Wednesday, December 28, 2011

The Unreliability of Home Valuation Websites

           In the shifting sands of today’s real estate market how do you get a true view of the value of a property?
For years, realtors were the gatekeepers to that information.  In fact, supplying a recommendation for what you might sell your property for was part of their job description. An individual could access that information – with painstaking difficulty, visiting the courthouse for tax assessments and for sales prices of comparable properties.
But in today’s instant access to online information – all that has changed.  With the click of a mouse you can visit Zillow or and get an estimate in seconds – with no real estate agent attached.
A blessing for consumers?  Maybe, but it’s mixed at best. Both sellers, buyers and even voyeurs are finding online real estate estimates change at an alarming rate.
In The Fuzzy Math of Home Values on SmartMoney.Com (, Alyssa Abkowitz describes some astonishing examples of inaccuracies on popular home valuation websites. For example, Jason Gonsalvez found his Sacramento home was valued on one site for $550,000  - $200,000 below his mortgage, on another for $640,000. But the real- life appraisal for refinancing was $1.5 million. And that’s just one example: inaccuracies abound. According to Abkowitz, “Evaluations that are 20, 30 or even 50 percent higher or lower than a property’s eventual sale price are not uncommon."
And there can be adverse consequences. An inflated valuation can give home owners an unrealistically high expectation of what their home is worth and make them inflexible on pricing. A too low estimate could encourage buyers to make low ball offers on property they believe is over priced.
So what’s a consumer to do?
Until these websites improve, consider their estimates much like weather predictions, or hot tips on the races; guesstimates at best.  If you want to determine the value of a property – accurately – the best way is the old-fashioned way: find a good real estate agent. 

Friday, December 23, 2011

Are Echo Boomers Holding Back the Housing Recovery?

One reason for the housing slump that has been less discussed is the reluctance of Generation Y (those born between 1980 - 1995) to purchase housing (  Peter Reilly in Forbes has stated that only 13% of Gen Y'ers own homes and only a third express an interest in ever owning one.

Reilly provides a number of reasons for these feelings:

1)  Gen Y'ers are more interested in spending money on experiences like traveling than they are in saving for a home;
2)  Gen Y'ers don't want to be tied down to a specific place for very long;
3)  Gen Y'ers want the amenities of urban living that they can only afford by renting.

I would add a couple of my own:

1)  Gen Y'ers are skeptical of owning real estate because of the recent housing crash;
2)  Gen Y'ers are saddled with education debt, which makes it harder for them to get a mortgage.

Whatever the reason for this generational phenomenon it creates great opportunities for landlords.  Gen Y'ers are inclined to rent so whoever can figure out what types of apartments they are looking for can profit from this trend.

Saturday, December 17, 2011

Addressing Real Estate Agent Critiques in Freakonomics

I just re-read the critiques that Steven Levitt and Stephen Dubner make about real estate agents and I think they need to be qualified.  Levitt and Dubner's point is that real estate agents only gain a marginal benefit by negotiating a higher price for a seller so agents just try to close a deal quickly and leave money on the table for sellers.  To prove this fact the authors reference a study "that found an agent keeps her own house on the market an average ten extra days, waiting for a better offer, and sells it for over 3 percent more than your house."

1)  Refuting myth No. 1 - Keeping a house on a market longer leads to a higher price.

Levitt and Dubner wrote their book in 2005 when the housing market had been booming for several years.  Perhaps at that time leaving a house on the market longer would have lead to a higher price but now leaving a house on the market usually leads to significant price reductions.

2)  Refuting myth No. 2 - Real estate agents are simply looking to close deals quickly so they don't care about getting top-dollar for their seller clients

Everyone has probably met an unscrupulous real estate agent at some point.  They don't last long in the business though and they never make much money.  Successful real estate agents take a long-term approach to the business.  They want to treat every client well because they hope the client will refer them other business and the client will work with them in future years.  An agent's reputation is everything to their business and if they shortchange a client it will significantly harm the agent's business in the future.  Since Leavitt and Dubner are so interested in economic incentives they should realize that real estate agents have the most economic incentive to treat their clients well.

Thursday, December 15, 2011

Petitioning to Remove Private Mortgage Insurance (PMI)

As you hold an investment property you can continually look for ways to reduce costs and boost your yield.  If you put less than 20% to buy the property you will invariably be paying private mortgage insurance.

The good news is that you don't have to wait until you have paid down the principal enough so that it reaches 20% of the original loan value.

After a certain amount of time you can petition the bank to remove the PMI.  Here is a representative case:

After 24 months of on time payments you can request that the bank remove the PMI.  This request is based on the current market value of the property.  In essence what you are saying is that the property has increased in value giving you a current loan to value of less than the required amount to remove PMI (75%).  The one thing you have to pay for is a Broker's Price Opinion or (BPO), which costs $125.  The bank will then hire a broker to do a comparative analysis on the property and see if your valuation is correct.  If it is you will save years of unnecessary PMI payments for an investment of $125.

Sunday, December 11, 2011

Contrasting Views on the Future of the Northern Virginia Housing Market

The Washington/Northern Virginia Real Estate Market has continued to outperform the rest of the country, but can this continue? What forces will shape the real estate market in the immediate future and in the years ahead?
As they gaze into their crystal balls trying to see where the market is headed, pundits – on the upside and downside - highlight outside forces and trends that may be transformational … or not.
On the downside Bryant Ruiz Switzky writing in the Washington Business Journal on 11/21/11, projects the negative effects on the region of automatic federal spending cuts that should go into effect in 2013. These cuts triggered by the congressional supercommitttee’s failure to reach a deficit reduction deal would hit the region hard, according to George Mason economist Stephen Fuller.  Specifically what does this mean for Northern Virginia?  Fuller estimates that cuts in military equipment spending would cost Virginia job losses reaching 122, 770 and $7.2 billion in lost earnings.  Sounds terrible for the real estate market, as well. But most pundits, Fuller included, feel that politicians will find a way around these cuts in an election year.
On the upside a recent analysis predicts that the D.C./Northern Virginia area will add more than a million new jobs by 2030, far outweighing the effects of federal spending cuts. According to Brady Dennis writing in the Washington Post (D.C. area is behind the curve on housing and jobs forecasts, 11/21/11), the study found that based on those projections the region will need as many as 731,457 additional units to house workers in the area where they work.  That means producing about 38,000 new housing units per year. 
Of course, the doomsayers worry that local communities won’t be able to meet the demand for new housing thus causing businesses to relocate to other areas and reversing the employment boom. But that doesn’t have to happen.
It will take planning and innovative new approaches to create communities where people want to live, raise families and work.  But when you think about it, that’s not a bad problem to have to solve. And the benefits to the real estate market will be tremendous.

Tuesday, December 6, 2011

Jim Collins v. Malcolm Gladwell on Success

After reading Great by Choice by Jim Collins and Outliers by Malcolm Gladwell, I've been thinking about their different views of how someone becomes successful.

In Outliers, Malcolm Gladwell emphasizes the importance of luck to the success of many great people.  For instance, he describes how lucky Bill Gates was to have access to a computer at the University of Washington when he was in high school.  Computers were a rarity in those days.  Gladwell also informs us that the Beatles were lucky to be given the time to hone their craft for so many hours at clubs in Hamburg, Germany.  Performing 8-10 hours a day in Hamburg enabled the Beatles to get to the necessary 10,000 hours of practice necessary for excellence.

Gladwell raises a good point.  Gates, the Beatles and others had some very special opportunities afforded to them.  However, his analysis undervalues the efforts that these extraordinary individuals put in to achieve mastery in their fields.

Jim Collins does a good job of quantifying the importance of those efforts.  He calls it return on luck.  In studying how great companies flourish in uncertainty, Collins determined that great companies and their competitors both experienced good and bad luck.  One of the things that made the difference between them though is the efforts they took to take advantage of the good luck and minimize the damage from the bad luck.  Based on the "fanatic discipline" and "empirical creativity" of their leaders the top companies excelled in turbulent times.

You can see this in the example of Gates and the Beatles as well.  Gates took advantage of the availability of a computer at the University of Washington from 3 am to 6 am in the morning to practice programming.  That was fanatical.  Sure he was lucky to have that opportunity but no one else wanted to do that.  It was an enormous sacrifice and extremely disciplined.  We can't discount that.  The Beatles also worked exceptionally hard.  Bands weren't just lining up to play 8-10 hour gigs in Hamburg for several months straight, for meager compensation.  But they worked that hard because they felt they needed to in order to succeed.

Both authors have contributed much to this field.  I guess the lesson is we should be grateful for the opportunities that come our way and be prepared to take the most advantage of them that we can.

Monday, November 28, 2011

Home Affordable Refinance Program (HARP) Take 2

If at first you don’t succeed in helping underwater homeowners … create HARP II.

In an attempt to help the millions of homeowners who are underwater on their mortgages, the government recently announced changes to HARP, the Home Affordable Refinance Program (aka the Making Home Affordable Program). 
Why the changes?  The 2009 HARP program was a huge disappointment.  Positioned to assist more than 9 million U.S. households – HARP has helped less than a million homeowners in the past three years. To give you just one example: over 60% of homeowners who sought help through HARP in California failed to get it and slipped into foreclosure according to one survey.
Today the housing market continues to deteriorate across the country and more than one in five homeowners are underwater on their mortgages. Even here in the Northern Virginia/DC market, which has had the top value gain in the country during the past year, more than 25% of homeowners are underwater.  According to one estimate that’s over 280,000 homes that would be short sales if they sold this year.
 Hoping to eliminate problems with the original plan and to allow many more troubled homeowners to refinance at today’s historically low interest rates, the Obama administration brings us HARP II.
So is HARP II better?  In an October 24 article in the Washington Post, Government announces new program to help ‘underwater’ homeowners, Zachary A. Goldfarb and Scott Wilson define the biggest problems of HARP I: borrowers who owed more than 125% of the value of their house were excluded; high upfront fees made refinancing impossible for many, and ‘banks were concerned that they might be held financial responsible if borrowers who refinance end up defaulting.’ 
To address these problems HARP II eliminates the LTV requirement – so there’s no cap on how much a borrower can owe; reduces fees and ensures that banks that refinance will be largely cleared of liability.
            The hope is that these adjustments to the program will help one million underwater homeowners to stay in their homes. That would reduce foreclosures, help stabilize home prices, and free up cash for consumers to spend, thus benefiting communities all across the country.  Hopefully this time they got it right!
For an in-depth look at all the ins and outs of HARP II we suggest Dan Green’s November 22 blog on The Mortgage Reports.  

Sunday, November 20, 2011

How Do I Know What A Property is Worth?

David Crook gives a very useful explanation of figuring out value from his book, The Complete Real-Estate Investing Guidebook.  

The best way to determine a building's worth is to figure out its capitalization rate or "cap rate".  This is the ratio between what the building costs and what it makes.  The cap rate is determined by dividing the yearly net operating income (nonmortgage expenses)/the purchase price.  If you had $26,000 of net operating income and a purchase price of $400,000 then you would have a 6.5% cap rate or return on your investment.  

This would be your return if you bought the building with all cash.  The higher the cap rate, the higher the return.  This is why the purchase price is so important.  Non-mortgage expenses don't change particularly but sales prices do.  The cap rate tells a real estate investor what a P/E ratio tells an investor in stocks. 

Another less accurate approach is the gross rent multiplier which is the price/yearly gross income.  Buyers want as low a GRM as possible.  This metric does not factor in costs though so you shouldn't rely on it alone.  

Thursday, November 17, 2011

Nationwide Construction of Apartments Growing Quickly

The Washington Post had a great article today about how construction for rental apartments is growing steadily:

Evidently, over the past year building permits to build rental apartments are up 63%.

What does this mean?  Developers are recognizing what a strong rental market there is.  They are also taking advantage of low borrowing costs.

This just reaffirms what we have been saying that there is still value out there in owning rental properties.  Eventually the scale will tip and there will be too many rental properties, which will bring down rents.  Until then, we'll be sharing the best way to take advantage of this market inefficiency.

Wednesday, November 9, 2011

Planning for Success: Developing a Focused Strategy

     When investing in rental properties you should decide up front the type of community and asset class that you will invest in, and clearly define your competitive edge – what you are offering tenants that sets you apart. Understanding these strategic fundamentals will help you stay on course and focused on growing your business.
So what type of community and asset class will you choose? Both will depend on your prospective tenants: where they work, their income level, what they are looking for in a home; and on your financial projections. Your guides will be your market analysis and our cardinal rule of investing: The rent you are able to charge should cover your mortgage and related costs (taxes & condo fees).  
Let’s use the market analysis we did for Northern Virginia in the spring of 2011 to determine type of community and asset class. 
According to our analysis Northern Virginia has a large pool of highly educated workers who are drawn to the area to fill well-paying jobs. Many come for short-term consulting projects and are seeking to live in safe communities with good public schools.
To meet the needs of these prospective tenants we would target upscale communities, which also have high occupancy rates and above average rental increases.
As for asset class our cardinal rule steers us away from condos, which have higher monthly fees and towards townhomes or single-family dwellings. And, it guides us to choose newer properties – built within the last ten years – which have low maintenance and require less updating and command higher rental rates.
This strategy also gives us our competitive advantage. Why should renters choose our properties? Because we are offering what they want: upscale communities, high-quality amenities, newer or updated properties, reasonable below market rents, and engaged and responsive property management.
            As you move ahead you may change your strategy and focus on a different asset class and other communities.  But be sure to have a clearly defined strategy behind your changes, to abide by the cardinal rule, and to maintain your competitive edge.        

Saturday, October 29, 2011

Your Personal Home is NOT An Investment Property

David Crook wrote an incredible book called the "Wall Street Journal Complete Real-Estate Investing  Guidebook".  If there is any real estate investment book everyone should read this is it.  I'll be writing a few pieces inspired by his book.

A first really good point that he makes is that most people think of their personal home as an investment property but it actually isn't.  This is because as Crook says, "[y]ou are more likely to spend far more money living in your home than you will make when you sell it."  Investing is using your money to make more money.  Anything else is spending.

To be an investment property it must cover all of its costs and produce a return on the money you invested (or cash flow).  Quite often homes end up costing more than they produce even in appreciation.

Take Crook's example of someone who bought a home for $200,000 in 1990 and sold it in 2006 for $650,000.  In this scenario they spent about $234,000 of after tax money on interest or half their gain.  A kitchen remodel, which was supposed to increase the value of the property so much was actually a money loser especially since it was paid for with borrowed money.  So don't repeat the mistakes of the last decade and think that you are "making" a lot of money on your personal home.  With 5% interest rates and 5% annual appreciation you are breaking even at best.

Monday, October 24, 2011

Planning for Success Step One: Market Analysis

To invest successfully in rental properties you’ll need clearly defined long-term goals and a well thought out plan or strategy to achieve your goals. This plan will keep you focused and enable you to weather the ups and downs of a cyclical market.
How to begin? Strategies will differ depending on the location you choose and its demographics. So after you’ve set your goals, step one of your business plan is to analyze your market. That will include researching: property values; employment status; prospective tenant pool; and the rental market.
Here’s a sample of a market analysis we did for Northern Virginia in the spring of 2011. 
Property values: Due to the many distressed sales in Northern Virginia, properties are available well below intrinsic market value.
Employment status: The employment climate in Northern Virginia is one of the strongest in the nation and is projected to continue to grow for the foreseeable future. Employers, including government agencies and high-tech firms, provide well-paying jobs for highly educated professionals.
Prospective tenant pool: A large number of highly educated workers with specialized skills are drawn to the area to fill these jobs.  Many come for short-term consulting projects. Due to the transient nature and mobility of the work force, many professionals are seeking high-end rentals.
Rental market: The current economic environment has created a high demand for rental properties. At the same time there is limited housing stock for rental properties due to lack of available land for development. The results are high occupancy rates, above average rents and above average increases in rent.
Once you understand the market, you’re ready for step two of your strategy.  Next time we’ll look at how to choose the types of communities you will target, the asset class that works best for you, and how to establish your competitive edge. In other words, what you will offer tenants that sets you apart from the competition. And we’ll examine our cardinal rule for determining the right price for a property: The rent you are able to charge should cover your costs: principal, interest, taxes, insurance, condo fees, vacancy costs, and repair costs. 

Tuesday, October 11, 2011

Is it a good time for you to buy investment rental properties?

According to some experts there’s money to be made- today’s undervalued properties offer bargains of a lifetime.  Others insist there’s money to be lost -today’s real estate market is poised for a bigger drop. Throughout history fortunes have been made in real estate over the long term - whatever the short-term market does. Conversely, during the exact same time periods fortunes have been lost. So, is it the best of times? Or is it the worst of times to invest in rental properties? How’s an investor to know?
Not surprisingly to answer that question you need to think of real estate investment as a business venture and take a long-range perspective. Because your investment goals, your time frame, and your game plan to achieve your goals will determine whether or not it’s a good time to invest. 
            The steps are simple: First - Define your goal: what exactly are you trying to achieve? Second - Delineate your time frame: Where do you want to be in five years – in ten? Third - Develop your game plan: What steps will you take to achieve your goal?
            And to be successful your long-term strategy should include:
·      Making informed and focused investment choices
·      Choosing optimum locations
·      Targeting your customers
·      Establishing your niche and competitive edge
·      Planning for cyclical changes
That means watch the market. If you buy when there’s a need for more rentals, and then the cycle changes and there are more buyers and fewer renters, then it may be a good time to sell into the rising market.
It’s key to have a well-defined plan and stick to it. If you do, then whether the market is on the rise or on the downturn you’ll prove the naysayers wrong.
 Next time we’ll be looking at key strategies in buying rental properties.  We’d love to hear what’s worked for you!

Tuesday, October 4, 2011

Downsides to Real Estate Investing Through A Self-Directed Roth IRA

Some of the benefits of investing through a self-directed Roth IRA can also have a downside.  Since you don't pay taxes on the rental income or capital gains in your Roth IRA you can't take advantage of the tax benefits of real estate investing.  This means that you cannot benefit from depreciating your property, which can be extremely lucrative.  In many cases, property owners make more money on the tax savings from depreciation than they do on the rental income.

Offsetting your rental income with expenses from mileage and other costs really don't have any benefit either.

Lastly, the ability to avoid capital gains taxes through a 1031(b) exchange does not help an investor in a Roth IRA.

In addition, there are strict rules for real estate investing through a Roth IRA.  If you don't follow these properly you can lose the protected status of the money and have to pay an early withdrawal penalty.

Consider the positives and negatives carefully when deciding whether to buy real estate in a self-directed Roth IRA.

Sunday, October 2, 2011

Never Pay Taxes on Your Investment Property Income Again – The Self-Directed Roth IRA

A very savvy real estate investor and friend, Ramesh Chandra (,  
shared with me a little-known way to avoid paying any tax on your real estate investment income. 

The tax laws allow you to purchase real estate investment property in a self-directed Roth IRA.  This is a little known fact because most brokerage firms offering Roth IRAs limit  what you can invest in to equities, bonds, mutual funds, etfs and other traditional financial instruments. 

You can find brokerage firms, though, that will permit you to buy the other assets that the tax laws allow.  (One of the most well known is Equity Trust -  These include real estate investment property, notes, partnership interests, some collectibles, etc. 

There are several benefits.  Since you have put in post-tax money to your Roth IRA, any additional income you make off your investment property will never be taxed again.  The rental income will never be taxed and the appreciation will never be taxed.  You can’t take the money out for personal use of course before retirement age but quite often you want to hold investment property until retirement age anyway. 

Then you don’t have to worry about doing a 1031 exchange when you sell the investment property because there are no capital gains taxes. 

This is a complicated area so we’ll do our next post on the downsides of investing this way and some of the rules you have to be wary of when you make this move.  

Thursday, September 29, 2011

Importance of Real Estate Mentors

As you are getting started in real estate investing you are going to have a lot of questions and concerns:

1)  How much should I charge for a late fee?
2)  When should I send a notice to quit?
3)  Do you know how to fix a leaky toilet?
4)  Did I make a horrible mistake?
5)  When should I sell?
6)  What accounting software is the best?

You'll be confronted with these and other similar thoughts at some point.  A book and even the best blog won't really be able to answer them.    

This is where a real estate mentor comes in handy.  They can commiserate with you when tenants are being high maintenance or refusing to pay.  They can advise you on basic repairs and share a few war stories that will reassure you that everything will turn around.

It shouldn't be too hard to find someone like this.  Surprisingly many people you already know will probably have their hand in real estate in one way or another.  So learn from their wisdom and optimism and be prepared to reciprocate for someone else when you have a little experience under your belt.

Wednesday, September 21, 2011

Investors in Rental Properties Transforming Neighborhoods

The contributions of small real estate investors to communities are often overlooked. In fact among the general public many misperceptions exist. Some think of investors in rental properties as harming neighborhoods even as slum landlords harming tenants.
The opposite is true. Turning a distressed property, be it condo, townhouse or single family home, into a renovated rental property has big benefits for any community. As empty homes are reclaimed and rented, neighborhoods improve, prices rise, and the perception of the neighborhood as a good place to live and raise a family rebounds. Over the years this has proven true in inner city areas from Savannah, Georgia to Capitol Hill. And it is small investors working property by property – not the fat cats – who have began these grass roots transformations.
And how do small investors benefit renters in the Northern Virginia area? They provide nice affordable homes for individuals and families including: recent graduates starting their first job, professional consultants in the area for short term work, older people transitioning from larger homes, and families who have been foreclosed on and need a new start in life.  
In his excellent article, The Value of Real Estate Investors to a Community, Peter Giardini lists six contributions real estate investors make to local communities. Be sure to read this great post. ( He encourages real estate investors to publicize these benefits.
Why does it matter? At the moment the administration is considering plans to lend money only to huge real estate investors, excluding the small investors.  We need to explain why the small real estate investor also needs access to capital so that we can continue to play our unique role in transforming neighborhoods and helping individuals and communities rebound.

Tuesday, September 13, 2011

Quick Primer on Debt/Income Ratio

As soon as you start to acquire some rental properties, you will realize that understanding how to finance more acquisitions is extremely important.

Getting access to capital has gotten more difficult in the recent downturn and on a micro level it is indicative of why it is difficult to turn the economy around.  There are good buying opportunities but investors can't get the financing to purchase them.

One calculation that you have to be aware of is your debt/income ratio.  This calculation compares your monthly debt payments to how much income you make.  Most lenders won't let this go above 36%.
You have to include in your debt payments the principal, interest, taxes, and insurance for the home plus car payments, student loans, credit card payments and other recurring debt.

This ratio could make it pretty difficult to buy more than a property or two as an investor because the PITI (principal, interest, taxes, and insurance) payments will be great than your income.  However, once you have two years of rental income on your tax returns that money will be added to your income in the debt to income ratio.  This means that you can borrow more because you have more income.  It is helpful to be able to show that your future purchase will have positive cash flow as well to please the lender.

Take this ratio seriously and make sure you can pass these requirements and you'll be ready to add more properties to your portfolio.

Monday, September 5, 2011

Refinancing Booming But Lenders Stretched Thin

With mortgage rates hitting historic lows, the refinance boom has returned.  The San Francisco Chronicle documents a new problem with the topsy turvy lending market though (  Because of all of the layoffs in the lending industry, there aren't enough knoweledgeable people at these institutions to process the increased volume.

This raises serious concerns about the Administration's plan to allow underwater borrowers to refinance:
Hopefully, this will be a boon to mortgage industry hiring and get a lot of people back to work.

In the meantime, anyone who can should take advantage of amazing low rates and contact my good friend
Richard Moroscak ( to find out more. 

Friday, September 2, 2011

Administration Wants to Let Underwater Borrowers Refinance

With the housing sector threatening to tip the economy towards another recession, the Obama Administration is looking for ways to assist struggling homeowners. 
Just how bad is the housing market? In July home foreclosures reached 212,764. And according to some estimates 11.1 million mortgages are underwater. This means that more than 23% of US homeowners owe their banks more than the underlying properties are worth.  Many of them will end in foreclosure.
To remedy this bleak picture the White House is considering proposals for another housing assistance program this one aimed at refinancing mortgages.  Writing in Marketwatch Greg Robb (Plan to kick-start housing wins Jackson Hole Nod) contends that Glenn Hubbard, a former top economic adviser to President George W. Bush and now dean of the business school at Columbia University, has presented the most concrete proposal to the White House.  With mortgage rates low, his plan would allow any homeowner who is current on a government-backed mortgage to refinance even if the home’s value was less than the current mortgage amount. With 75% of GSE borrowers holding a 30-year fixed-rate mortgage of 5% or more, this could significantly lower homeowners monthly payments. The hope: it would prevent them from falling behind in their payments and enable them to spend more. Hubbard claims his plan “would help up to 37 million borrowers and act as a long-lasting tax cut that would add $70 billion per year to spending.”
Of course, it’s not a great plan for bondholders who would get lower returns. And the 11.1 million who are behind in payments won’t be eligible.
Whether or not this plan becomes a reality remains to be seen.  But interestingly it has won support from many economists attending the Federal Reserve’s Jackson Hole policy retreat. That could be because the options of boosting the economy are becoming extremely slim.
            Let us know your thoughts on this latest proposed housing assistance program. Do you think it would actually get to the root of the problems facing the housing market? 

Saturday, August 27, 2011

President's Plan to Rent Out Freddie and Fannie Owned Properties

So just how do we dispose of hundreds of thousands of foreclosed properties? That’s what the Obama administration is trying to figure out.
Faced with roughly 290,000 government-owned foreclosed homes and a limited number of buyers (according to the Center for American Progress Article - Renting our Way Past the Home Foreclosure Crisis: ) the White House announced on August 10 that they’re asking for suggestions from investors.
The basic idea: to sell many of the properties owned by Freddie Mac and Fannie Mae to investors who would rehabilitate them as energy efficient and affordable rentals. The benefits include:
  • Stabilizing home prices by reducing the glut of foreclosures overshadowing the market
  • Improving neighborhoods by turning deteriorating empty houses into rentals
  • Create much needed affordable rentals
  • Provide construction jobs and increase the demand for homebuilding materials
  • Build more energy efficient homes  
The down side?  If the process isn’t handled well as rentals are bundled and sold to investors, it could end up being another boondoggle that benefits only hedge fund managers. Thus far the Administration doesn’t have a great track record – previous real estate fixes such as the loan modification plan have had questionable success.                
The effect on small investors? Yet to be seen. We’d welcome any thoughts you might have on how the small real estate investor could participate in shaping the program and in taking part.

Tuesday, August 23, 2011

Psychic Benefits of Real Estate

Malcolm Gladwell wrote a really good piece on Grantland about how the psychic benefits of owning an NBA team convince team owners to pay significantly more to own a team than the assets and revenues justify:

It got me thinking about how this principle applies to real estate.  From a purely economic view point, the value of a piece of property is the present value of the discounted cash flow from the rental income you can generate from the property.

From a simplistic view point, if your monthly rent exactly covers your payments for principal, interest, taxes, insurance, and any home owners' fees, the size of your mortgage is about the market value of the home.

Very few properties meet this test though.  When friends express their concerns about wanting to buy property they are worried about it losing value, I suggest they look for properties that they could cover their costs as a rental if they needed to move out.  They reply that they can't find anything near that price where they want to live.

Evidently, there are psychic benefits to owning real estate as well that increase the prices well beyond their discounted cash flow.  There is a certain prestige associated with living in certain areas.  The joy of a short commute or a good school system come into play.  However, when you are buying investment property forget the psychic benefits.  Focus on the numbers.  If they make sense economically you will reduce your risk and you won't worry about the fluctuations in the psychic value of your property.

Wednesday, August 10, 2011

Standing Up For Your Business

The good folks at Bigger Pockets wrote a great piece about how real estate investing takes you out of your comfort zone:

This article got me thinking about how you really need to stand up for your business to make it successful.

The number of people that will try to push you around when you get started can be too large to count:

1)  The seller may try to hide as many defects in the property as possible;
2)  Potential tenants may try to avoid paying security deposits;
3)  Current tenants may be late in paying rent and ask you to waive late fees or avoid paying at all;
4)  Contractors may try to fleece you for repair costs.

All of these people will try to use guilt to make you feel sorry for them and give them what they want.  It is a common manipulative tactic to try to make someone else feel bad when you have done something inappropriate.

Stay strong.  It is not "nice" to allow someone else to take advantage of you.  In fact, the kindest thing you can do is to stand for principle and hold them to their commitments.  This is treating them with the utmost respect.  You are seeing them as someone who has the ability to honor their obligations and teaching them a lesson that there are consequences for violating agreements.

They will respect you for your courage and your business will flourish.  Just another side benefit to entrepreneurialism:  personal growth.

Friday, August 5, 2011

Let's Get Some Cash Out Baby: The Basics of a Cash Out Refinance

With sincerest apologies to Katy Perry - we thought it was important to let beginning investors know about a way for them to free up their capital enabling them to buy additional properties.

It can be very frustrating when you are just getting started in investing.  You see a multitude of good opportunities all around you but you only have so much cash for a down payment.  Once you have purchased a property or two your cash is then tied up in the property and you can't get it out.

One way to free up that capital is called a cash out refinance.  Once you have paid down the mortgage enough or the property has increased enough in value, you can exchange your old mortgage for a new one.  The trick is that now you have more equity in the property you can receive the additional amount of the loan above and beyond what you need to pay off the old loan in cash.

That way you can get your initial down payment out of the property and use it to buy another one.  Then you literally have put no money into the investment and your return on a zero investment is looking exponentially better.

How does this look in real life?

Let's say you purchase a property for $100,000 and put 10% down ($10,000).  Then over the course of a few years the property increases in value to $140,000 and you have paid an additional $5,000 down on the principal of the loan.  So the loan is sitting at $85,000 and you have $55,000 worth of equity.

You can do a cash out refinance and replace your old mortgage of $85,000 with one for $100,000.  After paying off the old loan there is $15,000 left that goes straight to you as cash.  You can then make your next investment.

There are risks involved with this of course.  If the property goes down in value you have taken out a lot of your equity.  So it is important to do this when the property value has made a solid and stable increase in value.

In addition, there are fees associated with refinancing so you have to weigh those in to your decision.

Plus, lenders are getting much more strict about doing these refinances.  You need to show that you have a 25% Loan to Value (LTV) ratio before they will let you take any cash out.  Furthermore you will have to pay for the appraisal fee to show that the property has increased in value enough to justify the Loan to Value ratio.

This is just another tool to be aware of as you try to maximize your ability to acquire more properties at the right time.

Sunday, July 31, 2011

Review of Jim Collins' How the Mighty Fall

Jim Collins' How the Mighty Fall ( is a gem with a lot of lessons for real estate investors.

We never want to think about it but Collins reminds us that just about every great company eventually has a severe decline.  According to Collins' research there are five stages of decline:  1. Hubris Born of Success; 2. Undisciplined Pursuit of More; 3. Denial of Risk and Peril; 4. Grasping for Salvation; 5. Capitulation to Irrelevance or Death.  

Companies can take varying times to work their way through these stages and many turn around during this period of decline.

The Undisciplined Pursuit of More is particularly relevant for real estate investors.  Let's be honest, doing a deal is really fun and it is easy to imagine how much money we are going to make by accumulating more properties.  When considering your next purchase though remember some of what Collins says:

Big does not equal great.  Do not become addicted to scale.  Don't try to grow at an unsustainable rate.  Leave some growth on the table.  Ask yourself these three very important questions:

1)  What is the upside if events turn out well?
2)  What's the downside if events go very badly?
3)  Can you live with the downside?

If you weigh these questions carefully, make your decisions based on empirical evidence, and keep some  cash to get you through the lean times you'll make wise acquisitions.  

If you have any book suggestions that would be helpful for real estate investors we would love to hear your advice.

Monday, July 25, 2011

Entrepreneurial Qualities

            Dozens of articles have been written on what it takes to be a successful entrepreneur. Some list three essential characteristics, some as many as twenty-five. Oddly, few agree on the mindset one needs to succeed in a business of one’s own. But, because an entrepreneur must take the lead in starting a new business, I’ve adapted a favorite definition of leadership from Stand up, Speak out, Take the Lead by Mary Ann Livingston and applied it to create a profile of an entrepreneur. 
     “A leader must have:
·      A vision;
·      A concrete plan or road map to achieve that vision;
·      The ability to communicate that vision, and to persuade other people to buy into the vision.
·      And the persistence to lead them step-by-step through tough challenges until the vision becomes a reality.
Above all: Leaders must care.”
            Certainly an entrepreneur has to have a clear vision for his business. He has to have a concrete business plan to achieve his vision.  He has to communicate his vision and persuade others to back his plan.  He has to have the persistence to keep on through tough challenges – leading others – until the vision becomes a reality.  And above all, an entrepreneur must care about his business.  He must care enough to work hard and work smart – sometimes around the clock.  He must care about his customers. He must care enough to be willing to listen, adapt and change to meet customers’ needs better than anyone else. He must care about the product or services he offers.  He must care enough to be always working to improve.
                 And extremely important, as Charley Gould reminds us, “Entrepreneurs must have access to adequate financing.”
                 If you add to the mix the mindset that learns from failure, insists on success, and enjoys the journey – you’ll find a business owner who is unstoppable.

Tuesday, July 19, 2011

Guest Blog by Peter Accolla - Closing Tips

Don't Make That Big Deposit or Transfer 
What You Need to Know If You're Buying a Home!
You've probably heard the saying, "When you fail to plan, you plan to fail." That is especially true when it comes to buying a home today. Underwriters are following strict guidelines–and that means even things like bank deposits and transfers are under scrutiny.

Here's some insight on how underwriters analyze bank statements...and what you need to know and do (or not do) during the loan process.
Today, many banks require an explanation and proof of source of funds for any large non-payroll deposits that are listed on a bank statement. What is deemed a large deposit is largely determined by the underwriter and can be as low as a few hundred dollars. The reason for the underwriter's concern is that an applicant may be borrowing money from individuals, or accepting money from an interested party to the transaction, to help with the settlement costs.

It's easy to see how this bank requirement can create a lot of frustration, especially for people who are used to moving money between their accounts, which many of us do today. The key thing to remember is that anyone applying for a mortgage should avoid transferring money between accounts or making large non-payroll deposits during the home buying or selling period. While that may feel like an inconvenience, the time and headache you'll save yourself from having to account for all your deposits will be worth it.

Let me know if you have any questions at all about this or if there's anything I can do to help you at this time!


Peter S. Accolla II

Mclean Mortgage Corporation
Phone: (703) 738-0912

Thursday, July 14, 2011

When Buying Property Don't Pay Closing Costs

Just when you thought you have enough money to buy an investment property you learn about the closing costs you have to pay at the closing date.

These costs can be substantial:

1) Title insurance for the lender and the owner can add up to almost $2,000;
2)  Transfer Taxes (yes -- local governments tax you for merely buying property) vary but can be 1-2% of the purchase price;
3)  There is a government recording charge of $100 to record the required documents at the registry of deeds;
4)  A House location survey of $275;
5)  Termite inspection of $35
6)  Loan origination fees and appraisal fees can total close to $840.

The average title, insurance, and lending charges at closing in Virginia is $3,000

Your transfer taxes and recording fees can add up to several thousand dollars more.

In addition, you need to prepay a number of things for the lender including a mortgage insurance premium if you are required to carry mortgage insurance, homeowner's insurance, property taxes, and homeowner's association or condo association fees if there are any.

The bottom line is that you have to bring a lot more cash than you are expecting to closing to pay all of these costs.  It can be a real barrier to buying a property.  So one way to minimize this expense is to have the seller pay as many of these closing costs as you can convince them to.  When you are negotiating the seller down from their listing price ask them to pay the price reduction out of closing costs instead of actually reducing the purchase price.  This is because you have to bring cash for the closing costs and a higher purchase price just means a slightly higher monthly payment on your mortgage.  You won't really notice the higher mortgage payment but you will definitely notice giving up thousands of dollars at closing.  So avoid it at all costs.

Monday, July 11, 2011

Four Reasons that New Businesses Fail and How to Avoid Them

Small businesses are the backbone of the US economy. Just how important are they? According to the Small Business Administration, small firms:
·               Represent 99.7% of all employer firms
·      Employ half of all private sector employees
·      Generated 65% of net new jobs over the past 17 years.
And in 2009 during the current recession: an estimated 552,600 new employer firms opened for business. But the story doesn’t always end happily. Thirty percent of new employer firms fail within two years, 50% within five years, and only 25% stay in business for fifteen years or more.
A close look at key reasons new businesses fail reveal important steps entrepreneurs can take to make sure that they are among the survivors.
Writing in Financial Edge, Michael Deane describes how to address six main reasons that businesses fail (Financial Edge October 29, 2010).  Let’s examine the four reasons that most clearly apply to real estate investing.
1.     Poor market research.  It is key to carefully investigate your market. For investors in rental properties that would include learning the occupancy rates, rental rates, average yearly rental increases, employment statistics in the area, and worker demographics.  And also to assess any trends or future plans such as large employers moving in or out of the area, government programs, new public transportation (metro or commuter train stops), to name a few.
2.     Inadequate business plan.  It should come as no surprise that poor planning is a key cause of business failures. To be effective your plan should include financial projections as well as your target customer, how to reach them, what differentiates you from the competition.  You should develop short term and long range goals, envisioning where you want your business to be in five, ten, fifteen years.
·      The SBA website has tools for filling out a solid business plan.
3.     Too little financing. You will need enough money to cover problems such as unexpected repairs or assessments, tenants who are late paying rent, and vacancies.
4.     Expanding too fast. When it’s time to expand, Deane points out “you should treat the expansion as if you’re starting all over again” with the same careful planning, financing, and long range goals. Otherwise, the expansion could threaten your original business.

One other factor that can make or break your business is whether or not you have an entrepreneurial spirit. Are you a risk taker? Can you cope/function when things go wrong? Are you willing to do whatever it takes to make your business a success?
Soon we’ll be looking at the key qualities of a successful entrepreneur.  In the meantime send in your ideas on what you feel an entrepreneur needs to succeed. 

Wednesday, July 6, 2011

Great Book: Drive by Daniel Pink

Occasionally, we will digress from traditional real estate topics to review some truly revolutionary books.
Drive by Daniel Pink fits right into that category.  He turns traditional thinking about how we motivate employees on its head.  In his book he shows that traditional carrot and stick motivators do not bring out the best in employees and in fact may have a detrimental impact on their productivity.

Equally as important as compensation are qualities like autonomy, control over your work, purpose, and creativity.  Along with these insights, Pink introduces the reader to concepts like Flow - when we reach that state of joy and focus through work.  Anyone who has played a sport can connect with that concept also referred to as being "in the zone."  When you lose track of your surroundings and perform your task with ease.

Pink also suggests some other great books that explore this topic, which is a very thoughtful gift.  They all sound very intriguing and he is generous to share this additional wisdom with the reader.  You can tell he genuinely cares about the reader's development in this new area of motivation.

This book has a lot to teach us about the entrepreneurialism involved in real estate investing.  So much of what makes doing this worthwhile are the autonomy, control, creativity, and purpose that come from running your own small business.  It is amazing but you can lose track of time doing the accounting for your small business because it is yours and you are investing in yourself.  Take a look at Pink's book.  It is a quick and enjoyable read that will enrich your life and your business.

Wednesday, June 29, 2011

Expenses to Consider When Buying a Rental Property: It's a PITI

The really nice thing about figuring out whether you can make money on rental real estate is that there aren't that many expenses to factor in.  Generally, all you need to consider is Principal, Interest, Taxes, and Insurance or (PITI).

These are the principal and interest portion of your mortgage payment, the property taxes, and the homeowners' insurance.  There may be a monthly condo fee or homeowner's association fee that you need to add in as well.  Lastly, you should expect some money to be spent on repairs even if you do them all yourself.  Probably 10% of the rent per month is a safe estimate.

All you need to do then is compare whether the rent you will receive (plug in the address for the potential property at to find out local rental rates) will exceed PITI + condo fees + expected repairs.  If so, then you have a cash flow property on your hands.

Sunday, June 26, 2011

Major Obstacle to Real Estate Investing: Tightening Credit

It should be the best of times to invest in rental properties. There are a huge number of undervalued properties on the market, and more foreclosures waiting in the wings.  The demand for rental properties is growing fast as fewer people can afford to buy, and even affluent buyers sit on the sidelines waiting for the market to stabilize. And in Northern Virginia – where the unemployment rate dropped in May – the picture is bright.
But tight credit is making it difficult for investors to purchase rental properties.
New investments in rental properties benefit the real estate market by lowering the number of foreclosed properties, providing much needed rentals, and helping to stabilize the housing market. Knowing this, you would think that the government would be developing plans to support real estate investors and loosen credit. Instead, proposed government regulations – 367 pages of them – aimed at preventing the excesses that caused the 2008 housing collapse and reinvigorating the housing market, may actually have the opposite effect. 
By raising the down payment to 20%, the new exemption for “Qualified Residential Mortgages”, being proposed by six federal regulators, could sideline many creditworthy buyers and further depress the struggling housing market. 
(See: John W. Schoen, Proposed rules could shut many out of housing market, 6/10/11)
How will this affect commercial and multifamily real estate transactions?  According to the Mortgage Bankers Association, the tighter rules on QRMs will affect the flow of capital back into these markets. And that means tighter credit.
Happily opponents aren’t going down without a fight. Thanks to the efforts of a coalition led by the MBA, the government agencies backing QRM have agreed to extend the deadline for commenting on the proposed exemption to August 1.
Stay tuned.

Wednesday, June 22, 2011

Fannie/Freddie and FHA Loan Limits Set to Expire in September

Here is a Guest Post by Richard Moroscak, Senior Lending Officer at 
Southern Trust Mortgage (

Richard is an expert on lending and he alerted us to a looming deadline 
that all real estate investors should know about.

The loan limits for the Government Sponsored Entities (GSE) 
(Fannie Mae/Freddie Mac) and Federal Housing Authority (FHA) are 
set to expire on September 30, 2011.  This means that unless Congress 
extends the legislation in the next month or two, these loan limits 
will automatically drop to 115% of the median home price in our area 
and they will be capped at a $625,500 loan amount, from a current limit of $729,750.    

This change will restrict liquidity and make it more expensive for buyers to 
purchase homes.

Buyers should keep this deadline in mind and arrange their financing well in 
advance of September.  

Richard is a great resource for discussing this and any other financing issue with.  
His contact information is below:

Richard J. Moroscak Jr.
Senior Lending Officer
Southern Trust Mortgage
Greater Washington Region
Cell: 202-256-9505  Direct: 703-663-9755
Fax: 866-878-4918