Archive for the 'Real Estate Investing' Category
Florida is back!
We just released our latest real estate investment in Jacksonville, Florida. These are fully refurbished foreclosures within the greater Jacksonville market. The properties are all tenant occupied and managed by a professional management firm.
The properties provide investors with a positive cash flow of $100 to $250 per month (assuming a 20% down payment), generating a cash-on-cash return of 9.4% within it’s first year of operation.
Additionally, all our properties are 25% below market value. And many are up to 30% below market value. That is a tremendous return on your investment of 20% down.
These investment properties are 3 and 4 bedrooms single-family homes, with 2 to 3 baths, and up to 2 car garages located in desirable neighborhoods. The fact that they are like-new and fully refurbished makes them an attractive turnkey real estate investment for novice as well as seasoned investors.
Download the Free Investment Report here: Jacksonville Investment Property
It may not be the most widespread measure of housing prices, but if you want to follow a powerful driver, look at rents.
Specifically, it’s the rents Americans pay on condos, apartments or houses that are about the same size, and share the same neighborhood as your ranch or colonial, that in the end determine what your house is worth.
"If you look at the trend in rents to see where housing prices are headed, you’re looking at the right measure," says Yale economist Robert Shiller.
In recent reports, Deutsche Bank demonstrates how steady or even falling rents have pulled down housing prices, to the point where in many markets it costs about the same amount to own as to lease. That’s a golden mean that America hasn’t seen in almost a decade. The DB research also offers convincing evidence that the wrenching adjustment in housing prices is finished for much of the nation, with a bit more pain to come in selected areas.
Before we get to the numbers, let’s examine why rents exercise a kind of gravitational pull over home prices.
By now I am sure you’ve heard that it is legal, permissible, and profitable to invest in real estate using your self-directed IRA, SEP, or Roth IRA. If you’ve been using this technique, you know the drawbacks – delays in funding, fees from your custodian, potential lawsuits against your IRA.
Well, there’s a solution… the LLC-IRA.
Instead of investing directly from your IRA, we set up a single-member LLC that is owned by your IRA. Your IRA account is the sole member of the LLC. The LLC is a legal entity that has powers and protections that are not possessed by any individual or by any regular IRA.
The combination of the self-directed IRA custodian and the LLC produces great results. This is an entirely new type of LLC, not your run-of-the-mill LLC you may have done before. It generally requires an attorney to draft the operating agreement and provide an opinion letter to your IRA custodian. If the LLC operating agreement is improperly drafted, the entire LLC-IRA may be disqualified and taxed.
Lawsuit Protection of Your IRA Account
The FHA has gone crazy, making sweeping new changes in several policies. You’ve got to keep these in mind when clients consider FHA loans. Here are some of the most extreme changes:
- Raised up-front costs for insurance
- TRIPLE down-payment requirements
- Cut seller concessions by HALF!
The government hopes the new policies will help the organization better handle risk. And they’ve got every reason to be nervous. 9% of all loans that the FHA insures are past due. FHA claims have been skyrocketing with the organization paying out of its capital reserves.
30% of all new loans (and 20% of refinances) are backed by the FHA. This is a 1,000 percent
increase over 2006. This seems like shaky ground for the company. The FHA is hoping to scale back to pre-crisis times and minimize their exposure.
Owner financing is the most common way to buy a property with "no money down". Instead of getting cash at closing, the seller agrees to finance all or some part of the purchase price. What this means is the owner of the property will act as a bank and lend the buyer all or part of the money needed to purchase the property.
It is estimated that nearly 35% of all the properties in the United States are owned free and clear (no mortgage financing). A surprising number of those owners would be willing to finance all or part of the purchase price as a mortgage and take payments over an agreed upon period of time.
Generally, you will be getting a second mortgage from the seller. That means you will get the majority of your financing (the first mortgage) from a primary financing source like a bank. The seller would provide most or all of the balance in the form of a second mortgage.
There are four types of owner financing to that you could ask for:
Amidst all the difficulties we hear each day in the media about the economy, we must remember that there still are opportunities out there.
Here are 20 tips for a positive new year:
1. Stay Positive. You can listen to the cynics and doubters and believe that success is impossible or you can know that with faith and an optimistic attitude all things are possible.
2. When you wake up in the morning complete the following statement: My purpose is _______________________.
3. Instead of being disappointed about where you are, think optimistically about where you are going.
4. Take a morning walk of gratitude. It will create a fertile mind ready for success.
5. Eat breakfast like a king, lunch like a prince and dinner like a college kid with a maxed out charge card.
6. Transform adversity into success by deciding that change is not your enemy but your friend. In the challenge discover the opportunity.
7. Make a difference in the lives of others.
Existing home sales surprised the markets by rising 7.4% to an annual rate of 6.54 million units in November, the highest since February 2007, according to the National Association of Realtors (NAR). That’s only 10% below the all-time peak in 2005.
What’s more is that house prices, as measured by the S&P/Case-Shiller 20-City Home Price Index, rose for the fourth consecutive month in September before stabilizing in October when prices were flat.
The NAR is inevitably convinced that the worst is over and that housing is due for a rapid recovery, and that home prices will take out 2006’s peaks some time in 2011 or 2012.
Not so fast, guys!
The recovery in housing has been boosted by just about every artificial means imaginable:
- Interest rates have been kept historically low at 0% – 0.25% for a very long time.
- Fannie Mae and Freddie Mac, the bankrupt behemoths of housing finance, have been bailed out with what amounts to a blank check from taxpayers.
- The Federal Housing Agency (FHA) went on making mortgages with 3% down payments when nobody else was, thus very likely landing taxpayers with another bill for some large fraction of $1 trillion.
- And the government has been handing out cash subsidies for refinancing houses that were about to be repossessed and $8,000 subsidies for first time buyers – now $6,500 for all homebuyers.
Of course it looks like the housing market has recovered! The question is what happens when some of these subsidies are taken away? Read more »
Mortgage rates have been steadily climbing, from a low of 4.5% around November 27, 2009 to above 5% on December 22, 2009. For the past two months I’ve been warning that this will eventually happen. It’s not because the economy is recovering; it isn’t recovering. The reason mortgage rates will rise to 6% or above, sooner rather than later is because that is the "natural" market.
About a year ago, the Federal Reserve announced a $1.25 Trillion mortgage rates subsidy, by purchasing mortgage-backed securities in the open market, through March, 2010. Right before the subsidy was announced, mortgage rates were at or above 6%. The subsidy was referred to as Bernanke’s "nuclear option" meaning he was using an extraordinary monetary stimulus to keep mortgage rates artificially low.
One year and 12 months into the 15-month game, we’re at $1.07 Trillion spent on this open market MBS purchase program. This means that the Fed still has about $150 Billion to spend in three months, so mortgage rates should stay around 5%, right? After all, the Fed only spent $80 billion/month and they have at least 2 months of money left.
Markets are discounting mechanisms meaning that traders anticipate how potent the Fed can be. The Fed is just about out of bullets and MBS traders know it. Let me try to give you an example of what the Fed did by recanting the explanation I gave, to a Del Mar Realtor, on the beach this summer.
The mortgage loan limits and policies established in 2008 and 2009 will continue through 2010.
There are several types of mortgage loan limits. Generally, most borrowers need to look at conventional, FHA and VA loan limits to see how much can be financed with the most-widely originated loans.
If you borrow at or below the conventional loan limit for non-government mortgages, you would have what is generally known as a “conforming” loan. If the amount borrowed is above the conventional loan limit, you would have a “jumbo” loan and face a higher rate because larger loans imply more risk to real estate investors, the folks who buy mortgages.
Conventional Loans
For 2010 the conventional loan limits depend on the county where you’re located. Instead of one national mortgage limit, we now have one for each county – and there are more than 3,200 counties.
In general terms, 2010 loan limits for a single-family home range from $417,000 to $729,750. Once you know the loan limit for a single-family home in a specific area you can then see the limits for owner-occupied homes with two to four units.
Credit has its fair share of myths, legends and misinformation. Pile on top the proprietary nature of credit scores, the formulas for which are closely guarded secrets, and navigating the credit waters becomes even more confusing.
It’s time to dispel some common myths about credit reports, credit scores and credit cards:
1. Pulling your credit will hurt your credit score.
When you pull your credit report for your own educational purposes, it’s considered a “soft inquiry” and will NOT affect your credit score. On the other hand, when a creditor or lender pulls your credit report for the purpose of extending you credit or a loan, it’s a “hard inquiry” and may negatively impact your credit score.
2. Your income is factored into your credit score.
Your salary has nothing to do with your credit report and credit score. You may earn a solid income, but that doesn’t necessarily mean you have good credit. They are separate.
3. Closing a credit card account will help your credit score.
When you close a credit card account, you may be affecting your “credit utilization.” Credit utilization is simply how much credit you use (total of all balances) compared to how much credit is available to you (total of all credit limits). When you close an account, you’re lowering the amount of credit that’s available to you, which may increase your credit utilization percentage. A higher credit utilization may negatively impact your credit score, as it suggests to a creditor or lender that you’re a higher risk.
It looks like the majority of U.S. housing markets have bottomed. So, if you’ve been thinking about buying investment property, this may be the time to make your move.
When the National Association of Homebuilders released its NAHB Index for October last week, it showed a drop of one point in homebuilders’ view of the market, from 19 to 18.
The good news: The index is at double its level from last spring – when it bottomed out at nine – meaning homebuilders see an improving market.
The bad news: The index is based so that a reading of 50 is the “neutral market” view. That means there’s a long way to go.
30-year mortgage rates are still close to their all-time low, currently around 5.1%. But rates probably won’t remain that low for long. Building inflationary pressures and the huge U.S. budget deficit will combine to eventually push interest rates higher.
Even if house prices drop by another 10% in some markets (except in the very worst areas, I wouldn’t expect too see anymore than that), you still may end up saving more on financing costs by buying now than you would by waiting for any further declines.
Homeowners are facing an economic crunch from the housing crash, but investors often face even more severe repercussions. More than 1 in 3 foreclosures are of investment properties, and should the foreclosure epidemic worsen as forecast, that number is expected to rise as more investors walk away from mortgages.
During the real estate boom investors and speculators bought homes, fixed them up and many sold within months. But the real estate crash prevents them from doing just that. Living in a home intended to be an investment property has become the answer for some investors, while others select to rent the property. More than 240,000 homes sit vacant nationwide, according to the U.S. Census Bureau.
A key strategy of buying a home to flip has gone by the wayside as more and more real estate investors purchase properties for the long term. Just when and how long it will take to reap profits from their investments is an uncertainty with some economists saying that it could take more than 10 years for the market to become healthy enough to make a good profit.
In his book “The Millionaire Real Estate Investor”, Gary Keller, founder of Keller Williams Realty International, keeps a basic theme: “Buy real estate right, pay it down and pay it off.” The ultimate goal should be to own lots of real estate free and clear for maximum cash flow. That mantra is attracting millions of investors and wannabe investors back into the depressed housing market to invest.
For most people, it is difficult to read through a financial newspaper or watch late night television without seeing repeated (possibly obnoxious) exhortations to invest in commodities such as gold or silver. The logic of these advertisements is frequently sound, since it is certainly true that government irresponsibility is leading toward a currency collapse and massive inflation.
What frequently gets left out of the analysis are the other options available for investment that offer far greater prospects for return than gold or silver.
We are in absolute agreement over the prospect for commodity price inflation in the future. We are in absolute agreement over the massive deficits, crushing debt, and lax monetary policy of the government being a harbinger of runaway inflation over the coming decades. We are also in agreement over the dimming long-term prospects for the stock market, since there doesn’t appear to be a new pool of investment capital to propel the stock market into an upward spiral like the one experienced over the last 25 years.
The strategy that we advocate is to use the attributes of rental real estate to invest in the commodities used for home construction. By following this strategy, we gain ownership of valuable commodities such as wood, concrete, petroleum products, and other building materials with the advantage of leverage from the bank and tax advantages from the government. We affectionately refer to this phenomenon as ‘packaged commodity’ investing because the commodity products are packaged into a residential home instead of sitting in a warehouse. The culmination of this strategy lies in the fact that commodities packaged into real estate investments can be rented to tenants. As an investor, this allows you to purchase commodity products while outsourcing the interest payments to a tenant and hedge against inflation with fixed rate debt, while delaying the payment of taxes through a section 1031 exchange.
1.) If the vacating tenant has been a long-term tenant, and you had a good relationship, simply ask him. I bet over the years he’s followed the neighborhood and knows from friends and fellow renters. He can tell you if he thinks you should charge more or less. Feedback from your vacating residents should be ONE piece of the info you assemble to determine.
2.) The quickest way to figure out the market rent is to put your tenant "shopping" hat on and start looking. I observe area rentals (signs, newspaper, etc.), see how they are priced, and watch to see how long they stay vacant. Many times, I’ll even stop by to get up close to see the condition of the investment property. In every case, one that is priced right and sits for very long has "issues".
3.) Another resource is a property manager with local rentals (and a website) who knows what they’re doing. They make the most money by pricing at the top of the market and usually have little interest in discounting unless a property sits vacant for too long. I usually price mine 2% to 5% below their prices.
The caveat with property managers is that some have owners that force them to overprice. That happens fairly often, but it is usually pretty obvious.
It is well known that income producing real estate is one of the best investments you can make. What is less well known is that income producing real estate allows you to get paid to borrow money. At least that’s been the case historically.
The reason for this has to do with the reality of inflation. In times of inflation, your best protection against the declining value of the dollar is high quality, long-term, investment-grade, fixed-rate debt attached to a piece of income producing property. In a nutshell, the right kind of debt is good.
Here’s how it works:
Assume that you purchased a property back in 1979 and that a dollar was actually worth a full dollar ($1.00). Then, thirty years later you find that same dollar worth only $0.24 because of continued inflation (driven by the government’s absurd economic policy).
Although the overall purchasing power of the dollar has decreased over those thirty years due to inflation, the principal balance on your long-term debt is never adjusted in step with that inflation. By paying down your fixed-rate debt with continually CHEAPER DOLLARS than those you originally borrowed with, you are effectively saving yourself a lot of money each and every year.
Now, think about it another way:
Assume you purchased $1 million worth of income producing property with a combined mortgage balance of $800,000. And let’s assume that over the course of one year you didn’t pay down any principal and there was a 4 percent rate of inflation. Your loan of $800,000 would now be worth only $768,000 in terms of real dollars. That’s a reduction of $32,000 in one year!
Is the U.S. housing market truly at a turning point, as real estate investors seem to increasingly believe? Or is this actually a false dawn, meaning that there are problems ahead for those who turned bullish too soon?
New home sales jumped almost 10% in July, while the Case-Shiller home price index rose for the second successive month. Yet luxury homebuilder Toll Brothers lost $493 million in the quarter ending July 31, considerably worse than analysts had expected.
Housing stocks are certainly acting as if a recovery must be on the way. Pulte Homes Inc. has more than doubled from its low. Toll Brothers Inc. is up around 70% from its bottom. D.R. Horton Enterprises is up almost four times from its bottom. Lennar Corp. is up about 4.5 times from its low. Finally, Hovnanian Enterprises Inc. is up almost tenfold from its low after a flirtation with bankruptcy. Yet all of these companies are still racking up quarterly losses, according to their most recent earnings reports.
In terms of house prices, it would seem unlikely that a bear market bottom has been reached. Yes, the average house price is now back down around its long-term average of about 3.2 times average earnings, or only a little above it. But history suggests that markets don’t bottom at their average valuation: In fact, after such a huge excess to the upside, they overshoot on the downside.
I’m sure you know by now that it was the first wave of defaults in “subprime” mortgages that helped spark today’s economic meltdown. What you might NOT know is that there’s a whole second wave of mortgages in the pipeline that are just as toxic and just as large as the first. This second wave may be just as far reaching.
You can see that the first peak in subprime loan “resets” arrived smack dab in the middle of 2008. And many billions in bank write-downs, along with trillions of dollars in market losses, immediately followed.
This second wave of toxic property loans, made up of so-called “option ARM” or “Alt-A” loans, won’t hit peak resets until 2011.
What are these toxic loans? They are the fancy mortgages snapped up by middle Americans to buy homes nobody imagined would be worth only a fraction of their selling price just two years later.
And just like in the subprime wave, these loan contracts also carry a “reset” risk in the fine print, when already high monthly mortgage payments could as much as double — right at the height of the second biggest market meltdown since the Great Depression.
Millions of additional consumers will freeze up as their finances go over a cliff. More bank losses will drag down even more so-called “blue chip” retirement portfolios, and the impact of the consumer bust will get “multiplied” yet again. Millions of additional Americans could lose everything.
Will this present us with new real estate investment opportunities? Very likely. In addition to the large number of foreclosures and bank REOs, most real estate markets around the country will continue to offer investors with low-priced real estate due to an ongoing buyer’s market sustained by excess inventory.
What do you think the upcoming second wave of mortgage “resets” will bring us?
There seem to be signs that the real estate housing market is beginning to recover, leading some to think that income property investment is still profitable. In the southern part of the United States, a 7.1% increase in home purchases occurred during the month of June. Several of the federal government’s 12 regions, including New York and San Francisco, have been showing signs of returning stability and even California and Florida, the States most devastated by the mortgage crisis, are starting to bottom out. However, not every region is experiencing the same growth.
In general, the western half of the United States has not seen the same recovery rate as the rest of the country, and in places like Minneapolis, the situation might actually be getting worse. Nevertheless, the rising rate of unemployment may be preventing many Americans from feeling the recovery. Overall, the economy grew towards the end of 2008. That gave many people hope for the future. However, unemployment has been growing even faster and may reach 11.2% by February of 2010. With numbers like that, many investors are beginning to wonder if an income property investment would be an acceptable way to augment their finances given the fact that income properties are becoming a catch 22 situation. Many investors don’t have enough money to buy investment property, and if they did, they probably wouldn’t need to buy them in the first place.
A catch 22 is a very grim assessment, but one that needs to be factored into any discussion about the income property investment or the market’s. The sad part about all of this is that no one seems willing to broach the topic of bailouts for the individual. In fact, Congress is steadily trying to cut down the length of time that people can file for unemployment benefits. It would be much more reasonable to work on cutting down the unemployment rate. If that was reduced, then it’s reasonable to believe that people wouldn’t need to file for unemployment at all.
At this time, the real estate market is deceptive. Mortgage rates are very low, and it’s clearly a buyer’s market. However, buyers are losing jobs at an astounding rate, and that usually makes it difficult to own a home. The bright side to all of this is that, for the people who already own an income property investment, it is also a landlord’s market. Investors may be faring better than almost everyone else in the country right now.
The hottest buyers housing markets are places you may find comfort in the worst housing crash since at least the Great Depression. The top 10 buyers markets listed by Housing Predictor at mid-year are markets that aren’t necessarily big arts and entertainment centers, mostly found in smaller communities.
Amarillo, Texas takes the first position as the nation’s top buyers market in 2009 with the highest likelihood of housing inflation over the next few years. Austin, Texas and Tucson, Arizona are the largest metro areas to be named to the list possessing the highest probability of growing through the recessionary economy over the next few years. As a high-tech hub, Austin will have what it takes to not only sustain the downturn but see home values inflate.
All 10 markets hold the promise of prosperity in the near future. In the current economic environment there are few areas of the country that will see appreciation this year. The markets named here represent cities that are the most likely to experience housing inflation over the next few years, despite the downward economy and are the best places forecast to buy real estate to make a profit.
The financial crisis dealt a severe blow to the national economy that will take many years to overcome. Unlike any other downturn in real estate since the Great Depression, markets have seen home values decline at record levels. Times have changed as a result, and real estate inflation will take years to return in most areas. Investing for the long term, considered to be 10 years or longer is the best protection for those who choose to take the risk.
The following list of high potential real estate markets may not appreciate in the short term, but have the highest likelihood of long term appreciation making them ideal for purchasing investment property.
Are you still waiting for that perfect opportunity to invest in income producing real estate? How many opportunities have passed you by while waiting for that perfect opportunity? The simple fact is there are good opportunities all the time. Read the following poem written in 1917 and evaluate your current perspective.
I hesitate to make a list
Of all the countless deals I’ve missed:
Bonanzas that were in my grip-
I watched them through my fingers slip.
The windfalls, which I should have bought
Were lost because I over-thought:
I thought of this, I thought of that;
I could have sworn I smelled a rat.
And while I thought things twice,
Another bought them at the price.
It seems I always hesitate,
Then make my mind up much too late.
A very cautious man I am.
And that is why I never buy.
