Wednesday, September 26, 2012

Real Estate can be a much better retirement plan than traditional passive investments

Rental Income Produces A Better Return Than Wall St.


Let's face it.  The times of gradual yields from a typical stock have faded into the pre-mortgage melt down days.  Private equity firms are offering much higher yields for purchasing percentages of certain securities of their unwanted assets, claiming up to a 19% return.  If that sounds too good to be true... it more than likely is.  Aside from that, S&P's 500 is offering typical returns of 2% to 6% for their average junk bond.  Across the map, stock investing is less than average based on its averages.

Current trends are shifting to more tangible assets.  Primarily, real estate.  Specifically, rental property.  Buying a distressed property such as a foreclosure or short-sale at a significant discount can offer "hard to believe" returns in comparison to any typical investment vehicle offered on Wall St.  

Let's say you purchase a property from someone like OCWEN, BofA, Fannie Mae, Freddie Mac, or any other bank that has a massive amount of REOs.  More than likely, you can purchase that property for nearly half of it's after repair value.  After repair value is exactly as it states... A fair market value equivalent to it's comparables in updated marketable condition.  Typically, another 15% to 20% of that after repair value will be applied to repair the distressed asset.  With that added into the equation, the average investor is left with about 30% to 35% equity capture.  If the property's after repair value is $200,000.00, that leaves you with around $60,000 to $70,000 in equity.  
A standard rule for rental averages in the DFW marketplace typically allow for a property to have a rental rate of 1% of it's after repair value.  Using the previous example, the property would rent for around $2,000 per month.  If you were to cash out what liquid assets you have placed into the property with a mortgage,  your PITI (principle, interest, taxes, and insurance) payment would be near the amount of $1400 per month. That leaves the investor with what is called "cash flow" of around $600 per month.  

The strategy is to hold the investment until the mortgage placed on the property is completely paid off.  Since the investor has a tenant paying rent, the mortgage is paid by the tenant and the investor is simply profiting each month the difference of the rent minus the mortgage.  Once the mortgage is satisfied, the investor can choose to sell the asset.  Because the property has seasoned for the term of the loan (typically 15-20 yrs), there will be appreciation to factor into the value.  Using conservative appreciation at 2% of the term over 20 years, the value will have increased to just shy of $300,000.  

Obviously, there will be some renovation costs and some un-forseen instances.  Assume costs of 30,000 are to be subtracted from the selling price along with realtor fees and closing costs of an additional 20k, this investor will walk from the closing table with around $250,000.  Keep in mind that your passive income of $600 a month from this property over 20 years have not been accounted for.  Tax benefits are also unaccounted for as well, but that is for another blog.

This is one of my retirement plans, and it is proving to be an extremely profitable one.  I have others, but those are for different blogs as well.

Monday, September 24, 2012

Raising "G-fees" is FHFA's Way Of Loosening Up Lending In High Risk States

Starting in 2013, the FHFA plans to increase G-Fees charged on single family mortgages.  The charges are only to be increased in those states that have the highest rate of defaults.

What are G-fees you ask?  G-fees or "guarantee fees" are basis points charged by Mortgage Backed Securities providers for bundling, servicing, selling, and reporting to MBS to investors.  It's primary purpose is to protect against losses from defaulted MBS.

Currently, the rates for G-fees are the same across the country.  But, next year, states with higher foreclosure rates will be paying in excess of 15-30 more basis points for G-fees.  The current average rate of G-fees are 15-25 basis points.  What this means to the consumer is about an increase of $3.50 to $7.00 per month on a mortgage for around $200,000.

Passing this on to the consumer does not place responsibility on the banks, and still presents the same issues we faced half a decade ago.  If the bank or servicer responsible for packaging the MBS paid for the G-fees, it would more than likely ensure proper packaging of securities. If the banks are not directly being impacted by these fees, what does it matter to them to continue to package loans as ineffectively as they did in the past?

What this presents to me is not a way of presenting defaults from occurring, but rather opening up the tight reigns of lenders in states with the most defaulted MBS.  It has been difficult, if not impossible  to secure a mortgage in states such as Florida, New Jersey, Connecticut, New York, and Illinois since the mortgage meltdown at the end of 2006.  Now that these states will be charged an increased premium in G-fees, lenders will be able to loosen guidelines for borrowers.

As the market appears to be bottoming out and actually showing very mild appreciation, over optimism is allowing for business to resume as it did in the past.  Charging more "fees" to allow lenders to write paper for unqualified borrowers sounds a lot like "sub-prime mortgages" to me.  Creative methods are great, but must have a control to acquit for economic stability.

Thursday, September 20, 2012

Investment home flipping is on the rise, by over 25%

     As you already know, flipping properties was a way of life for close to half of the population in the early 2000's.  As lenders loosened up contingencies and qualification standards, more properties were purchased for investment purposes and things quickly spun out of control.  Mistakes were made that lead to a disastered market and crippled economy.  The market has been reshaped and government infiltration has placed strict restraints and precedents to control a downfall market such as the likes of the 2000's.  As the real estate market place inches itself into recovery, investors are capitalizing on a sea of foreclosures and short sales.  Below are the stats on current to date flips as of January 2012.

     That is correct! Investors have purchased more than 25% than last year.  Without investors to buy otherwise unwanted homes, this market would be in an out of control downward spiral.  Go ahead investors, pat yourself on the back.  Without the risk that real estate investors inherit when buying these homes and bringing them back to marketable and FHA worthy conditions, these houses would sit and rot.  And for those of you who doubt; think of this when you leave your home this morning and drive past that house on your street that has been on the market for over a year with grass up to the windows that are boarded up.  Because, without investors, that house will stay that way....

If you are looking to buy one of these houses, there are professionals that strictly find these homes for investors at drastically reduced prices.  A good start is to do some of your own research on your local markets.  Visit websites such as,,, or local investment real estate websites.  A service provider that can locate these properties for you can be found at

Good luck, and do your neighborhood a good thing by flipping that horrid house on the end of your street!