Tuesday, May 19, 2009

$8,000 Tax Credit? Now Even Better, $8,000 Tax Advance

Attention First-Time Homebuyers. Your voices have been heard...

How much good is a credit to stimulate the economy if the folks we want to stimulate are short on cash; like kind of a lot of us are in this economy. We've discovered that with a credit, you have to have the money up front in the first place to buy the home, then sometime down the road or paper trail, you'll get the money paid back or credited back.

What if I told you the FHA has finally got it, and now they're going to let you use the $8,000 for a down payment, available at closing. Well, it's true.

Read the following article if you have the time: http://www.realtor.org/press_room/news_releases/2009/05/re_summit?lid=ronav0019

Or give me a call, and let's go find your new home.

Not all the kinks have been worked out with the announcement of this policy; a bridge-loan is required, and which lenders will be approved and/or willing to participate is unclear. Not all applicants will be eligible for tax credit or bridge loan.

Friday, May 15, 2009

Cash Flow is Back

For years now I've been searching neighborhoods around me. Even in other markets, thousands of miles away, willing to even be a long-distanced landlord, but to no avail. I simply couldn't put that 1% rule to the test. You've all heard it...a viable investment property should bring in 1% of the purchase price, in rent, each month. If not, don't bother. It's not worth the aggravation.

I became an accidental landlord when we moved up to a bigger condo in a better part of town, and had a hard time selling our first condo. So, we rented it out. We got $1,750/month which came out to almost two-thirds of a percent, or .57%, of the purchase price of $289,000 in rent per month. Not bad, given the year we purchased was 2003, and real estate prices had already got on board the hot-air balloon. Incidently, we've sinced incremently raised the rent and are now at $2,150/month, which is almost three-quarters of a percent, or .74%, of the original purchase price.

That all sounds decent, but nearly 6 years into owning this rental unit, we're still not at the 1% rule-of-thumb, which is the recommended starting point for a viable rental. And when you factor in the headaches, the fix this, and the fix that phone calls...deduct hoa fees and any other rental expenses, it's been a steady stream of lossed revenue. Now, agreed, that loss can be carried over and off-set my personal income. Which for a lot of us, is kind of a nice way to re-coup at least some of those lost dollars. But to jump ship now could mean months of marketing the unit, without rental income, before it can be sold. And the sale price would not be enough to make up for all the time and effort we've put into this one. I guess you could say we're in too deep, so we're holding on. We're about breaking even now, and should be in the green soon enough. We have wonderful tenants who pay on time, and don't want to move. So we'll hang on. However, the best decision we made was to leverage the property while loans were still obtainable. And we have that leveraged-money set aside for the purchase of a second rental property.

And so the search continues...Can I find a property that will cash flow immediately? Can I find a property that will meet the 1% rule?

Yes, I can.

In Phoenix right now, some condos are selling for $10K. Single family homes starting at $15K.

Investors are in a frenzy. The bottom is here in greater Phoenix, except for the high-end market. We are eating up the inventory faster than the banks can foreclose them.

I've seen investors get much better than the 1% rule. How about 2%? How about 4%? Like rent out a unit for $650/month that you picked up for $15K.

I'm here in the trenches. I can help you find that next rental. You're not too late. There is a wave of REO bank-owned homes coming on. The moritorium has lifted. Let's take a closer look.

Thursday, May 14, 2009

When a flip becomes a spec-house.

When it comes to flipping houses for profit, I've developed a habit of one-upping myself. I just don't seem to get enough abuse.
After several cosmetic re-habs, I bought this single-story ranch for $367,000. To just renovate the kitchen and bath would have maybe broke the project even. I knew this house needed something more...like a 2nd story. I knew I could make money on the added square footage.
That decision shot the budget up from around $80K for my typical cosmetic re-hab to $167K to effectively double the total square footage of the home from 1100sf to 2500sf.

The town I chose to buy in had a cooperative, zoning-friendly building inspection department. So I was able to get plans drawn up, submitted, and had a permit in hand by the 5th week. I did have to carry the mortgage on the house for those 5 weeks, which was excruciating but worked into the budget.

By the time the house was buttoned back up, and ready for an open house, 12 weeks had flown by. I was 4 mortgage payments into this deal, and $167K lighter in cash but I had the best looking house on the market. After putting all that work and money into it, I was tempted to price it high. After all, there was no other new construction home on the market. I had a unique product.
About the same time I was coming on the market, Obama and McCain were at the height of their campaigns which both painted a bleak financial outlook for the US. That, coupled with the credit crunch, put a strain on my first open house.

I only had 127 people come through instead of the 150 I had hoped for. Yeah, it was a zoo. I came out 5% lower than any competition, and had the home under contract by the 7th day on the market. I had to come down a bit more in the negotiations, but got it sold in a week.

Here's how the numbers worked out:

After aquisition and construction, I was $534,000 into the project. I sold the house for $642,000, and after paying commisions, legal fees, closing and carrying costs, my profit was a little over $60,000.

This works out to about an 11% return on the total cash budget. Which is not so fantastic. Reasonable, but not fantastic. However, I utilized the most powerful tool in real estate investing: the power of leverage. Let's look at this again.

I didn't put $534,000 of my own cash into the project. Actually, I financed 90% of the aquisition cost, which meant I only put in about $200K of my own cash (and a sizeable chunk of that was on a credit card). So, my own cash-on-cash return came in at 30%. Now that's more like it. Annualized, because I finished the project in 5 months, is 72%. How many wall street guys saw those kinds of returns in 2008?

Invest in real estate. Whether short term or long term. Invest in real estate. You'll be glad you did.