Archive for April, 2011
Renting Dirt to Owner-Occupants
Today’s blog title sounds like an oxymoron but it couldn’t be closer to the truth. What I am discussing today are mobile home parks. Managed properly these are a fantastic commercial real estate investment. Done wrong and they become a residential landlord’s worst nightmare.
Here’s how to do it wrong. As a novice real estate investor, look at the “potential” revenue from a mobile home park that is half owner occupied and half of the trailers are owned and rented out by you as the investor. Of the 100 spaces, 50 with trailers owned by you are rented for $550 per month ($550 X 50 = $27,500). The other 50 are owner occupied and the dirt only rents for $300 ($300 X 50 = $15,000). Total “potential” monthly rent comes to $42,500.
Now, let’s look at what the “potential” numbers don’t tell you. Mobile home renters are very low on the economic ladder. These people often have credit scores so low they don’t even register as relevant. Employment-wise, they are highly unstable. They are also much more transient than mobile home owners. After their first month rent and deposit is gone and they lose their job, they disappear into the night. What they leave behind are broken down cars, overflowing garbage cans, and busted out interior walls to the mobile home that you own. Your chance of collecting pass due rent and damages is between 0% and 50%. Your cost to clean the place up to put in another renter is over $700.
What new real estate investors need to understand is that along with higher rental revenue come expenses upward of 70% of the income. The “potential” net operating income is really $12,750 ($42,500 X 30%) along with lots of headaches.
Now, contrast that with owner occupied mobile homes where you only rent them the dirt to park their mobile home on. The “mobile” in mobile homes isn’t very mobile. The cost varies greatly but is seldom less than $2,000 and often closer to $10,000 – if the owner can even find another park that will accept them. That means they are motivated to stay at the park they are currently in.
Sales Up, Prices Bottoming, More Foreclosures Coming
Doom and gloom in the real estate market? I don’t think so when you look at the big picture. There are three current events in the residential real estate market that when examined separately tell a different story than when examined as a whole. Being able to explain these complex workings in today’s market is a very good reason for you to have a real estate coach.
Let’s start with the good news. Both existing home sales and new home sales were up in March compared to the February numbers. Sales of existing single-family homes rose by an even 4.0%. New home sales were up 11.1%. The numbers have improved in six of the past eight months. It’s also important to note that this is happening without any government stimulus money. And new housing starts are up 7.2% in March.
Next, on your real estate couch’s radar screen is the decline in housing prices. Existing single-family prices are down 5.4% from a year ago and the median price for new construction is down 9.5% from a year ago.
Adding to the mix is that federal regulators are about ready to send instructions to lenders about changes they need to make in the foreclosure process as a result of the robo-signing scandal from last fall. Among the changes are requirements for lenders to hire more staff to process loan modification requests faster and to assure that foreclosures don’t happen if a loan modification is pending. Homeowners will also be provided a single point of contact for loan mods. These changes are intended to unfreeze the foreclosure process and get the market moving again.
Unemployment Down, Commercial Growth Up
First quarter commercial real estate numbers are coming out and everything is showing improvement. This is very good news for those that jumped into the market at its low point and are now poised to reap the financial benefits as the market grows along with the overall economy. If you are being left behind because you think the commercial market is too complex, now is the time for commercial real estate training.
There are several positive economic indicators driving the resurgence of the commercial market. Particularly good news is the trend in employment. The U.S. Bureau of Labor’s April 1 numbers show unemployment at 8.8% – down from the recent October 2009 high of 10.1%. More importantly, in March 2011, 216,000 people went back to work and since November of 2010, a total of 1.3 million have returned to the work force.
Looking forward to continued improvement on the all important employment front are the 3.1 million job openings that existed as of the end of February. There can be little doubt the commercial sector is the place to be investing and if you need commercial real estate training, now is the time to start.
Economic and investment fundamentals continue to bring more investors to the commercial sector. As long as cap rates remain in the mid single digits and interest rates remain at or near current lows, money will continue flowing into commercial real estate.
Think Multi-family for the Near Term
There are two issues occurring at the national level of the real estate industry grabbing me my attention this week. One positive and the other a concern.
First are the March numbers from the closely followed S&P/Case-Shiller home price indexes. These metrics track sales prices for houses in the top 10 cities across the U.S. as well as a broader group of 20 cities. The January sales data shows a very slight decline in housing prices for both metrics on a month-to-month basis. In the top 10 cities, the index declined less than one percent and the 20 cities measure saw a decline of exactly 1% compared to December 2010. Washington D.C. and San Diego saw slight up ticks in prices.
While some investors might see declines as a negative, I see it as an indication that prices are bouncing along the bottom of the price range. This provides us with an extended period of time to purchase real estate investments before they return to the growth cycle. Specifically, higher prices will follow the modestly improving unemployment picture. Now is the time to buy low whether you want strong rental property profits or to sell high once the market resumes climbing.
However, something else is occurring with new legislation proposed in several states that I think will artificially inflate house prices. The states of Illinois, Maryland, Missouri, and Nevada are considering new laws prohibiting appraisers from considering distressed sales in reports to lenders.
Structuring a Wrap Around Mortgage
Buying an investment property “subject to the existing financing” has a lot of appeal for several reasons. Today’s strict mortgage qualification requirements are one of them. If an investor has the slightest blemish on their credit history, they will likely be denied a new mortgage for a house they want to purchase. Banks have also tightened their policy on how many investment loans they will approve for investors regardless of their payment history.
While purchasing subject to is a great answer to these obstacles, sellers aren’t always keen being on the hook for the mortgage. They want more security than just a contract saying the buyer will make the monthly payments on the mortgage that is in their name. Investors with the proper real estate training know that’s where the wrap around mortgage comes in.
Wrap around mortgages provide another layer of security for the seller. Having the investor execute and record a new mortgage positions the seller to be able to foreclose on the property if the investor fails to make the payments. The new mortgage is junior to the first mortgage, which requires the seller to keep the first mortgage current in order to begin foreclosure on the second mortgage.
As part of your real estate training, let’ put together an example where the seller has an outstanding mortgage of $15,000 on the house and five years remaining on the original mortgage at 5% interest. The investor agrees to buy the house for $100,000 subject to the existing financing with a wrap around mortgage.