See How the Pro's Do It...

Generally I don't like to post in continuous days but after reading a recent blog post on "Bigger Pockets" I felt obligated to share the article / blog post with everyone.

http://www.biggerpockets.com/renewsblog/2010/09/15/analyzing-a-real-life-rent-flip-deal/?utm_source=BiggerPockets+Newsletter&utm_campaign=1e08f4e1dd-September_19_2010_Newsletter9_19_2010&utm_medium=email

When it comes to real estate investing unless you have formal education, training, real world experience or a mentor then generally you would not have been exposed to the financial tools and theory's that lead to quality decision making.  The blog posted at Bigger Pockets allows readers to see a real-world real estate investment in action.

There are a few criticisms I have of the financial aspects of this deal:

1.  His split for land value to building value is subjective and a better way to determine it would to look at a tax assessment to gain a more detailed understanding of land value to improvement.

2.  In today's market, the vacancy rate used on pro forma's is rising, 8.3% may be a good number for his property in his market but his number should be heavily dependent on the market you're investing in.  (Same with the rental rate but that should be more obvious).

3.  Revenue and expenses are estimated at 2% increases annually. This is a fair assumption for the sake of a pro forma but one needs to understand that rental rates can decrease if market fundamentals demand it.  Also, operating expenses can rise faster as insurance, taxes, etc. can be increased at a faster rate then rental rates.

4.  There are a few before tax cash flow ingredients missing like annual depreciation which can reduce taxable income (and possibly exploiting a deprecation analysis technique called cost segregation which depreciates improvements at individual schedules per the IRS leading to extra depreciation expenses).  NOTE: depreciation expenses are good, not bad, don't let the term "expense" fool you. This expenses is a non-cash deduction to your taxable income which decreases your tax obligation.

5.  This investor is using a 3 year balloon interest only loan.  This is a risky mortgage product as at the end of year 3 a lump sum mortgage pay off (known as the balloon payment) is due.  The assumption is that he would have the property sold at that time. The market may dictate otherwise. (this is the type of product that gave momentum to the housing industry collapse).  These products can be great but knowledge is power here...be careful.

6.  For the disposition (the sale of the property after year 3) I don't see reference to capital gains taxes. Of course using a 1031 exchange can defer capital gains tax but I don't see reference to that.

It's a great mental exercise to read and analyze articles like this as I think they are a great way to see a professional investors thought process in practice.  Just be careful and be critical of data, assumptions and missing components that make situations less rosy then they appear to be.

Get smarter:

10 Reasons to Buy a Home!!

http://online.wsj.com/article/SB10001424052748703376504575492023471133674.html?mod=WSJ_RealEstate_LeftTopNews

Brett Arends of the Wall Street Journal Online (at the above link) wrote a great article on the current benefits of buying a home in today's economic environment. Please read his actual article for specifics; what I will do is comment on some of his thoughts.

His thoughts mirror points I have made in previous posts on this blog.  His top 5 reasons are as follows:

1.  You can get a good deal:  Home prices have come way down.  Buying when the market is down can be a great investment whether you're looking to flip or occupy for the long haul.

2.  Mortgages are cheap:  mortgages are at or about all-time lows.  This environment has produced one of the cheapest borrowing platforms in history.  If inflation comes you will be in great shape and when rates begin to rise you will most likely not see a return to these low borrowing cost levels again.

3.  Save on taxes: write-offs abound with real estate; mortgage interest and property taxes can be written off against personal income tax.  With investment property depreciation expenses essentially reduce your taxable income.

4.  It's yours: in like living with Mom and Dad or renting, the house and property is yours to do as you please (of course their are limitations).

5.  You'll get a better home:  This is in line with prices and interest rates. Right now you can afford much more house then you could have a few years ago and that you will be able to have in a few years.


CAVEAT:  I've done a lot of preaching about what great buying conditions we have in today's market.  I want to caution everyone because I feel like i may have been a bit optimistic about things and possibly misleading.

What do I mean?  Well, unemployment is still very high, the economy is still on the unstable side and as we move towards November elections the economy tends to get even more unstable because the risks associated with changes in political leadership tends to scare investors on Wall Street. 

I think it is extremely important to have a full grasp on the mortgage process, the fees associated with home buying and a realistic view of your current financial status.  As we can learn from the recent Great Recession we are trying to crawl out of, knowledge is power and the uneducated consumer can be taken advantage of and make poor decisions that will have long term effects.

So although this is a good buying environment in terms of real estate fundamentals, please be cautious (what investors call being risk averse) and take the time to educate yourself and speak with unbiased professionals that can help you make quality real estate decisions.

Feel free to contact me to discuss real estate anytime, free of charge, or email or comment on the blog and I will be more then happy to help you or lead you to a professional that can answer your question(s).

Now it's time to watch Mickey's Playhouse with Molly....a show I highly recommend!

Opportunity is KNOCKING!!

I recently sold a REO (short for real estate owned which is what banks call the real estate acquired through foreclosure or deed's transferred in lieu of foreclosure) and my client purchased the home with an FHA 203K loan. This loan product is a federally insured mortgage instrument used specifically for rehabbing homes.  REO's are often great candidates for this loan as they generally need to be rehabbed for occupying or renting. 

The Department of Housing and Urban Development (HUD) insures these loans. Please visit their site for specific details on the FHA 203K loans:

http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm

Also, for a list of our REO's and properties in general please visitn Three Rivers Realty, Inc's site at:

http://www.threeriversrealtyinc.com/3/Active-Listings

There are some great deals out there in today's market that enable people to purchase these very low priced properties, get a rehab loan, rehab the property and either put it back on the market or rent it out.

REO's can be tricky; banks aren't looking to "give away" properties.  Banks can be negotiated with in terms of the asking price and other financial and property concerns but they are less emotional and have managers / REO departments to answer to so don't expect to make a "killing."  I'd recommend reading up on REO's and purchasing some sort of commercial software that can help in making these sort of financial decisions.

This is a pretty good write-up on REO's: 

http://www.realestateabc.com/homeguide/reo.htm

Feel free to call, email or submit questions that I can answer regarding these sort of deals directly on this blog!

Check out these products to, the time and money investment in these products can lead to better decision making and pay for itself over the course of your real estate investing career!

Do You Understand??

As I speak with clients, particularly first-time real estate buyers I get to understand where knowledge gaps exist.  I often field questions regarding fundamental aspects of mortgage financing.  This post will be dedicated to helping clarify some terms and general concepts related to mortgage financing...

In this post we will limit the discussion to fixed-rate, constant payment mortgage loans; those typically obtained for single-family residences.

A mortgage is a transaction created when one party pledges real property to another party as security for an obligation owed (usually re-payment of a loan).

A promissory note is signed with the mortgage as a document that creates a the obligation to repay the loan and spells out the details (interest rate, term, payment frequency, etc.).  The "note" and the mortgage are actually two distinct documents (usually).

Are you "personally liable."  If so, that means that not only is your property pledged to secure payment of the "note" but your other personal assets can be sold to re-pay the balance due on the note.  In most states there is a distinct process post foreclosure to obtain this lien; often referred to as a deficiency judgment.

The APR is the annual percentage rate and this is commonly referred to as your "interest rate."  Per the Truth-in-Lending Act, the APR must be disclosed to the consumer by the Lender.

The "Mortgagor" is you and the "Mortgagee" is the lender.

The following are the scariest words in the mortgage process; CLOSING COSTS!!! What are these vile things?  There are 3 categories; statutory, 3rd party and additional finance charges.  Statutory costs are those that cover the legal requirements of transferring property as set by the governing body...3rd party costs are fees to pay service provider like the appraiser, inspectors, title companies, etc...and additional finance charges are the banks way of making money. The additional charges can be called loan fees, loan origination fess and are generally fixed costs charged to borrowers. 

"POINTS" or discount fees are charges from the bank to the borrower that enable the bank to raise the yield on the loan.  In effect, assuming the loan is paid off early, points will make the borrowing costs exceed the APR.  1 point is usually equal to 1%  of the loan.  Essentially points allow the lender to lend less then the borrowed amount but the borrower actually pays back the full amount.

Pre-Payment Penalties: are fees for paying off a loan early, usually when you sell your house and use the proceeds to pay off the mortgage.  Most mortgages require the mortgagor to pay the loan off in full if the property is transferred (sold); this is called the due-on-sale clause. I believe that FHA loans do not have pre-payment penalties.

Here's some solid reads on mortgages:

BAD NEWS!!!

In an August 30 article on WSJ.com (wall street journal's website), Nick Timiraos related that HUD (Department of Housing and Urban Development) Secretary Shaun Donovan "side-stepped" the question of whether Obama would implement the housing tax credit that again.  Also Robert Gibbs, whitehouse press secratary stated that "it (the tax credit revival) is not high on the list."

This is unfortunate for first-time home buyers. My wife and I personally took advantage of the tax credit when we purchased our first home in 2009. We got the phase 2 $8,000.00 credit which we do not have to pay back.  This is an excellent program for first-time buyers and essentially pays for itself (I won't get into that in this post).

With the tighter underwriting and lending standards, constrained funds supply and risk averse investors in this troubled economic environment the economy and the housing industry could use a follow-up shot in the arm.  The ripple effect the housing industry has on the whole economy is obvious after the recent Great Recession.

I guess the moral of the post is that delaying to purchase a home because of the possibility of a tax credit revival is a gamble.  Most signs point to no revival.  For first time home buyers with a relatively stable job, working on your credit and saving cash for a down payment (the old fashion way) is probably going to the path to the "American Dream" of home ownership.

Here is a solid product for gaining knowledge about credit scores. 

New Housing Numbers - Important Indicators

According to an August 24, 2010 article published by NAR (National Association of Realtors) existing home sales have dropped significantly since the expiration of the federal housing tax credit.  An interesting fact in the article, quotes as, "sales are at the lowest level since the total existing home sales series launched in 1999, and single family sales - accounting for the bulk of transactions - are at the lowest level since  may of 1995."

On the flip side, home-starts are down year over year from July 2009 (note that data is usually published in arrears).  Housing starts being down allows for the current inventory to be absorbed quicker, which reduces the supply on the market. In terms of the basics of supply and demand, as the current inventory is absorbed (purchased and removed from the market) and supply is constrained, prices rise. 

The mix of reduced home sales keeping inventory on the market and reduced home-starts (construction of new homes) allows for an interesting dynamic in the marketplace. Prices should remain at low levels due to the reduced buying activity but even the low levels of transactions will begin to "eat away" at the inventory.  In that case, home sales will natural flow towards it's equilibrium (when supply and demand meet) price; in this case increasing.

Going back to the NAR article the NAR President Vickie Golder states, "mortgage interest rates are at record lows, home prices have firmed and there is a good selection of property in most areas, so buyers with good jobs and favorable credit ratings find themselves in a fortunate position."

In my opinion, now is the time to pick up your first residence or your first (or additional rental property) in order to take advantage of low prices and low mortgage interest rates.

* check back soon for a discussion on the tax benefits of owning investment properties. A breakdown of depreciation, mortgage interest tax deductions and their effect on before tax rates of return will show you why investment properties are more then just owning property.  Also, I will try to get a paragraph on passive real estate investment losses and their deduction to you income tax.

To get a better understanding of the fundamentals of real estate investing you can purchase some "entry-level" texts from Amazon.com.  My suggestion would be to go with books from respected sources, publishers and authors. This one is suggested by me personally:   The wall street journal. complete real estate investing guide, by David Crook.

General Thoughts & Survey - Consumer Choices

While thinking about the fundamental elements of creating a marketing plan we have to consider the mission of the "company" (our business); or the reason for the business, service or product.  Part of my mission is to create long-term relationships with clients that involves what is termed relationship marketing (as opposed to transactional marketing) and social responsibility.

I think that the consumer and general public were let down by the banking, real estate, appraisal and government (in terms of fiscal and monetary policy as well as the lack of oversight).  In my opinion what is needed moving forward is professionals that base their success not on the amount or value of their transactions but on the amount and value of their relationships (of course profitability is the primary goal).  The consumer should seek trusted advisors, consultants and professionals that have their best interest in mind; particularly when they hire professionals for that particular reason.

Also, consumers do (and should) demand social responsibility from today's businesses. So many company's lack a socially responsible attitude and do not address social responsibility in their operations. In fact, I beleive that social responsibility is no longer a marketing tactic but needs to be fully integrated into the core business strategy.

So what does this all mean?  My business plan is to build relationships with consumers based on trust and expertise in consulting.  Also, I will build in an integrated philanthropic strategy into my core business by dedicating a portion of my profits to organizations (non-profits) that serve the community. 

So my question to you is; would you choose a service provider based on the fact that they have a socially responsible (like philanthropy) program?  And are you more selective of the people and company's you choose based on the events that led to the Great Recession, housing crisis and the more recent issues with corporate fraud?

Here is a good text on helping to make socially responsible decisions, investing:

FSU Real Estate Program

I have to share this article since I am in a distance MBA program at FSU and some of those honored are my or were my Professor's.

http://www.fsu.com/News/FSU-real-estate-program-ranked-No.-2-in-the-world-for-faculty-research

Recent Comments from the FOMC

 LINK:  http://www.federalreserve.gov/newsevents/press/monetary/20100810a.htm

With the recent comments of the FOMC, the Federal Open Market Committee, and the consensus that the economic recovery will be prolonged, borrowing rates will be extremely low (due to the federal funds rate / monetary policy).  Couple that with the downward pressure on home prices due to poor macro fundamentals (like over-supply (supply and demand) and high unemployment) and you have great conditions for real estate investing and a tough environment for other investment platforms. Cheap borrowing costs and downward pressure on house prices maximizes the effect of leverage in real estate investing.

* leverage is the use of borrowed funds to maximize equity returns in real estate. Equity returns are the return on the cash you put into a property.

* Borrowing costs are a major part of the analysis associated with real estate investing. A cheaper mortgage will allow increased cash flows.  Assuming a fixed rate mortgage; inflation and market fundamentals should push rents higher and this increases the difference between cash flows and mortgage payments that remain the same over the term of the loan.  Also maximizing leverage allows the borrower to gain equity through appreciation of the property.

* There are downside risks to investing in any case and investing decisions should encompass much more then only considering borrowing costs and prices. For the purpose of commenting on the FOMC article I have limited my discussion.

Good software tool:

Real Estate Calculator Suite

The Purpose of this Blog - Reducing Complexity to Allow Quality Decision Making

The purpose of this blog will be to help individuals and potential investors, hereinafter "moguls" :), understand the fundamentals of real estate and real estate investing which I hope will lead to better personal real estate related decision making.

The crux of this blog is to help everyone understand real estate fundamentals, macro-economic conditions effect on the real estate environment and to provide personal commentary on current macro-economic data in a way that everyone can understand its application to real estate investing. 

I will also publish some of my favorite websites, books and articles that I feel will help educate everyone on important real estate related topics.  I will also supplement this blog with content from my MBA program (so we can learn together) and ask the real estate professors from FSU to contribute to the blog, whether directly or indirectly. 

Next, I will provide links to local real estate companies and professionals that can provide services that I can not.  This will help people understand what services are available and what professionals can provide these services in the Pittsburgh market.

I work in corporate real estate and I sell real estate part-time.  This blog is not to directly solicit business for myself but I will publish my listings and contact information to help develop my business.  This blog is an extension of my current and future business plans and will provide a platform for delivering information about my business. You can review my business mission and vision statement as well as gain an understanding of how I integrate philanthropy as part of my core business strategy.

Lastly, I am asking for feedback, thoughts and contributions to this blog.  Please send me your comments, opinions, criticisms and any general thoughts you have on the blog and other general topics in the business environment that you think will be a value-add to this blog. 

DISCLAIMER:  I am not a professional consultant nor do I claim to be an expert on anything; I am a real estate professional and an MBA student.  The opinions on this blog are my own; the interpretations of economic data are my own and neither of these represents anything else.  My goal is to educate people on real estate related topics that will allow them to make better decisions and to stimulate critical thinking.