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Real-estate-investors-get-off-the-sideline-and-get-into-the-game-in-a--slow--market--all-for-fun-and
By Dale-Rogers
For months now many Realtors have been pacing the floor wondering where their next sale was coming from. The bad news drips off the front pages reporting for all to see how bad the real estate market has become. Thickets of real estate signs explode out of the ground much like the peak of any mushroom season. Sellers are now buying into the story believing the market is slow. For buyers who just as little as six months ago were pushing prices with little cash flow properties suddenly, these same properties have become ugly overnight.
Shrewd investors always look for buying opportunities. Whether it is stocks, coins, gold, bonds, collectibles, antique cars, or real estate the investment principals apply. The typical successful contrarian looks for spots to make a move. If there isn’t any worthwhile action they simply stay liquid and move to cash. When the hand wringing begins by the general public the shrewd investor starts to lean forward on the edge of their chairs and begins to focus their collective gaze toward potential opportunities. Currently, there is a huge inventory of listed properties just sitting on the market in the Multiple Listing Services (MLS) in many areas. Some of these potential opportunities have motivated seller some do not. It is necessary to focus on the listed properties that have a motivated seller.
A lot of cash is returning to the stock market with the likes of Google and such pushing $500+ per share. Lots of “hot” stocks don’t have a lot of earnings, but have great stories and much supposed promise. Much like the dot COM companies in the 90’s there was much splash and a lot of broken hearts left in it’s wake of hype. After the stock market fall billions flowed into the real estate business as an alternative to the madness of the stock market. With ENRON and WORLDCOM fiascoes it made the decision much easier for many investors to move into real estate. Who could you trust at the time? The answer for many was to purchase and self manage their own real estate portfolios. Having saved their wounds and after taking the “cure” of property management many disillusioned investors are now moving back into the stock market. Some vacancies have risen in some areas with so many investors buying single family homes and condos the absorption for these properties slowed. The combination of higher vacancy factors and the thrill of property management precipitated an exodus back into the stock market. For many new to the game, real estate investors with a heightened desire to get back into the stock market is leading to clouded thinking and many will accept an offer that was unheard of six months ago. The shrewd investor will target those motivated sellers and make many offers to get a real estate deal that has cash flow and a chance for appreciation.
An early axiom of real estate investing is based on making money on the BUY. It does little good to over pay for a property that has little or no cash flow with some appreciation. When the market gets over valued, just like the stock market, the smart money looks for other opportunities or set on their cash and waits. In many markets, opportunity is knocking. Interest rates are currently at a very low rate for a while. The Real Estate Investment Trust (REITs) learned soon after the 1986 Tax Act that highly leveraged property without the previous shorter depreciation benefits
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gave little cash flow. It is the same with real estate investor. Going more that an 80% Loan-To-Value financing is asking for trouble EXCEPT in a highly appreciating area. There are a few pockets, however, they currently are far and few in between. Looking at say a fourplex as an example it would be good to focus on properties that have the potential to command high rents in the market place with a little tweaking. Two bedrooms would be the most desirous. There are many rental customers who need the extra bedroom for in home office space and/or beginning families. One-bedroom units have limited upside as far as rent command in the market place. In some markets, for example, a fourplex might be on the market for $375,000. The rents are say in the $850/month range. This would give a gross rental income of $3,400/month. With a 5% vacancy factor the Adjusted Gross Income is $3,230/month. The rental customers pay their own electric, gas, cable and water and sewer with separate meters for the utilities. The taxes are $350 per month and the insurance is at $220/month. For this example let us use a 10% of the collected rents for the management cost whether self-managed or not. The investment needs to carry itself regardless. This would be $323/month for management. Utilize $200/month for maintenance and lawn care. The idea is to have well maintained properties and keep them that way to command the highest rents. This would lead to the following: $3,230 adjusted gross income less-$350-$220-$323-$200=$2,137/month available for debt service. At this moment, with a seller paying up to 6% of the closing costs and prepaids there would be some left over to help the purchaser to buy the rate down. With 375,000 x 6% = $22,500. Closing costs and prepaids with full escrows for taxes and insurance could be in the $12,000 range. That leaves $10,000 for a rate buy down. With an 80% Loan To Value, $375,000 x 80% =$300,000 for a mortgage amount. At a rate of 6.25% at par for an investor loan on a four unit based on a fully documented loan there is a lender bump of 1% to the price for a 3-4 unit at 80% LTV. So with the buy down the purchaser can get a 30 year fixed rate at 5.75%. The principal and interest payment would then be $1,750.72/month for principal and interest. This would leave an initial cash flow after debt service without benefit of interest and depreciation of $2,137-$1,750.72/month =$386.28/month cash flow. The interest deduction would be $17,250/year. The depreciation with $75,000 on the land the improvement at say $300,000/27.5 = $10,909.09/year. Thus our after tax cash flow would be Net Operating Income: $25,644/year -$17,250 interest deduction - $10,909= ($2,515) tax loss. If the owner is in the 30% tax bracket this would save $754 in federal income tax. Thus the total after tax return is $386.28 x 12 = $4,635.36 + tax savings of $754 = $5,389.36. With a $75,000 cash down payment with seller help on closing costs and rate buy down the return then would be $5,389.36/$75,000= 7.19% After Tax Return. If a conservative 4% appreciation rate were allowed, then the initial investment of $375,000 x 4% would theoretically appreciate over time some $15,000. Then the total adjusted return would be $15,000 + $5,389.36 = $20,389.36/$75,000= 27.18% less say 4% for inflation or a net return of 23.18%. It should be noted this return would be muted with capital gain taxes and some depreciation recapture at the end and such. If you were self-managing then that money could go into additional upgrades or into the pocket. This is not a bad deal for an investor thinking long term. It is an example of leverage at work. If a Certificate of Deposit was paying say 6% on $75,000 that would garner $4,500 and again in a 30% tax bracket the return would be $4,500 x 30% = $1,350 for a total return of $4,500-$1,350 = $3,150/$75,000 = 4.2% in comparison. However, if inflation were at 4% the net gain would be .2% with no risk. The above investment is figured with management in place. For many shrewd investors the timing is now. With good pricing and seller help on closing costs and interest rate buy down the investment property can make some sense from an investment standpoint. The key, find a motivated seller and a property that can command top rents and make multiple offers. For buyers with challenged credit, asking for seller held second mortgages at a low rate can also make the numbers work. In any case, it is time for many real estate investors to get off the side line and move strongly into this soft real estate market with a primary goal of finding and acquiring “make sense” properties with cash flow. The market is begging for offers. Dale Rogers http://www.brokencredit.com http://www.sellerhelpsbuyer.com Article Source: http://activeauthors.com Dale Rogers is a thirty-year mortgage veteran and frequent contributor to the Broken Credit Blog. The BCB is a free website created to assist the general public with information about credit repair and responsible mortgage lending.www.BrokenCredit.com www.sellerhelpsbuyer.com
Here are some more estate planning articles...
Dominican Republic - Punta Cana - Real Estate Investment Opportunities In A Caribbean Paradise
By Roberto Bell
With pearly white sandy beaches, a sub-tropical climate, and plenty of ocean front property, Real Estate is booming in Punta Cana as thousands of Americans and Europeans are also discovering that the Read more...
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Is Short Sale The New Buzz Word?
By *** B Ziegler ***
The term “Short Sale” is used as a teaser by real estate professionals (unethical in my opinion) to suggest that a discounted deal is at hand, and that you can score “a good deal” with a distressed Read more...
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Think Property First For Commercial Real Estate Mortage
By joseph hanoa
Make sure the condition of the property you want to buy will survive market conditions before seeking a commercial real estate mortgage. When you go to purchase a new residence, a good lender does a Read more...
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Marketing For Professionalism
By Harikishan Pal
If you developed your marketing skills, both online as well as offline. You need to constantly market your listings. Consider investing some money in Search Engine Optimization and/or Read more...
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| colorado estate planning news: |
Nationals try new tack to keep home field advantage
The Washington Nationals, tired of opposing teams' fans overrunning the D.C. ballpark, are trying something new to stock the seats with their supporters.
Tickets were released Friday for the May 4-6 series with the Philadelphia Phillies, but only for individuals with addresses in D.C., Virginia or Maryland. The Nationals are calling it "Take Back the Park."
To get a seat (minimum of two tickets per sale, max of eight), Washington-area residents must enter their addresses at nationals.com/ourpark, then use a special code delivered to their email to buy tickets...<div class="feedflare">
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</div>MERS named in New York Attorney General's suit
The New York Attorney General?s Office filed a lawsuit against several of the nation?s largest banks, charging them with fraud and deception in foreclosure filings by the creation and use of a national electronic mortgage registry system.
Reston-based Mortgage Electronic Registration Systems Inc., also known as MERS, and its parent MERSCORP Inc are also named as defendants.
The lawsuit alleges that Bank of America, J.P. Morgan Chase and Wells Fargo submitted court documents containing false and misleading information that made it appear they had authority to start a foreclosure when they may not have...<div class="feedflare">
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</div>Giant takes over 2 Fresh & Green?s locations
Landover-based Giant Food LLC will acquire two Fresh & Green?s supermarkets in the Baltimore area from Mrs. Green?s Management Co.
The stores are Fresh & Green?s of Hampden on West 41st Street in Baltimore and Fresh & Green?s of Parkville on Harford Road in Parkville. Giant will close both stores for remodeling and reopen them as Giant supermarkets.
The two stores employ 125 people, who will be offered jobs with Giant. The company is also closing a Giant location in Baltimore in the Rotunda shopping center on West 40th Street as part of the Fresh & Green?s acquisitions...<div class="feedflare">
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</div>Sen. Chuck Grassley criticizes FDA alleged email surveillance
<img src='http://assets.bizjournals.com/twincities/news/084518-PRN-FDA-LOGO-n`084Screenres*100.jpg?v=1'>Sen. Charles Grassley, R-Iowa, has set a Feb. 17 deadline for the Food and Drug Administration to respond to his questions regarding allegations that the agency monitored email of employees who were whistleblowers, Federal Times reports.
In a five-page letter to FDA Commissioner Margaret Hamburg on Tuesday, Grassley sharply criticized the agency for its treatment of former FDA biomedical engineer Paul Hardy. Hardy is one of nine employees who expressed concerns to the incoming Obama administration and Congress that the agency had approved unsafe medical devices, the letter says.<div class="feedflare">
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Strategies used to direct property to the proper beneficiaries, to minimize tax liability and other costs, and to arrange for property management in the event of physical or mental disability.
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