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BofA Tests an Option to Foreclosure

March 23, 2012 By

Lender Lets Owners Stay in Homes, Rent From the Bank

By Nick Timiraos

Bank of America Corp. is launching a pilot program that will allow homeowners at risk of foreclosure to hand over deeds to their houses and sign leases that will let them rent the houses back from the bank at a market rate.

While the initial scope of the “Mortgage to Lease” program is small—the bank began sending letters Thursday offering leases to 1,000 homeowners in Arizona, Nevada and New York—it represents a big change in the way banks deal with borrowers who can’t afford their mortgages.

Until now, banks have focused the bulk of their borrower outreach on modifying mortgages, usually by reducing the monthly payments. When that doesn’t work, most foreclosure alternatives require homeowners to leave their house, typically through a short sale, in which the bank approves the sale for less than the amount owed. Banks often insert clauses forbidding the new owner from renting the property back to the former owner.

The new approach is unlikely to be expanded unless banks conclude that avoiding eviction reduces costs associated with taking back, maintaining and reselling properties. If a significant number of borrowers are willing and able to rent the homes, Bank of America could ultimately sell the properties to investors that agree to keep them as rentals.

Already, in a growing number of housing markets, investors are buying foreclosures and converting them into rentals, often filling them with families that have gone through foreclosure.

Executives last year began to ask themselves “isn’t there a way to sort of combine that whole process and keep the borrower in the property? It’s just better for the market,” said Ron Sturzenegger, the Bank of America executive who last summer was put in charge of the unit that handles troubled mortgages.

Bank of America became the nation’s largest mortgage originator after its 2008 purchase of Countrywide Financial Corp., but over the past year it has retreated from the mortgage market. The initial pilot is limited to loans that Bank of America holds on its books. Homeowners can’t apply for the program—only those who receive letters from the bank can participate.

Borrowers would agree to a what is known as a “deed-in-lieu” of foreclosure, where they essentially sign over ownership of the property to the lender. This is less costly to the bank and also does less damage to a borrower’s credit than a foreclosure.

Borrowers selected for the program must be at least two months past due on their mortgage and face considerable risk of foreclosure.

In exchange, former owners would be offered one-year leases with options to renew the leases in each of the following two years at rents that the bank determines are at or below the current market price. Borrowers would have to demonstrate an ability to pay the market rent.

For example, based on a sampling of home values and rental rates in Phoenix recently, a consumer with a $250,000 mortgage and monthly payments of $1,600 could swap the house for a lease, renting the home for $900, depending on the condition of the property and the neighborhood.

Consumer advocates and some investors have long called for less disruptive alternatives to foreclosures, given the limits of loan-modification programs. “You still have a lot of people that are facing foreclosures, and this is a way to keep people in their homes that is obviously much better,” says Dean Baker, co-director of the Center for Economic Policy and Research.

Foreclosures, particularly if properties are vacant, can drag down housing values in a neighborhood.

Borrowers selected for the program must be at least two months past due on their mortgage and face considerable risk of foreclosure. Bank of America is reaching out to borrowers who have exhausted other alternatives to foreclosure or who haven’t responded to earlier solicitations. Homeowners with second mortgages or other liens won’t be selected.

Mr. Sturzenegger said the success of the current pilot would determine whether Bank of America expands the effort. “We’re optimistic but realistic. If we get a great takeup rate and the process works, we’ll roll it out,” he said.

The program is the latest example of how banks are experimenting with ways to deal with a large overhang of foreclosed properties. Some lenders have begun offering incentive payments of up to $30,000 to borrowers who agree to short sales.

Fannie Mae rolled out a “deed-for-lease” program in late 2009 but it hasn’t been widely used. Some industry analysts say that banks haven’t aggressively marketed the initiative.

Already, investors have approached Mr. Sturzenegger about purchasing pools of leased properties from Bank of America. One of those investors is Laurie Hawkes, president of American Residential Properties, a Scottsdale, Ariz.-based firm that has bought nearly 800 homes in the Phoenix area as rentals. If homes are realistically priced, Ms. Hawkes says her firm would “definitely” be interested in buying them.

Foreclosures have slowed sharply in some states amid heavy scrutiny of allegedly forged paperwork used by processing firms. Banks completed 860,000 foreclosures last year, down from 1.1 million in 2010, according to CoreLogic Inc.

“One of the outcomes of the ‘robo-signing’ scandal is that it is more difficult to foreclose,” said Mr. Baker. “It’s more worthwhile for banks to pursue alternatives.”

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Renters wanted: A strategy to shrink REO inventory

March 1, 2012 By

By Stefanos Chen

With an estimated 3.6 million more foreclosures expected over the next two years, the government-backed mortgage giants have a proposition for you: How’d you like to take a couple (hundred) homes off their hands?

In a recently announced program, the Federal Housing Finance Agency, which regulates the quasi-government lenders Fannie Mae and Freddie Mac, is offering qualified investors the opportunity to buy pools of foreclosed homes, provided they agree to rent the properties for a certain number of years.

In its pilot run, the foreclosure-to-rental initiative aims to shift some of the burden of managing foreclosed and vacant homes from Fannie Mae to private investors, who’ll be tasked with maintaining the properties. Freddie Mac and Federal Housing Authority loans may be considered at a later stage of the program.

By mandating that the properties be used as rentals, the program seeks to lower rents where foreclosures have hiked up demand and to stabilize communities in the hardest-hit areas.

As neighbors of foreclosure victims know too well, vacant homes drag down prices and attract all manner of blight. Home prices nationwide have fallen 33 percent since the height of the bubble in 2006, according to the Federal Reserve.

Along with corporations, investment trusts and banks, individual investors can also get in on the action, as long as they’re worth at least $1 million (though the actual barrier to entry may be higher).

Behemoth bundles

But even for the largest and savviest investors, the mortgage giants’ first major foray into the foreclosure-to-rental space could prove too costly.

Donna Robinson, a Cartersville, Ga.-based real estate investor and consultant, expects the foreclosure pools to range anywhere from 500 to 1,000 properties — anything smaller, she said, wouldn’t be worth bundling. Fannie and Freddie owned about 180,000 homes at the end of September, The Wall Street Journal reported. Add in FHA-owned homes, and the number rises to 215,000. Even at 1,000 homes apiece, it would take more than 200 mega-investors to work their way through the current backlog.

And while there have been reports of options being available for smaller investors, the onus will still be on major investment firms to manage the bulk of the properties, Robinson said. A spokesperson for the FHFA would not confirm the expected size of the pools.

Geographic sprawl

If the pools are as large as Robinson anticipates, then distance is the investor’s biggest enemy. While real estate investment trusts (REITs) may be comfortable in managing several hundred-unit commercial properties, operating 500 single-family residential homes (defined as up to four-unit properties) spread out across a city — or even nationwide — is an entirely different story.

Local compliance issues and getting properties up to snuff across a large market will take time. Investors could spend upward of a year waiting for clearance to rent their properties while carrying the day-to-day costs of maintenance, insurance and taxes, Robinson said.

Yet with risk comes reward, and Robinson expects investors to get steep discounts on their purchases. “No pro is going to pay anything above 30 to 40 cents on the dollar, tops,” she said.

In the Works

With the initiative still in its infancy, much can change before the program rolls out. One way Fannie might avoid having to make huge price concessions to investors is to offer them a stake in the pools while keeping a share of the returns, suggests Nick Timiraos at The Wall Street Journal.

But whichever route the FHFA ultimately chooses, the program’s success remains tethered to several larger housing factors, said Celia Chen, an economist for Moody’s Analytics Inc.

Even though foreclosures will pick up in the early part of the year, home prices should start to stabilize toward the end of the year as part of the $25 billion mortgage settlement is used toward principal reduction, she said. The REO-to-rental program will take awhile to kick into gear, and could benefit as a result.

But some analysts are less hopeful about the program. A report by Goldman Sachs suggests the effort will have “positive but modest” effects, with maybe a 0.5 percent increase in home prices within the first year, and a 1 percent increase in the second -– but that’s a best-case scenario, the report states.

Scope is also a factor in the program’s success. There are at least four times as many properties still in some stage of foreclosure as there are in the REO inventory, according to a January report from the Fed.

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New American Dream is renting to get rich

February 16, 2012 By

(Reuters) – Rich Arzaga owns a luxury home in San Ramon, California, but he’s not betting on it as an investment.

The founder and CEO of Cornerstone Wealth Management, who bought the 5,000 sq. ft. property in 2005 for $1.8 million and has spent $500,000 improving it, considers the abode a wonderful place for his family. But ask him to rate his home — or any home, for that matter — as a financial investment, and Arzaga balks.

“It’s the American Dream to own a home, but whoever said that didn’t do the analysis on it,” says Arzaga, knowing he’s taking a contrarian stance to conventional wisdom.

Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, “100 percent of the time it was better to rent, rather than own.”

That’s right: 100 percent.

The reason is simple. While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs – what’s needed to hold and maintain the asset – range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs, leaving the occupant free to invest revenue in other areas.

“I don’t have the emotions a lot of people do surrounding real estate,” Arzaga says. “I have steely eyes for how investing in real estate works, and I’d better be a prudent investor for my clients.”

Owning a dream home, he says, creates a drain on other financial priorities, causing homeowners “not to meet their financial goals. They were going to fail.”

Some real estate experts thought there was some truth to Arzaga’s argument, albeit with several conditions.

“To state that owning a home is or isn’t a good investment is too simplistic,” says Jeffrey Rogers, president and COO of Integra Realty Resources. “It depends. In times of relatively higher rents, low home values, and low interest rates, it makes sense to own a home. But in a reverse market, it wouldn’t be economically feasible. Over time, those who purchase in down or flat markets with low interest rates come out ahead.”

“Our lifetimes are a long time, and when we look over the long term, real estate and other investments tend to have a positive return,” says Jed Kolko, chief economist at Trulia.com, a real estate search and research website. “But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving. If you move every two years, it’s probably a bad investment for you. It also depends on your job market. If you’re in a one-company town and the company goes down, there goes your job and there goes your home value.”

Greg McBride, a senior analyst at Bankrate.com, agrees with one point of Arzaga’s. “Home ownership is not so much a creator of wealth as a store of wealth,” he says. “The promise of home ownership is that over the long haul, it can rebate many or perhaps all of your costs, unlike rent, which doesn’t rebate a dime.”

The trouble, he says, is that many Americans want a home so badly, they neglect other ways to grow wealth and financial security.

“You have the other financial bases covered: emergency savings, retirement savings, paying off debt, saving for the education of your children,” McBride says. “There’s no sense in buying a home if it’s going to deplete your emergency or retirement savings.”

McBride crunched the numbers in a pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 just to break even. His conclusion gave Arzaga’s view credence: “Homeownership may not be the moneymaker you think it is.”

Then there’s the emergency fund, a must for when a home requires unexpected repair work.

“As far as emergency savings is concerned, six months of a cushion is adequate,” McBride says. “But only 24 percent of people have that kind of cushion, and about 65 percent own homes.”

So while home ownership may sound glamorous, you need a lot of money to make it work, without much guarantee of positive returns in a post-bubble era. Indeed, Arzaga cites himself as an example of how home ownership doesn’t pay off. His residence is today worth $1.5 million, about 17 percent less than what he paid.

So why not sell? For Arzaga, it’s a lifestyle choice, and one that he doesn’t regret, since his big money-making investments are elsewhere.

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Is lease-to-own home purchase worth the risk?

November 17, 2011 By

By Jack Guttentag

A lease-to-own house purchase (also “rent-to-own purchase” or “lease purchase”) is a lease combined with an option to purchase the property within a specified period, usually three years or less, at an agreed-upon price. Such arrangements have proliferated in the post-crisis market because many potential homebuyers can’t meet the tougher loan qualification requirements today, and many potential sellers are unable to realize a satisfactory price in any other way.

Lease-purchase plans can be structured in such a way that both parties benefit. They can also be structured so that all the benefits flow to one of the parties and none to the other. Buyers especially need to be careful because they usually know less about the market than sellers, and the seller usually provides the contract.

Contract features of a lease-purchase

In a typical arrangement, the borrower pays an option fee, 1 percent to 5 percent of the price, which is credited to the purchase price. The borrower pays a market rent, and an additional rent premium that is also credited to the purchase price. The option fee, option period, rent, rent premium, and purchase price are all negotiable items. If the purchase option is not exercised, the buyer loses both the option fee and the rent premium.

Buyers generally prefer a long option period because it provides more time to accumulate savings and repair credit. A long period can boomerang on them, however, if they are never able to exercise the option, because they lose the rent premium they have been paying all the while, in addition to the option fee. Sellers generally prefer a short option period — but if it is too short, the house won’t be sold.

The option fee and rent premium are viewed differently by buyers and sellers. To the buyer, they are part of the equity in the house they fully expect to own. To sellers, however, these payments are the best guarantee that their houses will sell; if they don’t sell, the payments are retained as income. That the benefit to the seller generally exceeds the cost to the buyer makes the lease-to-own deal a possible win-win.

A lease-purchase contract may or may not give the renter/buyer the right to sell the option. This will have value to the buyer who isn’t completely confident of being able to exercise the option. It is a cost to the seller who prefers to retain the house and the monies collected.

Lease contracts may also contain provisions that nullify the buyer’s option, a point discussed below.

Using a lease-purchase to buy

The lease-purchase offers homeownership opportunities to consumers who can’t qualify for a loan from any source, but who are prepared to bet on themselves. The bet is that before the option period expires, they will qualify for the mortgage they need to exercise the purchase option. During the option period, they have the opportunity to rebuild their credit and accumulate savings while living in the house.

Even though it is costly, the right not to exercise the option is of value to buyers. If there is something seriously wrong with the house, neighborhood or neighbors, the buyer can cut her losses by not exercising the option.

Dangers to buyers

A major threat to buyers is contractual provisions that can nullify their option, such as the failure to pay the rent on the first day of the month. Such provisions are most likely to appear in contracts used by developers or firms that own multiple homes. One such firm in Florida had more evictions based on unreasonable conditions than they had purchases. Read the contract very carefully to make sure you are confident you can meet all the conditions.

Using a lease-purchase to sell

Most home sellers want a cash sale, but for those prepared to hang on to the property awhile longer, the benefits can be compelling. Buyers unable to become homeowners in any other way will generally be willing to commit to a future price substantially higher than the same property could be sold for today.

While the deal may fall through, in that case the seller gets to pocket the option fee and rent premium. The seller also continues to enjoy the tax deduction on his mortgage interest payments during the option period.

Not part of the down payment

The option fee and rent premium are not part of the down payment unless the seller agrees to relinquish the right to retain these payments in the event the buyer doesn’t exercise the option. Few sellers would be willing to do that. But the option fee and rent payments do make the required down payment slightly smaller.

For example, the parties agree to a price of $100,000 and the option fee and rent premium add to $5,000 when the option is exercised. From the standpoint of the lender, the price is $95,000 and a 5 percent down payment requirement would call for a down payment of $4,750 instead of $5,000.

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Morgan Stanley predicts foreclosed homeowners will pay $72B in rent annually

October 31, 2011 By

by Jon Prior

The millions of homeowners facing default on their mortgages will likely become renters once their home is foreclosed. Investment bank Morgan Stanley crunched the numbers and said the boost to the multifamily segment, that arm of commercial real estate that includes apartment buildings, will most likely see a multibillion-dollar boost from the looming migration.

Oliver Chang, a housing and securitized products analyst at Morgan Stanley, the lead author of a report released this week, detailed the migration of ownership to rentals. He expects a drop in the U.S. homeownership rate to 60% in the coming years from 69% at its peak.

The rate tumbled to 65% from a decade ago, the Census Bureau reported this month. It’s the largest drop in 70 years.

According to RealtyTrac, there have been 8.9 million homes lost to foreclosure since 2007, the height of the credit crisis. And there is more to come in the fallout.

Chang said there are roughly 7.5 million households either in foreclosure or delinquent on the mortgage. With the majority of these borrowers forced to pay rent over the next five years as their credit heals, this would equal $72.7 billion in incremental rent payments instead of mortgage payments.

The government is moving ahead to take advantage of the increase in demand. It’s currently developing strategies to rent more of the thousands of government-owned foreclosure properties.

“Burned by the worst housing downturn in history, more households are choosing to rent instead of owning a home,” Chang wrote.

He went on to describe a shift in the focal point of the economy from manufacturing to services. In the latter, Chang said, workers value mobility, and renting provides the opportunity to pursue employment more so than owning a home.

“While traditional drivers like job growth and rent-buy dynamic clearly explain part of the resurgence in demand — the vibrant snap-back in apartment fundamentals in the past year has been augmented by the shifting attitudes in consumers towards renting,” Chang said.

The mortgage industry refutes this idea and is at work tackling its plethora of problems and shortcomings. They range from what some call overly restrictive lending standards on the origination side, a dormant private-label secondary market, and ongoing issues in servicing.

At the Mortgage Bankers Association conference in Chicago earlier this month, the trade group’s new CEO David Stevens refuted the claim that the desire to own a home in the U.S. was dead.

“We have first and foremost an obligation to restore trust with the consumer and ensure that when they buy a home the products they are qualified for will be built on safe and sound standards over the long term,” Stevens said.

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Some real estate sellers better off as landlords

October 13, 2011 By

By Dian Hymer

Hopes of a housing recovery in the second half of 2011 were dashed when low consumer confidence, high unemployment and the debt crisis debacle were exacerbated by Standard & Poor’s downgrade of the United States’ credit rating. In August, S&P demoted the U.S., Freddie Mac and Fannie Mae (two government-sponsored mortgage entities) from AAA ratings to AA+.

The first-ever downgrade of the U.S. was expected to cause interest rates to rise. Instead, it had the opposite effect. Low interest rates have set off a new surge in refinance applications, but it has done little to help most homebuyers who can’t qualify under current strict lender requirements.

Nationally, home prices declined approximately 5 percent between March 2010 and March 2011, according to Fiserv, a company that provides data analysis for the financial services industry. Fiserv expects home prices to decline another 3.1 percent by March 2012 and possibly increase 2.7 percent nationally in the first quarter of 2013.

It’s not a great time for home sellers. That is, unless you’re a homeowner who in lives in Tacoma, Wash., where Fiserv expects prices to increase nearly 25 percent by March 2013, or near Silicon Valley in the San Francisco Bay Area, which is generating jobs at a rapid pace. Otherwise, what should you do if you want or need to move now?

One option is to sell your home, even though the market is soft. But before going to the expense of preparing your home for sale, find out what your chances are of selling in your local market.

Some sellers in hot niche markets are breaking even, depending on when they bought. Others are bringing cash to closing because they can’t sell for enough to cover the loan payoff and closing costs. Others can’t sell at all without discounting the price significantly.

Find out how many homes like yours in the neighborhood have sold recently, along with the sale prices and how long it took to sell. If the market is still declining in your area, plan on selling your home for less than the most recent sale.

How many homes like yours are currently for sale? If there are few and buyer demand is high, the odds are in your favor. Keep in mind that listings that sell in this market are usually in move-in condition. If your home isn’t in great shape or doesn’t show well, are you willing and able to do the improvements that will be necessary to sell?

HOUSE HUNTING TIP: While you’re researching selling, consider whether it makes sense to rent the property rather than sell at this time. The rental market is hot in some spots. Even so, make allowances for tenant turnover, vacancies and the possibility of lower rents in the future.

A major consideration should be whether the prospective rent will cover the costs of carrying the property. Will you need to pay each month to make up the shortfall, or will the property generate cash? If you’ll take a beating on price by selling but you’ll receive a good income from renting, then renting it out might be the best option.

To make sure your property is properly maintained, consider hiring a property manager if you can’t manage the property yourself. Find out if there are any rent control ordinances and how they might affect you.

Consider the tax consequences of converting a primary residence into an investment property. Consult with your financial adviser and accountant to understand how this will impact you tax-wise, particularly if the rent does not cover your carrying costs. And, ask you financial consultants for advice on whether it’s better for you to sell or rent.

THE CLOSING: Finally, if you’re interested in renting only for the short term, you might be better off selling today. The market may stabilize in 2012 or 2013, but it could take a lot longer.

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Rental Market Heating Up: Should You Raise Your Rent?

October 4, 2011 By

By All Property Management

The daily headlines make it clear: rental markets across the country are tightening in the wake of the housing market collapse. Record foreclosure rates, economic uncertainty, tougher lending standards, and a major slow-down in the construction of new single- and multi-family housing units have all contributed to high demand for rentals.

With vacancy rates dropping, both investment property owners and property managers are looking forward to putting a little extra cash in their pockets, but here are some compelling reasons to avoid being too aggressive when it comes to raising rents:

The Law

It probably goes without saying, but most states have laws in place to protect tenants from unreasonable rent increases, even those who rent on a month-to-month basis. Before you raise rents, check to see how much notice you need to give, and whether there’s a cap on how much you can raise rent within a given time period.

Avoiding Turnover

Even with long vacancies a diminishing possibility in most areas, if you raise the rent and your current tenant moves out, just the cost of getting an apartment into shape to be rented to a new tenant can quickly eat into your profits. Make sure to factor the cost of repainting, cleaning or replacing carpets, advertising the property, and a vacancy of at least a few days into the equation when you calculate the advantage of raising rents.

Price-to-Rent Ratio

In many areas, house prices are falling, the glut of foreclosed homes on the market is predicted to hold prices down for at least the next two or three years, and there is no shortage of inexpensive housing stock available for purchase. Many people who could afford to buy these properties are simply choosing to rent—fearing declining house values—but if the rent you’re charging crosses a certain threshold, it might start making more sense for these potential buyers to risk a purchase.

One common way to calculate whether it makes sense for someone to rent your property or to buy their own is to multiply the rent you’re charging by 12, then divide the price of a comparable property by this number. So, for example, if you’re renting out a three-bedroom home for $1000 per month and a comparable property costs $130,000, you divide $130,000 by ($1000 x 12) and get an index of approximately 11. It’s widely thought that where the index is 15 or less, it makes more sense for a consumer to buy, rather than rent.

Choosing the Best Renters

Pricing your property slightly under market rates in a climate of high-demand is guaranteed to attract a lot of interest, allowing you to choose from the widest possible pool of potential renters. With so many people struggling financially due to economic hardships of one kind or another, the ability to choose the best tenants is a huge advantage when it comes to maximizing your profits.

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The new real estate boom: rentals

October 1, 2011 By

By Brian Davis

Home prices and sales may be flat, but the rental industry is booming. The percentage of renters is on the rise, the number of households is increasing, and more Americans are downsizing, all of which point in a single direction: rents are on the rise.

At the peak of the housing boom, homeownership in America reached an all-time high at 69.2 percent. Today that number has plummeted to fewer than 67 percent, which may not sound like a huge drop, but that represents roughly 3 million households that were owner-occupied and are now tenant-occupied.

The high foreclosure rate has accelerated the transition toward leasing, but there are a myriad of other trends coalescing to boost demand for rental housing.

For the first time in 40 years, demand has been shifting toward smaller dwellings, coinciding with a shift in demand toward urban centers. Baby boomers are considering downsizing, moving toward areas with more amenities, and members of Generation Y are just hitting their single, urban-living years.

Only the relatively small Generation X is in the buy-a-large-house-in-suburbs category, which means the demand for the traditional single-family home with a white picket fence is weak.

The number of households in the U.S. was artificially stifled during the “Great Recession,” as people took on roommates, moved in with family, or remained with their parents longer than they would have otherwise.

It’s estimated that 1.2 million young adults moved back with their parents from 2005-10, which does not include the number of adults who moved in with roommates or those who would have moved out of their parents’ houses but didn’t because the economy was so bad.

Now, however, these artificially joined households are separating, the vast majority starting with a lease agreement.

Rental vacancy rates are sharply on the decline as well. In the first quarter of 2011, rental vacancy rates had dropped to 6.2 percent, according to Reis Inc., which tracks nationwide residency data. This figure is down sharply from the 8 percent vacancy rate just one year earlier.

That, of course, means that rents are on the rise. Reis tracks data for 82 metropolitan areas in America, and of those, 75 experienced increased rents from early 2010 to early 2011. Furthermore, the nationwide average rental amount rose from $967 in early 2010 to $991 in 2011.

Each of these indicators are entire topics in themselves, but the bottom line is that the rental industry is on the rise, and some real estate experts believe that its growth will accelerate rapidly over the next three to five years.

Apartment-building construction is already responding to the growing demand for rental housing, but with so many construction firms either out of business or licking their wounds, it’s anticipated that there will be a rental housing shortage in many major cities around the country over the next few years.

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Choosing the Right Property Manager

September 26, 2011 By

By All Property Management

Choosing the right property management company from among the dozens in your area can seem like a daunting task. But with some careful planning and good interviewing techniques, you’ll be well on your way to turning the complex, time-consuming job of managing your rental property into a passive (for you) revenue stream.

Before deciding which companies to put on your short list, sit down and identify your needs and goals for the property in question. Do you need full property management services, or do you want help with only certain aspects of your business, such as leasing? Do you need a manager to live on-site? Would you prefer to work with a large company that has multiple locations and lots of resources, or would you rather work with a more boutique business, where you’ll likely receive more personal attention?

Once you’ve decided on your criteria and narrowed your search, take a close look at the following aspects of any property management companies who make your final cut:

Company focus: While many property management companies are willing to take on a variety of property types, it’s also not uncommon for a company to have an area of particular expertise, or to heavily preference managing certain property types. It’s also not uncommon for a property management company to focus heavily on a particular skill set, such as marketing properties, providing regular inspections, or handling the administrative aspects of running an income property. When you’re evaluating a property management company, you’ll want to make sure that your interests and those of the company are aligned.

Management systems: Regardless of how long they’ve been in business, a good property manager will be able to easily describe her proven methods for securing rental payments, performing routine maintenance, complying with regulations, handling emergencies, resolving disputes, and other critical tasks.

Cost structure: Good property management companies will make it easy for you to understand what the total monthly cost of their services will be. When you’re reviewing the contract, make sure you understand what tasks are included in the stated monthly, hourly, or project-based fee, and look out for excessive potential additional charges.

Availability: Like it or not, property management is a 24/7 undertaking. The company you’re looking at should have plans in place for handling any emergencies that arise outside of standard office hours.

Customer service: Keep in mind that your property management team will not only be servicing you, they’ll be representing you when dealing with your customers, the tenants of your property. If they lack professionalism or attentiveness in this area, it will cost you money in the end. If you can, observe the company you’re interviewing in action, and be sure to get familiar with their customer service policies.

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Cashing in on rental property

September 15, 2011 By

By Jeff Wallach

(MONEY Magazine) — Most of the news lately about real estate has been dismal: Home prices are swooning, foreclosures ballooning.

There is, however, one bright spot: the rental market, where demand is up and rents are rising. That’s partly because those foreclosures have turned more than 4 million former homeowners into renters, but also because many other prospective homeowners, worried about losing their jobs or housing prices falling a lot further still, are reluctant to buy now.

As with many investments, the best time to get in is when most others are sitting on the sidelines. To figure out whether you can benefit by investing in rental property, here’s what you need to know.

THE CASE FOR BUYING NOW

Many factors make this a great time to invest. Mortgage rates are at a 40-year low, and homes in many areas are ultra-cheap. Meanwhile, demand for rentals has risen in more than 500 cities, according to recent Census data. That, in turn, has enabled landlords to charge more. Hotpads.com, a real estate research firm, reports that rents nationwide jumped 11.6% in 2010, to $1,320 a month.

You’ll need that rental income to tide you over until home prices bounce back; in fact, the typical investor today plans to hold for 10 years, according to a survey by the National Association of Realtors.

If you can hang on that long, you’ve got a good shot at solid gains, especially if you’re financing the home purchase. “Whereas leverage is dangerous when buying stocks, it can be a good long-term strategy with real estate,” notes real estate investor and Columbia University adjunct finance professor Marshall Sonenshine.

The big catch: “Can you afford to hold the property that long and not need the equity for your kid’s college fund?” says Sonenshine. Or whatever other pressing need might crop up.

You’ll also face some tough financing rules. Most banks now require a down payment of at least 20% to 25% and evidence you have enough cash to cover six months’ worth of mortgage, tax, and insurance payments.

HOW TO FIND A GOOD DEAL

Investment real estate is like produce: It’s best bought locally. “Buy something you can get to in 10 minutes,” says Seattle real estate investor Bill Snyder.

Familiarity with the neighborhood also limits nasty surprises like a noisy bar or a nearby development competing for renters.

Work with a local realtor who has experience with rentals and can help you assess how attractive a given home will be to tenants.

And while prices on multifamily dwellings haven’t dropped as much as they have on single-family homes, don’t ignore plexes: Intake from a few rents instead of just one will boost your cash flow; a single vacancy won’t hurt as much; and you could benefit from economies of scale for things like appliances and painting. But stick to buildings with four units or fewer to avoid stricter financing requirements, such as a bigger down payment and higher mortgage rates.

Once you’ve identified candidates, crunch the numbers. The goal: to make sure your rental income will at least cover your loan payments, plus a 20% cushion to handle repairs, vacancies, and property management.

To figure out what you’ll garner in rent, ask sellers for recent leases, says Snyder, and double-check their numbers by perusing sites like Rentometer and Craigslist for similar rentals in the neighborhood.

Assume your mortgage rate will be at least a half-point higher than rates on owner-occupied properties. Factor in insurance and property taxes, and bank on a 5% vacancy rate. Otherwise, “one empty month can kill you,” says Ellie Berlin, a broker with Houlihan Lawrence in Larchmont, N.Y.

KNOW WHAT YOU’RE IN FOR

Brush up on your people skills: Owning rentals also means responding to tenant complaints, like the 2 a.m. phone call about a broken toilet. Want to palm off the grunt work? You can hire a handyman (around $45 an hour) or a management company (8% to 10% of monthly income plus a half-month’s rent for filling vacancies), but the luxury will eat into cash flow.

To find your own tenants, creative ads on Craigslist are your best bet. Run credit and reference checks (National Tenant Network, at ntnonline.com, can help). And invest in small touches to make your place stand out, such as cool lighting fixtures or antique door hardware. Those will pay off when it’s time to sell too.

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