APRIL 2012 PORTLAND METRO REAL ESTATE UPDATE!!!

So, what if you are interested in realizing some of the incredible real estate deals and super-low interest rates currently available and would like to purchase some investment real estate?  How do lenders look at including existing income from other rentals?  Or what if you want to keep and rent your present home and purchase a larger, smaller or simply different property?

Rental Income Updates

Crediting Income if a Current Landlord

• If you have owned an existing rental property one or more years, use Schedule E on your tax returns
• If the property is newly acquired, 75% of existing rents can be used as per leases
• For Fannie Mae, Freddie Mac, FHA and VA the property does not have to cash flow

• Proof of 30% equity position must be validated via bank-ordered appraisal
• Fully signed lease agreement submitted
• Security deposit from new tenant must be verified
• Bank statement from borrower showing these funds have been deposited.

Risk Determines Rate

Regardless of what a lender quotes on mortgage rates, the actual rate paid by a borrower is based on a number of variables. Lenders determine whether to loan money and at what rate based on the risk involved with the transaction.

Factors that increase the risk that the loan will be repaid will proportionately increase the interest rate charged to the borrower. If the risk becomes too high, the loan will not be approved.

• Loan amounts – conventional loans for more than the conforming limits set by Fannie Mae are considered jumbo loans and generally have a higher interest rate.
• FICO score – the lowest interest rate is reserved for the highest credit scores; the lower the score, the higher the rate borrower will pay.
• Occupancy – borrowers occupying a home as their principal residence are considered a better loan risk than second homes and investment properties.
• Loan purpose – purchase transactions generally have the lowest interest rate while refinancing a home is generally higher.
• Debt-to-Income ratio – a borrower’s monthly liabilities divided by their gross monthly income develops a ratio that helps lenders to assess the borrower’s ability to repay the mortgage.
• Loan-to-Value ratio – the lower the percentage of the loan to the appraised value of the property will generally lower the interest rate.

Any combination of these factors could limit your ability to secure a mortgage at the rate initially quoted. Being pre-approved by a trusted mortgage professional is the best way to know what rate you can expect to pay. Please call for a recommendation.

FEBRUARY PORTLAND METRO REAL ESTATE UPDATE!!!!

With the holidays, Valentine’s Day (not to mention my birthday) behind us, we can look forward to the 2012 Real Estate Season!!!  2011 ended on a positive note and this year has definitely started off on another positive note.  Closed sales experienced an 18.3% increase if you compare this January to the same month a year ago.  These are the highest numbers for January since 2007 (remember, if you believe the statistics, March 2007 was the height of the market).  The average time on the market has also improved, decreasing from 160 to 136 days.  December 2011 saw 5.3 months of inventory (down from 11.3 months in January 2011 and 12.6 in 2010).  January 2012 came in at 7 months of inventory, but that’s a fairly typical trend that January will be one of the highest (and usually THE HIGHEST) month of the year in housing inventory.  I have been in a multiple offer situation 3 times in the last 6 weeks!  So, well-priced, good condition properties are moving!!!  That speaks volumes to me!

SELLERS:  What does this mean for sellers?  It means if you haven’t already absorbed the market data, get someone you trust to give it to you!  Some properties are harder than others to price correctly; such as those with ethereal value (views, waterfront, etc) or challenged properties (fixers, un-staged, over-stuffed).  None-the-less, you must react quickly to the marketplace.  If you get a “lot” of activity and no offers, it probably sounded good but still has issues (remember price overrides all objections).  I’m telling you that well-placed, well-marketed properties will go fairly quickly.  If your home is not selling, re-visit price, condition, location.  There are no magic potions!

BUYERS:  What does this mean for buyers?  The Fed has claimed they will keep interest rates down until 2014.  If that doesn’t change, then mortgage rates (which still fluctuate daily) should stay very low giving buyers some time to position themselves for the best buy.  However, that being said, like I mentioned in my beginning paragraph the inventory is beginning to be absorbed.  Since pricing is always about “supply and demand”, I have to question that the pricing continuum will continue to go down!

INVESTORS:  What does this mean for investors?  The rental market is very good in the Portland area, generally with vacancy rates less than 4%. You use your down-payment + other people’s money (a Mortgage) to purchase a property. Your tenants pay that mortgage (PITI=principal, interest, taxes, insurance), you realize whatever cash-flow (rents minus PITI & maintenance=cash-flow). So, whether the real estate market appreciates or not, you accrue equity due to the tenants paying down the mortgage on a monthly basis.  It can be a challenge to lay the foundation to be an investor, but “NO PAIN, NO GAIN”!!  Read my recent post on “Preparing to Be a Real Estate Investor”!

By now, you’ve figure out that I’m “hot for real estate”!!!  And, I’m particularly excited about investment real estate!  I believe it makes an excellent addition and rounds out a financial portfolio that could include stocks, bonds, mutual funds, savings accounts, gold, your mattress and/or sock drawer!! So, how do you prepare to become a successful investor?

Keep in mind who might NOT be the best candidate.  People who are not engaged in the process, fad followers who expect “easy money” or people who are “too busy”.  It takes a bit of time and energy to research the properties, run the numbers and make a qualified decision!!  Sometimes you just have to “make the time”. The pay-offs or ROI (return on investment) can be very good!

It can be more difficult (but, not impossible, as I have proven) if your income is variable or newer, your debt load is high or there’s a lack of cash capacity and reserves!  For traditional Fannie Mae and Freddie Mac financing, most lenders require a 20% down-payment and you get a better interest rate with 25% down.  If you own more than 4 properties, you could have to put even more money down.  No gift funds can be used.  The seller can pay up to 2% towards the buyer’s closing costs.  The borrower can have no more than 4 mortgages total (if you own 5-10 properties, there are additional rules).  You must have 6 months PITI (principal, interest, taxes and insurance) for the subject property PLUS 2 months PITI reserves on all other properties.  If the buyer has no history of property management covering two years, the buyer must qualify for the full PITI regardless of expected rental income!!  There is no loan program for investment property purchases under FHA (Federal Housing Administration) and VA (Veteran’s Administration) financing (unless you live in one side of the duplex).  Lenders allow 75% of market rent to offset payments.  Lenders will look at 2 year’s Schedule E Tax returns and can use real rental income/loss.

If this is your first rental purchase, you must document all cash for the down payment and significant reserves.  You must qualify with no rental income to compensate.  And, the lender will require “rent-loss” insurance!

When you already have 4 mortgages, there is a Fannie Mae program for financing up to 10 mortgages but few lenders participate and the terms can vary!  Lenders typically have their own additional “overlays” or restrictions.  Portfolio financing (where the bank holds the loan instead of selling it on the secondary market, thus don’t HAVE to follow Freddie Mac and/or Fannie Mae guidelines) does exist with at least 25% down.  You could also refinance your primary residence and pull cash out or refinance current rentals and consolidate debt into fewer mortgages.

There can be other challenges.  A duplex, triplex and/or four-plex may lack good comparable sales data which will impact the appraised value.  Weekly rentals in resort areas are considered on a case by case basis and on a lender by lender basis. Condo purchases will require extra verification.

It may sound daunting and I know from experience, as I have personally experienced nearly all of this!!  I have owned a vacation rental, I presently own a condo rental, I have experienced a low appraisal on one of my duplex purchases, I have been turned down by lenders on duplex acquisitions because of my variable income, I own more than 4 properties.  But, if it were easy…everyone would do it!!!  No pain, no gain!!!  When the going gets tough, the tough get going!!!  And, every other trite inspirational saying I can include. My point being, you’ll never know till you try.  If you are interested, call for a lender recommendation and sit down and go over your assets with a Mortgage Broker and make a plan.  Meet with an experienced Real Estate Broker and plot out an approach that works for you.  Then you can start searching for properties that meet your pre-approved loan amount and your particular strategy.  Read HERE some things I’ve learned while managing my own investment properties!

Single family homes offer an opportunity to borrow high loan-to-value mortgages at fixed rates for long terms on appreciating assess with tax advantages and reasonable control.  I believe duplexes and/or small multi-plexes offer even more opportunity for cash flow.

This is the year to make some real progress on your resolutions (especially if they include purchasing some investment real estate to round out your financial portfolio). First, invest some time learning about rental properties by attending a FREE webinar on January 4th at 5:00 PM PST by national real estate speaker Pat Zaby. Click here to register.

FHA lowered the loan limits in October, but has reconsidered and now the limits are back to previous levels.  Good till 12/12.  And, you wonder why no one can keep up with what’s happening in the mortgage world!!??

• Single Family Residence       –                417,000                       
• 2 Unit                                                  -                 533,850           
• 3 Unit                                                  -                 645,300                                   
• 4 Unit                                                  -                 801,950                       

 Remember, you can get into an FHA secured mortgage for as little as 3.5% down!

 VA  Same as above, however there is such a thing as a VA Jumbo loan.  A jumbo loan is a loan amount (after down-payment) of more than $417,000 on a single-family home in the Portland Metro area.

• Single Family Residence       –                417,000                       
• 2 Unit                                                  -                 533,850           
• 3 Unit                                                  -                 645,300                                   
• 4 Unit                                                  -                 801,950                                    

OCTOBER 2011 PORTLAND METRO REAL ESTATE UPDATE!

Happy Halloween!!  I realize I’m a little late with this October edition of my real estate update, but I’ve been on my excellent “Aussie-Kiwi” vacation visiting my sister in Australia/New Zealand for three weeks and I’m still digging out from the pile of paper, files and work as I try to catch up.  I’m not sure I can give much insight into the market for this month (as I missed most of it).  I can share a few statistics and items of interest.  I can generally assess that “volume is up and prices are down” for real estate sales!  That, of course, makes sense.  As prices drop, more buyers are willing to venture back into the real estate market.  Inventory has decreased but the market activity is also decreasing in the condo markets but overall inventory lightening and market action trending up in single family market.  However, we were up to 6.7 months of inventory for September (from 6.2 months in August).  But, that’s typical for the time of year.  Sales activity in the Portland Metro area showed improvement in closed and pending sales this September compared with September 2010 and the inventory level remained much lower than the same month in 2010 (10.5 months).

BUYERS:  As a buyer, you are often seeking the lowest interest rate.  And current rates are excellent, hovering at around 4%, give or take!!  However, interest rates are not your only concern.  You must also consider and compare the “annual percentage rate” (APR).  APR is a federal calculation to help consumers determine which loan is best.  It adds all the costs of getting the loan to determine your true overall charges.  If your APR is more than 2/10 of a percentage point more than the comparables that equals measurably higher closing costs!  Ask for a “Good Faith Summary of Costs” from the lenders you are interviewing so you can compare “apples to apples”!  Also, start thinking ahead as a purchaser to when you might be a seller.  There are some benefits to the future assume-ability of FHA financing. Read more!  And, get pre-approved!  Here’s why….

SELLERS:  You may have heard rumblings in the news about the “new and improved” HARP (Home Affordable Refinance Program)!  The old program did not really work.  This one could be a little different as the key is getting the banks to bite!!  The new version will allow certain homeowners (underwater, yet current on their payments) to refinance up to 125% LTV (loan-to-value) if their mortgage originated prior to June 1^st, 2009.  The benefit for banks is that the banks will not have to re-purchase bad loans.  The new HARP would eliminate LTV, eliminate appraisals and reduce documentation.  This is a very simplified explanation and I’m sure more information will surface.  As far as selling property, it’s still pricing, pricing, pricing!!!

INVESTORS:  What a time to be a real estate investor!!  I know…I know coming up with the down-payment and getting the financing is a challenge!!!  I had to beg, borrow and (almost) steal to close my last purchase.  There are investor loans out there for 10% down, although the best interest rates are with 20+% down.  But, you will never know unless you visit a mortgage broker and “test the waters”.  There are cash-flowing properties out there!  It’s just something to consider to add to your overall financial strategy.  And, I’ve definitely learned some lessons managing my investment properties that I would like to share!

There’s always the good, the bad and the ugly!!!  That being said, personal experience is a great teacher but a very expensive way to learn.  So, I’d like to share some of what I’ve learned from managing my own investment properties.

If you’ve read any of my blogs, you know I have “put my money where my mouth is” concerning investment real estate and own multiple rental properties. I love that you use other people’s money (a mortgage) to handle the major portion of the purchase of an investment, the tenants’ pay off that mortgage (albeit slowly), you immediately enjoy the available cash-flow + realize the lowered principal balance/equity accrued caused by the tenants paying down the mortgage and the tax advantages! So, even if there is NO appreciation in the housing marketplace (which I think we can expect in the short-run, but eventually our economy will recover and natural appreciation will begin), you win!! I certainly can’t say that about my mutual funds!!

Nothing is perfect, so what’s the “down-side”?? Everyone has heard a “tenant from hell” story, so I won’t go into detail about my personal experience. I’ll “jump to the chase” and tell you what I’ve learned!!  I am determined NOT to get jaded. I always listen to my gut and I knew something was askew.  I just should have acted….plain and simple!  I bend over backwards to have a personal empathy with the residents of my homes (which is what I consider them, “residents” and “my homes”) but there are certain reasons why this time I let a situation go too far.  Listen and learn!

• I try to purchase properties that “I would live in…”.  Maybe they would not be perfect for me now, but in my younger years I would have said “what a score!!!!”.  I want to bond with my property the way I think the next resident will!!!
• I don’t necessarily “bank” on credit reports, but unless you’ve had a lot of experience I would run one!  I have to say that many of my best tenants were attempting to repair their credit and with that focus they became my best tenants EVAH!
• I  also call but don’t always “bank” on reports from existing/previous landlords.  If the tenant is still there and the landlord wants them out at all cost, they will tell you anything (so they don’t have to evict them).
• I do rely heavily on meeting and talking with my prospective tenants.  I’m not saying a professional con couldn’t pull one on me, but I trust my gut.  Things can go wrong and if you suspect they have…act, don’t react!
• I definitely check with employers.  Some are more “forthcoming” than others, but checking with employers will give you peace of mind.
• I love it when prospective tenants bring family, friends, whomever…it usually means they are really trying to get a consensus on their new living arrangements (and you can learn a lot from family and friends).
• I do not allow smoking in my units.  I know it’s tough on smokers but I have to protect the integrity of the property.  I’m not big on telling others how to live their lives but cigarette/cigar smoke residue is unacceptable to the future value of any property!
• I am sorry to say, that from now on if I even smell smoke on a prospective resident, I would not trust them to not smoke (despite the fact that all my rental agreements incorporate “no smoking” as a contingency of the agreement).  Smoking is a tragic addiction but I am not going to chance it in my properties any more!
• I do allow pets.  Do they occasionally do damage? …yes!  However, it’s usually something that can be covered by a security deposit and pet deposit.  I have this theory that people that love & care for their pets will often care for property in which they live.  They, at least, take responsibility for lives other than their own.  I do want to meet and “vet” (pun intended) the prospective animals.
• I pay for garbage.  I don’t pay for other utilities but I pay for garbage.  I just don’t want a notice from the city that because a resident is “cutting corners”, garbage has piled up.  I’d rather just pay for garbage but let everyone know how much you’re willing to pay (i.e:  one garbage can a week, any extra will be billed to the tenant, etc).
• I don’t pay for water.  I have installed sub-meters for separation of water bills for duplexes without separate meters (much cheaper than installing separate meters for the city to read).  You have to read them (or have the occupants read them) and do the calculations based on usage.  I also have investor/clients who merely divide the water bills and disclose the policy (their tenants accept the policy upfront).
• I try to get on a “rental rotation” that have the properties being rented no later than October of each year (preferably even earlier in the calendar year due to the “rental pool” lessening as we approach the holiday season).  Of course, you need to know your location.  IF you have a specific pool of potential renters (such as OHSU students/residents, as one example), you’d want to get on a rotation that reflects their schedule.
• I now have a new rule that I do a walk-through the property at least once a year (with the re-signing of the lease).  If I have ANY reason to suspect that something is “awry”, I’ll do it whenever (with 24-hr notice, of course).  Sometimes it’s easy to become complacent with long-term, paying residents…just don’t!
• I have, thus far, managed my own properties.  If you decide to utilize a property management service, I’d ask what their policies might be concerning walking through the properties.  If they don’t have a provision for this, I would insist or just do one on your own, if you feel comfortable doing so.
• I try to make it as personal a relationship as possible.  I want to be empathetic, sympathetic and consider each resident as an individual.  Life isn’t perfect.  Good “karma” has no monetary value.
• I absolutely listen and try to respond to the residents of my homes!  I try to be fair and available!  I can’t do everything they want necessarily, but I can listen and decide.

I’ve probably left out a lot but these are some reasonable lessons in the life of one real estate agent/investor!!!

An Investment Alternative

To say the investment market is unsettling is an obvious understatement. The market is up, then down 8% in the last ten days and the news suggests that this roller-coaster ride may continue for awhile!

Preservation of capital is probably today’s most important investment consideration (especially for those enjoying or nearing retirement) and making a profit would be a bonus. Of all the conventional investment alternatives like stocks, bonds, mutual funds, gold, commodities, CDs and annuities, housing could be one the best asset classes in America.  I always say that I’m a great believer in investment real estate: you use other people’s money (a mortgage) to handle the major part of the purchase of an investment, the tenants’ pay off that mortgage (albeit slowly), you immediately enjoy the available cash-flow + realize the lowered principal balance/equity accrued caused by the tenants paying down the mortgage!  So, even if there is NO appreciation in the housing marketplace (which I think we can expect in the short-run, but eventually our economy will recover and natural appreciation will begin), you win!!  I certainly can’t say that about my mutual funds!!

Homes have had a 30% to 40% price correction in the past four years. Mortgage rates are at near all-time low rates with 30 year terms available for investors. Rents have increased significantly over the past two years while vacancy rates have decreased. People will always need a place to live.

Five year certificates of deposits earn a little over 2% but rental properties are yielding much more than that. Income properties are tangible assets that have benefited dramatically in inflationary times. Cash assets can be devastated by inflation and diversifying into income properties could provide some protection.

Single family homes, duplexes and multi-plexes offer investors the opportunity to borrow large loan-to-value mortgages at fixed rates for long terms on appreciating assets with tax advantages and reasonable control. Investing in rentals can provide a high rate of return!