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.