Apartment Market Tightens as Housing Costs Jump

10-03

Landlords passed along hefty rent increases to tenants this summer, an indication that rising home-buying costs are helping heat up demand for apartments.

The average monthly rent in the third quarter was $1,073, up 1% from the prior quarter, the largest quarterly gain in a year, according to a report to be released Tuesday by Reis Inc., a real-estate research firm. Compared with the third quarter a year ago, average monthly rent was up 3%. None of the 79 markets tracked by Reis saw rents fall.

The rental increases were stronger than industry watchers expected and represent a turnaround from the past several quarters when it appeared that rent growth was slowing, reflecting falling demand for apartments as more families decided to buy homes. But as mortgage rates jumped over the summer, following big increases in home prices, the rising cost of homeownership has priced many families out of the housing market.

“Rising mortgage rates are definitely a speed bump for new- and existing-home sales and that certainly benefits landlords,” said Ryan Severino, a Reis senior economist.

After listing a two-bedroom Atlanta unit for rent in July, Chad Corley received a significant number of inquiries, he said. Within a few days, three prospective tenants were vying for the unit listed at $1,600 a month. Atlanta saw its rents climb 2.9% from the prior year to an average of $809. Its vacancy rate is 6.2%.

New York City remained the nation’s most expensive market in the third quarter, with average rents climbing 2% from the prior year to an average $3,049. But cities in the West had the strongest rental growth, particularly in technology-centered cities. Seattle led the nation with a 7% rent gain when compared with a year earlier, for an average rent of $1,124; San Jose, Calif., saw rents climb 5.2% to an average of $1,686.

Some argue that rents can’t keep climbing at the current pace. In the past five years, rents have risen 7.6% nationally, according to Reis, and in excess of 10% in some markets. “You just can’t have double-digit rent growth every year or rents would be a million bucks,” said Bob Faith, founder of Greystar Real Estate Partners, a Charleston, S.C.-based company that owns and operates about 216,000 rental units nationwide.

But there’s another reason why some expect the rent increases to slow: a flood of new supply on the horizon. Some 170,000 new units could hit the country’s largest 54 metropolitan markets this year—about 120,000 have already been finished—followed by 190,000 in 2014 and 300,000 more units in 2015-16, according to Luis Mejia, director of multifamily research for CoStar Group, a real-estate data firm. “We see a lot of supply coming, no doubt about it,” he said. “But, younger people are renting longer than previous generations.…There is the notion that homeownership will come, but will come later in life, not as quickly as it was before the recession.”

Multifamily construction typically takes several years, so developers who haven’t yet broken ground are likely to be more cautious about what they’re building and where. “At this point in the apartment cycle, they need to evaluate their options” by gauging local demand and housing preferences, he said.

San Jose, New York, suburban Virginia, and Washington, D.C., each saw inventory of apartments increase by at least 0.9% during the third quarter, one of the largest since Reis began keeping track in 1980. The firm expects new supply to affect the vacancy rate, which could slowly drift upward beginning next year.

During the third quarter, the national vacancy rate—which hit 8% in the aftermath of the financial crisis—slipped to 4.2% from 4.3% in the prior quarter and 4.7% a year ago.

New Haven, Conn., and Syracuse, N.Y., had the nation’s lowest vacancy rates, 2% and 2.1%, respectively, likely buoyed by the return of college students during the third quarter, Reis said.

With few apartments available, the concessions—from free rent to gift cards—seen after the financial crisis are rare. Brokers say they’re urging would-be renters to make decisions quickly, have their checkbooks and other documents on hand and to at least offer the asking rent. “It’s not worth haggling over a few bucks,” said T.J. Rubin, managing broker of Fulton Grace Realty in Chicago.”We’ve had people lose out because they’ve hesitated and we’ve had people lose out because there are multiple offers.”

(Source: WSJ.com)

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Pay Off a Student Loan or Buy a Home?

10-02

In the past, one of the best ways to secure a place in the middle class was to get a college education, which would assure a better income and the ability to buy a home. Over the long term, your home would be the cornerstone of your personal wealth.

I still think this is true, but as the events of recent years have proven, it is not a given. So it is more important than ever before to learn what debt levels you can comfortably handle, and have the discipline not to exceed them.

The housing recession proved that home prices don’t always go up—though Dallas loan officer Richard Woodward contends homeownership is still a better long-term investment than renting because of tax benefits and historic appreciation. “Purchase a home with monthly payments similar to your rent expense and don’t overextend yourself,” he advises. “You will come out ahead in the end.”

Meanwhile, college is no longer a guaranteed golden ticket—the Consumer Financial Protection Bureau has noted that the growth of the country’s collective student-loan debt is far outpacing wage growth for graduates. Moreover, the cost of getting a degree is growing at an alarming rate: both the number of borrowers and the amount owed have both risen 70% since 2004, according to the Federal Reserve. The nonprofit One Wisconsin Institute, a liberal nonprofit research group, found that the average payoff time for a student loan was 21 years.

That’s a long time to wait to buy a home. So I suggest that you start saving what you can now, while still paying down your student debt faithfully to preserve your credit worthiness. Some ideas:

Look into consolidating your loans, says Don Frommeyer, president of the National Association of Mortgage Brokers, because lenders will be looking at your debt-to-income ratios. Depending on whether the loans are federal or private, they may get you a lower monthly payment (though at the cost of a longer repayment period).

Consider Federal Housing Administration loans, which require a down payment of only 3.5%. But understand that, as Mr. Frommeyer says “you must be able to pay the loan back, based on your current standing.”

Pay cash whenever possible to avoid taking on any new debt, especially expensive credit-card debt.

Do what you must to keep your housing costs low while you save for a down payment, even if that means taking on roommates or living with your parents.

Eliminate every discretionary expense that you can, from gym memberships to restaurant meals.

Investigate first-time home buyer subsidies for down payments and closing costs.


(Source: WSJ.com)

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FHA will keep lending during shutdown

10-01

Applications for all government-backed mortgages will continue to be processed during a government shutdown, according to the U.S. Department of Housing and Urban Development.

HUD originally said on Friday that it would stop working on applications for loans guaranteed by the Federal Housing Administration if the lights go out in Washington. But it reversed that position over the weekend.

“The HUD Contingency plan posted on Friday mistakenly included incorrect information about a potential shutdown’s impact on the FHA single-family loan program,” HUD said in a statement. “FHA will be able to endorse single family loans during the shutdown. A limited number of FHA staff will be available to underwrite and approve new loans.”

HUD said it will continue processing loans “in order to support the health and stability of the U.S. mortgage market.”

Loans backed by the FHA and the Veteran’s Administration, as well as rural development loans backed by the United States Department of Agriculture, accounted for 45% of all mortgages used to purchase homes issued in 2012, according to the Federal Reserve. The FHA alone insures about 60,000 loans a month.

Fannie Mae and Freddie Mac, the giant government-controlled mortgage companies, had already said that their operations would be unaffected by a shutdown. Those companies pay for their operations out of the fees that they charge lenders.

It’s not clear how the FHA will still be able to handle the large load of loan applications when, according to the new contingency plan, it is planning to furlough more than 96% of staff members.

“There will be a limited number of exempted FHA staff available to underwrite and approve single family home loans,” said Jereon Brown, Deputy Assistant Secretary for Public Affairs. “The underwriting and approval process will definitely be slower than normal.


(Source: CNN Money)

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The right way to pay off debt to get a mortgage

09-30

Trying to secure a mortgage right now? From higher mortgage rates, to rising home prices to the contraction in buying power — securing financing, for some, can be no easy endeavor. As prices, and rates rise simultaneously, lenders will still place the weighted emphasis on “real income,” or, the amount of monthly payment you can afford — as that’s what the loan is truly made against. Unfortunately, the amount of debt you have effectively chips away at your “real income.” So before you try to get a mortgage, you might want to pay down your debt. Just make sure you do it the right way.

Before we delve into the specifics, here are some quick terms you need to know:

• Debt to income ratio (DTI): Represents the total amount of monthly debt payment (including the house payment) divided into monthly income. Whenever this number exceeds 45% of the gross monthly income, things get tricky.

• Real Income: Also known as “qualifiable income,” the net income considered for the housing payment after present liabilities are factored in. If you have $5,000 in monthly income × .45, that gives you $2,250 as a total debt allowance. If your other debts total $250 per month, that means your real income is $2,000 per month. Real income is also equivalent to a proposed housing payment.

• Debt: Refers specifically to the minimum payment obligations the consumer is responsible for. This has nothing to do with the total amount of debt, but what the monthly payments are. Lenders are looking for cash flow, how much or how little of it there is.

Tip: Debt erodes income (ability to borrow money) at a ratio of 2:1; it takes $2 of income to offset $1 of debt.

Now, the strategy for paying off debt to qualify differs when buying a house from refinancing. Let’s look at the differences:

Paying Off Debt When Buying a Home

When buying a home, and prior to attaining an accepted purchase offer, paying off debt to qualify is simply a function of learning how much more buying power is achievable by eliminating debt like credit cards, student loans or car loans.

A qualified mortgage lender can run “what if” possibilities, which could become crucial in your endeavor to purchase not only the right home, but ultimately the home you can afford. Let’s say there’s $5,000 left on your car loan, you have the cash in the bank and the car loan payment is $600 per month. $600 per month on a car loan reduces your ability to purchase to the tune of more than $100,000 in loan amount. Consider this: A $100,000 mortgage loan at 4.5% on a 30-year fixed rate mortgage translates to $506 per month, $94 per month less than if you didn’t have the debt. If you pay off the debt in full, your DTI is reduced, improving your ability to qualify and increasing your real income.

How to Pay Off the Debt and Still Meet the Lending Credit Standard

If you’re paying it off pre-contract, simply inform your mortgage company and they can do a third-party validation and the debt can be omitted. When paying off during the escrow process, monies will have to be sourced and paper trailed, which is a little more technical, but still achievable. The same goes for credit cards and other payment obligations.

Paying Off Debt When Refinancing

When you’re refinancing, the lender’s going to require that your credit obligations — such as a car loan or credit card — are paid off in full and closed to prevent the possibility of your accumulating further debt, thus potentially affecting your ability to repay in the future. Moreover, the lender would call for an escrow account to pay off the debt through the loan closing.

When it comes to paying off debt to qualify in refinancing, different lenders will vary on their specific approaches. Generally, though, the accounts will have to be closed as well. That won’t prevent you from reapplying for credit after the mortgage has closed, however.

How to Pay Off the Debt and Still Meet the Lending Credit Standard

The monies you use to pay off your debt, similar to a purchase transaction, will have to be sourced — and you’ll have to have proof that the obligation has been closed. If possible, pay the credit card in full, learn the date the creditor reports to the bureaus, then apply for the mortgage after the creditor has reported it to the bureaus. Doing this will show the updated balance on the credit report, which will improve real income (revealing less debt), making the process more streamlined.

If you have debt that otherwise could be eliminated and have the means to pay off the debt, strongly consider doing so, as higher credit risk mortgages tend to be more pricey overall — compared to those for borrowers with lower debt-to-income ratios and better credit scores.

As you get ready to buy a house or refinance your mortgage, it’s important to pull your credit reports and credit scores to see where you stand. You can get your credit reports for free once a year from each of the three credit reporting agencies, and you can monitor your credit score using one of many online tools.


(Source: YAHOO! Homes)

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Why You Should Be Investing In Real Estate

09-27

As entrepreneurs find success with their primary business ventures, many search for the proper investments for their profits.

Of course, we can and should all start traditional tax preferred vehicles like an IRA and 401k. These are the bedrock of good ‘benefit’ planning for ourselves and our employees. I’m also convinced more entrepreneurs should consider rental real estate as an important part of their portfolio.

I realize many business owners shrug off this concept after the recent downturn in real estate values, but let me list a few reasons that may change your mind:

1. Gain more leverage. Real estate is one of the few investment vehicles where using the bank’s money couldn’t be easier. The ability to make a down payment, leverage your capital, and thus increase your overall return on investment is incredible.

2. Grow, tax-free. Buying rental property based on speculation of its value is a dangerous tactic since cash flow is the key. However, appreciation over the long-run is certainly realistic and at the least you should be considering a tax-deferred strategy. In the future, you may even consider a 1031 exchange, charitable trust, or an installment sale to lesson your tax liability further.

3. Tax free cash flow. It’s no secret that because of depreciation and mortgage interest deductions (if you leverage your capital), your cash flow should be tax-free. That’s right! The far majority of the time an investor will never pay taxes on their cash flow and can wait for capital gains on the sale of the property in the future.

4. The tax write-offs against your other income. Depending on your classification as an Active Investor or Real Estate Professional and your income level, there is a good chance your rental property will not only give you tax-free cash flow, but an overage of tax deductions you can use against your other income. With that said, this is something you want to discuss with your tax professional before investing so your expectations are realistic.

5. Increased tax deduction strategies. Rental property affords investors with another incredible opportunity to convert personal expenses to potentially valid business deductions. Don’t forget that rental real estate is a business. This means that travel expenses to check on your properties and payments to family members who manage your properties (such as students away at college) can be deductible and increase the tax benefits when it comes to cash flow and the future sale of the property.

6. Rental real estate is a forced retirement plan. Americans are terrible savers. We lack the self-discipline to put a monthly deposit into our IRA, SEP or 401k as small-business owners. However, buying a rental property is a significant commitment that you are required to commit to and maintain. You will always be grateful in the long-run when you don’t give up on it and build future cash flow and wealth.

I meet with a lot of successful entrepreneurs, and almost every one of them has taken profits from their businesses over the years to invest in rental property. Based on this fact and the list above, I have consistently urged my clients to buy one rental property a year and already have clients with rental properties earning them money they never imagined they’d have.

The far majority of us will never get rich overnight. It takes long-term investing and a diverse portfolio to build true wealth. Don’t forget real estate as an important part of the equation.


(Source: Entrepreneur Media, Inc)

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