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By Les Christie, staff writer August 5, 2010: 8:36 AM ET NEW YORK (CNNMoney.com) — These are the glory days of the residential real estate investor. Low prices, rock-bottom interest rates and stable rental markets have created huge buying opportunities.

“It’s awesome right now. I don’t think we’ll ever see another time like this,” said Tanya Marchiol of Team Investments, which has operations in about 10 states but focuses mostly on the Phoenix market.

These investors are known to many as vultures because they swoop in and buy “distressed properties” — foreclosures and short sales — cheap. Places like Las Vegas, Phoenix and Miami are popular because home prices there have dropped as much as 70%.

But how they’re investing has changed. In the boom years, they would buy a property and flip it for a quick cash out. Today, they are holding and renting for hefty, steady incomes.

Once they analyzed their decisions based on home-price appreciation, which is very speculative. Now they consider potential rental profits, which is far more stable.

Back then, they flipped often and helped to bid up home prices into a froth. Now, the investors say, they can be a part of stabilizing neighborhoods.

“People are not in it to flip like back in the old economy,” said Matt Martinez, an investor and author whose new book, “How to Make Money in Real Estate in the New Economy” comes out next February. “The new economy dictates that you have to have a long time horizon.”

Marchiol, for example, does not even factor in home price appreciation for at least a year. After that, she calculates only a 3% annual increase — a return that won’t turn heads of investors who only want to buy low and sell high.

Marchiol just purchased four separate four-plexes in North Phoenix. Three years ago, each four-unit building sold for $310,000; she paid just $70,000 per building. She intends to spend about $64,000 rehabbing the properties, making her total investment $344,000.

In total, she currently owns about 17 rental units. Usually she buys the properties to keep herself, but she also works with a group of investors who are intent on holding them and renting them out. She can spot the deals and then sell to them.

For example, with her North Phoenix buildings, the investors will buy the buildings for $95,000 each. They’ll put 20% down and finance the rest, about $76,000 per building.

At today’s low interest rates, they’ll get a near 5% loan. That yields a payment of about $400 a month. Figure another 10% of the price for property management, 10% for maintenance, an 8% vacancy rate, taxes, insurance and other home ownership expenses, and you’re talking about a monthly nut of roughly $1,300.

Marchiol projects the apartments will rent for $600 a month each, for a total rent roll of $2,400. That gives the owners a profit of $1,100 per month and $13,200 per year — a nearly 70% annual return on investment.

Although conditions are very favorable, investors have to be adaptable because the market is evolving rapidly. In Phoenix it’s changed in just the past six months. Foreclosure auctions are no longer a fertile hunting ground for Marchiol.

0:00 /4:43Foreclosed, homeless, but fortunate

“Amateurs have come in and run up the prices,” she said. “In 2009 I bought 76 properties at foreclosure auctions, at an average of about 60 cents on the market dollar. This year, I’ve bought four.”

Glenn Plantone faces a similar situation in Las Vegas. A veteran real estate broker and investor, he has switched from buying mostly foreclosures and repossessions to short sales almost exclusively. That’s because the inventory of distressed properties available in Vegas is way down, to about a two-week supply.

“The banks make better profits with short sales, so they’re not foreclosing,” Plantone said. “They’ve switched staff to processing short sales and they’ve gotten faster at processing them.”

He tries to purchase properties for at least 10% less than what he considers to be true market value, then he does some light rehabilitation and sells them to some of the 3,000 buyers he works with.

Since prices have fallen about 70% in some Vegas communities and rents have only declined by about 20%, it’s possible for his investors, who are cash buyers, to make money from the first month the homes are rented.

“We’re getting cash flow (net return on investment) of 12% to 14%,” he said.

He doesn’t completely ignore potential profits from home price appreciation because he believes the town is bouncing around the bottom. (Homes already sell for below what it would cost to build new homes.) He does not, however, emphasize that aspect of the investment. It’s the income from rentals that’s paramount right now.

The beauty of cash flow, of course, is that even if the prices decline another 10% or 20%, the investors should be able to live with that.

“I tell them to plan on holding for five years,” he said. “With cash flow, there’s no need to worry about price drops.” 

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The flip side of this trend is a rising rental rate, which probably will hit 36% by 2015, versus 32.8% in 2004. Every percentage-point increase represents nearly 1.3 million households, and the average household includes more than two people—so roughly 10 million extra folks could be moving into rentals over the next five years.

Why? From now through 2015, the long slog that will unfortunately characterize the economic expansion will bring slow growth in jobs and wages. That pace of improvement should be just strong enough to permit new households to form, but not robust enough for the members of those households to afford to own homes. In addition, lax lending standards, fraud and predatory lending practices— key factors in the unrealistic bubble in home ownership in the mid-2000s and the subsequent debacle—appear to have become rarer, at least temporarily. At the same time, the once-exuberant Fannie Mae and Freddie Mac, now wards of the government, could well become more stringent when buying mortgages from banks and other lenders. That’s to say nothing of Uncle Sam’s latest efforts to protect consumers, which could have the unintended effect of making it even harder for young households to get mortgages. Demographics also will deal home sellers and builders a clear blow. Not surprisingly, the home-ownership rate tends to rise with age. For example, while the overall U.S. rate is 67.2%, the rate for households headed by someone under 35 is just 38.9%. Thus, whenever the age distribution of households tilts in favor of younger adults, the overall home-ownership rate declines. That happened in the early 1980s, when young (and numerous) baby boomers began to form households. And, says demographer Peter Francese, former president of American Demographics magazine, a similar tilt is likely over the next half-decade.peter@francese.com.) The residential real-estate market might benefit somewhat, assuming people over 50 buy second homes as investments or vacation properties. But the impact probably won’t be great.THE ECONOMY, AS ALWAYS, CALLS the tune in the housing market. The subpar recovery we are experiencing, which is likely to be followed by a subpar expansion, is tailor-made to help spawn a generation of renters.Young people who need the down payment for a home have often been helped by what jokingly has been called the new “G.I. bill”: generous in-laws. That will no doubt continue. But given the economic constraints those in-laws will be facing—imposed by higher taxes and the need to build (or rebuild) retirement savings—their generosity could be severely limited. The generous in-laws could perhaps afford to retire, but can’t sell their home at a decent price—in most of the U.S., housing in general isn’t appreciating, or is appreciating more slowly than it was, pre-bust. Or, they might rent out part of it, while continuing to occupy the rest. Or, if they move to a retirement property elsewhere, they might keep a couple of rooms in the old homestead as a place to return to on visits to the kids. And maybe their tenants will be their own adult children—renting, of course, at a reduced rate—even zero. More likely, however, the new version of the G.I. bill will take the form of, say, providing the adult offspring with the first two months’ rent for an apartment, plus security deposit, rather than the much heftier cost of a down payment on a home.REQUIREMENTS ON THAT down payment have climbed. According to the Federal Housing Finance Agency, the share of new mortgages requiring a down payment of less than a 10th of the house price was 8% last year, down from 29% in 2007.Michael Frantantoni, research vice president of the Mortgage Bankers Association, says the early 1990s were the last time the share of new mortgages permitting a down payment of 10% or less ran in the single digits. In fact, the average down payment on all mortgages last year exceeded 25%. The last time it was that high was also the early 1990s. Adds Frantantoni: “We’ve moved from a world where most of the effort was on streamlining the mortgage-application process to one where full documentation is the norm. Every data point needs to be checked and rechecked.” One of those data points includes higher standards on credit scores.Some observers, including David C. John, a Heritage Foundation research fellow, would call the current procedures a welcome return to sanity. But John also expects the new Consumer Financial Protection Board, authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act, to make it harder for low- and moderate-income households to get mortgages. “Last year,” observes John, “Congress made a high-minded attempt to fix credit cards, making it more difficult for issuers to change interest rates or to penalize people who misused the cards. The net result was that issuers backed away from higher-risk customers. I see the same scenario playing out with mortgage issuance.”The federal government’s now-expired tax credit to spur home buying did help the residential realty market. But even with house prices scraping along the bottom and mortgage interest rates at historic lows, home sales were tepid. In May, new-home sales, no longer helped by the tax credit, plunged to their lowest level since 1963, the year in which records of such transactions began to be kept. In contrast, the rental-apartment market, without any federal help, has been surprisingly strong. Dallas-based Axiometrics tracks monthly price and occupancy data on apartments in 305 markets around the country. Its research chief, Jay Denton, reports that, on new leases written through this year’s first six months, effective rents—those after all concessions are taken into account—rose a robust 3.2%, after declining through 2009 and much of 2008. And occupancy growth, adds Denton, is close to the best he’s seen in the past 13 years.Given this strength, Axiometrics President Ronald Johnsey believes nationwide job growth must be stronger than official estimates. Otherwise, he finds the rebound in the rental market hard to explain. Johnsey rules out the possibility that any great number of rental apartments were taken by former homeowners with jobs who lost their homes through foreclosure or who walked away because the value fell below the mortgage principal. For one thing, says Johnsey, anecdotal evidence shows that former homeowners generally rent other single-family homes, rather than apartments, because that’s where they’re accustomed to living. Axiometrics’ findings auger badly for home builders, especially those that cater to entry-level and first-time buyers. But they auger well for the apartment market. As younger households start to rent, apartments probably will be their housing of choice. The problem for investors is that this probability already has boosted the share prices of real-estate investment trusts specializing in apartments.Still, Alexander Goldfarb, associate director of investment banker Sandler O’Neill & Partners, does have Buys for three REITs: FRANCESE PROJECTS SUBSTANTIAL growth in households formed by people under 35, who mainly rent rather than own. Worsening the shift will be a decline in the number of households led by people 35 to 49 years old—the very ages when there is normally a huge jump in ownership. Francese does expect a rise in households led by people 50 and older, but the boost to ownership from this won’t be great. Home-ownership rates tend to level off when Americans reach their late 40s and early 50s. Back to the ’90sBarron’s projects that the share of U.S. households owning their homes will fall to 64% by 2015 —the level in 1993-94.In the 1960s, as the boomers—people born from 1946 through 1964—began reaching child-bearing years, demographers expected an imminent birth explosion. What happened instead was an extended birth dearth that produced a “baby bust” generation, born from roughly 1965 through 1977. Then, as though to confound the demographers even further, the boomers (along with some early busters), begot the echo-boom generation, through a jump in births from around 1978 through 1994.Based on the years when the boomers, busters and echo boomers were born, the size of certain age groups will expand and contract as the years pass, creating imbalances that haven’t been, and won’t be, altered by the net influx of immigrants into the U.S. Through 2015, those imbalances point to a decline in the rate of home ownership.Largely because the echo boomers are more numerous than the baby busters, there are now more U.S. residents aged 15 to 29 than 30 to 44. So five years from now, the nation will have more 20-to-34-year-olds than 35-to-49-year-olds. Similarly, largely because the baby busters are less numerous than the baby boomers, there are fewer 30-to-44-year-olds than 45-to-59-year-olds. Thus, five years from now, expect a decline in the ranks of the group that historically has been the most keen to buy homes—the 35-to-49-year-olds.At the same time, Francese sees the number of households headed by someone under 35—a prime rental group—expanding faster than the overall population. The key to the housing outlook is household formation. As defined by the Census Bureau, a household is formed when one person takes separate living quarters, or when two or more people do, regardless of whether those people are married or unmarried, and provided that the quarters aren’t in an institution, for example, a prison, nursing home or school dormitory. THE GREAT RECESSION OF 2007-09halted the growth in the number of households led by people under 35. The financial stress also led to the dissolution of some households that those in this age group previously had formed. Net result: The number of younger households fell, even though the ranks of younger Americans continued to increase.Many of the missing young householders were “boomerang kids.” As economist Greg Kaplan of the Minneapolis Federal Reserve has found, these individuals tend to move back with their families—thus dissolving their own households—when they lose their jobs. Others never left the family home, often because they simply couldn’t afford to do so.Still others entered college or graduate school. College enrollment jumped by an unusually large 850,000 in the fall of 2008, when the jobless rate among young people already had begun to rise. Regardless of the benefits that more education might bring to young people, there is an undeniable downside: more debt. According to estimates by Mark Kantrowitz—publisher of FinAid, which guides students about all forms of financial aid—65.6% of bachelor-degree recipients held an average of $23,300 in student debt by 2007-08, with both figures setting records. While the burden of student debt isn’t likely to prevent young people from forming households after they graduate and find jobs, it will inhibit their ability to take on mortgages.Francese sees a 2.8 million rise by 2015 in the number of households headed by people under 35. But he expects this group’s home-ownership rate to probably slip to somewhere below its current 38.9%. Another problem: Ownership rates soar as people move into their late 30s and 40s, so a rise in households in this age group would naturally be expected to boost the overall home-ownership rate. But Francese sees a 600,000 decline in the number of households headed by those aged 35 to 49, simply because the number of folks in that age group will decrease. The demographer does project a huge increase of seven million in households 50 and older, mainly because of the baby-boomer effect. (For more on how these numbers were crunched, demographer Francese can be e-mailed at Colonial Properties Trust (ticker: CLP), specializing in Sunbelt markets; Equity Residential (EQR), with properties in major cities throughout the U.S., and Essex Property Trust (ESS), with buildings on the West Coast.  Part of his rationale: “The apartment market has begun to turn the corner.” That turn should last for quite a while.  

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Look at the sheet…..         <a href=”http://tidaily.com/wp-content/uploads/2010/05/available-cash-flow-properties1.xls“>Click Here</a></p>

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Until recently, those answers were hard to come by. Credit bureaus were uncommunicative about expressing, in points, just how much impact different foreclosure types of mortgage delinquencies have on scores

Recently, Fair Isaac, which developed FICO scores, pulled back the curtain a bit, revealing some estimates of point-score declines following mortgage delinquency problems.

Here are the average hit your credit will take:

30 days late: 40 - 110 points

90 days late: 70 - 135 points

Foreclosure, short sale or deed-in-lieu: 85 - 160

Bankruptcy: 130 - 240

To come to these figures, Fair Isaac created two hypothetical consumers, one who starts out with a fair-to-middling score of 680 and the other with a very good one of 780. (FICO scores range from 300 to 850.)

The hypothetical person with the 780 FICO has 10 credit accounts versus six for the 580, plus a longer credit history, lower utilization of total credit limit and no missed payments on any account. The other consumer has two slightly damaged accounts. Neither have any accounts in collection or adverse public records.

See the chart above to see how each scenario affected each borrower.

Notice that for both borrowers a single one-time black mark results in steep drops, but it is when they fall further behind that things get really harsh, according to Craig Watts, a spokesman for Fair Isaac.

“The lending industry tends to regard an account differently when it has become 90 or more days late,” he said, “The likelihood that consumers will resume paying their overdue obligations drops off significantly after the delinquencies have reached 90 days.”

One reason credit companies were so closed-mouthed is that they often can’t definitively state how much each delinquencies will affect scores because there are too many variables.

Some borrowers will fall much more steeply than others for the same payment problem, according to Maxine Sweet, vice president for public education at Experian, one of the nation’s main credit bureaus.

“If you picture someone who has just one mortgage and one other credit account versus a mature credit user like me with 15 accounts, if they miss one payment that would impact their scores a lot more,” she said. “For me, one missed payment would just be a blip.”

The point loss also depends on the borrower’s starting point: People with very high credit scores have more to lose than low-score borrowers; the impact of a single blemish on an 800 score is more than on a 500.

0:00 /2:23Homeowners overtaxed

Of course, it just gets worse when you face foreclosure.

Mortgage borrowers can lose their homes three basic ways: a foreclosure; a short sale, where the home is sold for less than than is owed and the bank (generally) forgives the difference; or a deed-in-lieu, in which the borrower gives back the property and the bank again forgives any unpaid balance.

Sweet said credit bureaus generally slash scores equally for those three resolutions to someone losing their home. The important factor, she said, is that “it’s reported that you paid less on a settled account.”

Some borrowers may think that because they never missed a payment, they can “walk away” from their homes with relatively little impact on scores. Not true. “When a deed-in-lieu or short sale is reported as a partial payment, it’s treated as a serious delinquency,” Watts said, “just like a foreclosure.”

Even if borrowers made payments faithfully for years before short selling or doing a deed-in-lieu, their credit score will still take a hit. The total decline will run about 85 points for the 680 score borrower to as much as 160 for the 780 score.

Mortgage debt, combined with other financial problems, can send borrowers into bankruptcy, the worst thing that can happen to your credit score.

The effects are long-lasting, according to Sweet. In a Chapter 13 bankruptcy, which involves partial repayment over several years, the stain will take seven years to remove. A Chapter 7 bankruptcy, which involves liquidation, takes 10 years to get over.

It’s gonna cost you

Absorbing a big credit-score hit can make many transactions more costly. It’s not just paying more for credit card debt and auto loans, insurance can cost more as well.

The average savings for someone with a good versus mediocre credit score is about $115 a year for auto insurance and $60 for home, according to Loretta Sorters, of the Insurance Information Institute.

A low credit score can even make it harder to rent a home because landlords often use credit scores to weed out prospective renters.

Despite the problems a poor credit score can cause, Experian’s Sweet recommends that people who are in financial dead ends, like totally unaffordable mortgages, it’s better to recognize that and cut your losses quickly; don’t prolong the problem.

“You need to do what you need to do to get your finances back in order,” she said. “Don’t worry about your credit score.” 

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by Carla L. Davis

Realty Times

For new and existing home buyers alike, the options to “green up” homes abound.

Green upgrades on homes offer two-fold benefits. They contribute to a healthier environment, both now and in the future, and they can save homeowners big when it comes to energy costs.

How much impact does a green home have on the environment, you ask? The government reports that “Energy Star qualified homes built in 2009 are the equivalent of:

• Eliminating emissions from 51,645 vehicles
• Saving 312,399,672 lbs of coals
• Planting 85,372 acres of trees, and
• Saving in the environment 612,678,574 pounds of CO2.”

Many homebuyers shy away from green construction and green upgrades because of the upfront cost. But while some estimates have put the construction cost difference at 17 percent, recent estimates from The World Business Council for Sustainable Development put the cost of green construction only 5 percent higher than traditional.

Green building means using recycled, renewable, and native building materials. It also means tapping into the energy sources that nature has to offer, including solar and wind.

Here are a few ideas of simple “going green” ideas to get you thinking.

Energy Star Appliances: Appliances are an easy way to make a home more friendly to the environment. One of the fastest ways to explore your options is to visit energystar.gov. At this government site you can find our more information on tax credits and rebates. As an example of Energy Star appliances and their efficiency, qualified washers use 30 percent less energy and over 50 percent less water.

Toxin-free Paint: Also known as “zero-voc, low-voc, and natural” paint, this is a good option for families that have asthma sufferers. According to the EPA, “Paints, stains, and varnishes release low level toxic emissions into the air for years after application.”

Renewable Flooring: Looking for a beautiful way to incorporate wood flooring into your home? Consider bamboo flooring. How is bamboo a green option? It grows and renews itself quickly, unlikes most woods, making it an ideal and cost effective option for green flooring.

Passive Solar: In effect this option can cost you nothing, if you choose the right designed home. The goal is to design to take advantage of the sun’s positioning throughout the year. o that its windows, roof, doors, flooring, etc to take advantage of the sun’s position through the year.

Low Flow Toilets: Looking to keep utility costs down in your new home? Low flush toilets use 1.6 gallons per flush versus 3.5 in traditional toilets. That’s a lot of water saved. Worried about the efficiency of low flow? There have been major strides made in recent years in improving these toilets. Be sure to talk to your plumber about your options.

Hopefully, these items spur you to seek out your own ways to make your home as green as it can be.

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