Many people have made their fortune by purchasing rental properties. They hold it over a matter of years while they rent it out to tenants. During that time, the property increases in value and can eventually be sold for a handsome profit.
In the best case scenario, a rental property can earn a monthly income while it builds equity. In the worst case scenario, the owner could go belly up trying to cover the monthly shortfall. The difference between the two is often a matter of making realistic expectations about what a property will earn and what it will cost to maintain.
The first step to determining more realistic expectations is to try and determine exactly what the monthly cost will be. You should start by determining the exact amount of your mortgage payment, including insurance and interest and any other fees like private mortgage insurance (PMI). Of course, these numbers will depend on the loan so you should plan on running the numbers for different loans as you shop around for a lender.
You also need to consider other monthly costs. Include any utilities, garbage pickup, etc. that you’ll be responsible for paying. In addition, your calculations should include a safety margin to cover unexpected costs such as repairs and rent during times the property goes unrented. This safety margin might be calculated as a percentage of the rental income. You would generally want this to be around 20% to 30%, or maybe even higher if the property is older and might need additional maintenance. You might also want a higher percent just to be more conservative.
Next, you’ll compare these numbers against what the property will bring in. If the property is already being rented, you can see what the current rent is. Otherwise, a little research will be needed to gain a realistic estimate of what you can charge. Just try and be realistic in your estimate.
Finally, you should run all these numbers against the different loans you’re considering. Here’s where you determine if the deal will produce a monthly income or a monthly liability. If you’re losing money each month, then you should probably move on. On the other hand, if you’re producing a monthly cash flow, then this might just be the one.
There is a fair amount of number crunching involved here. Fortunately, there are tools to guide you through this process and produce simple reports you can use to make your comparisons. I like the free tool at http://www.realestateprofitcalc.com. By taking a more structured approach to evaluating rental properties, you can greatly increase your chances of success.
Almost one-third (31%) of independent landlords plan to buy additional rental property by the end of 2012, according to a survey released today by The National Association of Independent Landlords.
The top reason, cited by 68% of those planning a purchase, is that current prices make rental real estate a good investment. Other reasons include pricing low enough to allow them buy a retirement home (8%) or a vacation home (8%) that can be rented out to earn additional income until needed.
“With property prices still beaten up in many great areas – Las Vegas, Florida, Arizona and California – our members see this as a good buying opportunity and a smart way to beef up their property portfolios,” said Tracey Benson, president of The National Association of Independent Landlords. “Low interest rates are just icing.”
Most respondents (73%) say real estate is a good way to fund their retirement.
Nationally, housing prices and sales are mixed, with some areas having bottomed out and others in for further depreciation.
“It’s not like all uncertainty has been erased from the market – far from it. But buyers who do their research can find deals that really make economic sense for them,” Benson said.
The National Association of Independent Landlords polled 507 members from Aug. 24 to Aug. 26, 2010.
About The National Association of Independent Landlords
The National Association of Independent Landlords is the country’s largest provider of services for small landlords. Services include credit reports, electronic rent collection and tenant screening as well as information about property management, rental laws in all 50 states and other issues critical to property owners.
For further information, please visit www.landlordassociation.com or call 1-800-352-3395.
Despite speculation that this summer could prove tough for overseas holiday destinations all early indicators suggest that Lanzarote in the Canary Islands will be bucking this trend. As foreign tourist arrivals soared by nearly 30% in July, versus July 2009 figures. With both the British and German markets returning highly encouraging figures.
The relative weakness of sterling versus the single European currency and a growing trend towards stay-cations in the UK had led many observes to suggest that key European holiday destinations could suffer this summer. However the release of the latest figures from the Spanish airport authority AENA reveal that foreign tourism has boomed on Lanzarote during July. With the number of foreign tourists arriving on flights to Lanzarote soaring by nearly 30%. From 114,000 arrivals in July 2009 to 146,403 arrivals last month.
This stunning recovery totally outperforms the 5% average increase recorded in foreign tourism during the first six months of the year on this popular holiday island. And suggest that Lanzarote is now well on its way to recovery as the arrival figures are only 4% short of tourist numbers recorded in July 2008, prior to the full onset of the economic crisis.
The UK is Lanzarote´s key tourist market. And arrivals from Britain grew by 34.41% last month versus July 2009. As a total of 81,118 visitors from the UK touched down at Arrecife airport. The German market also outperformed expectations, with an upswing in visitor numbers of 44%. With arrivals rising by 44% – from 17,385 holiday makers in July 2009 to 25,127 last month. However Eire, Lanzarote´s third largest market returned disappointing figures with arrivals remaining largely static at just over 19,000 tourists.
These highly encouraging figures certainly make very happy reading for the many thousands of owners of property in Lanzarote. Many of whom have invested in holiday rental properties here. Attracted by the islands year round holiday season and buoyant tourist industry. As well as local estate agents, many of whom are now reporting an upswing in enquires and transactions during the fist six months of this year. Aided by the recent recovery of sterling against the Euro.
Property prices on the island also remain attractive for foreign investors. As the cost of apartments and villas in Lanzarote are back down at 2003 levels. Creating genuine opportunities for those in a position to buy. And with so few stable alternatives currently available, thanks to low stock market returns and interest rates in the UK, Lanzarote is starting to look like a viable investment option once more.
Even as the economy struggles to regain its footing in the post-recessionary environment, the state of the commercial real estate industry remains questionable. Many experts estimate that a meaningful recovery isn’t likely to happen in the sector until 2011 at the earliest. Though the recession may have officially ended in the summer of 2009, improvement in the real estate market typically lags the general economy by 12 to 18 months.
Grant Thornton LLP’s Corporate Advisory & Restructuring Services professionals have analyzed the challenges facing the CRE industry in the wake of the credit crunch and economic downturn in a new white paper. Their study found that real estate companies would be ill-advised to depend solely on the economic recovery to be competitive in today’s market place.
With $1.4 trillion in commercial property loans coming due over the next four years, lenders are expected to face overwhelming demand to refinance existing borrowings. Higher loan-to-value ratios, tougher credit standards and an uncertain securitization market will put further constraints on liquidity. In short, the opportunities to refinance existing real estate loans may be limited. CRE market participants are expected to face an environment where capital may be tough to come by and competition stiff.
Furthermore, history shows that the companies with the strongest performance pre-recession are not necessarily the strongest performers post-recession. “Our findings suggest that benefits from a recovery are redistributed among industry players and are not necessarily correlated to pre-recession performance levels,” said Paul Melville, a partner in the Corporate Advisory & Restructuring Group at Grant Thornton.
Grant Thornton’s white paper analyzed the return-on-assets (“ROA”) of 100 real estate companies, primarily real estate investment trusts with publicly available data, in order to assess portfolio property performance from 1997 through 2009. Companies were divided into four quartiles based on their return-on-assets at the beginning of the period, with the first quartile comprised of the best performers and the fourth quartile comprising the worst. Moody’s Investors Service’s REAL Commercial Property Price Index was also applied from 2000 to 2009 in order to gauge pricing trends. The median annual ROA for each quartile was then tracked to assess performance.
Grant Thornton’s research revealed a number of interesting findings:
- The median ROA for each quartile trended downward, with the 2001 recession putting disproportionate pressure on companies in both the first and third quartiles.
- The best performing companies before the recession experienced little to no benefit in return-on-asset performance after the recession ended.
- The 2005 to 2007 asset price bubble and its subsequent deflation is apparent. Asset prices are expected to improve as industry ROA stabilizes, reflecting a more normalized relationship between returns and prices.
The white paper discusses how most companies tend to operate in survival mode during an economic downturn as they seek to conserve cash, but this thinking often leads to actions that deliver little or no value in the long-term, and may even erode value.
Grant Thornton proposes a framework by which companies can evaluate their ongoing projects and initiatives to ensure that the right balance is struck between short-term costs and long-term value. This framework is particularly valuable in a distressed setting, whereby this kind of strategic thinking tends to become eclipsed by the crisis du jour.
This white paper urges CRE companies to act quickly. By the time the CRE sector begins to recover, capital may already have become scarce. Companies have a limited window of opportunity to make changes which can impact their future performance and viability. The critical need today is to pursue forward-thinking initiatives that will drive future growth.
To obtain a copy of Commercial real estate: Looking Beyond the Recovery, please visit www.GrantThornton.com
The group’s professionals possess extensive experience with both bankruptcy and out-of-court restructuring, spanning many industries, including energy, automotive, gaming and hospitality, healthcare, manufacturing, real estate and retail. Our clients include debtors, lenders, individual creditors and creditor committees, in addition to officers and directors and the boards and committees involved with corporate governance.
Well – seeing as the American Government Inc now seems to – directly or indirectly – hold all the mortgages on all the residential property in the U.S, a new panel and conference has been instigated to discuss the future of housing finance.
Which is of course – exactly what we have all been hoping for – another motley collection of quasi-government employees and “consultants” dipping their fingers in the public money trough as yet more is dumped into the ongoing disaster that is the US housing market. This is the official release:
EMBARGOED FOR 10:00 AM: August 12, 2010
CONTACT: Treasury Public Affairs (202) 622-2960
WASHINGTON – Today, the Obama Administration announced additional details about its August 17 Conference on the Future of Housing Finance, including a list of panelists and the conference agenda. This event will provide a forum for public input as the Administration continues its work developing a comprehensive housing finance reform proposal for delivery to Congress by January 2011.
“Across the spectrum, stakeholders agree that our current system of housing finance requires fundamental reform,” said Jeffrey A. Goldstein, Under Secretary of the Treasury for Domestic Finance. “This conference is an opportunity for us to broaden our perspectives on a number of key issues in a transparent way to make certain that all of the best ideas are on the table.”
“This conference is an opportunity to engage stakeholders and experts with broad knowledge and many perspectives,” said Dr. Raphael Bostic, HUD Assistant Secretary for Policy Development and Research. “It is part of our larger effort to make sure that we have a deep and wide understanding of these issues as we chart a thoughtful, sound path forward in reforming our housing finance system.”
During the conference, Treasury Secretary Tim Geithner and HUD Secretary Shaun Donovan will moderate panel discussions with a diverse group of experts about the critical issues surrounding housing finance reform. These panelists represent a cross-section of stakeholder groups with interests in the outcome of this reform process, including citizen advocacy groups, economists, investors, market researchers, originators, securitizers, servicers, and private mortgage insurers. The following individuals will be panelists at the August 17 conference:
· Barbara J. Desoer, President of Bank of America Home Loans
· Ingrid Gould Ellen, Professor of Urban Planning and Public Policy at New York University’s Wagner Graduate School of Public Service and Co-Director of the Furman Center for Real Estate and Urban Policy
· Bill Gross, Co-founder and Co-chief Investment Officer of PIMCO
· Mike Heid, Co-president of Wells Fargo Home Mortgage
· S.A. Ibrahim, Chief Executive Officer of Radian Group Inc.
· Marc H. Morial, President and Chief Executive Officer of the National Urban League
· Alex Pollock, Resident Fellow at the American Enterprise Institute
· Lewis Ranieri, Chairman of Ranieri and Company, Inc.
· Ellen Seidman, Executive Vice President for National Policy and Partnership Development at ShoreBank Corporation, and Chair of the Board of Directors at the Center for Financial Services Innovation
· Michael A. Stegman, Director of Policy and Housing for the Program on Human and Community Development of the John D. and Catherine T. MacArthur Foundation
· Susan Wachter, Richard B. Worley Professor of Financial Management, Professor of Real Estate, Finance and City and Regional Planning at the University of Pennsylvania’s Wharton School
· Mark Zandi, Chief Economist of Moody’s Analytics
Details regarding the event, including topics for panel discussions and breakout sessions, and logistics for members of the media seeking to attend the conference, appear below.
Media Logistics:
WHAT: Conference on the Future of Housing Finance
WHEN: Tuesday August 17, 2010
9:00 a.m. – 1:30 p.m. EDT
WHERE: Cash Room
U.S. Treasury Department
1500 Pennsylvania Ave., NW
Washington, D.C. 20220
The event will also be streamed live on www.treasury.gov.
9:00 AM EDT
Treasury Secretary Tim Geithner
Opening Remarks
Cash Room
U.S. Treasury Department
1500 Pennsylvania Ave., NW
Washington, D.C.
Coverage: Open Press
9:15 AM EDT
HUD Secretary Shaun Donovan
Delivers Remarks
Cash Room
U.S. Treasury Department
1500 Pennsylvania Ave., NW
Washington, D.C.
Coverage: Open Press
9:30 AM EDT
PANEL DISCUSSION ONE – Housing Finance Reform and Broader Financial Markets
Moderated by Treasury Secretary Tim Geithner
Cash Room
U.S. Treasury Department
1500 Pennsylvania Ave., NW
Washington, D.C.
Coverage: Open Press
10:30 AM EDT
PANEL DISCUSSION TWO – Housing Finance Reform and Broader Housing Policy Goals
Moderated by HUD Secretary Shaun Donovan
Cash Room
U.S. Treasury Department
1500 Pennsylvania Ave., NW
Washington, D.C.
Coverage: Open Press
11:45 PM EDT
WORKING BREAKOUT LUNCHES
Hosted by Senior White House, HUD, and Treasury Officials
Breakout Session Topics:
Breakout Session One: Key Players in a Reformed System: Role of the Private Sector and of Government
Breakout Session Two: Delivering Access and Affordability
Breakout Session Three: Funding Housing and the Role of Securitization
Breakout Session Four: Aligning Private Market Incentives in the Housing Finance Chain
Breakout Session Five: Supporting Capital for Multifamily Finance
Breakout Session Six: Managing the Process of Transition
Coverage: Open to correspondents only. No recording devices for broadcast purposes will be allowed. Space is extremely limited and will be allocated on a first-come, first-served basis. Interested reporters should gather at 11:35 AM at the Cash Room press riser for escort.
1:15 PM EDT
CLOSING REMARKS
Media Notes:
Conference panels and official remarks are all open to press; working breakout lunches are open to correspondents only. Space is limited and is first come, first serve. The event will also be streamed live on www.treasury.gov.
Media without Treasury press credentials planning to attend must contact Frances Anderson in Treasury’s Office of Public Affairs at (202) 622-2960 with the following information: full name, Social Security number, date of birth, and country of citizenship. This information may also be emailed to frances.anderson@do.treas.gov. Congressional and White House press passes will not grant you access to Treasury. Please note if you have camera equipment. The deadline to RSVP is Monday, August 16, 2010 at 12:00 PM EST.
Press with camera equipment should arrive at the Moat Entrance (south side of the Treasury building, adjacent to the Hamilton entrance) no later than 7:00 a.m. to allow time for equipment sweeps and escorts to the Cash Room. No vehicles will be permitted onto Treasury grounds; equipment must be carried in. All other media can enter the Treasury building through the Pennsylvania Avenue entrance and should allow 45 minutes to clear through security. Final access to the Cash Room will be 8:45 a.m.
Far be it for me to suggest that perhaps teh bulk of the panelists have already had their hand in teh trough and are “double dipping.” Lets see what sort of fiasco these geniuses can concoct this time. The only thing certain is – you will end up fotting teh bill.
Well the laughs continue in the US real estate market – one of the major instigators of the financial crisis – the US Department of Housing and Urban Development (HUD) is charging a bunch of local realtors and property owners with “housing discrimination” in Chicago. Apparently some one refused to sell (as if) a house to a black couple. Not seeing it myself as the home was on the market for at least two years and you have to think they were getting pretty desperate considering the amount of investment property for sale in Chicago. Still – you never know in the US real estate market - In any case – this is the official HUD press release.
The U.S. Department of Housing and Urban Development (HUD) today announced that it is charging a Chicago couple, their real estate agent, and a real estate broker with refusing to sell a home listed for $1.799 million to a black couple because of their race, in violation of the Fair Housing Act. The charge alleges that owners Daniel and Adrienne Sabbia and real estate agent Jeffrey Lowe stalled negotiations and took the property off the market after receiving a $1.7 million offer from radio personality and comedian George Willborn and his wife, businesswoman Peytyn Willborn.
The Willborns submitted the highest offer the sellers had received in the two years the property was on the market. Yet, when faced with the sales contract, the Sabbias refused to sign it. Real estate agent Jeffrey Lowe told HUD investigators that Daniel Sabbia expressed a preference not to sell his home to an African-American.
The charge also names the Lowe Group Chicago, Inc. and real estate broker, Prudential Rubloff Properties.
“Racial fairness is important at all income levels. Civil rights enforcement must be the effective shield against housing discrimination that in this case wealth was not,” stated John Trasviña, HUD Assistant Secretary for Fair Housing and Equal Opportunity.
The Fair Housing Act prohibits housing discrimination based on race, color, national origin, religion, sex, familial status, and disability. This includes the selling, brokering or appraising of a real estate property. HUD’s action is also on behalf of the prospective buyers’ real estate agent who was effectively denied a commission by the alleged discriminatory action of the sellers.
The HUD charge will be heard by an Administrative Law Judge unless any party to the charge elects to have the case heard in federal district court. If an administrative law judge finds after a hearing that discrimination has occurred, he may award damages to aggrieved persons for the damages caused them by the discrimination. The judge may also order injunctive relief and other equitable relief to deter further discrimination, as well as payment of attorney fees. In addition, the judge may impose fines in order to vindicate the public interest. If the matter is decided in federal court, the judge may also award punitive damages to aggrieved persons.
FHEO and its partners in the Fair Housing Assistance Program investigate more than 10,000 housing discrimination complaints annually. People who believe they are the victims of housing discrimination should contact HUD at 1-800-669-9777 (voice), 800-927-9275 (TTY).
For this considering investing in real estate in the US, the figures seem “interesting,” at the moment and another drop in pending home sales does not point to bottom being reached any time soon. According to Mike Larson, real estate and interest rate analyst at Weiss Research:
Pending home sales slumped another 2.6% in June after a 29.9% plunge in May. That failed to meet market expectations for a 4% gain. Moreover, sales were weak in three out of four regions of the country — down 0.2% in the West, down 9.5% in the Midwest, and down 12.2% in the Northeast. They ticked up 3.7% in the South. The index, at 75.7, is off 18.6% from its year-ago level and the lowest in history.
If you’re looking for a pulse in the U.S. housing market, best of luck. I can’t seem to find one. Pending home sales fell once again, with broad-based geographic declines and a nominal new low for the index, first published in 2001. Leading indicators like the Mortgage Bankers Association’s index of purchase loan applications also can’t get off the mat.
What’s remarkable about the weakness is that it’s coming at a time where mortgage rates are hovering around 4.5%. These aren’t just the lowest mortgage rates in the past several years. Some research suggests they’re the lowest since before the Wright Brothers first flew at Kitty Hawk! Unless and until we get a rebound in the labor market, we’re just not going to see good things happening in housing.
About Weiss Research, Inc.
Weiss Research, Inc., a subsidiary of the Weiss Group, is one of the largest, most reputable sources of global investment information. The company’s flagship websites, MoneyandMarkets.com and Uncommon Wisdom Daily, contain unbiased market commentary you won’t get from Wall Street. Weiss Research also produces a series of monthly newsletters including Safe Money Report, Asia Stock Alert, and Real Wealth Report. For more information, please visit www.weissgroupinc.com
Our own research suggests staggering amounts of investment property for sale in the United States, with estimates of 22 million foreclosed homes sitting rotting on bank’s balance sheets. Hard to know or guess at where the bottom of the market is going to be.
A recent announcement by the HUD secretary has just thrown another spanner in the mix as far as investing in US real estate goes. Already, far too much interference by the US Government Inc has skewed and in many cases destroyed the independent nature of the real estate market. Once one takes into consideration the fact that US banks own 22 million residential properties, and HUD foreclosures are mostly sat rotting, the introduction of $65 million seems like a drop in the bucket, and we suspect that most of this will vanish into a few select pockets in any case. Regardless, this is the announcement:
Yesterday the House Financial Services Committee took a key step toward enactment of a signature Obama Administration priority, the Choice Neighborhoods Initiative. This proposal is designed to transform distressed neighborhoods and public and assisted housing developments into viable and sustainable mixed-income neighborhoods by linking housing improvements with appropriate services, schools, public assets and access to jobs.
The initiative was passed on a 42 – 27 voted by the Committee as part of a larger public housing measure (H.R. 5814) that also included proposals aimed at clarifying federal rules for replacement of demolished housing units, and providing new methods for financing of public housing. Choice Neighborhoods was originally funded as a $65 million demonstration project in HUD’s 2010 funding bill, and yesterday’s Committee action marks an important milestone in the effort to move beyond this pilot concept and establish the program on a permanent basis.
The following is a statement by HUD Secretary Shaun Donovan:
This is a crucial step toward encouraging viable communities that connect families and individuals to quality housing, more jobs, better educational opportunities, and greater community support,” said Secretary Donovan. “I want to thank the members of Congress we worked closely with to refine this proposal – specifically, Committee Chairman Barney Frank, and Housing and Community Opportunity Subcommittee Chair Maxine Waters. I look forward to continuing to work with them and their colleagues as this proposal moves forward.
It really is hard to imagine what $65 million is going to achieve. By the time the various fingers in the pie have taken their cut – less than half of this will end up where it belongs, so – just more spin and a slight addition to the tax burden we imagine.
For those of us despairing at the level of spin and misinformation being bandied around, some welcome news (maybe) about another commercial real estate index has just been released. With commercial real estate funds around the world still frozen ans the central banks print more and more money to attempt to prevent a collapse, any new source of information is welcome.
A few commercial funds are being unfrozen. Great-West Life Real Estate Fund recently announced they would allow redemptions again, paying 58%, although the amount of investors asking for their money back far outweighs their ability to pay. According to a spokesperson, Marlene Klassen:
The total amount of transfers, switches and withdrawals requested by unit holders exceeded the cash available for distribution on July 9, therefore, payments will be made as a percentage of the total amount requested.
Although it looks as though London Life may also unfreeze later this year. We shall see. In any case – this is a press release from CoStar Inc, claiming they are creating an impartial Commercial REal Estate Index. CoStar Group, Inc. announced that the company is launching the CoStar Commercial Repeat Sales Index (CCRSI), a measure that is intended to provide consistent and timely information to help answer some of the fundamental economic questions regarding the commercial real estate (CRE) industry, including, “Are prices climbing or falling?” and “On a month-to-month basis are property values going up or down?”
In the last two decades, repeat-sale regression has become increasingly accepted as the most clear-cut and rigorous method to meet investors’ requirements for understanding price movement. The repeat-sale analysis, based on CRE properties that have sold more than once without a significant change in building characteristics between sales, is fundamentally comparable to stock and bond indices, based on same-stock (or bond) price changes from one period to the next. In residential real estate, the most well-known repeat-sale index is the S&P/Case-Shiller home price index. Not only has it become the barometer of the health of the nation’s housing market, it has also been used by the Chicago Mercantile Exchange to support and facilitate derivatives trading against housing.
“Currently, there are no effective, non-biased indices to measure commercial real estate price movements, and even less comparative information by property type or geographies,” said Andrew Florance, Chief Executive Officer of CoStar Group. “In response to this void, we’ve developed the CoStar Commercial Repeat Sales Index to provide a comprehensive set of benchmarks that investors and other market participants can use to better understand and predict CRE price movements.”
CoStar has identified more than 85,000 repeat sale pairs in its U.S. database, which we believe is the largest and most comprehensive comparable sales database in the U.S. commercial real estate industry. We have constructed more than two dozen sub indices using the unique breadth of CoStar’s property and comparable sales data.
“An accurate measure of real estate price changes is a critical component to understanding investment or market performance. With commonly used average, median price and price per square foot indices, there are no controls for the ever-changing mix of properties sold during different time periods,” added Florance. “Therefore, we do not believe average or median price indices per square foot are useful for rigorous analysis of market cycles. Appraisal-based indices are ineffective because they introduce lag and bias and minimum price cut indices are a circular reference in that they use price to define price.”
By covering all levels and all types of CRE transactions, and by using well-tested available methodologies, we believe that CoStar’s indices will provide one of the most comprehensive benchmarks for tracking and analyzing CRE price movements to date. CoStar Group expects to release the initial CoStar Commercial Repeat Sales Index on August 4th and plans to provide updates the first Wednesday of each month to serve as timely indicators of the overall health of the commercial real estate industry.
I tend to agree that median prices are not a good way of doing commercial real estate evaluations – in fact – they are not a good way of doing any real estate valuations. Residential British property prices may be hanging on by a thread, but sales levels are at almost record lows – and this skews the figures completely.
