investment property finance | InvestingInProperties.com

Investment Mortgage Loan Costs

A tighter lending market

Property investors know that a rental mortgage is harder to obtain financing for, as well as costs more, than residential home mortgages. Why? The answer is simple:

lender risk. The greater the risk, the greater the financing costs for the bank. And likewise, the lower the risk, the lesser the cost structure. Lenders always look at their worst case scenario: that is, a property going into foreclosure if the monthly mortgage is not paid in a timely fashion. It is for this exact reason that lenders assign greater risk to investment mortgage loans.

Home purchases are highly emotional to borrowers. There is a natural human affinity to stay in one’s home – one’s own personal sanctuary. And a borrower will do all he can to keep his home, even when beset with personal financial difficulties. A homeowner is thus much more likely to attempt to hold onto his home and make payments on his mortgage in a timely manner than an investor would on a rental property. Investors look at balance sheets and income statements to determine if a property is worth sinking more money into and making mortgage payments in a timely manner. It is the concept of emotionalism and ties to a home that makes home buyers a safer risk than property investors.

The extra costs with an investment property mortgage

While there are daily fluctuations in rates globally, all real estate is local – and rates will differ from region to region. However, on average, rental home mortgage rates have

traditionally cost about half a point higher in mortgage financing costs relative to the residential home mortgage marketplace. Again, this is due to the increased inherent risk associated with non-owner occupied rental properties.

There are some discreet factors that ultimately affect the rate any investor will be able to obtain on their rental property. Some of the factors include the type of rental property – ie., a single family versus a multifamily, the loan-to-value ratio (the lower the LTV, the lower the mortgage rate, and vice-versa), the borrowers credit score, and of course, the current occupancy and rental cash flow of the property. The higher the occupancy rate, the lower the costs associated with the loan. Also, know that extra points can be shaved down by accepting a slightly higher interest rate on a rental mortgage.

The basics of rental property mortgage financing

While credit markets are much tighter for investment property, some generalities hold true when choosing from different rental property investment strategies. Occupancy rates help lower overall mortgage costs for rental property. Traditionally, 75% of current rent roll on a property can be used as an income qualifier for any given rental property. Loan-to-value ratios tend to start at 70% for investment property (while it’s 80% for home loans). Lower LTV’s (eg., down to 60% or 50% even) can substantially lower overall costs of the loan, including points and interest rate). In addition, when real estate investing, an excellent credit score (above 740) will also aid in reducing overall rental property financing costs. This can greatly expand what you can borrow, helping paint a brighter financial picture for your investment opportunities.

photos courtesy of realtor.com, todaysfacilitymanager.com, tenantscreeningblog.com

Partnership Property Investing 101

Do you have the right temperament?

If you have the personality type that works extremely well with others, doesn’t have to have “their way,” and can compromise in order to realize a common goal of higher profits – then partnership property investing may be perfect for you. You’ll find it’s a great way to finance investment property. In any business partnership, there will be several key basics you’ll need to understand in order for the concept to work well.

The basic partnership agreement

You’ll need to fully delineate in a formal partnership agreement what each partner is responsible for – that is, who will do the scouting ,searching and locating of properties, who will do the negotiating, who will do the legal work, who will proscribe the repair work to be done, who will do the budgeting and accounting, and then who will actively manage the property. This part would include finding tenants who are qualified, collecting rents and making all necessary ongoing repairs and maintenance. Also spelled out should be who will receive tenant emergency calls, as well as make rent collections.

Of course, ultimately, there needs to be a decision process created and set down in writing. In addition, a plan detailing how much capital in total each partner will be putting up in this new enterprise, as well as whether all the partners will have equal shares or not will need to be laid out. You may all decide all the partners would like to participate in the locating of potential investment properties for the group to acquire. That’s fine too. Just make sure it’s written down exactly how you’re going to individually and collectively locate – and then actually decide – which properties to go after for purchase.

The grand payoff of a partnership

Using a partnership will allow you to create the seed money (that is, down payments) to bankroll either bigger projects, or larger individual projects than you could if you were investing on your own. It’s truly a nifty way to help finance investment property. Profits (or losses) will be shared pro rata amongst the partners. And a good partnership agreement will also spell out the mechanics for when a partner wants to leave the company, when the other partners want to push a partner out, or how to add a new partner to the mix. Certainly, each alternative requires a detailed written plan to avoid potential litigation down the road.

Creating synergy

Like with any business partnership, you’ll be able to utilize your unique set of partners’ synergy, and make the whole greater than the sum of its parts. You’ll be lessening overall financial risk in the process, whilst still maintaining the ability to utilize leverage on any property your company acquires and rents out.

If you don’t already have an accountant and/or a lawyer as one of your initial partners, then you truly must seek out their respective professional help in setting up the partnership, writing the partnership agreement, as well as creating a basic set of bookkeeping standards for you to follow. Of course, if the partnership decides to hire a separate property management firm to manage all its acquired investment properties, then the property manager will be doing all the bookkeeping functions for you. Certainly, a property manager will also remove all the day to day responsibilities for running your properties as well. In the case of a partnership, a good property management company can really help free up the principal partners for the locating, financing and acquiring functions of the business.

Consider all the advantages

Again, partnerships are a good way to gain entrée into the world of property investing by lessening overall risk while still allowing for complete leverage of limited assets. And the same real estate tax advantages will be afforded to the partnership as well. Borrowing funds may be a bit trickier – but then again, all the partners’ separate income and assets will be considered in making a loan to the partnership. But once a particular lender starts working exclusively with the partnership and writes all the mortgages, acquiring properties will become much easier than if you were to do so on your own since you’ll already have a strong working relationship with one banker. As mentioned before, it can be a much more powerful way to help finance investment property.

photos courtesy of fairfaxcountypartnerships.org, thinkglink.com, accounting-financial-tax.com, blog.guidantfinancial.com, managementspecialistsinc.com, dmp.com

Banco Not-So-Pop-u-lar

Don’t invest in a vacuum

Let’s face it – we live in a world-wide economy. And property investing in the United States requires being cognizant of the potential pitfalls that await us from overseas markets. It seems like every day there are new, gloomy reports of impending financial disaster coming out of Europe. The latest news comes this week from Spain, as their banking industry seems poised to collapse. Banco Popular, as well as Bankia and Bakinter, three of the largest banks in Spain, have been downgraded by the credit ratings agency Standard & Poors. S & P lowered their ratings to near-junk standards, as these banks have been hit hard by increasingly bad loans, especially mortgages.

In addition, Bankia, which is Spain’s largest mortgage maker, announced on Friday that it required an infusion of an additional 24 billion dollars to stay afloat. Spain had seized the bank earlier this month, due to the bank’s huge portfolio of delinquent mortgage loans. The greatest fear is that Spain will not have the ability to raise the funds to keep Bankia alive. If this mammoth lender were to collapse, the entire European banking community will be rocked to its core. Of course, the reverberations will be felt here in the states, much like a financial tsunami hitting our shores.

The bursting of their bubble

Spain is currently experiencing the same bubble burst in real estate that began here several years ago. However, their central government may have waited too late to try to repair the rupture to their economy. There is a double whammy on the horizon for them: the genuine threat of a run on Spain’s banks, combined with the government’s inability to raise funds to cover all the bank losses in the short term. Currently, short term debt is being offered by the government there at a whopping 7 percent in order to entice foreign investors. It’s a very ugly situation indeed.

Will Germany have to come to the rescue again, as they have several times already with Greece? It’s looking more and more like a strong possibility. But at some point, Germany itself will be simply unable to financially take the lead as the main country in helping to bail out weaker European Union countries. The writing’s on the European wall – and it’s not looking very positive in the long term.

For this reason, property investors here in the Unites States should be extremely concerned about the negative consequences that lie in wait for us. What exactly does this mean for the small investor in our country and the ability to obtain an investment property mortgage? Will the overseas crisis come to our shores? And if so, when?

The tsunami ahead

As I’ve written before, I think this financial tsunami will occur in some form, and will be making its way over the Atlantic to our shores by late this year. And the net effect for small property investors will be a further tightening of credit. It will be

much harder to get an investment property mortgage later this year and going forward well into next year as the crisis in Europe develops and intensifies.

So the end result is that you should be planning your buys of investment property accordingly. If you haven’t already this year, be sure to speed up your property purchases as soon as possible, and do not wait till the end of the year to try to go out searching for property and locking up an investment property mortgage. By the end of this year banks in the United States will be feeling the crippling effects of what is going on overseas. Banks here will try to tighten their credit in order to ensure mortgage repayments, ratcheting up their standards for lending in the process. Small investors will be hit with higher FICO scores in order to qualify for a mortgage, as well as much lower loan-to-value ratios on all new mortgages.

A new bottom line

The new bottom line is that it will be much more difficult to increase leverage on your properties. More stringent qualifying standards will apply not only when you try to purchase new investment property by obtaining an investment property mortgage, but also when you refinance any of your existing properties. So your ability to leverage will plummet, and that will mean more cash out of pocket in order to help finance your new purchases. With less leverage of course, you will not be able to grow your real estate investment holdings as quickly. It will also create a scenario where your returns on investment will be substantially reduced as well.

So be aware of all that’s going on in Europe right now. Banco Popular, Bankia and Bankinter are not merely names of distant lenders – their failure would have far-reaching effects on how you purchase your investment property here in the states. To protect yourself, purchase and lock in an investment property mortgage now, well in advance of the end of this year. And plan accordingly. You should be planning your next year’s purchases based on the assumption that higher credit scores will be necessary to obtain that investment property mortgage, and your ability to leverage will be lessened. Also prepare for a reduction in mortgage loan-to-value ratios offered by lenders here. This means you’ll have to make up the difference utilizing your own cash on any new investment purchase.

photos courtesy of flickr.com, telegraph.co.uk, economicnoise.com, bloomberg.com, colourbox.com, dmciphilippines.wordpress.com, kelsocartography.com

Good News: Things Are Looking Flat!

Now is the time to utilize all investment property finance options

The latest news for property investors is that according to the National Association of Realtors, pending house sales are rising. Their index of pending home sales indicates a 4.1% increase in March compared to February, and is almost 13% higher than March of last year. This information reflects contracts on houses that have been signed but have not closed yet.

The index is also now showing that pending home sales are at their highest level since April of 2010. In this first quarter alone, closings were at their highest level for a first quarter in five years. The indications from the March pending home sales index now suggest that actual second quarter sales will be very good as well.

Sales are considered “pending” when contracts have been signed but the deal has not closed, so the sale has not been finalized yet. Closings usually take 1 to 2 months after contracts are signed to finalize. The latest pending home sales index is based on a very large national sample and represents about 20% of existing sales transactions.

The bottom has been reached

As I had written back in mid-March, I firmly believe from all the economic indicators over the last couple months that the bottom of the real estate market has been reached. Now is clearly the best time to be considering all your investment property finance options. Increased sales are very gradually lowering the inventory of houses on the market, including short sales and foreclosures. So as this year goes on, stabilization of the market will see a slight increase in house values.

Other indicators showing a clear-cut flat-lining and bottoming out of the real estate market include first quarter sales results, especially in the Northeast. In this region, house inventories have remained steady, days on the market have been dropping slightly, and house prices have remained flat overall during the last few months. Compared to the precipitous price drops, inventory increases, and increased time on the market data of the last several years, a flat-lining of the market is good news indeed.

The ramifications for the property investor

So what does this all mean for the property investor? As I’ve been saying for months now, if you haven’t already decided to get into the market by either purchasing your first investment property, or adding on to your stable of properties, then this is the time to do it. You need to get in before prices start rising. All signs point to the second half of 2012 as a continued slow recovery period. However, it is expected that 2013 will start to see some serious price increases occurring in the real estate market across the country.

So clearly this is the time to get in on the investment property bandwagon, as prices remain at their relatively lowest point in years. The bottom has definitely been reached. And you should be exploring all your investment property finance options now. Whether you decide upon utilizing conventional mortgages, FHA 203K renovation loans, owner financing or hard money lenders, the window is slowly closing on making good deals on investment property while they remain priced at historically low levels.

photos courtesy of thegreenhouseproject.org, csmonitor.com, prospect.co.uk, ocregister.com, guardian.co.uk, quickenloans.com

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.

photos courtesy of petetheplanner.com, thenakedtruthinaconfusedworld.blogspot.com, apartmenttherapy.com,

newsone.com, candysdirt.com, politico.com