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.