10 Financed Properties
Allowed Again!
– EFFECTIVE MARCH 1, 2009
On February 6th, 2009 FNMA announced their plan to allow up to 10 financed properties per borrower again.
This rule had been pulled back to just 4 properties last year and as a lender who works with investors this was a painful change.
Well as part of the overall plan to save the housing market, FNMA has acknowledged that allowing investors to provide rental homes is a good idea. So for well qualified applicants we can now do loans on properties 5 through 10.
A few details:
· This is allowed for purchases and limited cash out transactions only.
· FICO must be above 720
· Client will need 6 months reserves for each property owned plus the one being financed.
· Loan to value for purchase is 75% and refinance is 70% LTV.
Investment Property Financing
FCB Mortgage Partners, LLC has financed literally thousands of 1-4 unit investment properties over many years, specializing in high loan to value acquisitions.
We will work and understand the process of utilizing a 1031 exchange for the investor transitioning from one property to another, or large value properties into multiple smaller value investments.
For a consultation or information about a 1031 exchange or other investment property financing, please call Donna Clements directly at 214-360-9505.
Why Invest in Texas Real Estate?
What we know now to be thriving Southwestern economic hubs of Houston and Dallas are still excellent examples of this “get rich mentality” that has lasted long after the cities were settled. Oil trading and exploration, as well as finance, telecommunications, and real estate have remained vital components to these two cities.
Austin was crowned “the Capital of Texas” and for many years served mostly as a bucolic and relatively small outpost for state lawmakers and an internationally renowned University. Today, the University of Texas is considered by some to be the largest in the United States at over 55,000 students, and there are another 75,000 students attending one of many other local educational institutions.
Beginning in the 1970’s, some forward-thinking men and women, both from politics (in the interest of economic development) as well as technology (both from East and West Coast centers like New York and a still-in-its-infancy Silicon Valley), began to plant the seeds for an incredible transformation from a college and government town to one of the most significant hotbeds of marketing, design, and creative energy in the United States, a reputation the city appears to be adding to each year. Technology firms appreciated Texas’ low business taxes, no state income tax, and other incentives that spurred business instead of restricting it.
The industrial age is over. The United States must and will utilize its comparative advantage as a leader in technological innovation. Knowledge work — not manufacturing – is the real capital of the United States. Most importantly, knowledge workers can work ANYWHERE (Detroit? Pittsburgh? No Thanks!) — and that “anywhere” is increasingly attractive. Cities with warm climates, low costs of living, and a great future — Texas.
The same reason people want to move to Texas motivates HR managers and entrepreneurs from across the globe to locate their startup and medium size companies in Texas.
For those CEO’s, the simple fact that Texas has no state income tax is enough to motivate them to look at alternatives to California and New York. The fact that their employees can actually afford to own a home (take a look for example at the median home price in Orange or Los Angeles county), is a strong and compelling reason to put down roots in the Texas region.
Additionally, there aren’t many sacrifices that these business owners have to deal with — in addition to the lower taxes and happier, more rooted employees, the great weather, cultural amenities, and natural beauty of the area “seals the deal” for many.
Office space is at a record high as homegrown startups compete with prime space for the re-locating firms and for the existing behemoths already in the area.
Have I already missed the boom?
No!
There were a series of events that led to the West Coast’s run-up in property values over the last few years, including tight supply constraints, high personal incomes, as well as a flight of capital from the stock markets into property.
Not surprisingly, the real estate market on the coasts was not immune to economic gravity, and the music stopped playing with some owners having no place to sit down. In fact, the National Association of Realtors projects 2007 to be the first year since they started keeping records that the median home value in the country will actually go down.
Bubbles are created when the fundamental value of real estate (which we believe to be, simply enough, the income you derive from the property vs. its purchase price) becomes too high to support the income generated from the property.
Our median home value just recently crossed the $200,000 line, and we regularly help 20 or more real estate investors per month find investment properties in that price range that cash flow quite readily with 20% down.
As long as our market continues to add jobs and grow, and as long as our fairly civic minded and progressive city councils continue to put curbs in development of new competing inventory, Texas has a bright future ahead of it with regard to equity and rental values.
Equity Appreciation vs. Cash Flow
The reality, of course, is that a real estate investor (like any investor) must make some sacrifices and do a little picking and choosing when it comes to property investment. The key is to make the right sacrifices, and not to apply lessons learned in another market that may not necessarily fit this market.
Based on our years of experience working with investors, here is what most investors prefer, in order of importance:
- Cash Flow — this is of course the primary reason investors invest; if they wanted to spend outrageous sums of money for negative cash flow, they would be investing in California, Arizona, New York, or Nevada, etc.
- Appreciation — the appreciation seen in the U.S. from 2001 to 2006 has in some cases created unrealistic expectations about property values. Regardless, appreciation is a vital factor in real estate value.
- Location— most investors prefer, all other things being equal, to own property in more affluent areas adjacent to prestigious universities, landmarks, and job creation engines (e.g., tech firms)
- Year of Construction — thanks to less-than-scrupulous hawkers of “pre-construction” , new construction, condominiums and single family homes in primarily Florida and western U.S. markets, many investors believe new construction property to be the most important investment factor; and they could not be more wrong.
- Property Type — many investors believe single family homes are the best investment because they will appreciate the fastest, given what they have seen in other markets. Other investors stick religiously to “fourplexes only” believing that more units is better since it cuts down on the risk of vacancy. In Texas, neither investor is correct.
We like to draw a picture for our investment clients, with a beautiful new construction mansion in a wealthy area at one end of the scale (illustrating high equity appreciation potential), and a dumpy fourplex in a working class area of town on the other end of the scale (cash flow)
The single family “mansion” in Texas will cost perhaps $500,000, and due to the fact that most renters in Texas do not make investment banker sized incomes, may earn $2,000 to $2,500 per month in rental income. With today’s prevailing interest rates, such an investment would require a huge down-payment to be cash flow positive, and though the investment would likely see significant equity appreciation, all other things being equal, the investment would not be a wise one for most investors due to the significant negative monthly cash flow while awaiting the ultimate equity return.
On the other hand, the fourplex in the working class area of town looks great on paper. It may be priced at $200,000 and be generating $2,100 per month in rent. However, a closer look at the history of the property will show that it has turned over 2 or 3 times the last five years, has a headache inducing amount of deferred maintenance, takes months to lease, and suffers from renters bouncing checks, skipping rent all together, or crowding ten residents into one rental unit.
The best investment is somewhere in the middle. Here is what we help our clients look for:
- Jobs! — there is no single more important factor in choosing an investment property than its proximity to where people go to work or school.
- Socioeconomics — it is important to choose investment property in areas where tenants are able to pay rent on time each month, and whose lives allow them some free time to maintain their units. In some rougher areas, it is a fact that more tenants do not take as good care of the buildings, and sometimes do not pay rent on time.
- Purchase Price to Rents — A fully leased property with great tenants is not necessarily a great investment if its price is so high that it will always create negative cash flow.
For most investors, a 120 x [monthly rents] factor should be sought. For those seeking higher equity appreciation, and are less dependent on monthly cash flow (i.e. in high paying careers), a 140 x [monthly rents] or higher factor may be appropriate.
