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: