Locating Investment Property: The Walk Score

June 9, 2013 By Leave a Comment

An important measuring device 

locating investment propertyWhen evaluating a set of potential money-making buildings while locating investment property, one factor seriously tied to the building’s ultimate cash flow will be its “Walk Score.”  This is a relative measure, compiled by the web site WalkScore.com.  The score is a ranking between 1 to 100.   It takes into account the proximity of shopping, transportation, schools and recreational facilities in relation to the actual walking distance from any particular rental property.  So you can use it when evaluating potential rental properties to see which ones offer the greater possibility for rental profits.

Comparing Walk Scores 

Thus, for a rental unit in a large, central city location that has a close walking distance to all local shops, buses, trains, parks, playgrounds, etc.,  a Walk Score could be in the high 90’s, for example.  A good suburban setting, while still closelocating investment property to shops and transportation and other recreational amenities, would usually garner a Walk Score in the 70’s.  And on the other end of the spectrum, a rural rental property, which requires a car to get to any local shopping, public transportation, downtown area, parks and schools, would probably yield a score close to zero.

There have been studies that have shown a high correlation between greater Walk Scores and a higher valuation on a similar property (same size, square footage, bedrooms, baths and amenities) than those rental units with much lower Walk Scores.

In monetary terms… 

It has been estimated that for every point increase in a Walk Score, there could be locating investment propertya possible increase in overall property market value for a like property by as much as $3,000.  The reason for this is simple:  the rental housing arena places a much higher value on units that are located within an easy walking distance to public transportation, schools, recreation and other services, like shopping.

If renters don’t have to use their car for everyday chores and/or commuting to work, then they attach a much higher value to the rental unit.  And this translates into greater overall demand for the unit based on its better locale.  And ultimately, that demand pushes rental prices (and cash flows for investors) up.

The bottom line 

To sum up, any rental property with a higher Walk Score will produce greaterlocating investment property overall rents.  They’ll produce a higher rate of cash flow, as well as have greater demand.  And this will ultimately yield fewer overall vacancies, and down the road, when it comes time to sell the asset, will yield a greater overall sales price in a faster selling time than a comparably-sized property in a lesser Walk Score locale.  So it’s always a good bet to check any location’s cash flow potential by utilizing their Walk Score as part of your overall evaluation process.

 

photos courtesy of  bs757.com,livesimplyenough.com, usatoday.com, davegi.com, nakedphilly.com

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Basic Cash Flow Analysis For Investment Property

May 30, 2013 By Leave a Comment

Determining the cash cow

So you think you’ve spotted a real winner of a rental cash cow, and are thinking of investment propertymaking an opening offer on it.  Did you crunch your numbers properly before making the offer?  Here are some basics you’ll need to do to accomplish this, in order to back in to a number for your offer on the investment property.  Once you know your cash flow, you’ll also be able to determine your return on investment.  And then you’ll be able to compare the prospective purchase with other properties, as well as other assets classes.

Doing your basic research

First, make sure the gross monthly rent is an actual rent, and not an imaginary,investment property hoped-for rent.  If you feel an actual rent is way under market value, then you can adjust your numbers accordingly, as long as there are no long term leases associated with the property that are currently in place.  Obviously, to get a feel for what market rent is in your area, you’ll need to do a little homework.

This would include checking out ads for other, similar units currently being offered for rent in your area, as well as visiting some of them to make sure they are like investment propertythe property you’re considering making an offer on. Ads can be located in your local paper(s), Craigslist, or other online classifieds for your area.  Also check with local real estate agencies to see what they have listed for current rentals.  Sites like Zillow or Realtor.com can also provide you with this invaluable information.

You can also obtain prices of actual rentals – what the units actually rented out for, through the same sites and/or your local realty agency.  Most multifamily or apartment unit rentals tend to rent for the same amount, or slightly less than their advertised rents.  However, in the case of single family home rentals, be sure to check for their actual rental price, since they may have a much larger disparity between advertised and actual rents.

Determining your exact costs

Once you have a good fix on market value for comparable rentals, and also know the exact amount of existing rents on the property, you can come up with your proinvestment property forma income statement to determine cash flow.  You’ll have at the top your total estimated gross monthly income.  On the other side of the ledger, you start subtracting all your monthly costs.  These include your fixed costs like property insurance, taxes, any property management fee, home owners association fees, and other maintenance items that you are responsible for.  This may include, landscaping, snowplowing, or, in some cases, heat or water charges.  Make sure the seller of the property’s figures are accurate when you ask for them about all existing expenses.  Always double check them.

Add in the vacancy rate

You’ll then want to subtract an amount for vacancies.  In a good, solid area where investment propertythere are many renters, a standard vacancy rate would be 7%.  In a diceyer area, where tenants come and go more, you may want to bump up this figure.  Either way, you’re going to have at least a one month vacancy when a tenant leaves, and you need to build this number into your calculations to show an accurate picture of cash flow over time on the particular investment property.

You’ll then need to subtract your mortgage payment based on what you intend to offer on the property to determine your net cash flow per month.  Naturally, if you’re paying all cash, there would be no mortgage payment figure to subtract. The greater the positive cash flow it shows on paper, the more attractive the property will be to make a bid on.

Figuring your return on investment

Now, to determine your return on investment (ROI), you’ll need to divide the annual positive cash flow amount by the expected total amount you’ll be sinkinginvestment property into the property when you buy it.  This will include your down payment (or, the total amount if you’re paying all cash) plus all closing costs on the purchase. This ROI is also sometimes referred to as your “cash on cash” return on the investment property.  It will enable you to compare buying this particular asset with other types – whether they be another property you’re interested in, or other investment choices like REITs, stocks, bonds, etc.  Of course, this simple analysis does not take into account the other benefits of property ownership, like market appreciation, tax benefits that include the ability to depreciate your asset, and the overall barrier against inflation that property usually confers on investors.

To sum up…

So make sure you crunch your numbers properly, obtain accurate market data as to market rents for your area, as well as confirming all seller-given data as to expenses and current rents and leases.  In this way you’ll be able to tell quickly and accurately whether the investment property you think will be a real winning cash cow will, in fact, perform this way.

 

photos courtesy of  prw.net.au, wendywonder.blogspot.com, ipmchico.com,  detroitcashflowanalysis.com,  propertymanager.com, biggerpockets.com, smallbusiness.chron.com

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Walking Through The House Of Mirrors

May 23, 2013 By Leave a Comment

Be very wary…

Just like a fanciful walk through the twisting, colorful and dizzying amusement park attraction, the House of Mirrors, that bend your shape and leave you rubbing your property investment adviceeyes for better perception, so too is the effect on real estate investors trying to read the current state of the U.S. housing market.  My singular property investment advice:  be wary of what you see in the current housing recovery.

All factors and new data suggest a rapidly improving housing arena.  But, like the House of Mirrors, everything’s bent totally out of proportion and  recognition.  And, we’re left with the main issue I’ve preached in two previous articles here this year:  all investor’s eyes need to remain squarely fixed on the unemployment rate – not how the housing market is doing.  For it is that unemployment rate that should dictate how you invest in these current economic times. 

Here’s what others are saying…

In an article from this week’s Time magazine (“The Housing Mirage,” by Ranaproperty investment advice Foroohar, Time, May 20, 2013), she notes that in regards to the present housing market conditions,  “prices are up, but the market is far from healthy.  We’re missing key elements of a true recovery.”  She goes on to ask, “if housing is back, why is the percentage of people who own homes lower now than it was over a decade ago.”  Of course, it’s because property investors have been gobbling up most of the foreclosure market over the last few years.  And this is especially true with institutional investing firms. 

She goes on to note “that a relatively small group or rich investors…is driving the real property investment adviceestate market.  That includes private-equity titans like Blackstone (which owns a portfolio of 20,000 rental properties) as well as high-wealth individuals who can pay cash  up front for property for themselves or to rent out. “Investors remain the dominant force behind the house-price bounce back,” says Capital Economics property economist Paul Diggle.  That’s reflected not only in the lower rate of homeownership but also in the swelling ranks of renters.  Not since 2002 have fewer rental properties been empty in the U.S., and rents are rising sharply in many cities.”   And that’s a scenario that makes property investments in residential real estate all the more valuable in the coming months, if not years.

Let the unemployment rate be your guide

Ms. Foroohar makes the case that tight credit policies by banks are still placing a stranglehold on mortgage lending nationwide.  She then makes a point I had property investment advicepredicted  back in my article of January 1st  here, entitled “Predictions For 2013.”   I had written then:  “watch the unemployment rate.”  I then went on to offer up these pearly bits of property investment advice:

“The unemployment rate will be one of the most important figures to keep a watchful eye on in the coming year. If it starts ticking upwards because of the effects of no deal being reached by Congress on the proverbial fiscal cliff, then look for overall U.S. rents to continue to increase as homebuyer malaise begins to sink in.  So individual rental property owner’s should be able to see increases in their cash flow as the new year progresses.  Clearly, residential rental properties will become even more valuable than they were in 2012.  So it would behoove the individual property investor to continue to search for and acquire additional rental property in 2013.’

property investment adviceAnd now, five months into 2013, Ms. Foroohar backs me up. She quotes  Jonathan Miller, CEO of a New York based real estate appraisal firm,  who said “to have a sustainable and healthy market, all that really matters is employment….You need higher employment and wages to support housing consumption and looser credit.  If we see some real economic growth over the next two to three years, then we’ll know the housing recovery is real.  Until then, we’re in what I call a precovery.”

The bottom line

She then goes on to bring it all home:  “ this precovery has been underwritten by the property investment advicegovernment at historically unprecedented levels.  Every month, the Federal Reserve is purchasing $40 billion worth of mortgage-backed securities.  And Freddie Mac and Fannie Mae stand behind the bulk of new mortgages.”  Finally, she notes that “it has long been said that you can’t have a sustainable economic recovery in the U.S. until the housing market is back.  In truth, it may be the other way around.  Until you have more jobs, rising wages and a middle class that can afford to take out a mortgage….you can’t have a real housing recovery.” 

Sounding like a broken record

And, as I’ve been saying for months, the housing arena does not indicate nor showcase the deeper, structural problems such as tapped-out consumers pinched by a slowing job market, higher taxes and lower savings.  I had also previously written that “if the unemployment rate were to go up next year, look to continue acquiring residential rental property, since rent prices will then continue to escalate.  And cash flows on rental properties would commensurately increase as well.”  I would have to amend that statement slightly, and say, if the unemployment rate remains stagnant, as it has been, or goes up, then look for increased cash flows on your rental properties.

property investment adviceMy best property investment advice continues to be taking your existing properties and make sure you continually maintain, if not upgrade, them in a down economy.  Especially in this House of Mirrors economy, where rent prices continue to escalate.  Continue to make your product more attractive relative to your competition.  In this way you’ll be able to maximize cash flow and profits. Also remember the advice I gave in that earlier article on the coming shape of our economy, and how it will affect what you do in your property investing strategy for the coming year. “Consider the next year as a good time to try refinancing your investment properties to help increase your overall cash flow on all your collective properties.  With rates at all-time historical lows, and with an economic downturn occurring, you’d be able to lock in excellent rates for the long-term on your portfolio of real estate holdings. 

 

photos courtesy of selmainthecity.wordpress.com, ptoday.blogspot.com,  travelwebdir.com,, multiplex.coolhouseplans.com, hereandnow.wbur_.org, 3-424tales.blogspot.com, laurieflower.com, auroragov.org

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Property Investing Advice – The Best And The Worst

May 14, 2013 By Leave a Comment

Two extremes

Sometimes I am asked by novice property investors what types of advice I’ve received in my investing career.  And what was the best advice I ever received – as well as the worst.

The absolute best advice I ever got about property investing:

Roll, baby, roll. Leverage is EVERYTHING in real estate.  It is unlike any other investment asset class, in that you can increase your leverage with each new property you acquire.  Forget about the bank “owning” the property.  They’re simply your “partner.”  Lenders are what allow you to grow your business steadily over time…even without the need to put more of your own capital into each new acquisition.  If you manage your acquisitions properly, maintain them, improve them, then refinance them, all on a planned, strategic acquisition schedule, you’ll be able to roll your property investments up – that is, increase your leverage with each new property acquired.  Ultimately, you can build your own version of a “real estate empire.”  Keep things realistic, and you will succeed in property investing.  Keep growing your property portfolio with high leverage  – always putting down as little of your own funds as possible.  That’s the absolute best property investing advice I ever received.

On the south side…

The worst advice I ever got about property investing:

Anyone can do it.

WRONG!

It takes a certain temperament, a certain je ne sais quoi, to be a good property investor.  Basic personality qualities include being entrepreneurial, being decisive, and having a proper aptitude (though not genius-level)  with math, as well as being meticulous, grounded, and having stick-to-itiveness.  These are some of the basic qualities a good property investor will display.  Notice I did not include:  being good with people, or being a  “wheeler-dealer” type.  These two traits are not something you need…and they can be learned, as well as delegated to others.  That’s what property managers , as well as real estate agents come in and can do for you.

What are the traits that make a good real estate investor?

So be cognizant of what makes you tick – and what your passions are….Active investors in real estate (those that prefer to control their own properties, as opposed to investing in Real Estate Investment Trusts, REITS, for example) don’t get in strictly for monetary rewards alone.  There are too many pitfalls to running a successful property investment business to take on the added risks.  Rather, hands-on property investors enjoy wearing many different hats:  being the site locator, searching for properties, then being good numbers crunchers to see which are the most attractive properties available at any given time.

They then switch hats to become buyers, making offers, negotiating, then finding financing for the properties.  Finally, there’s the investor who needs to wear the hat of property manager – acquiring tenants, refurbishing units, and keeping them continually maintained properly.  This requires great diligence and attention to detail.  You are running an active business, not simply parking your investment dollars in a fund that will (hopefully) offer you positive returns.  So heed the worst property investing advice I ever got – that anyone can do it.  And make sure you have the right temperament and personality for the job.

 

photos courtesy of newmusicworld.org, dionisteam.ca, carterrealtyagency.com, sanpedrosquareproperties.com

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A Tenant’s Nightmare

May 1, 2013 By Leave a Comment

Being a  bad landlord – from the tenant’s perspective

I was recently pitching in with a local United Way “Day of Caring” campaign.  I was helping out by doing some yard work for a disabled woman in my area.  While there I was told that she was a tenant of the house she called home.  And while I was raking leaves and branches in her yard, I couldn’t help notice all the building code violations and generally unsafe conditions that existed around just the exterior of the house alone.   Items like rotting window sills, rotting foundation beams, missing gutters and leaders and unsafe walkways to name just a few.

Without going inside, I knew from experience that there had to be general water leakage problems present.  I asked her why her landlord had not made the necessary repairs.  She said that he just doesn’t do anything.  Basically, she painted a picture of a classic slum lord – except this house was not in an inner city, but rather more in a rural setting.

Reporting the violations – the basic problem

I then asked why she doesn’t call the town building inspector and report these violations.  That way, the landlord would be forced to make the necessary repairs and create a safe environment for his tenant.  But then her answer was chilling:  “because he’d kick me out.”   Folks, we’re talking about a blind woman with diabetes, who had recently suffered a heart attack.  And she’s scared her landlord’s going to throw her out for reporting safety violations.  So, for paying her rent in a timely manner, she gets the right to live in sub-standard, unsafe conditions.  This truly gives all property investors a bad reputation by inference.  For my part, I reported the problems to the United Way in hopes they can investigate and intervene.

Doing the right thing

I note this little story in the hopes that all property investors will be cognizant that running a cash-producing investment into the ground is unacceptable when other people’s lives, and safety, are at stake.  Basic, minimal and constant maintenance is required of all hands-on property investors.  God forbid there is a fire, or your tenant gets hurt in some way due to your negligence, it’s not enough to say, “I’ve got property as well as liability insurance.  And that will cover it.”

All property investors belong to the same club.  No one says you have to be a “people person” to be part of this club…Or want to earn as much profit as possible on your investments. That’s the goal, after all.   But if you’re not going to treat your tenants – your customers – like human beings…well, please stay out of our business.  You hurt the good name of all of us decent property investors.

 

photos courtesy of investors.housez.ca, neastphilly.com, 24dash.com, keypersonofinfluence.com

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Is It Time To Cash Out?

April 18, 2013 By Leave a Comment

Never cash out your money-maker unless it’s an emergency

With residential rental property, always stick to your long-range goals of steady yearly cash flow growth, combined with the tax advantages of depreciation and holding your investment property asset, as well as capital market appreciation in the long term.  The only time you should be cashing out should be reserved for emergencies.

Recent data from the National Association of Realtors (NAR) suggests property investors are intending to hold onto their rental property for at least eight years now (up from five years the prior year).   However, some are finding the strong demand for properties coupled with a decreasing inventory of foreclosures and investment properties in general, as well as continued low mortgage interest rates to be too irresistible.  And so they are placing their cash cows on the market now.  Again – big mistake if you’re not in an emergency situation, and must have the cash on hand quickly.

Investment drop-off

Since real estate investments peaked in 2011, there was a dropping off of property investing last year as inventories declined, and foreclosures available to the marketplace lessened.  With decreased inventory and market valuations rebounding, many investors decided to begin cashing out.  As noted in my prior articles, only negative-cash flow rental property (or, the “dogs of war”) should be jettisoned when consistently non-performing, or when you are unable to make positive cash flows when still renting out at full capacity and at top market rents.  Positive cash flow properties should remain within your stable of properties for increased leverage to acquire additional property, as well as future cash growth and appreciation.

Institutional investors

As foreclosures have dwindled in the past year or two, so too are property investors that originally came into the marketplace by swooping in and purchasing large numbers of foreclosures, fixed them up, then rented them out for positive cash flows.  As prices have been on the increase of late, and with fewer foreclosures readily available in the marketplace, investors (especially institutional hedge fund type investors) have cut back on their rental property investment.

Higher entry costs into the market

In addition, with the rebound in the entire housing market over the last year, prices to get into the rental property acquisition market concurrently have risen.  For example, according to the NAR, the median investment property price rose 15% from 2011 to 2012 – from a median price of $100,000 up to $115,000.  Significant to note is that while the median down payment on all investment properties remained the same, at 27% of property price, the percentage of buyers who paid all cash for their investments rose to almost 50%.

The combination of increasing prices and tight credit have also produced a scenario where investors are lessening their current buying schemes for investment rental property.  However, the NAR data also shows that 47 % of real estate investors intend to purchase another property at some point within the next two years.  Though with current tight credit standards in the mortgage industry, roughly half of all investors will continue to make all-cash buys.

 

photos courtesy of  clearlyderby.blogspot.com, mathforgrownups.com, flickr.com, infrawindow.com

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The Bargain Basement Days Appear To Be Over

March 7, 2013 By Leave a Comment

Resetting your property investment strategy

After several years of horrendous declines in the valuation of house prices in the U.S., the latest reports show a definite pattern of a slow but continued rise out of the housing slump.  So much so, that it appears the days of the great “bargain” prices for those looking to buy investment property are beginning to come to an end.

Statistics don’t lie

Even before the traditional Spring selling season is about to begin, statistics show that house prices are rising at their greatest pace in almost seven years.  Home prices rose 8.3 percent in December, and are now reported to have jumped 9.7 percent in January, compared to the prior year’s data, according to CoreLogic, which tracks house prices in the U.S.  While price valuations are still down a huge 26 percent from their lowest point in 2006, this recent trend upwards is good news for all those looking to buy investment property.

Continued price rises

Except for Delaware and Illinois, prices rose in all other states in January.   Western states garnered the lion’s share of price improvements, with Arizona, Nevada, Idaho and California leading the nation, with double-digit percent increases.  The nation-wide inventory of homes for sale has been slowly shrinking, and that coupled with increased pent-up demand has been fueling the price increases.  Property investors with existing holdings finally have some cheery news to celebrate.  Now, for the first time in years, price appreciation can be added to your expectation of returns on rental housing properties, besides the positive cash flows from operations.

Moving off the fence

Another fortuitous sign of the housing recovery is the fact that the number of signed contracts for sale of existing properties jumped in January from December to their highest level in over two years.  Again, this activity is occurring prior to the Spring real estate sales market – a very good sign indeed.  It would appear that all the fence-sitting buyers are now starting to realize that this is the time to move ahead and purchase before house prices rise even further.  Especially with interest rates for 30 year mortgages continuing to stay at extremely low rates – for the time being.  So if you’re looking for a great “deal” now as you look to buy investment property, your mindset should be changing.  Instead of a good bargain, be more concerned with obtaining a proper cash flow return on your investment.  The increase in property valuation will begin to come to fruition naturally after that.

 

photos courtesy of  news.com.au, domain.com.au, robertsinvestmentproperties.blogspot.com, dailymail.co.uk, usprefrealty.com

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The Latest Outlook For Property Investing

February 7, 2013 By Leave a Comment

The new normal

As the overall real estate market continues to recover across the U.S., there is now becoming a new normal for property investors. Compared with the last several years, investors need to be aware of several important changes in the marketplace.  Understanding  these changes is crucial to properly allocating your real estate investment dollars in the foreseeable future.

Inventories are stabilizing

As the foreclosure crisis slowly becomes a foreclosure way of doing business, and the overall volume of foreclosed properties continues to drop, the real estate market will respond by pricing rebounds.  The less inventory, the more demand.  This is simple, basic economic theory.  Banks have been selling off their inventories of distressed properties to investors in record numbers over the last few years.  And that huge glut of foreclosures has now been worked down to a manageable amount.  Investors who bought them are now reaping the rewards of either flipping or holding them for rentals.  This slow lessening of housing inventory nationwide will invariably tighten the overall marketplace.

Investment loans are getting costlier

Interest rates have remained at record lows for quite some time – almost three full years.  That’s about to end.  The Federal Reserve has indicated they may tick rates up slightly later this year, based on the continued slow but steady economic growth pattern exhibited in the U.S.  last year.  Rates should remain relatively low through the end of the year, on average between 3.5 to 4 percent.  But the lowest rates have already come and gone.  In addition, expect the credit markets to remain tight for property investors, making qualifying for a mortgage much more difficult.

 

The Ability To Repay Rule makes borrowing more difficult

As mentioned in one of my recent articles posted here, the Consumer Financial Protection Bureau instituted a new rule to make sure lenders prove that borrowers can actually repay the mortgage they’re applying for.  Obviously, this was created to help protect the entire U.S. banking system, and avoid the collapse we came through over the last few years, as no-income mortgage lending was the norm – and got so many homeowners into hot water as they could not repay their loans. So now all lenders must verify all assets, income and debts of every borrower.  In order to now qualify for a loan, the new norm here is that investors are obtaining mortgages from hard money lenders, with higher interest rates and much shorter terms, in record numbers. 

As inventories level off, expect a construction boom

Records indicate that building permits for single family homes nationally are up about 25%  from the past year alone.  With the near-record low interest rates currently available, builders have been gambling on pent-up demand in the housing market.  And it’s a demand that has been held back since 2007.  New home prices have been rising faster than existing single family homes of  late, and builders also want to take advantage of this trend.  However, this expected larger supply of homes could keep prices down over the next year.

Valuations continue to level off

While a majority of local real estate markets saw increases in house prices over the last year of about 9 to 10 percent, due to shrinking inventories and low interest rates, this year should produce more modest gains.  Economists feel these price increases will probably be in the 2 to 3 percent range.  Naturally, everything is an average, so there will still be some areas of the country, like in the Northwest, which will continue to remain hot regarding price increases.  But others will lag, and some major cities will continue to show little or no growth.  These include cities like Denver, Atlanta and Chicago.

Investors continue to feed on distressed properties

As mentioned above, it’s getting harder to find great foreclosure deals these days, as the sheer supply of distressed properties plummets rapidly.  Most large investors have gobbled up the best foreclosure deals.  Real Estate Investment Trusts (REITs) enlarged their portfolios over the last two years, buying huge numbers of distressed properties, then fixing them up and renting them out en masse.  Still too, many banks decided to hold a number of their foreclosures, add value to them by making minimal repairs, and have placed them back on the market with higher prices.  But overall, as the inventory has declined, house prices have rebounded.

 

photos courtesy of reiwa.com.au, blogs.va.gov, legalrefinance.com, builderonline.com, vamortgageveterans.com, guardian.co_.uk, biz.thestar.com.my

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Creating Your Investment Property Exit Strategy

January 29, 2013 By Leave a Comment

A crucial strategy 

When buying any piece of investment property, you need to have your exit strategy in place before you spend your first dollar on that investment.  By exit strategy, I mean a marketing plan for unloading your investment – especially when times are bad in any given real estate marketplace, and you need to sell fast.  As with all good property investing advice, it’s best to be prepared for the worst.

Flipping out

When flipping a property, the exit strategy is set well before you buy:  you’re already thinking of the end user, the speculative purchaser you’ll be selling your property to…In this scenario, you’ll be creating a psychographic picture of your potential buyer, after you’ve made all renovations to the house.  This not only helps you define your marketing plan ahead of time, but you’ll be able to figure out your target sales price, and work backwards into your renovations required to please this prospective buyer, as well as determine exactly what renovations are crucial to help you move the house once it’s ready to place on the market.

Psychographic profile of your buyer

Psychographic data includes demographic information – basics such as age, income level, gender, size of family, and even ethnicities.  But it also includes psychological quirks and leanings of your prospective buyers.  For example, the location you are considering purchasing in will determine a great deal about your potential buyer.  Is the school system of paramount importance to them? Are they Democrats, Republicans or Independents?  Are they liberal, moderate or conservative thinking?  How religious are they?  Do local religious institutions need to be extremely close to the investment property you’re acquiring?

Likewise, do they value privacy, and are looking for a more remote property to make them feel at peace.  What types of psychological stimuli will appeal to your prospective buyer?  Once you’ve begun answering these questions, create a page write-up of what your potential buyer will be like – both demographically and psychologically.  Proper property investing advice  will show that with this “road map” in place, you’ll be in a much better position to figure out what your target sales price should be.  And you’ll then be able to work backwards to come up with your renovation budget.

Rental properties

If you’re looking to acquire a rental property to hold for the long term, cash flow and purchase price are the two most important features that will determine your overall profitability on the property.  However, you must also consider your exit strategy in case things go wrong.  (And invariably, with some properties, they will go wrong.  After all, it only takes one truly horrendous tenant to blow your cash flow to bits…)

Devising the exit strategy

So what exit strategy can you put together before you acquire a long term investment property?    When things go wrong, they usually go wrong fast.  So, plan ahead for this eventuality.  Always make sure you have the best tenants.  And always keep checking what current market rents are by constantly researching the rents of your competition.  And then make sure you align the rents on each of your units accordingly, as leases come due.  Also, never neglect the upkeep and regular maintenance on your property.  Ever.  In this way, if you need to sell fast, you’ll at least have maximized your rent roll, and kept your property up.

This will help maximize the amount you can obtain for your property when it comes time to sell – whenever that may occur… Even if that time is years before you’d like it to be.  In addition, always have a regular Realtor lined up – one you work with exclusively.  In this way, if you need to market your property quickly, a brief call to your very own Realtor will produce immediate results – thus shortening the time it takes to get your property on the market. 

Keeping the exit strategy current

Whichever exit strategy you create – whether it be for flipping a property, or for longer-held rental units, make sure you stay on top of it, and tweak it regularly.  This is especially true for your long-term holdings.  Simple property investing advice states that you’ve got to stay on top of market rents, maximizing them at all your units, and keeping up with regular maintenance on all your properties.  In this way you’ll always be prepared to place the best product on the market quickly, should the need arise.

 

Photos courtesy of  starchilde7.deviantart.com, consulting-business.com, debugdesign.com, rockiesventureclub.org, crownglobalinc.com, greencpa.blogspot.com,  betting.betfair.com

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A Quick Peek At The Current Mortgage Landscape

January 23, 2013 By Leave a Comment

Traditional lending sources remain difficult to obtain

In the current investment property mortgages landscape, traditional bank loans remain a tough road for financing. And many property investors have had to hold onto their existing, long-held properties while paying off those older mortgages that were set at much higher rates. These investors are finding it nearly impossible to refinance their debt loads, and tap into their equity to help finance new investment property acquisitions. So it’s a double-whammy: not only can they not finance new opportunities, but their cash flows are reduced due to their old, higher-rate mortgages remaining in place.

New Lender Rules = Tighter Credit

The latest news from Washington means traditional bank mortgages will continue to be hard to obtain. This is because the new “qualified mortgage” definition could adversely affect investors who require jumbo mortgages that are too large to qualify for government backing. Most recently, the Consumer Financial Protection Bureau created a rule that spells out exactly how lenders can avoid legal liability under a new law that holds these lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet the new qualified mortgage definition will get a clean bill of health – and they will have shown compliance with the new ability-to-repay part of this law.

Fortunately, some jumbo mortgages won’t be considered as qualified mortgages, and would be exempt from the new rules. Any loan that features an interest-only provision for an initial period won’t be considered as part of the new regulations. And any loan where a borrower’s total monthly debt payments exceed 43% of his or her income would also not be considered a qualified mortgage under the new rules.

Interest-only mortgages increased during the housing boom because they were marketed as being more affordable. It allows property investors the ability to carry a mortgage, and gain a tax deduction – all this while making a minimum loan payment. Later down the road, the investor can refinance or pay off the loan before they are required to make principal payments. Or at least, that was the thinking behind this type of mortgage. The debt-to-income rules, meanwhile, could wreak havoc with investors who have lots of cash and other assets, but whose incomes are harder to document. This includes some small business owners or self-employed professionals who have incomes that fluctuate widely from year to year.

The true meaning of these rules for property investors

Since the current real estate market is rebounding, investors are now looking to refinance their existing investment property mortgages and search for new, additional properties for their stable of investments. However, finding traditional bank loans for new investment property purchases, as well as trying to refinance existing loans has become much more difficult with the qualified mortgage rules. Even borrowers with excellent credit and income, who still show a steady rental revenue, are having trouble getting a bank mortgage on an investment.

As such, a great number of property investors have been financing recent acquisitions with their own cash. Of course, this is a horrible way to grow your business, since no leverage is being utilized. More importantly, these investors who bought all-cash thinking they’d be able to refinance afterwards, and pull out some of their equity on their income-producing properties, are being left high and dry when they find that traditional lenders, tied down by the qualified mortgage rules, are simply unable to extend mortgage loans to them.

Hard money lenders

Likewise, it is just as onerous for those investors who acquired investment property in recent years using hard money lenders. Since hard money loans are always short-term, those investors who could not refinance their investment property mortgages at a bank, and who are unable to come up with their own cash resources to pay off those loans, are being forced to sell those properties that they had originally intended to be long-term acquisitions.

To help fill this void, a recent trend has been for hard money lenders to offer additional short-term mortgages to fill the gap. These non-traditional lenders now offer two- to- five year loans on investment properties, all at a much higher interest rate than traditional banks would offer, of course. However, these mortgages have allowed many investors to retain their properties until they can qualify at a traditional bank. And they don’t have to place these properties on the market just yet. These loans, even at their higher rates, allow investors the ability to reduce their monthly costs, increasing their overall cash flow. And they also allow investors the ability to pull some cash out for future purchases.

photos courtesy of etsy.com, allmandlaw.com, answers.yourdictionary.com, realtor.com, worldpropertychannel.com, hardmoneylendersutah.com

 

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