The tell-tale signs of impending problems for the residential rental market are becoming clearer by the day now. In this particular article, the author also tells how “property developers are following the money, and new construction has surged. Apartment building completions in the top 30 metropolitan areas of the country more than doubled. And more apartments are on the way, with new permits to build multi-family homes reaching a new high.”

A smart choice – or stupidity?

He also then goes on to describe his recent investment decision: “Of course, all real estate markets are local markets. Until recently, I owned a single-family rental property just north of metropolitan Denver, where vacancies are at a 13-year low. Rents are also at a multi-year high. I bought the property since 2003, and it’s been a solid income investment. It’s consistently provided monthly rental income of 15% to 20% above my costs. When my last tenants moved out, I could have negotiated a 12-month lease with new tenants willing to pay 20% more than what the previous tenants paid. But instead of finding new tenants, I decided to sell the property. The reason was simple: I don’t expect real estate to stay hot much longer.” He then goes on to explain his rationale why he would sell out now, when his cash flow was so excellent – “there are a few obvious reasons. Multi-year trends in both vacancies and rents are unsustainable. I expect more multi-family units will mean lower rents. That aside, the market simply looks and feels like it’s approaching a melting point. For evidence, look no further than bidding wars for homes that hit the market.” So he cashed out, rather than riding his cash cow.

A wise choice, or a huge mistake? Well, let’s take a look at the meaning all these articles in the news of late have been saying. Clearly, the upshot of so much national attention on the apparent rise in residential house values while rents have also been zooming upwards – until very recently that is, points to an indication that the residential rental boom is about to go bust. With homes being more affordable than rental rates nationally now, coupled with the slow rise in mortgage rates this Summer, it would appear that property investors should be wary about their calculations for the short term in increased cash flows due to yearly rental bumps. And if institutional investors, like hedge funds that specialize in residential single family homes, find their bottom lines dropping due to this rental rate bust starting to happen, then look out for these large funds to unload their worst-performing homes – en masse. This, of course, will create a glut of single family homes on the market, which will naturally depress home values in the short-to-mid-term range of the next few months through the end of next year at least.

Be wary, but remain calm and in control

What’s a small property investor to do? Well, for one, revise your cash flow projections, to make sure your property will remain comfortably cash-positive in the short run. In addition, since unlike a large hedge fund, you only have to appease yourself and not thousands of investors, determine at what level you are willing to ride out the coming storm that’s about to adversely hit the rental marketplace, as well as home values in general. If you’re OK with your current projections, then by all means, stick. Selling your property only produces more costs as you convert it to another asset class. You may stick with real estate – commercial is hot and steady right now –making for an excellent choice in real estate conversion possibilities. Again, be wary of the costs to do so. It just may be simpler to revise your market value and cash flow projections downward, ride out the short term, and continue to milk your investment property cash cow – but just not at its current level. ‘Cause it certainly ain’t sustainable…

photos courtesy of vitafair.de, labho.com, usnews.com, columbus.uli.org, brokersfirstrealty.com, digonline.org, trexglobal.com, sallyradi.wordpress.com, mortgage.lovetoknow.com, naplesguru.com, whatsthepointofaventura.com

Property Investment Death By Drowning

Water – a property investor’s greatest natural foe

Any investment in real estate – be it residential or commercial, will always have water as the main, natural element’s source of agita for property owners. Can you mitigate water problems? Absolutely. However, whether you can retain a positive cash flow in your property or not may hinge upon several key factors when dealing with water-related issues. Here are several important points to remember before you proverbially die from water torture.

Before you buy

You must have your potential investment property inspected by a licensed house inspector, or commercial building inspector. They can suss out any potential water problems associated with high water tables in the area, poorly graded building siting, underground streams and the ever-popular cracked foundations. Sometimes existing water or mold issues can be easily fixed. For example, an unmaintained building may have damaged or non-existent gutters and leaders. Hence, rainwater is dropped right next to foundations, and in heavy rains, there will usually be some form of basement seepage. This can then translate into standing basement water problems and/or mold growth – which of course, can spread. The solution – repair or replace existing gutters and leaders where needed, thereby stopping the problem from re-occurring.

In addition, make sure the area around the building is properly graded to allow for rainwater to escape away from the foundation walls. Simply sealing foundation cracks is usually not enough. The perimeter grading is what is all-important. Your inspector will also be able to tell if any underground streams and/or a high water table will require you to install an interior French drain system in the basement, complete with sump pump and outflow pipe considerably far enough away from the building.

Mitigating water problem costs known before you buy can easily be figured into your offer price on any potential acquisition. This type of water issue, while a bummer when you first buy the property, does not cause the kind of heartburn that the following problems most certainly will…

Emergency water problems

Here’s where things get icky. Any burst pipe will cause your tenant to call you – at any hour of the day or night, naturally. So you better have your emergency plumber (or two) lined up to call after you hang up with your frantic tenant. A plumber you can trust to get right out to your building and handle the bleeding, as it were, immediately. Sure, you’ll be paying double-rate for an emergency call – but think of the damage a burst pipe can do to your building. The worst-case scenario with a burst pipe, is when you don’t have a tenant in place to call you. (If a tree falls in the woods, did it make a sound?) Walking in on a flood as a property investor is one of the worst feelings you can have…So to hopefully avoid this, conduct regular inspections of your building(s), looking for potential water and or/pipe problems. Especially if you know you have any older, or rusting pipes. Maybe it would be best to replace them with pex (plastic) piping now to avoid any major problems later.

Train your tenants

Next to a burst pipe that produces an immediate emergency, the greatest water problem that can ruin your profitable investment property and turn it into a financial disaster, is the slow leak. The leak that’s never reported by your tenant. The tenant with the long-term lease. The one who will “just live with” the minor annoyance of a small drip emanating from the base of the toilet, or under the kitchen sink, or behind the refrigerator. The leak you won’t notice until they move out, and you discover a warped floor, damaged carpet, or ceiling stains from above. Or worse – if you discover mold that’s been growing for quite a long time – requiring you to remove entire walls or ceilings, and completely replace them with new sheetrock, as well as painting them.

Don’t put yourself in this position. Always do regular maintenance “visits” into your tenants’ units. Train them to call you immediately – if not sooner – when they discover the first drip out of anything in the unit! Then call your trusty plumber to make the necessary repairs. You’ve budgeted for repairs and maintenance as part of your cash flow analysis – make sure you follow through and get your tenants to alert you to the smallest of problems as quickly as possible. In this way, you can avoid the much greater hassles in dealing with any growing water issues, and the overall monetary damage they can truly represent.

photos courtesy of the-purest-of-treats.blogspot.com, mosbybuildingarts.com, homesinspectors.com, brookfieldangler.com, flooddamagetoronto.com, buzzle.com, .home-dzine.co.za

Financing Investment Property Tips

Down payment suggestions

When first time property investors feel they are truly ready to jump into the property investment game, they tend to find they don’t have enough for their initial down payment on a piece of investment property. Typically, mortgages on non-owner occupied investment real estate require 20% down for single family properties, and 25% down for multifamily properties (typically two to four family houses). This assumes you’re buying using standard residential lenders. For commercial mortgages (for residential real estate, over five family properties, or non-residential investments), mortgages can typically require down payments between twenty to thirty-five percent. The actual amount of the down payment will depend upon many factors, including your credit, the cash flow of the property, and what lender you’re utilizing for the loan. So how best to acquire the funding for a down payment on your initial piece of investment real estate? Consider these possibilities to get the mortgage down payment required by your lender…

Residential owner-occupied

If you don’t mind living in the same home as your tenants, consider this particular option. If you purchase a multifamily investment property and owner-occupy it, you can apply for an FHA loan with a low down payment of 3.5%, or a conventional loan with 5% down. Naturally, you’ll need impeccable credit, as well as be willing to submit more paperwork on these types of mortgages, but the rewards can be great…especially when you’re utilizing mostly lender funds for your leverage of this type of investment property. The key component here, especially when considering making offers on owner-occupied properties, is that you get pre-approved first. This may take a month or so, especially with an FHA loan – but it’s an imperative when you start placing offers. Making an offer on a property with an FHA contingency will not be taken seriously by any seller – unless you submit your pre-approval letter with your offer!

Self-borrowing options

You can also choose to do some self-borrowing. If you already own your own home, consider utilizing a home equity loan or line of credit on it. You can then use the ample equity in your home to good use, tapping into it for a down payment on a piece of investment property. It’s a great, low-cost use of your equity as leverage for property investing acquisition. Also consider using retirement savings for down payments. There are some types of retirement savings plans available that will allow you to utilize your retirement savings without incurring any tax penalty. As an example, setting up a self-directed IRA, or SEP-IRA, is one way to go. Of course, always consult a tax attorney or accountant to set up this type of account, as well as explore all your options to pull funds from your existing retirement accounts in a manner that won’t trigger a tax liability. Another option for self-borrowing is to utilize short-term credit card balance transfer offers with low interest rates. Make sure you understand all the terms of the agreement first though – especially the repayment terms. Most are good for short-term funding, but be ready to pay back the principal before the promotional, low interest rate offer expires! Otherwise, you’re setting yourself up for a crushing financial blow. Unless you’ve had some experience using these types of credit card promotions, be wary of using them for the first time to finance any down payment on investment real estate.

Find suitable partnerships

This is a tried and true way to finance down payments on investment property. If you can find other, like-minded investors, partners are a great way to help you come up with down payments on investment real estate. While it is typical to split costs and profits equally, it does not necessarily have to be this way. Maybe you agree to be a property’s manager in return for your share of the down payment. Or maybe your partner can put up the full amount of the down payment in return for a much greater share of the profits – if you do all the searching, negotiating, and managing work. There are limitless ways to set up a partnership agreement. What will you bring to the table to offset your lack of cash for the down payment? Whatever you agree on, make sure it’s in writing – and preferably set up using the services of an attorney for your protection.

Other People’s Money (OPM)

As another creative way to fund down payments on any piece of investment property, why not use “Other People’s Money,” or OPM? Consider asking family members (at least the ones that like you) as well as friends to help you come up with parts for a down payment on investment real estate. Maybe you’ll pay them interest on it (in which case, you should write up a simple loan document for all concerned’s safety – you can find these type of loan documents readily available in any Google search), or maybe they will gift it to you. If it’s going to be considered a gift, make sure you understand what gift rules your lender may have as regards your mortgage. And you need to find out the lenders rules before you actually apply for a loan.

Using Your Own Funds

This is the least favorite, and last resort type of funding for any down payment. It decreases your overall leverage ability on any piece of investment real estate – but it will help you ultimately to secure the property. Though it is often used, it is not necessarily the best way of going. Certainly, simply sticking to a schedule of savings – whether by socking away some portion of your paycheck, or scrimping on something else in your life (like foregoing this year’s vacation), or putting a company bonus to work for you, using your own savings is one sure-fire way to obtain the funds for your down payment. Any way you accomplish it, eventually you’ll be able to save up enough for the necessary amount down on your first piece of investment property.

photos courtesy of kwcommercialsa.com, anchoragehomesearch.com, bubbleinfo.com, thelastembassy.blogspot.com, moneycrashers.com, theaceblackblog.com, clearlyderby.blogspot.com

The Rule Of Four In Property Investing

Basic property investment strategies

While direct, hands-on property investing is not for everyone, those who have the right temperament and personality for active property investing should utilize the rule of four in property investing. That is to say, they should employ some (or preferably all) of these four base strategies when searching for properties.

The four basic strategies include:

1) Look for properties where rental values, and concurrent market value, can be increased through repairs and/or wholesale renovations/rehab.

2) Acquire properties in geographic areas with quantifiable economic growth patterns.

3) Try to find properties with unique selling propositions (USP’s) – properties that offer tenants something they can’t readily find elsewhere in the area.

4) Always purchase properties below market value.

Renovate to increase rents and market values

If you’re only looking to buy properties that are turnkey operations, in which you don’t have to lift a finger to improve – you’re overpaying. In this case, overpaying to the seller of the property who already made the necessary improvements. Think in these terms: why pay retail, when you can buy wholesale – and for a little extra work, obtain retail prices? Always look for properties that need some form of repairs or rehab work. In this way, you can add value to the units. It’s far less expensive to make repairs than pay for someone else’s finished work.

By the same token, it is not OK to acquire more than a fixer-upper: namely, if there are structural and/or major renovations that are required immediately, the costs may not justify the reduction in market price you’ll e getting in the purchase. That’s why God made house inspectors – to protect you from making costly mistakes.

Buying in economically desirable areas

You should be searching for properties in areas that already display a positive economic growth pattern. Is the downtown area on the rise? Are rents in local retail shops increasing? Are retail vacancies lessening? Check the numbers with your local Chamber of Commerce to see how economically desirable the area you’re considering purchasing in truly is. Also, do not equate economic growth with whether you would want to live in the particular area of your prospective investment or not. Even if it’s not what you might consider a “safe” enough area to live in, if it’s a growing area, it meets the litmus test for property investment.

Unique selling propositions

Many investors let this strategy go by the wayside. This is too bad, since you’d be missing out on the great upside potential inherent in this concept. It takes a bit more searching work, but the payoffs can be great. Examples of USP’s would be multifamily houses with large parking areas – enough to fit two cars per unit. Or properties located next to a park. Or within walking distance of the bus, commuter train, or highway. Or within walking distance of one or more religious institutions, like churches or synagogues. These types of properties will have high Walk Scores (walkscore.com) – which will increase their desirability for tenants.

Look for property priced below market value

Obviously, you’ll need to know what market value is before you can determine if an investment meets this requirement. Always be checking Realtor.com, Zillow.com and/or Trulia.com for market valuations of like properties in the areas you’re searching in. You can also use the services of your local friendly Realtor to assist you in your research. You must be up on current market values and fluctuations in any given area of your search. In addition, don’t assume that a property can’t be purchased for below market value, when it’s priced above, or significantly above, market value. If it’s been on the market a long time, you have no idea what the seller will take – until you make an offer, and begin a negotiation. Never get scared away by a seller’s asking price. Ever. If you’re able to purchase below market value very time, you’ll be way ahead of the game.

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