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 www.rentometer.com 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, msnbc.com 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 (richm@southerntrust.com).


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
richm@southerntrust.com
www.southerntrust.com/richm 

Monday, June 20, 2011

Lessons on Perseverance from Rory McIlroy

In case you missed it, 22 year old, Rory McIlroy from Northern Ireland had one of the greatest turnarounds in any sport on Sunday at Golf's US Open.

Just two months ago he took a several shot lead going into the last day at the Masters and ended up in 15th place at the end of the day.  He had a meltdown of historic proportions.  On the 10th hole he hit a house and ended up with a score of 80.  Abysmal for a professional golfer and especially one who had been leading for several days in the tournament.

Fast forward to last weekend at Congressional Country Club in Bethesda, Maryland.  Rory lead the field at the end of every day of the tournament.  He dominated the tournament, breaking all sorts of records and winning by 8 strokes over his nearest competitor.  How did he do it and what lessons can we take from the experience for business?

1)  Be humble:  After the Masters, Rory was gracious to a fault.  Instead of storming off the course in a rage he answered question after question from reporters about his painful loss.  He admitted it was a very difficult experience but he expected it to be a learning experience.

2)  Take stock:  Rory said he really thought about what changes he needed to make to endure the pressure of leading at a Major golf tournament.

3)  Double down:  Instead of holding onto the past Rory became even more committed to winning and he played so well that it was basically impossible for anyone to catch him.  

4)  Play to win/Not to avoid losing:  Playing in a way where he was afraid of losing didn't work at the Masters.  He needed to continue trying to shoot low scores at the US Open to keep his competitors on their heels.  He forgot about the fear.

As real estate investors our mistakes won't ever be as public as a professional golfers but we are sure to have them.  We can learn from them, grow from them, and draw on them to become better business people.  

Thursday, June 16, 2011

Basics of Depreciation

As I mentioned in an earlier post, Depreciation is one of the four ways you make money in rental real estate.  It allows you to subtract a portion of the cost of the property you purchased from your gross income thereby reducing your taxes.  Just by owning the property you get this tax benefit.

You need to consult a tax expert before calculating your depreciation amount but IRS Publication 527:  (http://www.irs.gov/publications/p527/index.html) is a helpful starting point

This explains how quickly you can depreciate your property (generally 27.5 years) and your convention (mid-month, mid-quarter, or mid-year).

Here's how it works in practice.  If you spend $100,000 on a rental property you can depreciate approximately 3.5% of that purchase price or $3,500 the first year.  That means that your gross income is decreased by $3,500.  If you are in the 35% tax bracket, you have just saved $1,225 on your taxes.

When calculating your total return on your investment, your tax savings from depreciation will be an important factor.

Monday, June 13, 2011

Great Article on Benefits of Investing in Real Estate

Amy Hoak had a great article today on Marketwatch about the benefits of investing in real estate:

http://www.marketwatch.com/story/why-investing-in-rentals-could-be-a-good-move-2011-06-13

As she says, there are properties out there that investors can buy and immediately make money renting them out above and beyond all of their costs.

This is above and beyond the additional ways investors make money (depreciation, paying down principal, and appreciation).

This has benefits for the housing market as a whole.  It puts a floor on prices and can improve abandoned or foreclosed properties.  It can also bring back occupants to properties that had been unoccupied for a long period of time.

The article also makes clear that there are a lot of challenges involved with being a landlord but there is a great upside if you are prudent about it.

Saturday, June 11, 2011

Market Opportunities


Every market cycle presents opportunities for real estate investors.  And today is no exception.  Across the country the residential rental market is hot! 
Nationally, rental and occupancy rates are on the rise.  At the June 7 REIT conference in New York, investors were focused on multi-family rentals for the first time since the recession hit.  (http://blogs.wsj.com/developments/2011/06/07/at-reit-confab-buzz-is-multifamily/)
Why are more people choosing to rent? Many, as you would expect, are renting because they are victims of foreclosure or are unable to meet stricter mortgage requirements.  But the race to rent is affecting middle and even high-end rentals as well. In Manhattan, five figure rentals are in demand, according to a June 7 piece in the New York Times. Even among the wealthiest, uncertainty in the current market, is causing people to decide to rent instead of buy.
            The Northern Virginia rental market - with high occupancy rates, high rents and above average rental rate increases - is one of the hottest in the nation and offers exceptional opportunities to real estate investors. 
 The employment climate in NV is well above the national average, and is projected to grow for the foreseeable future.  Government agencies and high tech firms provide well-paying jobs for highly educated professionals, many of whom come to the area for short-term consulting jobs, and seek high-end rentals.
The demand for rentals among middle class professionals is expected to continue as the homeownership rate continues to decrease, and as rent ratios hover around 18.3.  At the same time the lack of available land and financing for development is keeping stock low, making it harder and harder to find homes or apartments to rent.  (http://activerain.com/blogsview/2105535/northern-viginia-rental-market-going-going-gone-).
Today a large supply of foreclosed and undervalued properties in Northern Virginia offers investors a great opportunity to get into the rental market.  Next we’ll look at the biggest obstacles facing new real estate investors.  The causes might surprise you.

Tuesday, June 7, 2011

How to Make Money by Owning Rental Properties

Investing in rental properties can be a lucrative investment.  It takes time though and some of the ways do not end up in instant cash in your pocket.  This can be a deterrent for those who just want to make money quickly.  For the patient investor, however, it pays off in the long run.

The four main ways to make money on rental properties are:

1) Rental income;
2) Depreciation;
3) Tenants pay down the principal of the mortgage increasing the owner's equity; and
4) Appreciation of the property.

A few of these are obvious and others take some explaining.  

Depreciation is a tax concept, which can be confusing.  On a basic level it means that you can deduct a certain percentage of the purchase price from your taxable income every year.  This can be a tax savings of several thousand dollars every year depending on the purchase price.  (I'll do a more in-depth post on this concept alone at a later date).

You don't see this money right away but you'll get it back in a tax refund or you can adjust your withholdings to receive more money every month. 

Another invisible way you get paid is the fact that the tenants are paying down the principal on your mortgage.  Eventually you will own the property outright and someone else will have bought it for you! 

Lastly, if you buy a property with low costs and good rental income then appreciation will just be a side benefit.  You do not want to expect to make most of your money that way because as we have seen the last few years you cannot necessarily count on it! 

Sunday, June 5, 2011

An Online Community for Real Estate Investors in Northern Virginia

Welcome to a community of current and potential real estate investors in Northern Virginia.  This blog attempts to fill a void.  I couldn't find a website that explained the basics of real estate investing to people new to the business.  I also couldn't find an effective way to connect with others who would be interested in sharing best practices and potentially doing business together.  This blog is my attempt to fill both of those niches.

Initially, I'll go over the basics of residential real estate investing: 1) How you make money; 2) What you need to get started; 3) Putting together a team; 4) Screening tenants; and 5) Managing the property.

I'll have guest posts from other investors and people in the industry including: lenders, real estate brokers, and home inspectors.  I'll also share articles on the latest real estate trends.  Hopefully, we'll build up some good comments and sharing of information for those interested in the subject.

Stay tuned, the next post is the most important: How to make money investing in residential real estate!