Real Estate Investing, Real Estate Investment and

Concepts: Investing in homes in and ; real estate analytics; rental cash flow.

Real Estate Investing in and .
We have helped investors from all over buy second homes and rental properties in San Diego County and and . We have taken great efforts to bring a numbers-oriented approach to our web site.

The bookstores have dozens of real estate investment strategy books. For those who already own a home and have the money for another downpayment, one of the easiest strategies is to move to a new home and rent the old one. Under current tax law, you may be able to avoid capital gains taxes as long as you sell the rental home within three years.

Rather than skim the surface of a topic that is complicated, we will leave the detailed discussion to the books at the bookstore. Our focus is to make sure that we help you locate and negotiate good investment deals. We have developed the on-line tools to identify target homes quickly and to assess the values of those homes.

For Investors, Cash Flow is King
The most important thing for rental property in and is cash flow. If a property can support itself, then you can hold it indefinitely and obtain wonderful capital gain. However, due to the high cost of real estate in San Diego, positive cash flow is a difficult goal to achieve. There is, in practice, an upper limit to the rent amount that can be charged. Why? If someone could afford a $4,000 per month rent payment, that person can afford a mortgage of a lesser amount and could buy a home. Having said that, there ARE homes for rent at $5,000/month and more.
Minimizing your monthly cash outlay requires a plan. It is a combination of downpayment, loan program, rent, and tax deductions. Some people prefer to leverage the equity of their own home by taking out a home equity line of credit or with a cash-out refinance, thus allowing them to put more money down. Though their residence mortgage may be high, such investors can thus claim it as a tax deduction, thereby minimizing their overall costs at the end of the year. Other investors choose to use negative amortization loans to reduce the payment of interest on the money by leveraging the capital gains of the property. This latter approach can be scary if the market flattens because the mortgage is increasing while the property value is not.
Having a strong agent/team on your side is important. There is a lot of investor money in San Diego real estate, and such investment may not abate. (How many people do you personally know that want to invest in the local market?) Investor properties can move quickly even in a slow market because of the number of people who are scouring the MLS for such homes.
Having the best tools to identify target properties can go a long way to finding the needles in the haystack. This is one of the reasons why we have created so many value-added indicators, like the HTeam Value Picks and other statistical profiles. These can be accessed at the Registered-Plus level with the Crystal Ball Search Tool.

If you are new to real estate investment, we would encourage you to contact a good, reputable loan officer. We can and do endorse Chris Comer of The Mortgage House; Chris can be reached at 760-533-5174. By talking with Chris, you can create a game plan for positioning your resources to make the investment smooth and to lower its cost.

Frequently Asked Questions
Q: What is the cost of investor money?
A: Compared to an identical loan for purchase as owner occupied, an investor loan will cost approximatley 2% in origination. (That doesn't mean you have to come to closing with 2% because you can raise the interest rate and still have a no-points, no-origination loan.)

Q: Is there any relatively easy way to drive that cost down?
A: If the property could reasonably be seen as a second home AND you do not require the income from the property to qualify for the loan, then you may want to talk with your loan officer about applying for a second-home loan instead of a straight investment loan. This will save you approximately 1 to 1½% in origination costs.
1031 Exchanges The IRS passed Section 1031 to permit investors to sell an investment property and avoid capital gains taxes as long as they reinvest the gain subject to certain rules. For some more information about 1031s, click here. For info about so-called Reverse 1031s where you buy BEFORE you sell, click here.
The central provision is that you AVOID touching the money by hiring a Qualified Intermediary ("QI") to place someone between yourself and the money and who is bound to follow the rules. In addition, there are timing rules that require that you identify your reinvestment properties within specified time limits.
If you are in need of engaging a QI or are running up against time deadlines, CONTACT ME, as I can assist you.

Q: Can I just check the checkbox on the loan application that it will be owner occupied?
A: Lying on a loan application is considered fraud, and that would include applying for a second home loan for an investment property. Ethics aside, if the loan is, for whatever reason (and that can include the random draw from the hat), audited by the lender, they will determine whether the property IS actually being occupied by the owner. If the lender concludes that it is not, then the lender may call in the note on the basis that fraud was committed.

Q: How much will I need to put down?
A: Loan programs will vary, but most investor programs require a minimum of 10% down. However, the amount of the downpayment will usually affect the origination cost (or corresponding rate if one wants to not pay an origination), with 20% down costing about 2 points. Less down will usually make for a higher origination, and more down will reduce it.

Q: Why are investors penalized?
A: Actually, they aren't. The higher downpayment and increased origination reflect that the lender is taking on additional risk with the investor loan. Ask yourself the question: If you lose your job and funds get tight, will you pay the mortgage on your residence or your investment property first? The banks (and you) know the answer to that question. The increased downpayment ensures that there is some distance between the amount loaned and the market value of the property so that the bank won't get burned in the event of foreclosure/trustee sale. The increased origination offsets the increased number of foreclosures that occur with investor loans.

Q: What can I do to get the money I need to buy a property?
A: The bank wants to loan money, but it wants to see that you are financially sound and that foreclosure won't occur. Good assets, a high downpayment, etc. help to do that. In addition, the investor bearing the risk that the cost of money goes up (i.e., getting a fully indexed loan) can also mean that you are able to borrow the money you need at a rate which is acceptable.

Q: How much of the income from the property can be used for qualifying for the loan?
A: Lenders will usually allow you to claim 75% of the rental value. Why only 75%? This factors in the fact that vacancy will occur from time to time.

Q: Do I have to show prior rental experience?
A: Underwriting requirements can vary, and you may have to show 2 years of rental experience to claim any income. Why? Without prior history, the lender has no way of knowing whether you will be effective at selecting reliable tenants and/or what the vacancy rate will be. If you need the prior rental experience (but don't have it) for your particular loan program, you can hire a property management company and satisfy the requirement in this way. However, you will have to offset the income by the cost of the property management company's fees.

Q: Should I use a property management company?
A: If you do not live close by, then a property management company is probably necessary because you need someone on-the-ground to address any issues that come up. If you live in the area, then using a property management company is a convenience that frees you up to focus on other matters. The cost is usually around 10% of the monthly rents.

Heather Foster
(619) 665-2782 Team.At.SurfTheTurf.com

Representing Both Buyers and Sellers
On the Web at
http://www.SanElijoTeam.com
and other areas of San Diego County.
Last Updated: 9/4/2010;3:02 PM

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