Archives for December 2014

Rental Property Investment Strategies For 2015

New Year’s real estate investing trends and predictions

As we approach the beginning of the new year, as in prior years here, I like to offer several predictions on property investing for the coming year. To begin with, look for credit markets to ease up as interest rates stabilize over the course of 2015. As the FED lessens its purchasing (monetary easing) of US backed securities throughout the coming year, a practice it had already started earlier this year, look for less of an overall credit crunch on rental property loans. In addition, with a much smaller foreclosure rate, better mortgage rules for potential lenders in place, and a banking system that is generally loathe to greater speculation in housing investments (read: mortgage backed securities), look for lenders to take the signs of the improving US economy and run with it. Ultimately, this should provide more investment opportunities and options for property investors who plan on investing in real estate in the coming year.

An improving economy’s effects on rental property

With lower oil prices, and more disposable income made available, the economy can’t help but pick up speed in 2015. With this, consumer confidence will edge up, still slowly, but definitely upwards. As the unemployment rate continues its trend of ticking downwards, even with the greater stratification between the haves and have-nots in our country, job creation will also continue to increase slowly, but demonstratively. This will result in an improved housing market overall. Already, over the past year, many cities have shown house pricing gains in the 10 to 15 percent arena. Expect much of urban and suburban US communities to continue to see this type of increase in housing appreciation in 2015. However, rural areas will continue to lag behind in growth rate.

Increased consumer confidence

As housing heats up in urban and suburban America in 2015, due to more job creation, increased consumer confidence and most importantly, the positive psychological effects of expecting to hold onto their jobs, American workers will raise their confidence level enough to come off the sidelines to start purchasing first time and move-up housing. The net effect for property investors? A mixed bag: First, the positive – greater overall capital appreciation in current market value of investor owned properties. The down-side? Look for a stalling of unit rental price increases, so prevalent over the last several years, as greater numbers of potential homeowners sat on the sidelines, and became renters. The once-super hot rental markets, while not cooling off completely, will certainly slow down, as demand lessens for rental housing over the next year.

Millennials real estate investing and partnerships

Continuing a trend that began this year, 2015 should see more and more Millenials creating partnerships amongst themselves to purchase rental property. This will be especially prevalent with rental property like a multifamily that one or more can live in at the same time, as the owners then rent out and collect investment income on open units. Standard two to four family homes represent their best buying options at the lowest cost. Financing remains in the residential domain, making mortgage loans much less expensive than commercial mortgages (for five family and over properties). In addition, they can take advantage of FHA and Fannie Mae loans at lower interest costs than standard lender financing, as well as with higher loan-to-value ratios being allowed. This can be accomplished since they will be living in at least one of the units, becoming landlord-owners.

What rental property investors should consider investing in for 2015

With the increasing capital appreciation returning to urban and suburban metro areas nationwide, interest rates remaining stable for the year, and credit becoming more readily available, property investors should consider upgrading existing properties to take full advantage of their continued appreciation. Since it will be more difficult to raise rents in the coming year to account for increased cash flows on your properties, try to make any much-needed or put-off repairs in the coming year. Look to improve more than simple maintenance items, that is. Consider renovations that will add value to your investment property, and take advantage of stable interest rates in which to finance these renovations. This should be accomplished either through refinancing existing loans, or taking out new mortgages on properties previously bought for all-cash.

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Searching Tips For REO Properties

Opportunities still abound…

While the market for purchasing Real Estate Owned (REO properties) is not as rabid as it was even just a couple of years ago, it still represents tremendous opportunities for property investors. If you have the temperament to go in and renovate or repair an REO property, then deals can still be had. Most of the foreclosed homes coming on the market in recent months have been on the sidelines for years, languishing in a type of suspended animation. In a state like New York, for example, where the foreclosure process must go through the court system before being placed up for sale, a sizeable backlog of foreclosed homes is now hitting the market. It has taken years for some properties to make it through the full foreclosure process.

When a foreclosure occurs

A foreclosed home comes on the market after an owner has defaulted on his mortgage. This occurs after he has been delinquent in his loan payments for many months…or years, depending on the lender. Once the lender is able to successfully complete the foreclosure process on any given delinquent loan, the bank then assumes ownership of the property. At that time the property is referred to as an REO property. Most banks have stables of REO properties they are trying to unload on the market at any given time. And coincidentally, the bureaucratic red tape for buying an REO property is quite large. Property investors considering acquiring foreclosures need to fully understand this process – it’s not as simple as purchasing from a seller directly (whether a Realtor is used or not). Certainly, if you’ve got the patience and stamina to handle the red tape inherent in the process when dealing with lenders’ REO properties (which could take up to six months or longer from the time you get an accepted offer to closing), then foreclosures could be a great opportunity for you as a property investor.

Cash is king with foreclosures

Always keep in mind that acquiring a foreclosure is best done using all-cash offers. In this way, a bank doesn’t have to worry about any mortgage contingency, where you can back out of the deal if you are unable to get a mortgage loan commitment on the property. All cash offers mean substantially less risk for the bank, making them more preferable to deals involving bank financing. Also, keep in mind that asking the same lender who is selling their REO property for the mortgage loan will most definitely result in a higher sales price. The more risk to the bank, the more they will want in return.

Best ways to locate REO properties

If you’re searching for foreclosures by yourself, I would recommend going right to the source of the greatest number of foreclosed homes. Fannie Mae (FNMA) homes that have been foreclosed are easily accessed by their marketing arm, Homepath. Simply go to homepath.com to search their huge inventory by your preferred local area. In addition, be sure to check out HUD homes (portal.hud.gov) for additional inventories of their foreclosed properties currently available for sale. And don’t forget to continue your search through large inventories of bank-owned REO properties by reviewing the offerings from Citibank (through Citimortgage at citimortgage.com). Additionally, Citimortgage can get you qualified for one of their investor mortgages as well at the same time. Another good site for your search should be Ocwen (at ocwen.com). This is an excellent foreclosure prevention company that specializes in high-risk loans. However, they are also an excellent source for information on foreclosed properties as well.

If you’ll be utilizing the services of a Realtor (and it’s a good idea to work with one exclusively), try to search out a Realtor who has a good working relationship with local lenders and their foreclosure departments. This may not necessarily be your main Realtor, but sometimes working with a specialist (for example, a Realtor that deals in primarily foreclosure listings) is a good way to go. Lenders get used to working with a select few number of Realtors in any given geographic area. They prefer the specialization these Realtors provide. Be sure to use them in your search for the best REO properties as well.

photos courtesy of forsalefortcollins.com, psdgraphics.com, newgeography.com

Your Exit Strategy: Consider The Mortgage Rate On Investment Property

Selling off only when necessary

When considering if you should ever sell off one or more of your investment properties, it’s intelligent to already have an exit strategy planned out. Even when you’re buying rental property, your exit strategy should be kept in mind. Cash flow is of utmost importance here. With current US bank mortgage rates taking a dip this week, remember that holding a lot of debt is an excellent strategy – as long as you maintain your positive cash flow. Only when a property is throwing off a negative cash flow should you consider releasing it.

If you utilize the rental property calculator on our site, or any other, you should be able to input your raw property information numbers data to see if your potential property will throw off a proper positive cash flow. Take into account that current property loans with lower mortgage interest rates should be input into the calculator. In this way, you’ll be able to get a truer picture of the anticipated cash flow on a property.

When it’s time to unload your rental property

If you’ve been living with a poorly performing investment property for some time (at least two years), then it certainly may make sense to unload it. However, consider the option of converting any of your existing investment property mortgages into interest-only loans, if possible. If not possible, consider, using your home as a source of funding. If you take out a home equity line of credit, and replace an existing principal and interest payment loan on a poorly performing investment property in your stable, you may find the monthly savings from the interest-only line to be the perfect solution to a negative cash flow scenario., Even it it helps enough to create a break-even scenario, it would be best to hold the property long term for capital appreciation.

Only sell the dogs of war

The only rental properties you want to unload are the ones that have been underperforming for a very long time (what I call the dogs of war), with no sign of turnaround…even after you’re able to pare down financing costs to interest-only on them. At that point, it would be wise to sell the investment property off. Remember, it’s always best to have your exit strategy in place when you first acquire a property. And try to forestall a quick unloading of any rental property by attempting to convert an existing principal and interest mortgage to an interest-only equity line. If that’s not possible, replace the mortgage with proceeds from an interest only home equity line. The savings may be enough to allow you to retain the investment property, while taking advantage of capital appreciation…not to mention the tax breaks associated with holding the rental property.

photos courtesy of davegi.com, worldpropertychannel.com, wilmothpropertyservicves.com

Investment Real Estate With Little Money Down

Strategies abound…

Whether you’re a property investor looking for a single family house, multifamily property or even an apartment complex for sale, there are strategies you can employ that involve acquiring investment real estate with little money down. Use any one of the following ideas to help solve the common issue most beginner investors have…namely, how to make money in real estate.

Other People’s Money (OPM)

Many novice property investors like to get their feet wet by flipping single family properties. Unfortunately, they don’t have much experience in knowing how to flip houses with no money down. One way is to use “Other People’s Money,” or OPM. Don’t be shy about asking family members and friends to help you come up with your down payment on a piece of investment property. You can either agree on interest payments to them, as well as a payoff time for repayment of their loan. Or, have them gift it to you, if you have a special relationship with them already. If it’s going to be a gift, make sure you understand what gift rules your mortgage lender requires first. You’ll obviously need to scope this out before you actually apply for your mortgage loan.

Create partnerships

Another strategy for flipping houses with no money down is to utilize a partnership. Look for other investors interested in partnering with you to acquire investment properties. Many communities have local investing clubs that are a great source of potential partners. Many times, one partner will put up the down payment on a property while the other one does all the hunting and searching work. Likewise, an investor may put the money down in return for the other partner (or partners) managing the building(s). In many circumstances, one partner puts the money down on the property for a greater share of the potential profits the building will return in the future, including when it sells. Whatever the structure of the partnership agreement, make sure you put it in writing. It’s also smart to have an attorney review it prior to signing.

Residential owner-occupying

Another strategy that solves the how to flip money fast issue, is to consider living in the same house as your tenants. Essentially, become an owner-occupying landlord. When you buy a multifamily 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. You’ll need an excellent credit score (above 740), as well as be willing to supply more paperwork on these mortgages, but you’ll be able to leverage so much more with a 95% or 97.5% loan to value on the mortgage. Make sure you get pre-approved first. It will make the negotiating process much easier.

Other borrowing ideas for flipping houses with no money down

If you already own your own home, why not use a home equity loan or line of credit on it? You can then use that equity for your investment real estate down payment. Also, why not use some of your 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 possibility. Of course, always consult a tax attorney or accountant to set up this type of account. Another option is to use some credit card balance transfer offers that have low interest rates. Most are good for short-term funding, but be ready to pay back the principal before the promotional, low interest rate offer expires.

photos courtesy of anchorloans.com, kapitall.com

Best Ways To Handle Tenants When Owning Rental Property

Saving on investment property expenses

There are many ways a property investor can save on expenses when owning rental property. A major expense trimming can be had by simply searching for the best investment property mortgage rates. After all, finding excellent terms on any investment loan can save an investor many thousands each year. In addition, locating the optimum prime properties that can be purchased under current market valuation is another huge savings. However, buying a rental property and then knowing how to choose and handle the right tenants can realize the most cost savings of all.

Set your ground rules with your tenants

I always advocate for a written lease when renting out your units. Month to month rentals are fine – however, consider at least placing it in writing. A written document, even for a month to month rental, helps solidify your expectations. It also makes it more difficult for a tenant to negotiate with you down the road. In the lease, you’ll need to include exactly what you require for your rental: the monthly rent, the day payment is due each month, the penalties for late or bounced checks, and all the negative consequences (read: the eviction process) should the tenant break any of the rules.

Stick to the rules you set

Once you break your own rules for one tenant (as a nicety – giving them a break – just this once), you’ll end up getting into a bad, costly pattern with other tenants. This could prove disastrous to your business. Tenants talk. To one another. Never show weakness (that is, being a nice guy). Once you, do they will, by human nature, start taking advantage of your largesse. Always stick to your guns. If you have not received full rent from any given tenant by the fifteenth of the month, send them written notice immediately. Don’t wait a full month (or worse, longer) before getting tough. Impose late payment fees after the fifteenth of the month.

Evictions – the nuclear bomb of owning rental property

If you have not received full payment and late fees by the end of the month, you must start eviction proceedings against a bad tenant in order to protect yourself, and minimize the damage they are doing to you. Expect eviction proceedings to last up to two months, on average, depending on your local municipality’s court schedule. If you are unfamiliar with the eviction process, you’re certainly going to need the services of a local, experienced attorney you can trust to act expeditiously on your behalf to remove the delinquent tenant. It’s always a gut-wrenching, ugly experience. And obviously, quite costly as well.

Unpaid time

Besides paying for the services of an attorney, there’s the issue of lost rent for the time period until you find a new tenant to replace the delinquent one…It’s not simply the time period that the bad tenant has not paid you. Until you get them out of your building, it’s going to be very difficult to even show the unit to prospective tenants. And many times, a bad tenant, just before they are finally evicted, will perform some form of “revenge” destruction inside your unit. A bad tenant can end up costing a property investor a tremendous amount of money.

Finding the “good” tenants

For this reason, it’s best to find only “good” tenants to avoid this scenario. Make sure you’ve properly vetted them – check their references well. Speak to their current and prior landlords, as well as their work references. Check their credit. Make sure they can afford your unit. To this end, their rent should only comprise no more than 33% of their current gross monthly income, as a general rule of thumb. If you follow these simple rules, you’ll be able to save a tremendous amount in unnecessary operating expenses. In this way you can turn each and every one of your rental buildings into a prime property.

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