Friday, 29 April 2016

Entry Level Rental Property Investing -- Even if You're Renting


You want to be a real estate investor, but you don't even own your own home. How can you make it happen? Especially when you check out your assets and cash and can't find a 20% down payment anywhere in the pile, it looks impossible.

You've toyed with the idea of buying a personal home, but you're still renting. You can manage to scrape up a low FHA down payment for your own home, but you can't get that low down for an investment rental property. Wrong! Not only can you make that happen, you can live close to rent-free and later you can move to positive cash flow.

You can get a mortgage through the FHA with a super low down payment if you live in the home. So, how do you live in it and rent it out too? No, not a roommate. You can purchase a duplex home and rent out one side while you live in the other. Because it is your principle residence, you can get FHA lending. You not only now own your home, you're an investor too! The FHA will even let you count the future rental income to help you to qualify for the loan!

I'm not blowing smoke, and I'll use a real life example duplex for sale in Houston, Texas, as well as rental rates, all as currently listed at Here are the home particulars:

• Listed selling price is $255,000.
• Each side of the duplex is approximately 1996 square feet in size.
• Built in 2007.
• Rents of apartments and one side of duplexes in the local area justify a conservative rent income of $1,100 to 1,200/month.
• Zillow's mortgage estimator shows the payment will be approx. $1,497/month.

Let's become the world's worst negotiator and pay full price for this home. However, we're going to take advantage of the FHA and our credit score is good, so we're going to be able to get a 3.5% down payment. With closing costs, we'll bring about $9,350 to the closing table. Let's run the numbers:

• You'll be paying approximately $1,687/month with taxes and insurance included.
• You can reasonably expect to rent out the home for $1,150/month.
• Your gross out-of-pocket to live there is now $537/month.

So, you own a home and you only fork out around $537 per month to live there. But, I'm not through yet. You get some tax breaks that reduce your monthly net cash out-of-pocket. These are estimates, but pretty close based on the example mortgage. First, you get to depreciate the rented portion of the home (not the land value). Let's say that the lot here is worth $40,000, so the structure for depreciation is worth $215,000. You can depreciate the rented portion (one-half) right now over 27.5 years, so:

• $215,000 / 2 = $107,500  Divide that by 27.5 for $3,909/year.
• $3,909 / 12 = $326/month deduction off your income.
• In a 25% overall tax bracket, $326 X .25 = 80/month cash not going out.
• Our previous out-of-pocket of $537 - $80 = $457/month net out-of-pocket.

I'm not through yet though. You also get to deduct the mortgage interest on the half of the property that's rented (you're still getting to deduct your own mortgage interest on your personal residence side). The amortization schedule for this loan showed approximately $760 on average per month in mortgage interest the first year.

• $760 / 2 (half is rented) = $380/month X 25% (tax bracket) = $95/month
• Current $457/month out-of-pocket - $95 = $362/month new out-of-pocket.

Next we can look at our tax bracket and deducting one-half of the property taxes and insurance, but you're getting the drift. You'll not get this down to zero or positive cash flow, but are you living in a nice home for around $300/month now?

Consult an accountant, as this is an on-the-fly example, but it's all realistic and on a real home in a real market. Then think about enjoying this for two years and then renting something else for you and renting out the other side of this property and moving to a positive cash flow position. The two-year requirement is how the FHA makes sure that you're building on a solid rental history that will allow you to use all of the income to qualify for another loan.

Also, if you have the discipline, taking the difference in what you were paying for rent that is now staying in your pocket and investing it somewhere is the way to go. If you were paying $1,100/month, you should see a cash infusion of the $800 +/- difference now. Use it to build a savings account balance to fund your next property purchase down payment.

NOW you'll see some positive cash flow and you're a rental property owner/investor ready to grow your business!


Wednesday, 20 April 2016

Buying Real Estate Notes for the Small Investor


There is a lot of information out there about buying notes as a real estate investment niche strategy. It can be very profitable, particularly if you approach it with more than one strategic goal. There are investors doing this now, and some are helping homeowners to keep their homes while profiting in the process.

The Profit Focused Approach

The approach taken most often is to buy a note on a distressed property and to either foreclose on it or to continue to work with the homeowner within the structure of the current mortgage and payments. The investor can also flip the note, selling it to another investor for a profit.

With notes available in the open market at large discounts to value, the investor can realize a nice ROI even if the homeowner continues to be late or short on payments. The asset is worth far more than the money invested, so risk is minimized and the option to foreclose is always available.

The Borrower Focused Approach

A new breed of note-buying real estate investor is focusing on helping distressed homeowners as the top goal and the ROI as a secondary consideration. This doesn't mean that a great return isn't still part of the deal, just that it's not quite as fat. There is still plenty of profit to motivate the investor, but there is a human side to the deal that's quite satisfying as well.

Because some of these notes are purchased at a major discount to the home's market value, there's room for a humanitarian goal in the deal. This new breed of real estate investor is getting into the investment with a goal of helping the homeowner to keep their home, even when it requires concessions or refinancing so that they can afford it.

Many homeowners in this situation have some equity, but they're experiencing financial hardship and are having trouble making their mortgage payment. The real estate investor who can purchase the note at a deep discount to value can enter the deal with the goal of helping them to stay in the home. The due diligence of course requires that the investor knows what they can do and still justify the end ROI result.

Refinancing the home to reduce the debt and monthly payment and still yield an acceptable return on the investment is satisfying from both investor and humanitarian viewpoints. There can be some icing on the cake as well. There are some local and national government homeowner assistance programs that may offer some incentives to the note holder to help the borrower to remain in the home.

One of the most interesting things about real estate investment is the many ways in which you can get into the game. This is just one, and it offers the investor a way to help someone while enjoying investment profits.


Thursday, 7 April 2016

Should You Worry About a Housing Price Bubble?


The Case-Shiller Home Price Index reported that home prices rose on average 5.7 percent in January from January the year before. That was pretty much as expected, but there was also a statement in the report that could raise alarms in some circles: "Home prices are rising very rapidly -- twice the rate of inflation. There is very, very little supply."

Could we be seeing a housing price bubble building similar to the one that burst in 2006 and took down the market? In one word, the answer is "No." There is very little similarity in today's housing market and the pre-bust market in 2006. Other than rising prices, other factors are very different.

Most analysts agree that a major factor in the crash that began in 2006 was lax lending standards and numerous programs spurring careless home buying and speculative flipping. People were in a frenzy to buy houses back then, and prices showed it. When the bubble burst, it was a nasty situation that lasted for years.

Today's market is very different. The rising prices today are caused by a fundamental economic supply and demand imbalance. There are simply far more buyers than sellers in the current market, and this is creating competitive buying and higher prices.

Another major difference is the financial market and home loan requirements. It's much more difficult these days to get a loan, with the old "stated income" and "no income verification" loans nowhere to be found. This keeps the careless buyers out of the market and isn't contributing to price increases.

So, what can we expect if it's not going to be a big bubble burst? With fewer artificial influences on home price action, the market will take care of itself. There are still a great many would-be sellers who are waiting to list to get back equity they lost in the crash, or just to maximize their equity and sell when they meet their cash goals.

A large group holding onto their homes is the baby boomer generation. Some housing analysts are blaming some of the supply problems on boomers sitting on their homes and not selling at anywhere near the rate they sold in the past. Part of this is because they're not wanting to buy a replacement home in this market, or they don't want to pay high rents. Rents have been rising faster than home prices, and it's not the best time to be checking out retirement rental properties.

The market will take care of itself, and when prices hit points that spur sellers to list their homes, the supply will increase quickly. I don't think demand will rise nearly as quickly when this happens, and there will be a slowing of price increases, and possibly even reversals in some areas. Will some recent buyers get hurt? It's possible, especially if they paid up for a home in a bidding war. However, the overall market will be healthier.

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