Lower Tax Bill = Higher Returns

Posted on August 29, 2011 by admin

Where we invest in Memphis, we have started to file tax appeals on properties in our portfolio.  On average, our properties provide a cash-on-cash return of between 8-10% and a five-year Internal Rate of Return of over 18%.  By appealing our tax rates, we have been able to increase our cash flow with minimal effort.

As an out of state investor, I am not as interested in doing this process for myself. To appeal taxes, there are ways to do it online. But I find the most effective way to do it is to get a tax specialist to file an online appeal and also attend the hearing on your behalf in the county where the property is located. 

Typically, the tax appeal specialist (lawyers, realtors,private individuals) go in armed with evidence to plead the case before a judge or a panel.  The most powerful things are legitimate comps from listing services (MLS, Chandler, and CRS). Other documents can include the HUD or pictures of the property.

With the specialist we have, we only pay if the appeal is successful, so we have nothing to lose.  Over the long term, this can result in real changes to our returns.

Conservative example:

A home purchased in 2009 for $151K original assessment with a current purchase price/value of $130K. This represents a 14% reduction in value.  If the taxes are $2700 per year, a new tax appraisal at $130K can result in a reduction of $378 per year in your cash flow.

Aggressive example: 

The same home purchased for $151K in 2009 is reassessed at $100K during the appeals process. This example would result in a $900 annual reduction in taxes/increase annual cash flow.

So, take a closer look at that tax bill and evaluate if now is the time to boost both your returns and your cash flow with a timely appeal.

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Three Key Real Estate Terms to Understand

Posted on August 18, 2011 by admin

One of my colleagues, Burdett Streeter, complied some very helpful definitions and examples of common real estate terms. Understanding NOI, LTV, and CAP rate are important terms to understand before investing in real estate.

Net Operating Income (“NOI”):

Net operating income is the property's gross rental income plus any other income, such as late fees, laundry income, or parking income, less any vacancies and rental expenses, such as utilities, management and maintenance.  Essentially, NOI is the net cash generated before mortgage payments and taxes.

Loan to Value Ratio (“LTV”):

The Loan-to-Value Ratio is the amount of a secured loan or mortgage divided by the fair market value of the property.  For example; if your property is worth $100,000 and you have a mortgage balance of $50,000, the Loan-to-Value ratio on your home would be 50%.  The LVR helps you quickly determine what percentage your property leveraged based on the fair market value of the property versus your cost.  You can also use the LTV to determine the amount of your equity.

If you have more than one loan secured against your property, you need to add up the outstanding balance of each loan in order to calculate the Loan-to-Value ratio. For example, if your home is worth $100,000 and you have a mortgage balance of $50,000, the Loan-to-Value ratio on your home would be 50% as stated above however, if you also have a second secured loan on your home for $25,000, the Loan-to-Value ratio on your home would be 75% ((50,000+25,000) divided by 100,000).

Capitalization Rate (“Cap Rate”):

The Capitalization Rate is a ratio used to compare properties with different valuations, and to also place a value on a property based on the income it generates.  The Cap Rate is computed by taking the net operating income (NOI) and dividing it by the property's fair market value (FMV).  The higher the Cap Rate for a property the greater the cash flow return.

Cap Rate - Practical Use #1:

You can use the Cap Rate to value your property.   Let's say that your property generates $10,000 of annual net operating income.  Your real estate agent tells you that the Capitalization Rate in your area is approximately 4%.  That would mean that the approximate fair market value of your property is $250,000 ($10,000 ÷ .04).

Cap Rate - Practical Use #2:

Let's assume that you are looking at investing in two properties.  The first property has a projected NOI of $20,000 and an asking price of $500,000.  The second property has a NOI of only $10,000 but an asking price of $110,000.  Which one would the Cap Rate suggest is a better financial investment?  That's right, the second property since the Cap Rate is 9% ($10,000 ÷ $110,000) versus 4% ($20,000 ÷ $500,000).  Of course, other factors are also important to consider in the overall buying decision.

Provided by: H. Burdett Streeter II, CFP,CEP,CPhD,MCEP(ret)

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Wall Street and DC turn to Main Street

Posted on August 15, 2011 by admin

This week's volatility on Wall Street reminded me of two things. First, why my personal portfolio is heavily weighted in real estate, and second, why working in a business that helps solve the current foreclosure crisis is crucial to mending the economy.

Why the sudden attention in the press? Two reasons, first, institutions, as well as individuals are looking for excellent returns without the volatility and risk. Second, as a result of the housing bust, opportunities for acquiring these properties are not only plentiful, but supported by both savvy investors and policy makers.

The Wall Street Journal  featured an article that highlighted Wall Street's new attention on the value of investment properties. The article, Big Money Gets into Landlord Game discusses how the 8-12% returns in investment real estate are drawing the eyes of hedge funds, private-equity firms, pension funds and even university endowments  looking to form strategic partnerships with local real estate investment companies.

Even the government is getting in to the game. Solving the glut in foreclosed homes is one of the keys to economic recovery.  Market Watch published an article about how the government is looking to create more incentives for investors. According to the article, "The government agencies are hoping a wide variety of market participants — such as financial institutions, hedge funds, buyout shops and even municipalities, nonprofits and community groups — will provide ideas and scenarios in which they would be interested in buying packages of foreclosed homes owned by the U.S. government’s Fannie and Freddie in “significant transactions."

As we watch stocks continue their roller coaster ride, it's refreshing to see some eyes turned to assets that don't fundamentally change with the emotional whims of the market. Real estate offers a safe, accessible investment with return rates that even the big players are beginning to value. So while I may not agree with a lot of what happens in Wall Street or DC, I am encouraged that big money players and  policy makers are now considering working on solving some of our economic turbulence by turning the focus to fixing main street.

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Building an Inflation Hedge

Posted on August 5, 2011 by admin

I'm old enough to remember having a 12% mortgage rate on my house.  In the early 80s, mortgage rates reached stratospheric heights.  As with all cycles, higher inflation and interest rates may be looming on the horizon. As an investor, I see this as a critical opportunity to wisely invest in asset classes that will perform even if the economy continues to sputter.

There is a lot in the news right now about the debt ceiling, the Fed's course of action, and the question of coming inflation.  For 2011, inflation is trending upward (1.63% in January, 3.56% in June).  When inflation rises, the cost of living goes up, and often, the stock market begins to falter.  With real estate investments, upward trends in rents and home prices create an advantage.

I believe the best way to hedge against inflation is with hard assets like real estate. People will always need the basics. After food, shelter, or a place to live is a fundamental necessity.  Sophisticated investors are currently  purchasing investment property at historic price points and low interest rates. Other folks are playing it "safe" with more traditional investments like CD's. The latter locks up cash at anemic rates (currently 1.2%) and will not meet or outpace inflation or hyper-inflation.

So when I find myself remembering the 80s inflation rates of 9.1% and my mortgage rate of 12%, I take comfort in the fact that during that time my house appreciated at 15% per year and that rents were trending upward.  If those times come again, or come soon, I know that my real estate portfolio has a built in "green" hedge to protect me from the (economic) elements.

 

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Through the Knot Hole – Navigating Current Financing Challenges

Posted on July 29, 2011 by admin

After a run of over-aggressive lending practices, the pendulum has now swung back the other way.  Financing is difficult to obtain, and involve more time, procedures and patience than ever before.  For those who persevere, and are able to finance investment properties in the current market (low prices, pending inflation and great interest rates), 2011 will allow for some of the most attractive additions to their investment portfolio in recent years.

But how to navigate the new bank jitters that require, not only excellent credit and low debt ratio, but new levels of documentation?  Being prepared and having the right attitude can go a long way, but there are a few other tactics to support the process.

Work with a trusted team or a  group of like-minded investors and try to obtain financing through a referral.  Even with the tight standards, relationships and good service are still important pieces of any deal. Other investors can mirror back their own experience with lenders, the most favorable rates, and the lowest closing costs. It is important to work with groups that not only understand your deal, but are willing and able to perform.

Give them what they ask for (pleasantly, and right away).  Being available to the lender via phone and email when document requests come in can be crucial to securing financing. Even if they ask for the same thing. Twice. Even if you fax them 100 pages.  Think about the long term investment and the returns. They are worth the short term headache.

Make sure you have allowed extra time for delays.  Loans don't always close on time.  Delays and additional documents requests are common. So, aim for a date, but don't count on it, and allow yourself some time on the back end if you need to extend. Set aside a whole day to conduct the business of the closing.  If you haven't closed an investment loan before, or haven't done one recently, there are several moving pieces.

If you are purchasing out of town, allow yourself a couple of days to execute the transactions.  Call your bank or brokerage firm ahead of time to secure wiring instructions and information.  There are often time cutoffs (EST) and different fees for wires vs. cashier's checks. If you need a notary, secure one ahead of time.  Find out the latest drop times for Fed Ex.  Sometimes the last few days are a carefully executed logistics ballet.

Finally, to get through to the other side, keep focused on a positive outcome.

"There is one quality that one must possess to win, and that is definiteness of purpose, the knowledge of what one wants, and a burning desire to possess it."    -  Napoleon Hill

 

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Taking the Long View

Posted on July 22, 2011 by admin

I have been talking to several hesitant investors recently about the current state of the market. Some are waiting to see if housing is still going to fall further.  Others wonder about whether they can count on appreciation in the future.

I can’t underscore enough that regardless of the small bumps along the bottom, I believe this is an excellent time to purchase investment real estate in the right markets, especially ones that cash flow.

But one must take the long view.

Why? In the more stable markets of the country that did not see the volatility of the coastal cities, prices either are flat or fluctuate a few percentage points.  Quality, desirable homes in the median price range can be found that offer excellent value and immediate cash flow.

This is an excellent time to be a long term investor for several reasons:

  • Replacement costs are so far above current home values. This can only last so long.
  • Current lending standards are extremely tight and keeping many buyers out of the market.
  • There is a disruption of supply and demand due to foreclosures.
  • There is a large supply of available homes, but current demand is low.

Eventually, the market will swing back and home prices will rise. I believe there is political will in this country to get back on track. I believe that current barriers to home ownership will lessen and people will
once again come back into the retail market. In many parts of the country, it is substantially cheaper to
buy than it is to rent.  So the only people renting are those who have to.  Often that is because they a) have damaged credit or b) they have not saved up enough of a down payment.  Both of these correct with time.

The bottom line is that people want to become home owners. They may have already been homeowners who over leveraged or got in during the low or no money down craze that swept the nation and fueled the bubble. Over the next five to ten years, those folks will save up the down payment, fix their credit, and enter a more buyer friendly loan market.

When that happens, home prices will rise and the savvy investors will see incredible returns on their 2011 investments.

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The True Value of Due Diligence

Posted on July 12, 2011 by admin

In investment real estate, we often discuss with potential clients the value an importance of due diligence. These talks with our clients  focus primarily on the fundamentals and numbers (median home prices, local economy, economic forecast, tax and insurance). As we watched the flooding and devastation in Memphis this spring, we were reminded, that due diligence has greater value in areas the clients don’t often consider.

Behind the scenes, we have  meticulously looked at neighborhoods street by street.  Whe have asked, which streets are developing and improving, which streets are located in areas that may be in decline or losing home owners?  Often the difference of a street can make the difference in cash flow, viable exit strategies, and the difference between a great investment and poor one.

Our office  received a few calls during the Memphis floods from clients and friends who know that we have chosen Memphis as our primary investment city.  Pictures of the flooding and cresting Mississippi were frightening; our hearts went out to the people affected by the flooding (including members of our on the ground team in Memphis). .

One of the less exciting pieces of due diligence that we perform is analysis of flood zone characteristics in any area where we invest.  Consequently, our investment properties in Memphis are located 10-15 miles East of the Mississippi and out of harms way.  Of the over 200+ homes we have sold in the SE Memphis, Cordova, Barlett, and Germantown areas, none were in the flood warning path of the cresting  Mississippi and its tributaries.

We often talk about the benefits out of state investing with an excellent team as a way for you not to lose sleep.  That’s our job.  And this spring, we lost some sleep flying to Memphis to check on our houses, connecting with our team on the ground, and ensuring that our clients’ properties were safe. This unfortunate real world test gave us a chance to see the benefits of our careful planning in action.

As in the cases of all natural disasters, this is a chance to reflect on whether we expecting the best, but ensuring that we have thought about/prepared for the worst.  We will continue to support and work with our Memphis colleagues and friends to help in the days ahead.  We will also take this as one more lesson on true value of due diligence - the absolutely lowest risk /best planning possible for our clients, and peace of mind for our business so that we can sleep at night (most of the time).

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Selecting a market for 1031 Exchange Investment

Posted on May 13, 2011 by admin

 

    We spoke last about finding areas of the nation that made certain a trader was selecting marketplaces using the greatest possibility of income using the cheapest risk profile.  (Where to Invest - Selecting an Investment Market)

    Once a trader has selected a MSA, the next thing is to appear much deeper in the specific communities within that city.

    An excellent neighborhood should share the next characteristics to assist narrow the quest for investment possibilities:

    • Home values that fall within -30% to 10% from the median cost range for that city
    • Generally fall outdoors from the city center, in typical residential towns
    • Have been in zip codes, subdivisions, or communities, and roads that people know personally which provide the characteristics that people seek
    • Attract traditional single family tenants (three or four sleeping rooms, 2 baths)
    • Have a superior area of home owners
    • Monthly rents which are roughly 1% or a lot of market price from the property

    If done properly a trader might find the next advantages of their research:

    • Median-listed houses in quality communities possess the largest appeal, and therefore are the simplest to rent then sell
    • These communities have lower crime rates than lower earnings communities, leading to less crime-related maintenance and vandalism issues.
    • These quality communities attract tenants with greater wages, greater education, and greater credit ratings.
    • Property managers come with an simpler time selling, controlling, and keeping good tenants during these desirable communities.
    • Working families generally rent these qualities.

    Typically, families search for more stable, long run living plans near to schools and work producing a lower vacancy rate. Families also have more pride and take better proper care of the houses they reside in, leading to lower maintenance expenses for traders.

    Quality communities bring both temporary income along with a long-term investment. Temporary, quality communities have houses that "individuals have to reside inInch: they're inexpensively listed and lie in areas with greater rates of home owners. Furthermore they provide excellent rent ratios, they're appealing to tenants and property managers, have low vacancy rates, and low maintenance expenses. Long-term, these premium communities will always be sought after, have stable appreciation, and therefore are the simplest to market assuming a trader selects.

    As Kevin Conlon, from Meridian Off-shore Qualities, Corporation. describes in the article Investing in the Sweet Spot, getting very specific criteria for selecting investment communities is vital for an traders success.

     

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    Investors Taking Advantage of Tightening Lending Standards

    Posted on May 13, 2011 by admin

    I have  observed that traders are actually acquiring investment characteristics inside a record pace in recent several days, since the cash-on-cash returns in a number of areas are actually consistently above 10%, too as with some areas, for example with Memphis, TN, every once in awhile as much as 15% internet of expenses.  It's been fueled by mainly three factors: low median home values, high rents, and low interest rates.

    One of the key main reasons why housing cost is low and rents are high stem within the same cause: tightening lending standards.  Depending on articles in the present Wall St. Journal, normally at this time around in the business cycle lending standards ease as banks look for home based business in the fledgling recovery.  But private loan providers have ceded industry to government organizations Fannie Mae, Freddie Mac as well as the Intended, which agencies they're under heavy political pressure to avoid taking new risks.  And so the loan providers are actually requiring borrowers to produce bigger lower obligations, have greater credit rankings, and possess greater documentation from the their earnings and assets.  Borrowers must show couple of years of earnings about the tax claims, which regularly affects borrowers who've been unemployed for a short period, or perhaps the self-employed taking breaks that shrink their taxed earnings.

    So for a number of would-be home customers, the recession makes being qualified to borrow money very hard.  In regions of the u . s . states where it's substantially cheaper to experience a house instead of rent, people anxiously have an interest, but need to rent since they cannot qualify to borrow money, no matter the plentiful affordable housing inventory fueled with the many house house foreclosures as well as the low interest rates.  Consequently, the effective demand from qualified customers for houses is low, which has saved home values from rising.  As well as the would-be customers must rent their houses, which increases curiosity about rental housing and drives rents up.  So rents in compliance with home values are really at record levels.

    Because the lending atmosphere is problematic for people ambitious for home possession, I have been seeing traders with a decent credit rating and available capital getting upset up investment property at an unequalled rate to take advantage from the earnings.  In particular, the newborn Senior citizens that are approaching retirement see single family houses among the most beautiful options for creating earnings for retirement inside a low-degree of risk in contrast for the stock market, with much greater returns than CD’s, money market funds or bonds.

    Property originates into its as an outstanding alternative investment.  The lending crisis has produced a substantial investment chance.  For me that investment houses bought this season and 2011 will be the finest undertaking earnings characteristics that people may have over the following 2 decades.

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    Why Invest Out of State?

    Posted on May 13, 2011 by admin

    Investment rentals are simply that, a great investment.

    Most traders are primary home proprietors.  They understand and value home possession and rehearse that understanding just like a platform when considering buying and selling in solid estate.

    The pitfall of drawing parallels with one’s own property experience is the criteria legitimate estate buying and selling are often greatly different then individuals we use to evaluate our primary residence.

    Investment rentals are simply that, a great investment. With ideal property possibilities you need excellent returns, minimal risk, together with a passive relationship while using resource.  To make this happen you will discover several main reasons including location, census, and expert knowledge of local property areas.

    Excellent Returns

    To have the ability to achieve excellent returns, traders need solid, examined products, backed by data and experience.

    Current CD’s are supplying meager rates as well as the stock market remains volatile.  Many people who devoted to property where the bubbles were most likely probably the most acute understand that although returns showed up at incredible levels, lots of people did not make the most of people returns and rather lost profit their primary and investment property holdings.

    Excellent returns in investment property products depend local market criteria:

    • Quality Characteristics (two-and-a-half decades old, 3-4 master bedrooms, well-maintained and attractive to tenants)
    • Quality Towns – (Owner occupied, working families, near to the median cost point for your neighborhood)
    • High Rents In compliance with Property Values ( Rent ratio or monthly rent divided with the property's value @ 1% or greater)
    • Strong, Varied Local Economy and Employment Record (real jobs for middle-class families e.g. manufacturing, distribution, medical facilities)
    • Stable Appreciation – With good rent ratios and positive earnings, appreciation boosts the return and guarantees a lucrative exit strategy.
    • Low Costs to Investor (insurance, taxes, labor and maintenance costs)

    In our market, very handful of towns work in many of individuals criteria. Consider a few good good examples, or consider your individual hometown:

    • Hillcrest – Excellent characteristics and towns, low rent ratios, volatile appreciation, and high rates
    • Miami – bubble market heavily affected local economy, high rates (weather related), low rent ratios
    • Detroit – Older affordable houses, poor weather, no economy, maintenance costs (weather related)
    • Your Town – Although it may be an excellent place to reside, place you near family or personal employment, it in most probability fails to get results in a number of tests just like a effective investment property

    Minimal Risk

    Should you receive a quality property in the quality neighborhood, you can measure the investment concerning the 2 kinds of factors: quantifiable and variable factors. Quantifiable factors include property value (evaluation), property taxes (via tax records), insurance (quotes), and property management costs (quotes).  All of individuals costs are known factors inside the evaluation of returns.

    Both variable factors are vacancy and maintenance.  If your house is carefully selected and evaluate plus you've got excellent property management, both of these factors might be mitigated.

    Vacancy – location, local rental market and prices, quality property management

    Maintenance – quality tenants place by property management, low maintenance (labor costs) when turning property between rents.

    Passive Relationship while using Resource

    Though we may enjoy Home Depot and projects inside our primary residence, handful of of desire to handle core evening plumbing problems or, difficult, negotiate getting a tenant who's late on his rent.  Most individuals don't have enough time, expertise, or experience to consider proper care of your entire day-to-day control over investment characteristics.

    A great investment should provide you with excellent returns both financially too as with your time and effort.  Though initially, the thought of being near your possibilities may provide comfort, an excellent product handled masterfully from condition, evolves in a few objective distance from your investment.

    We may understand our personal property in addition to neighborhood market as homeowner.  Adding hard assets like property for your portfolio, however, needs to be made by getting a goal, well looked into have a look at exactly why is the amounts use little risks and handful of mind aches. So, prior to deciding to believe that your backyard is where to start buying and selling, have a take a step back and measure the best local market. It really is probably not your local market.

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