Foreclosure Properties: A Good Investment?

The nation’s housing market is bracing for another wave of foreclosures. The past few years saw waves driven by subprime loans, but inventory was partially mitigated by the temporary demand created by the first time buyer credits. Now experts are concerned about the “shadow inventory” that banks allegedly have been holding back, and new waves are potentially on the horizon, this time driven by option ARM loans and owners making the decision to ‘strategically default’ on their severely underwater homes by simply walking away.

If you’re in the market for a new house, you should look at foreclosed homes being held by banks. Here’s why…

Click here to continue reading the article, posted at http://singlemindedwomen.com

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Reasons to Sell Your Investment Property in 2010

Attention Investors: I’m about to give you 8.8 reasons to sell your investment property in 2010. Actually I’ll give you 5 reasons, and then another 3.8 reasons.  8.8 reasons that will net you an additional 8.8% when you sell your investment property.  Guaranteed!  What am I talking about?  Capital gains taxes.

Many investors are already aware that  capital gains tax rates for most brackets are due to increase from 15% to 20% in 2011–so your profit is 5% less if you sell January 1, 2011 versus December 31, 2010.  5%!

But many investors haven’t yet realized that, buried in the health care bill that recently passed, for those above certain income limits, there is an additional 3.8% surcharge on real estate investment profit starting in 2013.

Of course there are ways to avoid these taxes–many investors will consider pursuing 1031 exchanges, but if you’re hoping to liquidate some of your real estate holdings, you’d be well advised to consider doing so in 2010.

Another reason to consider selling now?  Low interest rates. Buyers have more purchasing power than they’ve had in years thanks to historical low interest rates within the conforming loan level limits.  But these rates won’t last forever, and buyers are taking advantage.   A flood of inventory in the upper price ranges ($1,000,000 and up) in our area is expected in the coming years, which will create competition in those brackets for years to come, as financing remains tight.

If you own a Northern Virginia investment property and would like to keep 8.8% more profit by selling in 2010, contact Katie Wethman, CPA, MBA, Realtor for a free analysis of your home’s value.

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More Resources: Free Market Report for Your Property

Read More: About the Wethman Group and Wethman Group in the Press

Read More: Marketing Your Property

Read More: Myths About Choosing a Listing Agent

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Does the Health Care Bill Have a Tax on Real Estate Sales?

In a word, yes.  But according to FactCheck.org, few taxpayers will be subject to the new tax. But beware DC and Northern Virginia homeowners…the numbers indicate that more of us are at risk of being subject this tax.

Few people realize that buried in the recent health care legislation is a tax that affects home sales–3.8% to be exact. As most homeowners know, one of the primary benefits of selling your home is that a significant portion of any profit–$250,000 for a single taxpayer and $500,000 for a married (filing joint) taxpayer–is completely tax free if you’ve lived in the home two out of the last five years.  Yes, you read that right.  Completely tax free.  And that part  is STILL true.

The part that’s new is a tax on the profit above that exemption amount for taxpayers in certain brackets. If a single taxpayer makes more than $200,000, or for marrieds above $250,000, they are subject to a new 3.8% tax on the profit above that exempted amount starting in 2013.

Knowing the DC area has several of the highest per capita income counties in the country (four of the top ten, in fact), and given historical returns on real estate in our area (yes, even after the bubble burst), there are quite a few homeowners in our area who could get hit with this tax.

For example, let’s say a single homeowner purchased in 2001 for $300,000 in North Arlington.  That taxpayer’s home might  now be worth $600,000 (which is not unusual for someone who purchased prior to the big run-up in prices we experienced from 2003-2006).   If that taxpayer makes more than $200,000 in AGI, she will be subject to tax of 3.8% * (300,000 profit – 250,000 exemption) = $50,000 taxable profit = additional $1900 tax on the sale of her home (in addition to capital gains taxes) .

Plan those sales accordingly, especially you long-term homeowners.   If you have significant appreciation in your property, and are above those income limits, you may want to ‘cash out’  between now and 2012 to save 3.8%.

Read More: Reasons to Sell Your Investment Property in 2010

If you’re thinking of buying or selling a Northern Virginia or DC investment property, contact us to discuss how we approach real estate from a different angle.

Update 7/17/2010:  This issue is finally getting some press, sort of.  WaPo has an article entitled “Debunking Rumors of a Housing Sales Tax.”  Despite the headline, the body of the article proceeds to spell out the circumstances under which there IS a tax on home sales. Just because people under certain income limits or profit margins aren’t charged the tax doesn’t mean that the tax doesn’t exist for other people. Maybe we need to work on the definition of “rumor”??

Update 11/21/2010: Here’s a good article that clarifies the tax and how to calculate it, and gives a simple example for a “high income” taxpayer.  It states “Complicated? Yes. Let’s look at these examples. Your adjusted gross income is $150,000. You sell your house and made a profit of $400,000. There is no change in the way you determine your gain: You take your purchase price, add any major improvements you have made over the years, and subtract that number from the net sales price…..

let’s assume you strike it rich and have made a profit of $600,000. Your income is $300,000. You can exclude only $500,000 under current law, so you will have to pay capital gains tax on the remaining balance. The rate currently is 15 percent, so you will owe Uncle Sam $15,000 ($100,000 multiplied by 15 percent)…But since your income is over the threshold, you now also have to pay the 3.8 percent tax. But on what amount?

As indicated earlier, the tax is based on lesser of your profit or the difference between the threshold and your income. Your profit is $100,000. The difference between your income and the threshold is $50,000 ($300,000 minus $250,000). In our example, the lower number is $50,000, and you will have to pay an additional $1,900 to the Internal Revenue Service (3.8 percent multiplied by $50,000).”

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Washington DC Regional Market Updates

Existing home sales across the nation took a surprise jump in December, but most experts say that trend (nationwide) is unlikely to continue given further economic decline. Moody’s, however, is optimistic: claiming that 2009 is the “bottom.”
Our local economy and flow of investment dollars continues to outperform the nation’s averages.
Forbes recently named DC as one of the best places to buy real estate right now, and the Association of Foreign Investors also named DC as #1 on its list of top global cities for investment.
Where there is money and investment, there are jobs, and where there are jobs, there are people that need homes, whether rental or purchase. Here are some of the headlines this month indicating continued investment in our area.

Ready to start your search for a home in the DC or Northern Virginia area? Consider attending one of my free first time home buyer classes – details are here. Or start searching for homes in the MLS here.

Thinking of selling? Contact me to to discuss the impact these developments might have on your home’s value!

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Finding an Investment Property in Northern Virginia

As prices plummet, some solid investment opportunities are starting to emerge…but how do you identify good investment properties?

Step 1: Identify some target neighborhoods.

– The first thing to do is to consider long term (e.g., 10 years) appreciation potential. Think about area employment (and more importantly where those employers are—commuting time is a big factor). Also think about long term demographic shifts like BRAC, as well as infrastructure projects like new metro stations or light rail lines.
– Consider the neighborhood. Ideally you want to find the lone problem house in a great neighborhood, but that’s easier said than done. Also consider neighborhoods that previously had been more desirable in terms of age, location, and home condition, but perhaps were hit hard by this recent wave of foreclosures.
– Consider the price range – While you hope to ultimately find a property that will be cash flow positive, you nonetheless have to front the money to buy it, and getting a loan these days isn’t easy, especially for investors. Financing remains a problem, and lenders require investors to put 30% down, plus closing costs of about 3%. Interest rates run about a percentage point higher than owner occupied properties. Figure out how much cash you’re willing to put into the property, what you can qualify for in a mortgage, and back into a price range from there.
– Look at rents the neighborhood can command. Once you identify a few target neighborhoods, begin collecting rent data. The best place to collect rent data is on Craigs List in addition to the MLS. This is because many landlords conduct the process themselves and so the listings are never in the MLS. You also can’t be sure how aggressive a listing agent was in procuring a renter, which may skew the price. If they put it into the MLS but then never on Craigs List (by far the more popular site for finding renters), then it’s likely the rents there are lower than what the market actually commands. Unfortunately there’s no easy way to gather historical Craigs List data – you just need to keep watching and see which rentals seem to go quickly. Consider calling some of the landlords to ask whether they’ve had a lot of responses.

Step 2: Identify some target properties

Short Sales & Foreclosures are a great opportunity because you can be patient. (See my post on the challenges of timing a foreclosure transaction here and the frustrations of shorts sales that never close here.) While an owner occupant doesn’t have the luxury of time and can get frustrated with all the problems of these transactions, investors can go with the flow since their timing is more flexible. And that flexibility pays off by getting properties for less money.
– Consider the home’s condition and your level of expertise in doing or managing renovations. Many of the short sales and foreclosures on the market today come at bargain prices, but require everything from heavy cosmetic work to kitchen and bath remodels to mold remediation. Very few properties in the attractive price ranges are move-in ready, but there’s a lot of upside for people not afraid of elbow grease and with the right handyman connections.
Be patient. You may need to wait for the right house at the right price. Set up an alert so that you can be ready to jump on a property that meets your investment needs as soon as it comes on the market—you can be sure other investors are circling and waiting for the right opportunity as well!

I’ve seen some inside the beltway single family homes below $400K and townhouses in under $300 in areas that I feel have great long term potential given our area’s strong job market and expected government growth (see this post on the best place to live in a recession here, and article on the bailout being a boon to our local economy here.)

In another post I’ll cover how to look at cash flows for an investment property.

I’m working with several investors and have already previewed many homes that fit the criteria above. Call or email me to set up an appointment to discuss investing opportunities!

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Buying an Investment Property in Northern Virginia

The Washington Posts’ Express paper had a special Home Buyer’s Guide this past Wednesday, and I was honored to be asked for my thoughts on buying investment properties.

During my conversation with the author, I noted that prices inside the Beltway–areas that are optimal for finding renters–have not dropped to the extent people may think, and thus finding an investment property that is cash flow positive is difficult. Having said that, it’s not impossible to find a good property with long term potential, and if you’re looking out side the Beltway, there are deals to be had in terms of price (though finding renters may be more difficult than with close-in areas). The challenge right now is in obtaining financing, as I and Will Gaines, of Access National Mortgage, noted here.

» DOUBLE DOWN: Expect to break the piggy bank open — wide open. “You usually need a minimum of 15 percent down for an investment property, and, ideally, for good pricing, it should be 20 percent,” says Will Gaines, senior loan officer with Access National Mortgage in Reston, Va. “To get your very most competitive pricing, you really need to have 30 percent to put down.”

» DOUBLE TROUBLE:
Don’t blame the banks for tighter restrictions. “The private mortgage insurers got burned so, so bad in the past few years, and they’re reluctant to provide insurance,” warns Katie Wethman of Long & Foster. She says they’re especially wary of insuring rental properties because “if a borrower falls on hard times, they’re more likely to skip a payment on an investment property than one they live in.” That said, she advises borrowers to come up with a big chunk of cold, hard cash to sweeten the deal; the less credit you need, the more likely you are to get the loan you want.

» DOUBLE UP: Count on your friends. “I see more younger people going in together to buy investment properties,” Gaines says. “That way, they can share the down payment and spread out the risk if they’re without a renter for a period of time.” Be sure to have a game plan for buying each other out in case one of you is ready to cry “Uncle!” before the other.

If you have the cash for a larger down payment, and the patience to ride out the downturn, there are investment opportunities out there. In particular, being flexible on timing and having a bit of cash for repairs makes short sales and foreclosures more of an opportunity for investors (versus someone who has to move before their lease is up: read more on my foreclosure risk post on timing a transaction.)

What else do you need to consider when searching for an investment property? Long term demographic trends, price to rent ratios, competing inventory (i.e., apartments), cash flow, and a host of other factors. If you’re considering an investment property and need an advisor for your transaction, contact me to set up a meeting.

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