rental property strategies | InvestingInProperties.com

The Purpose of Title Insurance For Rental Property

Chain of title

The chain of title, or who actually owned a piece of real estate, is a construct from merry old England from the days of feudal lords. When real estate investing, title ensures an owner is the rightful owner of a rental property, and that there are no other claims, past or present, on it. And the purpose of title insurance is to protect anyone acquiring real estate (and if a mortgage is involved, their lender as well) from having a claim of title placed on the property. In actuality, anyone can make a claim as to ownership of a piece of property. However, title insurance companies relieve the purchaser of anyone investing in real estate from having to worry about settling any claims on it in the future. The title company, in essence says: “It’s our problem now, you go out and worry about only your investment opportunities.” Naturally, title companies run complete chain of title checks to make sure they protect themselves, prior to any closing, and insurance being taken out on a property.

The ordering of title

Title is traditionally ordered by the buyer’s attorney for his client. This occurs after a property investor has either agreed to a purchase price and terms for all cash, or if there is a mortgage involved, he has been approved and received a mortgage loan commitment from his bank. The title company then performs an intensive search of county records to determine an accurate chain of title to the property. This search is a comprehensive review of all the mortgages, deeds, easements and liens on a given property that have ever been recorded. Recorded is the key word here, because without a property sale being recorded, no one else can make a legal claim on it in the future. Without a sale being recorded, it’s as if the sale never occurred – legally, that is.

The title search

Any title company property search will be sure to include all records the local municipality has on file for the investment property. This will include any outstanding water or tax bills, special assessments, tax liens and any other item that could conceivably affect the title. Traditionally, building department records are also checked to ascertain any outstanding building permits (opened, but never closed as completed), or similar code violations. Once title is completed, a title report is prepared by the title insurance company. It is sent to all the attorneys in the property transaction for their review.

If there are any current problems (for example, an unaddressed easement that was never disclosed), the attorneys need to hash out a solution prior to a closing. Similarly, if a building code violation comes up in the title report, or, as another example, the title picks up an existing, illegally built shed (that was built without a building permit), the seller will need to obtain a building permit (or tear down the shed), prior to the closing. Once the buyer’s attorney is satisfied that all outstanding violations have been removed, and that his client, the buyer, will be able to purchase the property with no encumbrances on it, the title is deemed to be “clear.” And a closing can finally be set.

At the closing

At closing, the buyer who has purchased title insurance is given his policy. This ensures that his title rights are fully protected, subject only to any conditions set forth in the insurance policy. An example of a condition could be any kind of pre-existing easement on the property (for example, a right of way for a trail path, or utilities right of way). And the bank holding the buyer’s mortgage is also named as an insured member on the policy. The cost of the title policy is a small sum to pay amongst all other closing costs, especially given the protection it affords the buyer (and his lender).

photos courtesy of business-law-pa.com, askgreganddanielle.com, welchgroup.net, massrealestatelawblog.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

The Republican Sweep And Rental Property Investment Strategies

The mid-term elections recap: little change for real estate investing

The mid-term elections have come and gone on Tuesday this week, only just two days ago. And because both houses will be controlled by Republicans starting in January, it doesn’t necessarily mean that the party of big business will take existing banking laws and revamp them en masse, along with their protections to the American people. Current banking loan standards will most assuredly stay in place, and the concomitant tight credit atmosphere that comprises today’s investment property mortgage market shall unfortunately remain unfettered.

On the downside for property investors

The investment property mortgage marketplace will remain as is, with very tight credit available. There’s simply too much downside for Republicans if an easing of current banking reforms (created since the banking crisis of 2008) were to be repealed, and a new banking crisis were to develop anew. Of course, President Obama would never allow any stripping of current banking mortgage protections, would the Republican majority try to proffer any revisions to current law. Obama would simply use his veto power to stop any changes in their tracks.

Minimum wage laws – some good news for property investors

Even with the Republican’s sweeping into a Senate majority, thereby controlling both houses of Congress in two months, don’t expect any major change in effects for property investment opportunities. Republicans will be quite averse to legislating anything that could hurt big business (and, to a major extent, small business as well). Before the election, there was at least a hint of a Democratic push for a major hike in the federal minimum wage. That will be tossed to the junk heap now. In addition, the wave of Republicans winning major state governorships on Tuesday, will mean that, even on a state by state level, minimum wage hikes will most probably remain at or near inflationary levels only. Even with the mass of protests by fast food workers this past year, expect the prospect of a $15 per hour minimum wage to be a pipe dream for at least several more years.

Keeping costs down

How does this affect the average property investor investing in real estate? Simple. If you don’t already do the menial maintenance work around each of your rental properties yourself, then you probably hire others to clear the walkways of snow, rake the leaves, empty the gutters, etc. As you keep adding on investment properties to your empire, these seemingly small costs become quite large when taken together. Whether you hired the labor yourself – or had your property manager do so – you still end up paying for this maintenance on each rental property you own. The prospect of a hike in the minimum wage would have definitely put a dent in your rental property cash flow. So with the Republicans being victorious on a national scale, expect to keep your maintenance costs at or near current levels. And that’s some good news that property investors can cheer about as a result of Tuesday’s elections.

photos courtesy of nola.com, socalfools.org, myweathertech.com, trashitman.com

The Changing Nature Of The Investment Property Market

Current effects of the millennial generation

If you haven’t noticed, the entire landscape of the residential property investing marketplace has been going through a seismic shift over the last several years. Coinciding with the financial crisis that begain in 2008, demand for single family homes has plummeted. At the same time, rental prices have skyrocketed, making residential rental properties hot commodities of late.

Millennial characteristics

One of the main reasons for this is the millennial generation. They have come of age, and are taking their place in rapidly increasing numbers into the workforce. However, unlike their predecessors in the Baby Boomer and Gen X demographic models, millennials stay at home with their parents much longer, don’t feel this is a major social negative in doing so, are not fiancially prepared to obtain mortgages for their first home, and are quite scared of losing their jobs. Hence, these reasons effectively keep large numbers of them on the first-time home buying sidelines.

An increasing trend

However, statistics are now showing an increasing trend for millennials to start purchasing investment property to live in as their first home. Buying two to four family homes, and living in one of the units, allows them to offset the normal investment property expenses, pay their mortgage each month, and even create a small positive cash flow in the process. In addition, they are treated to the loophole of being able to utilize FHA and VA style mortgages, since they will be owner-occupants. This makes obtaining a rental mortgage much easier.

Friends with benefits

Many in the millennial generation also are purchasing multifamily homes with friends to offset their costs. The millennial generation (born between 1977 and 1998) share some rather unique characteristics that make then especially suited to do this style of investment property acquisition. Generation Y characteristics include a celebration of diversity, with an overriding sense of optimism about the future. They tend to be rather inventive. And while they may be used to individualism, they consider their friends quite dear – so much so that they may equate their friends as family.

Creating their own rules

In addition they are used to creating new rules, and they are certainly well-versed in the internet and the concommitant communication style that entails, including an easy acceptance of all new technological advances. They’re excellent at multitasking, and are used to feeling nurtured. All of these characteristics make them better suited for the ability to trade off the traditional first time home buying process for the non-traditional role of first time owner-occupant-landlord.

Priced out of the current first-time home buyer market

When coupling these characteristics with the fact that, in today’s real estate market, rental prices are very high, first time home prices are also quite high, and most first time buyers are unable to afford to buy a home in an area that they would like to live in, these millennials are basically priced out of the home real estate market. But not so with the owner-occupant multi-family rental property market.

The entree into the real estate market

The average first time investment property buying millennial has never bought a home before, and sees the rental property as his entree into the home buying world, while at the same time creating an inflationary hedge in real estate. They effectively get in on the ground floor, utilizing their rental units in the process. Again, many millennials may jointly purchase an investment property spreading the costs, while also renting out other units for cash flow. Remember, they hold their friends in high esteem – and aren’t afraid to live with them in the next unit over as co-owners. This is one of the many characteristics that give generation y the ability to make these bold, new, trend-setting investment property moves.

photos courtesy of loyalogy.com, immersiveyouthmarketing.com, screenmediadaily.com

The VA Rental Mortgage Loophole

The inside scoop on this legal trick

Of all the tricks and investment property financing tips I point out in my real estate investing articles, the VA mortgage loophole is one of the better ones. Veterans Administration (VA) mortgage loans, traditionally offering financing of 100% of the purchase price on a home for veterans, are designed specifically for homes – that is, owner–occupied houses. However, VA loans, like most FHA loans, allow for financing of 1-4 family homes as long as the purchaser will be an owner-occupant. So if you qualify for a VA loan, you would be able to purchase a two, three, or four family investment property, live in one unit, and rent out the other units in the building. All the while taking advantage of 100% financing provided by the VA, in a de facto rental mortgage loophole.

Qualifying veterans

As long as you are the owner-occupant at the time of the loan, you could qualify and take advantage of low rental home mortgage rates. But let’s say you do this, then decide to move after a period of time. The loan would stay in place, and in theory, you could look to repeat the procedure. Keep in mind that any veteran has an amount that he would be qualified to borrow without having to make a down payment on the property. If all of a veteran’s allowance is not used up on one property, he could utilize the remainder to obtain 100% financing on another property. In this way, you could start building up investment properties utilizing strictly VA loans.

Another investment mortgage loan possibility

The VA also offers another excellent choice of financing for veterans. It’s called the Interest Rate Reduction Refinance Loan (IRRRL). This program would allow a veteran to refinance a property that had been formerly bought with a mortgage from the VA. This would be done, ostensibly, to obtain a lower rate of interest on the loan. This Interest Rate Reduction Refinance Loan also has some unique provisions regarding owner-occupancy. For example, it does not require the owner to live at the property – only that he once lived at the property. This would offer a veteran the ability to buy a multi-family property, live in it, and then eventually obtain this IRRRL mortgage at some point in the future. In this scenario, one could then move out and purchase yet another multi-family under four units, live in one of them – and obtain yet another VA first mortgage with no money down. You can see how much leverage these types of investment mortgage loans can produce…and they’re not really investment mortgage loans per se.

Using your equity as leverage

Finally, a veteran would be able to utilize his equity in each succeeding investment property he acquires in order to leverage the acquisition of even more rental properties. He could use the IRRRL route of mortgage financing, or decide to utilize other forms of non-VA, traditional rental mortgage loans from banks or other lenders. Either way, he’d be substantially increasing his investment property acquisitions by wisely using leverage to its optimum advantage, simply by taking the accrued equity from each of his properties and plowing it back into other property investment purchases.

photos courtesy of albanyhomes411.com, salending.com, americanhousingbuilders.com

The Most Dangerous Hazards When Buying REO Properties

Foreclosure pitfalls

While REO properties (“real estate owned” bank foreclosures) can appear on the surface to be great deals, make sure you’re aware of these potential pitfalls that could mean unexpected gargantuan costs down the road. These hazards should normally be avoided even when acquiring non-foreclosed investment properties. However, there is an even greater danger with REO’s. In many instances, water and electricity have been turned off by the bank that owns the property. This safeguards them from further property damage in case of any leaks or winter freeze-ups.

However, banks that own REO’s tend to be sticklers in the adage “caveat emptor” (buyer beware) when they place their inventory of foreclosed homes for sale on the market – and they require all offers be in “as is” condition. Also, they usually refuse to turn the water and electricity back on prior to closing. So you’ll be in the dark, quite literally, regarding your house inspection.

When buying a foreclosed home, make sure you get a very experienced house inspection company to go over the property in tremendous detail. If they can’t make a determination about some of the following major hazards, you’ll have to build in a slush fund for the probability that one or more of these hazards are present. Crunch your offer numbers accordingly…

Mold

Buying a property with mold is a major headache. While the reasons for the mold problem itself is usually an easy fix, mold remediation is not. In addition, trying to get a mortgage on a foreclosure with mold present is going to be problematic, since the lender will want it removed prior to your closing on it. (I am currently representing a buyer in the purchase of a ranch house with mold in the unfinished attic. The seller foolishly had bathroom fans on the first floor empty hot, humid bathroom air without venting of any kind directly into the attic space…You can’t make this stupidity up. The situation had apparently been this way for years. In winter, the attic space would actually develop frost, according to one current tenant of the building. Naturally, there is an accumulation of mold throughout the attic now. And in order to sell the property, the seller must address the issue. And to do so properly, a specialized mold abatement company, licensed by the state, needs to be called in to properly remediate the problem.) So make sure there is no evidence of mold anywhere in any REO you’re considering purchasing. Especially since banks will still expect you to be making an offer on their property in “as is” condition only.

Structural problems

Any foundation cracks need to be inspected for size, shape and duration for how long they’ve been there. Different cracks mean different things. Let your house inspector make the call as to how big a potential problem any given crack could represent in the future of the property. If it’s simple settling over a long period of time – not a big problem. But if the issue means a total rebuilding of the foundation – well, obviously, this will be a major costs that could run tens of thousands of dollars.

Pest issues

Any good house inspection company will be able to ascertain very quickly the presence of pest infestations. Termites tend to be number one on the potential list. If evidence of past termite infestations is old and not active, and the damage to the house sills have been minimal, or repaired, there shouldn’t be a problem moving forward. But if the damage is active and extensive, calling for sill replacement, this could also pose a potential cost you didn’t expect that could run in the thousands of dollars. Be very wary when confronted with the evidence of termite damage in foreclosed homes.

Plumbing leaks

If the water has been turned off, you really won’t be able to get a good idea of any potential problem lurking in the house, especially if there is the presence of much older piping in place. In this case, you must plan for the worst – and expect the pipes to have burst or leaked at some point in the past. Using “caveat emptor,” you’ll need to either plan on a very expensive renovation of all plumbing in the building. Or simply be prepared to walk away. And make an offer on another property in the foreclosure process instead.

Electrical issues

Likewise, if an REO has no electricity on, it is impossible to ascertain the integrity of the entire electrical system. Are some wires old? Are some fixtures shorting out? A house inspector won’t be able to inspect anything that’s hidden behind the walls. They must have the electricity turned on to determine the potential hazards. With REO’s, just like with plumbing when the water has been turned off, expect the worst. You’ll have to decide if you’re prepared to rewire the entire house – or move on to another offer. Just be aware of the potential hazards.

photos courtesy of bestlongislandhomeinspectors.com, homesinspectors.com, 203krehabnow.com, 24dash.com

Best Tenant-Choosing Tips

Maximizing profits

Attracting good tenants is the lifeblood of any successful rental property investment. And there are some essential rules for attracting these tenants to your units. Keep these tips in mind as you continue buying rental property. These tips will also help keep you maximizing your cash flows when investing in real estate. Remember that you can always be learning new and better ways to maximize your profits in investment properties by becoming an even better landlord.

If you want good tenants, be a good landlord

Any landlord worth his salt will ensure he performs proper maintenance on his rental property. As a landlord, you should not only make repairs in a timely manner on all defects you can see – but also on those you can’t. Remember, that when investing in rental property, since you’re not going to want to disturb your tenants constantly, make sure to ask them on a periodic basis what physical property issues are arising in their units. Is there a new small leak in the kitchen drain? Is their toilet working properly? Any gas or oil odors suddenly present? You need to ask to find out.

And you should be asking these questions about your investment properties on a regular basis. When you keep up with repairs to your investment property, you make your tenants feel more secure about you, as well as making them feel good about staying in your unit. This will aid in future retention. Obviously, the more tenants you can retain year to year, the less work you’ll have to do – since you won’t need to look for new tenants to replace them. Proper maintenance also keeps your overall repair costs down over the entire term of your ownership of the rental property.

Hire a good property manager

If you’ll be using the services of a property management company, make sure you are stringent in your due diligence prior to hiring them. Check out their references, talk to their current landlord roster, and obtain referrals from local real estate pros like real estate agents in your area. Good property managers always stay in regular contact with all tenants. They don’t simply collect rent. It’s their job to maintain good relationships with all tenants. They are proactive at performing property inspections, and will take care of maintenance and emergency repairs as needed. And they will screen prospective new tenants for you as well.

Set realistic market rents for your units

If you set a rent that’s too high, you may profit from the incremental amount above market rent for a short time…but you’ll end up paying for it later when that tenant decides to move because his rent is too high. Again, looking for new tenants is always a costly endeavor. Not only time-wise, but also due to the increased vacancy that occurs every time a tenant moves out. On average, expect at least a month of lost rent due to any tenant moving out. Always make sure you know what current market rents for your area are. Check out your competition for like units. Go visit them. Talk to local real estate agents to get more information as to what constitutes market rents for comparable units at any given point in time. Check out Craigslist listings for rentals in your area. Become an expert on market rents. Know what other real estate investors in your area are charging at any given time.

Likewise, setting rent too low does you no good either. While you may get more takers for your unit, you’re not optimizing your cash flow, as you are giving up the differential between market rent and what you’re charging each month. Remember too that tenants that pay rents under market rate tend to not be so careful about keeping up the look of the unit. Ultimately, they may end up doing more harm to the physical space due to increased wear and tear, and lack of care. Basically, they’ll take much less pride in their living environment when they know they are paying a discounted rate for it.

Beware the professional bad tenants

Tenants that know how to work the system are the ones you’ll need to be most careful installing in your units. While tenants that don’t pay their rent on time need to be evicted as quickly as possible, some states allow the eviction process to last for months. All the while you’re losing revenue due to non-payment. And don’t forget the legal fees involved as well for retaining the services of a good eviction attorney. The best advice here for all real estate investors is simple: make sure you carefully check all references for any prospective tenant. This includes speaking with their previous landlords, running credit checks on them, as well as criminal background checks too. Do this, and you should properly protect yourself from those professional tenants who are gaming the system.

photos courtesy of regulatedtenants.com, iresvegas.com, newhomessection.com, lowesforpros.com, landerassociates.wordpress.com

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.

photos courtesy of quickenblog.com, newsone.com, auroragov.org, infrawindow.com, newgeography.com

The Diversification Model

Safety versus reward…

When I was just starting out buying rental property, an investment opportunity came on the market that totally captured my fancy. It intrigued me so much, I came very close to acquiring it – and making a major error at a very early stage of my real estate investing career. The property was an eight unit set of townhomes, all attached, and owned by a local bank that had taken them over when the developer defaulted. The project was totally finished – nothing had to be repaired, fixed up, renovated…a truly turn-key operation among investment properties. Of course, new tenants would need to be found for it, which would take several months after a closing to gain full occupancy.

Thinking pragmatically

I negotiated directly with the bank, and they were willing to provide the loan, with investment property mortgage rates that were very beneficial for me on the property. And the numbers, which I got into a habit of crunching several times a day, every day for a few weeks, kept making more and more sense. So – why didn’t I acquire the property? Simple – it would have used up every penny I owned in available capital. Any mistake on my part in my numbers crunching meant I could potentially lose money as I was just learning about investing in rental property. And it could happen quickly – without any means to tap a “slush” fund for emergencies…not only for the townhomes, but for myself personally. In effect, I could lose everything I owned on this one set of real estate investments.

Listen to your inner self for the danger signs

I could sense the danger every day I got more and more serious about closing the deal. Ultimately, common sense prevailed. While the upside was also quite large on this grouping of townhome investment properties, and would have set me up, in theory, quite nicely moving forward, the downside, as I evaluated it was equally nerve-racking. I just didn’t have the stomach. So I backed out of the potential deal.

A self-taught lesson in fiscal restraint

This offers a good lesson – as I taught myself – in the need for diversification in any type of real estate investing. To have put all my eggs in one basket, at the beginning stages of my property investing career, would have been a very risky, and probably fool-hardy thing to do. When I applied reason to my analysis, I came away with other options, like picking and choosing smaller multifamily homes, one at a time, that were much less risky. Again – not as much reward, but no one property would sink me like this townhome project could if I was wrong in my calculations.

Basic property investment theory

Diversifying is such an integral part of investing theory, and yet when confronted directly with the prospect of a “big kill,” the notion of diversification can easily go out the window, especially when dollar signs go up in the sky in big bold letters.

In real estate, this means diversification can have many looks. You can diversify across one class of properties – for example, sticking entirely within residential real estate, and acquiring individual homes as I have done. It can also mean spreading risk out over several classes, or types of real estate investments. Owning a small office building, a retail store property and a multifamily home at one time are a good way to diversify your real estate holdings.

Eschewing the big kill mentality…

With more diversification comes lessened risk – as a downturn or a financial hit to one segment won’t totally destroy your overall holdings. It’s slow and steady financial gains that are approached as an averaging of all your different real estate holdings in the diversification model. In this way, real estate investors can protect themselves, and can be ready in the event of any downturn…Ready to acquire another, different class of investment property moving forward.

photos courtesy of besthawaiihomes. com, elementcommunity.com, worldpropertychannel.com, chrismercer.net, rifuture.org

Property Investing Trends

The current state of the property investing market

I am asked quite often to be a prognosticator for property investors, as to what the current state of the real estate market will bring in coming months. The most recent government data suggests a continuing slow, growth market place nationwide. But there are pockets of great market valuation increases, while most of the country languishes in an extremely sluggish growth pattern.

The latest consumer figures

Recently released retail sales figures suggest consumers are be very cautious with their disposable income, as retail sales have slowed in the second quarter of this year. What effect does the retail market have on real estate? Simple. The ripple effect of consumers pulling back, and the psychology behind it, are very telling indicators of a severe lack of consumer confidence. When consumers pull back, they are most interested in conserving their disposable income. As such, this displays an overt lack of confidence nation-wide in the general work force holding on to their jobs. And of course, when this lack of confidence is displayed through outward indicators like cut-backs in overall consumer spending, it is easy to become worried about the short-term prospect for the current real estate market.

The psychological effects

When people are worried about keeping their jobs, they postpone their decision to purchase homes. Or, to move up to a larger home for their needs. This delayed need gratification creates another ripple effect through the national economy, as more potential buyers hit the sidelines.

Also taking into account the current state of the tight credit market for home loans, and how difficult it is for the average borrower to secure a home mortgage, the double whammy of current tight credit standards and commensurate difficulty obtaining a home loan, coupled with the latest vote of no-confidence by U.S. consumers in the retail markets, makes the outlook very spotty and problematic for anything approaching a proper rate of return from market valuation appreciation when it comes time to acquire investment property.

Continued rental growth pattern

Rather, property investors need to look towards the prospect of continued growth in rents nationwide, as the effect of more homebuyers sitting on the sidelines creates more demand for rental housing. If the cash flow numbers work out at current rent prices, then you can bet they will look better within the next year as well. Just don’t count on any market appreciation in the process. As long as you plan on holding your property investments for the mid-to-long term, and your properties are cash positive, you should be in very good shape.

The current dangers in flipping

But if you’re more into flipping properties, be very concerned. Unless you’re paying substantially below market value, and fell very strongly that your improvement costs will remain within a tight set of constraints to end up with a property whose cost is still below market value, you should be OK. I would build in a fudge factor of at least 15%. This means after your acquisition and renovation costs are completed, your property should still be able to sell, at a profit, for 15% under current market value. You must take into account the latest retail data, and how it adversely affects the overall real estate market when you crunch your numbers.

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