Landlord Shmandlord

Like James Saft, I believe that we will face heavy inflation in the coming years, which will help those of us who own financed real estate.

For the first time in a very long time U.S. housing might actually be a reasonable buy on a five-year view.

As a long-time housing bear and someone who believes there is still considerable pain to come in the U.S. economy and banking system that is quite a hard thing to say.

However historically cheap long-term fixed-rate financing (less than 5 percent on a 30-year mortgage) and the prospect of some nasty inflation a year or two out, both courtesy of current Federal Reserve and government policies, make owning a real asset that is debt financed a lot more attractive than would have been the case just three or six months ago.

You can read the whole article here.  

[Found via Paul Kedrosky]

I love the innovativeness of Zillow, and especially their new features (mainly Make Me Move).

It will be interesting to see how far they can take this. Can Zillow become a one-stop shop for buying/selling real estate, almost like what ebay did to the used-item market?

IE,

1. I put up a house on Make Me Move.

2. Joe is interested and responds to my offer through Zillow.

3. For a flat fee (a few hundred dollars?) Zillow acts as the coordinator of the sale, similar to what a real estate agent does now. They would verify Joe’s pre-approval and financial eligibility, schedule the inspections and closing, work with the title agent on the title search, etc. Ideally, there would be a very mechanical process that would have build-in provisions to handle the inevitable problems that would arise (ie, house doesn’t pass inspection, buyer can’t get mortgage, house blows up before closing, etc). Again, this is similar to ebay in some ways, in that ebay can handle deal-breaking issues that arise like buyers who don’t pay, items that don’t meet description, etc.

4. The sale goes through. No percentage would be paid, just a flat fee. (Also, Zillow wouldn’t collect their fee until the deal goes through)

I think one of the additional keys will be to open up their listings to other systems. There needs to be an open MLS-type site where I can go, see everything that is available, and initiate a purchase. This listing system must be comprehensive, which is why existing closed systems like MLS must be incorporated.

Obviously there are a lot of logistical issues, but it seems to me that this type of system is doable and that both the buyer and seller would really benefit (cheaper costs, comprehensive listings, standardized process).

I was reading this post on Blueprint for Financial Prosperity and it brought up several thoughts which I’d like to share.

The article is about paying a mortgage bi-weekly rather than monthly, so you end up making one extra mortgage payment a year. The thought behind this is that the extra payment will drastically cut the life of the mortgage.

Consider a 30-year $200k fixed 7.00% mortgage starting in December of 2006. If you make one extra payments every December, then instead of the mortgage ending in December 2036, it will end in December of 2030 (if you make two extra payments a year, it will end in March 2027).

Now, this is obviously a tremendous savings, in the case cited above the savings is almost $100k. In the case of a primary residence, people like the notion of freeing up their cashflow early, so that they can use it in other ways, like a personal safety-net or to invest elsewhere. I think in this case, the peace of mind that people get from fully owning their house is certainly valuable.

However, how does this strategy work for investment properties?

Let’s say that I’m renting an apartment out for 2k a month, but my mortgage payment is only 1k. Is it better for me to use the extra money to pay down the mortgage, or is it better to take that money and invest it elsewhere? Surely if you highly doubt that you’re not going to be able to make anything near 7%, it is better to just pay off all of your mortgages.

The point of the investment property is that it’s an investment. What if instead of paying off the mortgage, you save the excess rent until you have enough money to buy another place on which you will also have a positive cash flow (by design, of course)? You’ll then be collecting positive cash flow from two properties, which you will then use to purchase another eventually. All the while, you’re paying off the mortgages of your existing properties. Instead of keeping all of your equity tied up in one place, you’re using it to grow your investment. In 30 years, your first property will still be completely paid off, but you’ll also have other properties that are almost paid off as well.

If you use the extra money of an investment property to pay down the mortgage, in 30 years you will have one house that is paid off, 100k, plus the rent collected over the last 6 year period, but I don’t think it compares.

In the second scenario where you buy other houses with the leftover rent, there are tax advantages plus you will benefit more from appreciation.

You’re certainly leveraging yourself more in the second scenario, but I believe that it can be done in a responsible way according to your tolerance for risk. Maybe you’ll want to wait 5 years before purchasing the second property because you want to have a large safety net before investing again. As I’ve said elsewhere on this blog, it is important to make sure that you have enough money to cover problems that will arise. If after you pay a mortgage and allot a percentage to maintenance and vacancies you still have rental profits left, I believe it would be wise to save that money and invest it elsewhere.

What do you guys think?

Thanks revdancatt for the pic.

This post on TheLandlordBlog talks about how HUD-1s are never correct, and I completely agree with this. It seems like many mortgage brokers and title agents go out of their way to pull the wool over your eyes, and that the first and last time you’ll see these extraneous charges are on the HUD-1. For an inexperienced investor, these pointless charges can go undetected and get paid. If the mortgage brokers are questioned, they will be removed, but you have to know to look.

From my experience, dealing with a mortgage broker requires extra care compared to dealing with a bank. The worst experience I’ve ever had dealt with one company who slapped on several thousand dollars in fees that I saw for the first time on the HUD-1 (at the closing, because “it wasn’t ready until then”). I was refinancing two properties at once, and planning to use the money to purchase another. When I looked over the HUD-1, I noticed that there were several extra thousand dollars in fees to the mortgage broker and to the bank. Things like “Processing fee”, “Commitment fee”, “Appraisal review fee”, “Funding fee”, and of course the unexpected 1-point “Loan origination fee”. None of these items were listed earlier when the broker was enumerating my closing costs. And although I had never heard of any of these fees before closing, they wouldn’t remove any of them. I ended up just dropping the deal and walking out of closing, because the people were just too slimy. Since then I much prefer banks = )

While most cases aren’t typically this bad, there still may very well be a few hundred dollar fees that can and should be removed at closing. Here are a few things that you can do to minimize the risk of getting taken advantage of at closing:

1. Be familiar with the process and know what fees are typically paid at closing.
2. Ask your loan officer to enumerate all expected closing expenses when first applying for the loan. While unexpected costs can and do occur, it is helpful to remember verbatim what was stated earlier to make sure that he was at least being somewhat honest with you.
3. Go through every line in the HUD-1 with somebody who is both good at math and understands the process. Ideally this person should have no financial stake in the outcome.
4. Be prepared to walk away from the deal. If you are not, they’ll smell blood and won’t budge. You’ll end up getting jammed with the costs.
5. Shop around early in the process, use a bank or trusted/recommended mortgage broker (recommended again by somebody who doesn’t have financial interests in the deal).
6. Use your own title agent
7. Don’t be too excited/excitable, you need to be able to think rationally during closing.
8. Use a lawyer

Any other suggestions?

As the housing market cools down, the rental market will heat up. Rising rental prices are obviously great for landlords. I’ve already noticed this happening in the area surrounding my rental units, where rents have increased 10-15% in the past six months. This change is also happening in Philadelphia, where apartment buildings are full and are increasing prices of the remaining units.

The WSJ has a good article on the topic here.

Generally, rents in East and West Coast cities are expected to rise the fastest. Archstone-Smith, which owns apartment buildings in 41 cities, says it is increasing rents 8% to 10% in New York City and Southern California. And in South Florida, vacancy rates are so low that some landlords are raising rents as much as 28%, according to McCabe Research & Consulting. In Chicago, just five of 34 large apartment buildings offered concessions to renters in the first quarter, down from 19 a year earlier, according to Appraisal Research Counselors, a real-estate consulting firm.

It’s partly a supply-and-demand issue. Years of soaring house prices (and recent increases in mortgage rates) have simply priced many people out of the home-buying market. Indeed, the portion of U.S. households owning their own home slipped to 68.5% in the first quarter from 69.1% a year earlier, according to the Census Bureau.

For long-term landlords/investors, this is a great situation. Day-to-day fluctuations in the current market value aren’t exceptionally important, because I’m not going to be selling them anytime soon. Even if we’re heading into a downturn or cooling off period, housing is cyclical and will come back and appreciate over longer periods.

Monthly cashflow is what is important today, and higher rents will directly benefit this.