Buying Rental Property Has Benefits

With foreclosures on the increase (read: Rampant) right now, people who are losing their homes also have to find a place to live and are turning to rental properties to move their families.  This opens a great opportunity for potential buyers with good credit and down payment money to create wealth through residential real estate investment.  Whether you’re looking to have wake-up money in your retirement years or starting a college fund for your children or grandchildren, real estate in the long run is one of the best investments there is.

I shared this list with my friend Kathy who has published it on Banks.com.  We’re telling a national audience about the Benefits of Residential Real Estate Investments, and I wanted you to hear about it too.

1. Cash Flow.  The rent provides income.  A wise real estate investment will pay for itself on a monthly and annual basis, while paying the note. Your ultimate goal is to own property “free and clear,” which creates maximum cash flow.
2. Leverage.  You can own $150,000 worth of real estate with only 15-20% cash. You can borrow cash from one property to buy another. Your short-term goal is to use leverage to acquire a portfolio of real estate. Your long-term goal is to pay the loans off and own your properties “free and clear”
3. Debt Reducation.  Real estate is one of the few investments where someone else will make your payments. In essence, the tenant makes the payments and reduces your debt.
4. Tax Savings.  You are allowed to depreciate the house and write off your expenses in order to reduce your taxes*.
5. Appreciation.  Over time the value of houses and condos have risen. The average value of home has traditionally doubled in value every 15 years**.

*Consult your accountant or tax attorney to specifics related to the tax benefits of investing in real estate.

** The government Office of Federal Housing Enterprise and Oversight figures appreication rates for Metropolitan Statistical Areas around the county. Check this site to see what appreciation rates have been in your area.  Using their figures, the following data shows appreciation of a $100,000 home purchased in 1982:

1982 – $100,000
5 years – $135,800
10 years – $150,100
15 years – $196,000
20 years – $243,600
25 years – $316,700

I will talk more in the future on the college saving aspect.

 

The Mortgage Storm

A mortgage loan officer stopped by the office last week to speak at our sales meeting.  His subject was the “Mortgage Market Meltdown: What it Means to You.”    The speaker was Scott Matuk of First Community Mortgage, and one of my recommended lenders.  He said that if the mortgage market was compared to a hurricane, it would be a Category FIVE because not only is the market affecting the economy of the U.S., but it’s also have a huge impact on Europe, Asia, etc.  In the last two weeks alone, $2 TRILLION has been lost in the market.

There were several factors that caused this huge mortgage problem, including: subprime and alternative lending practices (anyone with a heartbeat could generally qualify for a home loan and AltA was for people with good credit but had other issues).  These loans accounted for between 40 and 70 percent of all loans in 2005-06 and this appetite brought loose underwriting practices.  Then reality set in and we learned many folks had bad credit for a reason – they couldn’t pay back the money they borrowed.

As this began happening, mortgage backed securities – those giants who typically buy loans that free lenders to loan even more – start backing out of purchasing them.  Or if they do take the loans, they pay the loan companies less for them.  This practice either shorted the liquid assets of lenders or stuck them with high-risk loans.  Eventually they were unable to cover the losses from delinquent loans.  So the consumer is maxed out and unable to repay.  The securities industry is no longer willing to buy subprime and AltA loans from lenders.  And the subprime lenders have no more equity to support the loans, causing the perfect storm.

For the real estate industry, it means there are fewer potential buyers, increasing inventory, increasing foreclosures, and increased pricing pressure.   The good news is that although more exotic, weird mortgages are going away, there are still plenty of loans available for buyers.  Typically, these are conforming loans and government backed loans such as Fannie Mae, FHA and VA.  But buyers are cautioned to not get too comfortable. 

If you are planning to buy a home in Smyrna, LaVergne, Nashville, or the surrounding area in the next six to twelve months, have your credit score pulled now to see if your credit is okay.  Talk to a lender like Scott (who can be reached at 500-5276) who can counsel you on what you can do to increase your credit score before you’re ready to buy.  Even loans for people with 720 scores may no longer be available, so this is vital.  You should be prepared to bring your tax returns, W2 forms, bank statements and pay check stubs when you go for a home loan … this means that you are getting a fully documented loan and those are the loans that are still available.

If you are a seller, you must get real about the price of your home.  No “I’m going to price it $5,000 higher than it’s worth so I’ll have room to negotiate.”  Price it at what your agent believes is fair market value, not what you think it’s worth.  Your agent has access to what’s happened with home prices and they do not take lightly the home price they recommend!   Scott said that sellers could also consider seller-held second mortgages for buyers… I’ve always advised my sellers to steer clear of these, but maybe this scenario is worth talking about.  BEWARE of the non pre-approved buyer.  If you get an offer, make sure the purchase contract states that they must have a financial commitment letter from their lender within five days of binding.  If they do not provide this, the contract becomes void. 

Finally, rest assured that most bank-backed mortgages will be okay.  Get a loan through someone who is controlling the decision – be a bit more cautious of someone who is sending your loan application to a land far far away for approval.  And remember, ALL loans will be credit score driven in the foreseeable future.   For everyone, routine credit monitoring should be just like your annual physical.  Every year, review yoru credit.  If you are considering buying or selling, start your credit review process three to six months in advance.  Get your financial house in order.   Good luck!

Reprinted with permission by Kathy Tyson.

100 Lenders Close Doors

In the last eight months, over 100 national lenders have closed their doors according to an alert I received from Dana McNerney of Wilson Bank & Trust.  She asked what this means to consumer, and said:

1. Potential borrowers cannot wait any longer.  The volatile credit market can change overnight, leaving fewer options available to borrowers.  With decreases in home values and fewer availale mortgage instruments, delaying any longer could get significantly more expensive.
2. Borrowers with applications in process must not delay.  Even minor delays can result in funds being yanked at closing, especially non-conforming, stated-income, and stated-asset laons.
3. Sellers can no longer be reluctant to accept offers or reduce prices.  Tightening credit and diminishing mortgage products will continue to reduce the pool of qualified buyers.
4. Buyers with credit issues or who have difficulty providing required documentation can no longer sit on the fence.  If market conditions change, buyers who qualify for a loan today may not qualify a few weeks from now for the same exact loan.  THIS WEEK, many lenders have stopped offering No-Doc loans, and some have even pulled back on all forms of stated loans.
5. Subprime and Alt-A refi candidates, especially those with ARMs scheduled to reset over the next 12 months, need to act now – even those with a prepayment penalty.  ARMs borrowers struggling with monthly payments now might be shocked to know that monthly can double in some casees once an ARM resets.

If you have any questions, you’re welcome to contact me or Ms. McNerney in Smyrna at 904-6321.