foreclosures | InvestingInProperties.com

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.

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The Current State Of REO Properties

Foreclosure dumps and the small property investor

As foreclosed homes for sale continue in a rapid pace, REO (“real estate owned,” by banks who have completed any given foreclosure process) buys from large hedge funds such as the Blackstone Group over the last few years have created a de facto wholesale-retail environment for these formerly bank-owned properties across the U.S. Though not getting as much press in the past year, buying a foreclosed home, thousands of times over, remains a mainstay of hedge fund buy-ups. States like New York that require legal proceedings for each and every foreclosure home, are now working through their years of backlogged homes that banks wanted to foreclose on. As they come out the other end, so to speak, of the legal process, they promptly go on the market for sale. Small property investors thus have to compete head to head with large hedge funds who are well-capitalized, and can easily offer all-cash for any and all properties they purchase. This is not so easily done with smaller investors. And this gives the hedge funds quite a leg up in the buying process. In addition, it also explains why they have been monopolizing the foreclosure buying industry in this country for several years now.

Making it simple for banks

These large hedge companies will purchase a property (or thousands at a time), and take the foreclosure in as is condition. This makes things very simple for any selling bank to make a deal with them. The hedge fund then hires renovation specialists, and they come in to do their thing right after the purchase is completed. These specialists will do the very simplest, most basic repairs to make the home livable – and attractive to a prospective tenant. Fresh paint jobs inside and out, and kitchen cabinet and appliance upgrades are the mainstays of these quickie rehabs. Then the homes are placed on the market as rentals only. In this way, hedge funds are willing to wait out the current tepid pace of the resale estate market until it comes time to unload their holdings. (In fact, some large hedge funds have been slowly beginning to do so to realize quick profits on their poorest performers.)

All-cash deals are preferred

When banks place huge inventories of their foreclosed properties on the market, you can be assured that all-cash deals are there preference. The safety of the all-cash deal, in which hedge funds tend to be the winners in locking up these properties over the small homebuyer who requires some form of mortgage financing, as well as the speed of the transaction, make it much more worthwhile for the banks to unload their property inventory at deep discounts. In addition, all-cash deals usually don’t require the bank to make any repairs…that is, the buyer is purchasing a property in strictly “as is” condition. Thus, the buyer is taking the inherent risk of finding some major defect with a property – and being placed in the position of having to fix it (at possibly at an exorbitant cost). Naturally, all-cash buyers make very lowball offers to protect themselves in case of this occurring.

The newly created wholesale-retail real estate market

As I’ve noted in a prior article here, hedge funds have just recently been starting to unload some of their poorer performing rental properties back onto the market to capitalize on the currently improving state of the real estate market. This creates a de facto wholesale-retail environment. The hedge funds buy up large amounts of bank REO’s for all cash, do the least amount of repairs necessary, and then convert these homes into rentals. In this way they are acting as the wholesalers of the residential real estate industry. After holding them a few years, they now look to take their gains by placing at least some portion of their portfolios back on the market for either single family homebuyers to acquire, or for small mom and pop investors to purchase. In this fashion they are acting as the retail merchants of the real estate business. Either way, they don’t care much about the communities their properties are located in. And this ultimately can have a deleterious effect on many communities around the country that have been plagued with large percentages of their housing stock ending up as foreclosures over the last several years.

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Investment Property Loan Financing Tips

Understanding the psychology of lender risk

The reason investment property loans are more expensive, harder to obtain, and more restrictive than loans on personal homes, is that investment property mortgages are inherently riskier than home lending. Fannie Mae and Freddie Mac charge higher rates for investor property loans, much more than for primary home loans because of these higher risk factors. It’s a simple axiom – the greater the risk, the higher the cost. Of course, the opposite axiom is likewise the same – the lower the risk, the smaller the cost. For lenders, real estate investors are inherently more dangerous as a group to make loans to than are homeowners.

Thinking like a bank thinks…

Banks have to look objectively, and ruthlessly so, at their bottom line. What’s their worst case scenario in any lending situation? Naturally, a foreclosure. And in the case of those investing in rental property who are unable to make their monthly loan payments, since they have no emotional stake in the property, they will be more likely to walk away from their loan obligations in any worst-case scenario. Much more so than any homeowner would, since homeowners are emotionally grounded to their home – which is most probably their single greatest asset. This helps explain why total mortgage costs run higher for real estate investments, as well as why investment property mortgage rates are higher than homeowner rates.

Real estate investors understand that buying a rental property is simply a game of numbers. A homebuyer views their purchase decision in much more emotional ways – deciding what emotional benefits will accrue him if he buys a particular home. Conversely, this makes it much more difficult for the homebuyer to give up “his baby” so to speak. And this single reason is what makes lenders value the homebuyer as much less risk than anyone buying rental property.

Mortgage rate differentials

Regardless of the specific area of the U.S. you may look to buy in, real estate investments will have mortgages that will generally run about half a point greater than home loans on average. In addition, many fees tend to be added to loans on investment properties – many more than home mortgages. Thus, the overall cost of any rental property mortgage will be greater as well. Some of the factors involved in the overall costs associated with an investment property loan include the borrower’s current credit score, the loan-to-value ratio for the loan, the property character (ie. – single family, duplex, multi-family, multifamily with owner-occupying one unit) and the specific mortgage program being applied (FHA, Fannie Mae, Freddie Mac or no government-insured program).

LTV’s

In many instances, when in investing in real estate, lenders set up loan-to-value (LTV) ratios at higher overall amounts than home loans. The greater the amount you put down on the rental property you’re trying to finance, the less overall risk to the lender. Most lender these days have maximum loan-to-value ratios of 70% of the purchase price, where you, the buyer, must put down at least 30%. But if you put down 40%, or even 50%, you’ll find your interest rate and overall costs of the mortgage loan will come down substantially. This is also because you are helping to substantially lessen the lenders overall risk. (After all, it’s much harder to walk away from a property you have 50% down in equity than it is if you had only 30% down.)

Using rents as income qualifiers

Traditionally, banks will allow 75% of gross rents currently in place on units in any property you’re thinking of acquiring to help offset the monthly carrying cost of the loan. Keep in mind that this applies only to actual rentals…not hypothetical “market” rents. In addition, the tenants need to already be in place. Typically, the same 75% figure can be used to offset monthly loan costs in any refinance situation for your rental property.

Credit scores

You should also remember that lenders usually require those buying rental property to have better credit scores than their homebuyer counterparts. Lenders like to see scores of at least the low to mid-700’s before extending any rental property mortgage. (That’s not to say that it’s impossible to obtain a loan if your score is in the 600’s – but it will be more difficult, and certainly, it will come with a much higher interest rate. The bank, after all, is always looking to defray their risk.)

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Rental Property Rates Should Remain Strong This Year

The latest jobs report’s effect on rental property

With the latest news out of Washington showing that U.S. employers added only about 88,000 jobs last month, compared with 268,000 in February,, residential investment rental property is poised to remain quite strong through the remainder of this year. The latest Labor Department statistics reveal that this is the third Spring season in a row where employers cut back on hiring after starting the year more robustly. And while the unemployment rate went down ever so slightly, from 7.7 to 7.6 percent nationally, the major cause appears to be that more workers were dropping out of the work force. Clearly, not that many people were hired over the last month.

A dwindling work force

The work force of the U.S. has been dwindling for some time now – and stands at about 63 percent of the total U.S. population – a figure which has not been that low since 1979. Retirement from baby boomers would certainly account for part of this figure. But a large helping of psychological pessimism seems to be wreaking havoc with both employers and potential employees in such a lack-luster economy as we currently are in.

Probably the greatest drop in the worker participation rate can be attributable to young, new workers just entering the economy. Many of those fresh out of college are rapidly giving up hope of finding entry level positions in their fields. And in turn, they are choosing to continue their education on the graduate level, thereby deferring their entrée into the job market until a (hopefully) better jobs picture develops in the not-so-distant future. Of course, in so doing, they take on more debt to finance their education, thereby showing a higher overall increase in outstanding consumer debt loads nationally.

Keep watching the unemployment rate

As I had mentioned in an earlier article, the unemployment rate will be one of the most important figures to keep a watchful eye on for the remainder of this year. With the stagnant nature of today’s economy, and more workers feeling driven out of the work force, continue to look for overall U.S. rents to increase as homebuyer malaise sinks in. Housing valuation increases and continued drops in housing inventories and days on market are more a reflection of institutional property investors swooping in and purchasing massive amounts of foreclosures over the past year. While displaying quite a positive sign for the housing market numbers overall, keep in mind that the general malaise in the workplace lurks right behind the cheery reports

Beware a false housing market rebound

Any rental property investor should be fearful that the housing market rebound will continue in its robust way. Once the foreclosures are worked through, the overall psychological component of an unsettled workforce will play havoc on the housing arena. And this means that the rental market should remain quite strong for the rest of this year, with landlords able to squeeze out higher rents as vacancy rates continue to edge downward. So individual rental property owners should be able to see increases in their cash flow as the year progresses. Clearly, residential rental properties will become even more valuable than they were in 2012. So it would behoove the individual property investor to continue to search for and acquire additional rental property for the remainder of 2013.

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The Latest Outlook For Property Investing

The new normal

As the overall real estate market continues to recover across the U.S., there is now becoming a new normal for property investors. Compared with the last several years, investors need to be aware of several important changes in the marketplace. Understanding these changes is crucial to properly allocating your real estate investment dollars in the foreseeable future.

Inventories are stabilizing

As the foreclosure crisis slowly becomes a foreclosure way of doing business, and the overall volume of foreclosed properties continues to drop, the real estate market will respond by pricing rebounds. The less inventory, the more demand. This is simple, basic economic theory. Banks have been selling off their inventories of distressed properties to investors in record numbers over the last few years. And that huge glut of foreclosures has now been worked down to a manageable amount. Investors who bought them are now reaping the rewards of either flipping or holding them for rentals. This slow lessening of housing inventory nationwide will invariably tighten the overall marketplace.

Investment loans are getting costlier

Interest rates have remained at record lows for quite some time – almost three full years. That’s about to end. The Federal Reserve has indicated they may tick rates up slightly later this year, based on the continued slow but steady economic growth pattern exhibited in the U.S. last year. Rates should remain relatively low through the end of the year, on average between 3.5 to 4 percent. But the lowest rates have already come and gone. In addition, expect the credit markets to remain tight for property investors, making qualifying for a mortgage much more difficult.

The Ability To Repay Rule makes borrowing more difficult

As mentioned in one of my recent articles posted here, the Consumer Financial Protection Bureau instituted a new rule to make sure lenders prove that borrowers can actually repay the mortgage they’re applying for. Obviously, this was created to help protect the entire U.S. banking system, and avoid the collapse we came through over the last few years, as no-income mortgage lending was the norm – and got so many homeowners into hot water as they could not repay their loans. So now all lenders must verify all assets, income and debts of every borrower. In order to now qualify for a loan, the new norm here is that investors are obtaining mortgages from hard money lenders, with higher interest rates and much shorter terms, in record numbers.

As inventories level off, expect a construction boom

Records indicate that building permits for single family homes nationally are up about 25% from the past year alone. With the near-record low interest rates currently available, builders have been gambling on pent-up demand in the housing market. And it’s a demand that has been held back since 2007. New home prices have been rising faster than existing single family homes of late, and builders also want to take advantage of this trend. However, this expected larger supply of homes could keep prices down over the next year.

Valuations continue to level off

While a majority of local real estate markets saw increases in house prices over the last year of about 9 to 10 percent, due to shrinking inventories and low interest rates, this year should produce more modest gains. Economists feel these price increases will probably be in the 2 to 3 percent range. Naturally, everything is an average, so there will still be some areas of the country, like in the Northwest, which will continue to remain hot regarding price increases. But others will lag, and some major cities will continue to show little or no growth. These include cities like Denver, Atlanta and Chicago.

Investors continue to feed on distressed properties

As mentioned above, it’s getting harder to find great foreclosure deals these days, as the sheer supply of distressed properties plummets rapidly. Most large investors have gobbled up the best foreclosure deals. Real Estate Investment Trusts (REITs) enlarged their portfolios over the last two years, buying huge numbers of distressed properties, then fixing them up and renting them out en masse. Still too, many banks decided to hold a number of their foreclosures, add value to them by making minimal repairs, and have placed them back on the market with higher prices. But overall, as the inventory has declined, house prices have rebounded.

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Unlocking Hard Money For Investment Property Loans

Using hard money lenders

Hard money loans are basically a form of short-term borrowing available to property investors. They are like bridge loans, in that they are designed to get in and out of very quickly. Hard money loans are typically used by those in dire financial straits, like borrowers facing foreclosure or bankruptcy. But property investors utilize their services as well – and with good reason. Simply put, hard money loans are a much better alternative to all cash deals.

Private investors

The average hard money investment property loan is supplied with capital put up by private investors – usually as a pool of money that is used to drive much greater profits for its investors. This private capital is traditionally unregulated, which gives the hard money industry a kind of “Wild, Wild West” feel to it’s practices and reputation. Pejoratively, many consider hard money lenders as sharks feeding off the misery of those in bad financial straits. As a property investor, you will certainly need to approach any hard money investment property loan with a great deal of caution and foresight prior to signing on the dotted line.

Who hard money is designed for…

That said, if you do not have excellent credit, or if you’re self-employed with much income written off, or if you are investing money from a self-directed IRA, then it may be difficult for you to obtain conventional mortgage financing. You could pay all cash for your next property acquisition. But hard money lenders allow you the ability to utilize leverage – even in the short term.

Think of hard money lending as a local train on the real estate train line. Conventional bank loans are quite onerous to qualify for, but they offer the best rates and terms for property investors. They are like the express trains on the line. Hard money investment property loans are like local trains in that you will need to continually be stopping off at more points along the route. Points where you need to pay off your existing short term loan’s balloon payment by taking out another short-term loan to supercede it.

Is this more costly, time consuming and fear-provoking? Absolutely. But, hey – you’re a property investor. You should be used to living with debt and risk – and be comfortable with it. Your safety is knowing there are always going to be hard money lenders out there with their private funds to ensure you make it through to your next “stop” on the line.

Leverage ability

While paying all cash for a property is the “safe” way of investing, it provides no way to leverage your financial strength. Assuming you could not obtain conventional financing, hard money lenders offer the next best alternative to all cash deals. While your cash flow will be severely impacted because of the relatively exorbitant interest payments on hard money loans, even a small positive cash flow will yield great leverage over several years of making timely payments on the loan. Remember, besides the cash you put up on the property as your down payment, you will be paying off the principal on your hard money loan each month – thereby helping to increase your return on investment (ROI). Over several years, a small positive cash flow will yield much greater ROI’s than an all cash purchase would.

Costs for hard money investment property loans

If you’re going swimming amongst the sharks, your protective shark cage is knowledge. You need to know ahead of time that typical hard money loans carry interest rates that can run anywhere between 12 and 18 percent. Balloon payment are de rigeur, and these mortgages usually come due within 1 to 3 years. In all but rare instances, hard money lenders require being in the first mortgage position, so they can get their money out first if you default.

In addition, typical loan-to-value (LTV) ratios on hard money investment property loans range between 50% to 65%. And this LTV is based upon the “quick sale” market value of the property…that is – what the property will fetch today – not three months from now after you’ve fixed it up. Another potentially scary cost to take into account are points (up front interest charges). Typically, they can run anywhere between 4 to 8 percent of the total mortgage amount.

Not for the faint of heart

As a borrower, the hard money loan is definitely not for the faint of heart. You should already be comfortable taking on more debt, especially of the short term variety. You should also be well aware of the consequences in case of default.

The hard money lender takes on the increased risk of borrowers with less-than-stellar credit. For this, they are able to charge exorbitant interest rates, with onerous terms, and even more Draconian conditions if the borrower defaults.

A mature, responsible investment property investor/borrower should not be scared off by the terms of a hard money loan. They realize they can use the leverage to their advantage to help grow their real estate holdings. And they enter into hard money investment property loans with eyes wide open.

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Fighting Your New Assessment

Beware the overzealous town assessor

In the current climate of depressed property valuations, and for the past several years since the beginning of the housing crisis, property assessments have plummeted as house values have declined across the country. The net result: a severe decrease in property taxes in communities throughout the nation. Obviously, the strain on local municipalities has been terribly damaging, as belt-tightening is performed by town councils in every region of the country. And when you’re investing in property, you need to know that you could be a target.

The latest trend

As part and parcel of the current real estate slump, town assessors now usually look to find ways to offset these decreases, using any legal means possible. The latest trend has been for many assessors in numerous states to take sales data from recent foreclosure sales to property investors, and throw the sales prices out the window. They then attempt to jack up property assessments on these investment properties many times the actual sales price. This, of course, yields much greater tax revenues from these houses. So as you continue investing in property, the tax consequences could be devastating the longer you hold onto them.

The main rationale of these assessors has been that foreclosures and short sales sold to real estate investors were sold by banks while under “distress.” And, following this logic, distress yields market values far below what a “normal” operating marketplace of real estate transactions would yield.

Baloney.

What that logic fails to account for, is that the entire real estate market has been in distress for the past several years. Property owners, both homeowners and those investing in property alike, have seen the values in their properties plummet by about one-third. In much harder hit areas, values have declined by well over fifty percent.

Pretzel logic

The employment of pretzel logic by these overzealous and opportunistic assessors also assumes banks have an incentive to unload their portfolio of foreclosures quickly, thus creating further distress. Their argument is that ultimately, these sales are not “arms length transactions.” An arms length transaction is simply one where the seller and buyer do not have a relationship with one another.

The illogicality of their argument is that when banks place their portfolios of foreclosed properties on the market, they are traditionally listed using real estate agents. Thus, these houses are available to all potential buyers. And the free market system will act to adjust the selling price accordingly. You know full well that when you are investing in property, there’s always investor competition for the most desirable houses.

Market analyses help set prices

Further, banks set their asking price for each property in their portfolio based on information from broker opinions of value or listing agent comparative market analyses. And once an initial asking price is set, banks set limits on how much they will lower that price the longer a property remains on the market. So the notion that the banks are selling in some sort of distressed mode can’t be further from the truth.

Rather, they are making informed, analytical decisions based on professional recommendations as to the current market value for each property. Just because a foreclosure is purchased by an individual investing in property for a fraction of what the property was once worth is irrelevant. The new selling price IS the market price

What if you get a reassessment letter?

So what should you do if your local assessor’s office sends you a letter informing you of an increase in your assessment (and eventual increase in taxes as a result)? The first rule of thumb in deciding whether to fight the new assessment is to see if the new assessment is greater than ten percent more than what you believe the market value of your investment property should be. If it is, then it’s worth fighting (also known as grieving). Every municipality is different in when you can grieve your assessment. In that reassessment increase letter, they will notify you of the date when you can grieve your valuation in your specific town.

Use a grievance attorney?

You next have to decide if you will grieve the assessment on your own, or if you should use the aid of a specialized grievance attorney. These attorneys traditionally will charge you a percentage of your first year tax savings as compensation for their services. If they are unable to obtain tax savings for you, you would not owe them anything. But you’ll find they won’t take your case unless they feel there is a certainty of winning some savings.

If you decide to fight the assessment increase yourself, you’ll quite simply need to show evidence of your current market value. And that value needs to be closer to your idea of market value rather than the assessor’s valuation. Recent sales price data is traditionally used to support market valuation. If you’ve made improvements to a house as you are investing in property, bring your receipts for the work done to show the exact amount of “added value” you put into the property since you purchased it.

As an investment property, you can also impute market value based on the net income approach to valuation. As an example, if rental property in your area usually sells for eight times net income, and your specific property’s net income times this multiplier shows a market value well below the assessor’s valuation, you should by all means use that data in your grievance as well.

Always know your current market value

So be aware that with the current state of our economy, local assessors will be trying to squeeze out every penny from investment property owners through constant re-assessments. Just be sure to always have a handle on the current market value of each of your investment properties at any given time. And if you do get that assessment increase letter in your mailbox, decide if the increase is worth the fight. If it is, decide on whether to hire a specialized grievance tax attorney, or do the grievance yourself. Either way, do not let assessors get away with outrageous over-assessing as you continue investing in property each year.

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Investment Property Advice: Beware The Angry Tenant

The stereotypical view

The “angry tenant” is such a classic stereotype in our culture, but the image exists, and dealing with a difficult tenant is always dreaded by property investors. Certainly the best investment property advice simply states that you must be wary of installing any potentially disastrous tenant in one of your units. An angry tenant can quite literally rob you through non-payment of rent, and take any positive cash flow investment down into an abyss of red ink in very short order.

“One Bourbon, One Scotch, One Beer”

In our culture, for me, the quintessential angry tenant is represented in George Thorogood’s 1977 recorded version of a classic blues song written by Rudy Toombs and covered by John Lee Hooker, “One Bourbon, One Scotch, One Beer.” In it, Thorogood created a mash-up of the original song by combining it with another Hooker recording, “House Rent Boogie,” which serves as a background storyline to explain the singer’s predicament.

“House Rent Boogie” describes the events that occur after the singer has lost his job. Unable to pay his rent, he tries to gain temporary lodging with a friend, but is unsuccessful. He then lies to his landlady that he has gotten a new job, and is then able to return to his apartment, but proceeds to remove all his possessions. He then goes to a bar and orders the three drinks to help him drown his sorrows. All the while stiffing his landlord:

“So I go back home I tell the landlady I got a job, I’m gonna pay the rent She said yeah? I said oh yeah And then she was so nice Loh’ she was lovy-dovy So I go in my room, Pack up my things and I go I slip on out the back door And down the streets I go She a-howlin’ about the front rent, She’ll be lucky to get any back rent She ain’t gonna get none of it”*

The cost factor

There can be quite a few interpretations when you mix a tenant’s anger, stereotypes of uncaring landlords, and blues music all rolled together. But let’s face it – as a property investor, you want to avoid the angry tenant at all costs. Obviously, because it will cost you plenty. Just as the song alludes…

I’ve got to wonder if George Thorogood owns any rental properties these days…you know – setting up that nest egg for himself. And if so, what does he do when encountering an angry tenant? Smash his guitar over the tenant’s head? Now that would make for a slightly ironic visual image…

Hold onto the good ones

One thing is for sure: the best way to avoid a bad tenant is to select a good one. But even more importantly, you’ll want to hold onto the good ones. Without a doubt, the cost to keep a good tenant is a fraction of the cost of dealing with the negative effects and destruction a bad tenant can cause.

We already know that for several years now, the U.S. has been evolving from a nation of homeowners to renters. As numbers rise for total renters, so does the incremental rise in real estate investors who look to buy investment properties. But only the savviest of investors will see positive cash flows on their investments.

A property investor’s misconceptions

Usually property investors who are not getting the returns they planned think they bought poorly. They think that either they didn’t buy a property in the right location, or they bought it for the wrong price. However, the more valid reason for not showing positive cash flows is that the investor did not do their homework properly. They may have underestimated their total expenses, or gross revenues from rent, or both.

But probably the single greatest greater factor in failing to buy investment property with a positive cash flow, is simply poor management of one’s properties. This includes doing a poor job of selecting good tenants.

How to find the best tenants

When you screen for tenants, don’t be afraid to research your prospects in great detail. This includes performing a credit check on them as a start. You’ll also want to speak with their current and previous landlords to get a sense of how reliable your prospective tenant may be. In addition, ask about any problem or complaints the former landlord may have had with them. Another good tip is to actually visit their current home. Look for how they maintain it, since this will be an excellent sign of how they will treat your unit. In addition, try to speak with their employer about their length of time on the job, as well as their prospects for future employment with the same firm.

Make nice with your tenants

Once you’ve chosen your new tenant, be sure to ingratiate yourself with them (thus helping to explode the stereotypical landlord image, noted above). On their first day, meet with them to go over the operation of appliances in the unit, as well as to discuss area amenities they should check out. It’s also a good idea to offer them a small housewarming gift too. Remember, this is a business. And it’s always easiest and least expensive for any business to retain clients than it is to search for new ones.

Collect in person

Finally, when it comes to collecting rent, do it in person. Time consuming? You bet! But you’ll have the chance to meet face to face with your tenants once a month, ask about any problems they’ve encountered with their unit or the area, as well as check on how well the unit is being maintained – all at the same time. And that’s what I call good preventative maintenance.

In addition, when you are acting as your own property manager, you should be acquiring properties that are no more than a half an hour away from your own home. If anything major were to go wrong in an emergency, you’ll be grateful you live close by.

Buy investment properties intelligently

With over three and a half million single-family rentals in this country right now, and growing daily because of increased rental demand and the foreclosure crisis, looking to buy investment properties is an intelligent addition to any investment portfolio. Just remember to crunch your numbers conservatively, and find only the best tenants when screening. Be sure to avoid those stereotypical “angry tenants” at all cost.

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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.

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Has The Housing Market Reached Bottom?

A big week ahead

As you look down the road at your investment property finance decisions, this week ahead may prove to be the one where you look back and declare “the housing market has finally, and definitively, reached bottom.” There will be a number of economic indicators coming out this week that will help in ultimately making this call.

While housing has continued to be one of the largest drags on the U.S economy since the bubble burst back in 2008, all property investors have been wondering if the bottom has been reached yet. The constant flow of foreclosures, ever-increasing inventories and average time on the market for properties in general, as well as poor new-build numbers in the past few years, have all slowed the housing arena to a crawl. Of course, this has made for an ever-increasing and robust rental market, as homebuyers stayed on the sidelines in droves.

Nearing bottom

However, recent rebounds in stock valuations of some of the nation’s largest home builders in the past few months, as well as their forecasts for greater home buying during the remainder of this year, lead to the conclusion that the bottom is near. In addition, apartment construction has been rebounding of late as well, as more buyers look towards renting for the short term, until they see a bottom has been reached.

In some local markets around the country, house inventories have been shrinking. Also, property investors, as we know, have been out in force over the last couple of years, picking up foreclosures and other bargain-basement properties that they can either rent out, or look to re-sell as the market slowly rebounds.

Apartment construction as indicator

In general, apartment construction traditionally precedes new home construction by one to two years. And of course, once the bottom is reached after any housing bubble, prices usually will continue to drop off a little more, even as the bottom is ultimately being hit. This is simply due to the time lag of consumers psychologically assimilating the concept of a bottom being reached, then turning their thoughts into action by actually searching for, then closing on their next home.

Key reports coming out

Some of the key reports and numbers to be watched this week to check on as indicators of a bottom being close at hand include the National Association of Home Builders Market Index, which is due out on Monday. It’s a measure of builder confidence. (It rose in February to 29, up from 25 in January.)

Next, look for housing starts and building permits figures, to be released by the Commerce Department on Tuesday. A number over 700,000 for building permits will represent a very positive sign for the housing rebound. On Wednesday the existing home sales report will come out from the National Association of Realtors. Later in the week new home sales will be reported by the Commerce Department. If sales are at or above 325,000 units on an annualized basis, while very low, it would be another indicator that inventories are going down.

Watch for the trends

So look for the trends in all these reports this week. They may all point to the beginning of the end for the housing downturn. Of course, once the bottom is reached, you’ll want to start thinking about shifting your investment property finance decisions. It may soon be time to start looking at fixing up properties to turn over and sell again, rather than simply holding onto rental units.

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