Archive for October, 2008

How does a $100,000 rental home in Suburban Phoenix pencil out? It will pay for itself, sure, but how does it work as an investment?

Lender Brain Brady wrote a follow up to the post I wrote about 100 potential rental homes for sale for less than $100,000 in the Greater Phoenix area.

Brian cut right to the quick:

Investment properties make good sense when leveraged to the point where the rental income covers all costs.  Most mortgage lenders require 25% down for the best rates. On a $100,000 property, that means that an investor will need some $30-35,000 for down payment, closing costs, and repairs to make the home tenant-ready. A $75,000 loan will most likely have a PITI payment of about $600.

I thought this was an interesting problem, so I prepared a spreadsheet on a typical $100,000 property. This is a real property, really for sale right now for $100,000. I took the closing costs as a discount from the seller, but the property is in a subdivision with a community pool, so the HOA fee is fairly high. We’re getting a home in a booming, freeway-convenient suburb — built in 2002, stucco walls, all-tile roof, 1,614sf, 3 bedrooms, 2 baths, 2-car garage on a 7,032sf lot. Decent, walkable schools, with plenty of retail less than a mile away. Appreciation should pace the market, but it won’t beat it. In other words, a nice bread-and-butter rental home that should rent easily and stay rented to premium tenants and should sell easily to owner-occupants on the way out. This is my kind of investment home.

Even though I’m making the seller pick up the closing costs, I’m adding in $5,000 for initial repair costs. This is high for a home like this, but I’d rather be too pessimistic than too optimistic. We’re figuring interest and property taxes using today’s true numbers. We’re allowing for interest, maintenance costs and the HOA fee. We’re assuming a 10% annual vacancy rate, even though I wold expect this property to do better than that. Finally, we’re assuming a relatively tepid 4% annual appreciation rate over an 8-year holding period.

How does the home pencil out? Before taxes (and ignoring any accelerated depreciation), the home should throw off around $1,300 a year in positive cash flow. After taxes, you’ll be closer to $1,800 a year. That’s not the riches of Croesus, but the property should pay for all of its costs the entire time you own it. Even assuming our relatively anemic 4% appreciation rate, your initial $30,000 investment could grow to around $58,000 in eight years. And that’s after you pay capital gains taxes on the investment. If you sell the property using an IRS Section 1031 tax-deferred exchange, you’ll bank even more.

Your real-life mileage will vary, of course, but this spreadsheet takes into account all foreseeable expenses. We bought the right home at the right price and we managed the investment wisely, selling at a premium price on the way out. It’s plausible that we could have done better — or worse — in the securities markets. It’s hard to imagine doing better in a low-risk investment.

I do these every day. There are homes out there that make me drool — so much value for so little money. If you want to talk about investing in a Phoenix rental home, a spreadsheet just like this one will be an essential step in our process. There is no way to make the wrong home profitable, and for that reason I don’t work with homes that are nothing but cheap. But when we know we have found the right home — the perfect rental home — that’s when we’ll run the numbers to make sure it works financially — month-by-month and year-by-year, in the service of your overall financial objectives.

I’m dying to talk about this stuff. I can’t stop talking about this stuff. If you want to explore your investment opportunities in the Phoenix rental home market, email me or give me a call at 602-740-7531.

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100 under $100,000: Bargain-priced lender-owned properties that can work as premium rental homes abound in the Phoenix market

I normally preach a higher-brow real estate investment philosophy for the Phoenix market, but this is simply amazing to me:

Click on this link for a PDF file of listings for 100 potential rental homes selling — right now — for $100,000 or less. These are lender-owned homes, so they’re going to be fixers. And some of them will need so much work they’re not worth bothering with. But some of them will need next to nothing — $5,000 or less in repairs — and they will be cash-flow positive from the very first tenant.

For the most part these are not Cadillac homes, but they still have a lot going for them: 1,400sf and above, stucco and tile, built 1995 or later, with back yards and garages. These homes can attract decent rents — $800 and above in most cases — and many of them will be appealing to owner-occupants on resale.

I sell a lot of rental homes, and the homes I sell stay rented. A list like this might produce ten workable rentals. But they’ll be choice rentals, attracting premium tenants and selling at a premium price when you’re ready to move on. Take a look at our investments page to find out how I work. Then email me or phone (602-740-7531) to discuss your investment goals.

Prices are low, interest rates are low and choice rental homes are abundantly available at bargain-basement prices. This is a perfect storm for real estate investors in Metropolitan Phoenix.

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Foreclosure homes are sold “as-is” — but most need only minor restoration to bring them back to fully-livable condition

This is my column for this week from the Arizona Republic (permanent link).

 
Foreclosure homes are sold “as-is” — but most need only minor restoration to bring them back to fully-livable condition

If we were to have a contest for the Valley’s most-gutted home, judging might take a while.

A significant number of homes for sale in the Phoenix area, especially at the low end of the price spectrum, are in the foreclosure process. Not all of these homes are in rough shape, but a lot of them are. At a minimum, buyers of short-sale or lender-owned homes should anticipate painting the walls and replacing the carpets.

But virtually all foreclosure homes will be sold “as-is.” This means, first, that any defects discovered in the inspection process will be the buyer’s responsibility to repair after close of escrow. But the “as-is” addendum also often implies that there may be serious deferred-maintenance issues.

Still worse, many lender-owned homes will have been looted, either by the former owners on their way out or by burglars. Missing ranges, microwave ovens and dishwashers are common. Air-conditioner compressors and hot-water heaters are also absent from many homes. It is not uncommon to see that all of the ceiling fans or all of the knobs on drawers and cabinets have been removed.

My pick for the most-gutted Valley home? The entire kitchen was gone — even the kitchen sink — and the air-handler had been removed from the attic.

I would not want to refurbish that last home, since there is no telling what else has been taken. But for most lender-owned properties, the cost of bringing the home back to livable condition is fairly low.

A new set of kitchen appliances is maybe $2,500. A brand new air-conditioner compressor is around $4,000. A decent water heater is perhaps $1,200 installed. Paint, carpet and tile in the high-traffic areas should run $5,000 for a typical suburban home, less if you do the work yourself.

There definitely are homes to avoid in this market, but there are many, many others that are selling for very low prices. These properties need only very minor restoration efforts to bring them back to fully-livable condition.

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This just might be the optimal time to buy a home in Phoenix

This is my column for this week from the Arizona Republic (permanent link).

 
This just might be the optimal time to buy a home in Phoenix

Who should be buying residential real estate in Phoenix right now?

If you have been planning to buy a home sometime soon, and if you know for certain that you won’t need to sell it for at least five years, this just might be your magic moment.

Interest rates are still deliciously low, but both current events and long term trends suggest they’re headed higher. You’ll probably have to sell your current home for less than you wanted to, but you’ll be buying your next home at a bargain-basement price.

Sadly, you may not have enough equity in your home to move up. But if you do, there are some amazing homes out there selling for unheard-of prices. Houses that sold for $375,000 in 2005 are going for $175,000 three years later.

If you do have substantial equity in your home, even at today’s prices, moving up now may make a lot of sense. The rules for the capital gains exclusion on primary homes change on January 1st. If you’ve been in your home for more than the last 24 months but fewer than the last 60 months, moving before the end of the year could save you a significant amount of money on your taxes.

It makes sense to me for college students and their parents to snap up condominiums and starter-homes while prices are so low. After the start of the year, if the student holds title, it will take five years to realize the full benefit of the capital gains exclusion — approximately the length of a college career.

First-time home-buyers are taking advantage of this market, as well, with low-down-payment or even nothing-down government-sponsored loans.

Who else should be buying? Investors, of course, but the smart ones have already figured that out. For now, it’s very easy to acquire a premium home in a commuter-friendly suburb that will be cash-flow positive from the first tenant. Investor loans can be hard to obtain, but prices are so low that many investors are simply paying cash.

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If you have cash or can qualify for a mortgage, this could be the ideal time to grab a bargain-priced home in the Phoenix area

This is my column for this week from the Arizona Republic (permanent link).

 
If you have cash or can qualify for a mortgage, this could be the ideal time to grab a bargain-priced home in the Phoenix area

The Phoenix area is hosting a wave of real estate investors like we haven’t seen since 2005. Unlike the novices who came here during the boom, these are experienced landlords. They’re here now because lender-owned homes are selling for bargain-basement prices.

They’re not alone. Savvy home-buyers are scooping up bargains, too, especially first-time homeowners. Interest rates are still attractive — even if the homes themselves are less appealing.

Interestingly, over the last couple of weeks, many of the lowest priced homes have seemed to evaporate. I’m guessing that October is going to be a banner month for closed transactions. Yes, most of these will be foreclosed homes, but buyers are performing the liquidator function, restoring the value of underperforming assets.

With so many homes selling, are we nearing a bottom in the Phoenix market? It’s plausible, if the number of sales meets or exceeds the number of newly-listed homes to be sold. But, even now, around 7,500 homes a month are entering the foreclosure process.

It could be a long time before that inventory is absorbed. And if it comes onto the market faster than buyers can snap it up, prices will continue to decline.

Visualize the real estate market as a pipeline. The home that gets a foreclosure notice today won’t hit the lender-owned market for three to six months. Are there enough investors and other buyers to snap up record numbers of homes, month-after-month, for the next two years — or longer?

The answer to that question is yes — if the price is right. If the demand for low-priced homes already exceeds the supply in the pipeline, prices will stabilize or even start to rise. If not, lenders will be forced to cut prices until buyers find them impossible to resist.

It’s an awful time if you have lost your home, and it’s not great if you are living in a home you cannot sell profitably. But if you have cash or can qualify for a mortgage, this is an ideal time to snag a bargain-priced home in Phoenix.

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Other types of credit may be feeling the crunch, but home mortgages are still readily available

This is my column for this week from the Arizona Republic (permanent link).

 
Other types of credit may be feeling the crunch, but home mortgages are still readily available

Bad news about the economy is coming in from all directions, so you may be in the mood for some good news: There is plenty of money available for home loans.

By taking over FannieMae and FreddieMac, the federal government has essentially nationalized the secondary mortgage market. The lenders themselves are still private entities, but the government’s loan guarantees are viewed as being so strong that, by now, virtually all residential real estate loans are coming through Fannie, Freddie, the FHA or the VA.

The other way of saying the same thing: There is virtually no secondary mortgage market left for non-conforming or sub-prime loans.

So while you may have trouble getting new car financing or a loan for your business, you should have no problem getting a home loan — if you qualify and if the amount you’re borrowing falls within the limits set by the four government agencies guaranteeing home loans.

And there’s the rub: For most of the Phoenix area, qualifying for a conforming loan should be no problem. But higher-priced homes are sold with non-conforming “jumbo” loans, which are difficult to obtain right now and come at much higher interest rates.

Using an FHA loan, it is still possible to buy a home with “nothing down.” FHA borrowers are obliged to pay a 3.5% down payment, but this can be offset by the $7,500 tax credit incorporated in the mortgage relief bill passed in July. FHA borrowers can ask the seller for up to 6% in closing costs, so they can take possession of the home for no money out of pocket.

But there’s a catch: To obtain an FHA loan, the home will have to pass a rigorous FHA appraisal, which will eliminate many foreclosed homes unless the seller is willing to correct the most serious defects.

All that notwithstanding, while the financial sky might be roiling with dark clouds, real estate is still a silver lining. Because of the government’s loan guarantees, lenders are willing to take risks on homes loans much more readily than on other types of credit.

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