Is it the Right Time to Buy an Investment Property?

I’m working with several investors right now.  They believe that the Northern Virginia and DC market is having a ‘perfect storm’ of opportunity: low prices, high rents, and ridiculously low interest rates, even for investment properties (which historically have carried a significant premium to owner-occupied properties.) I recently had a transaction where the investor put 25% down and paid just 4 1/8% on a 30 year fixed mortgage! And all in an area that is arguably the strongest job market in the country.  The property, located within walking distance of the incredibly popular orange line in Arlington and commands high rent, was cash flow positive immediately.

Given my business background and CPA, I tend to get a lot of inquiries from potential investors–some experienced, and some looking to buy their first investment property.

  • How do I find a neighborhood that is good for investment properties?
  • How do I estimate my expenses and cash flow?
  • How do I find good tenants?

I’ll try to address these in this and subsequent posts.  The Washington Post had a good article with some items to think about when buying a home, and the lessons can also be applied to buying an investment property.

First and foremost, remember that you’re locking in the majority of your expenses via a FIXED 30 year mortgage.  This means inflation is your friend.  The value of the property will rise, and rents will rise, but the bulk of your expenses remain the same.  This is time to buy-and-hold, not flip.

Consider the tax effects of a purchase.  For owner-occupied property, the interest is deductible (within limits).  For an investment property, the income is considered passive income, and the rules get much more complicated.   You’ll need to file a Schedule E.  Be sure to consult your tax adviser about your specific situation.  You’ll also want to factor in capital gains taxes (due to significantly rise soon) for the sale.

Finally, consider the cap rate.  The article states:

Make an educated guess as to what the home would rent for if it were on the open market. Granted, this is easier for condos, which have a more active rental market than single-family homes. Let’s say that for a home, on sale for $400,000, the rent would be $2,000 a month. Subtract any condo or homeowner fees, monthly property taxes, insurance, and an allowance for repairs from that rental rate. Let’s call that $500, meaning we’re down to $1,500 a month. That’s the monthly operating income an owner would expect to take in if the property were rented. Multiply that by 12 to make it an annual number, and divide by the purchase price. In this example, that leaves you with a 4.5 percent cap rate…..You can use the cap rate to compare homes you might buy to figure out which is the best deal when viewed purely as an investment. The higher the rate, the better.

In another post I’ll discuss some of the common expenses associated with an investment property.

Read More: Foreclosure Properties: A Good Investment?

Search the Entire MLS for an Investment Property

Contact us to discuss your search for an investment property.

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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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Giving a Facelift to a Dated Exterior

While Arlington is a fantastic place to live, there are many neighborhoods built in a time when…well let’s just say it wasn’t necessarily architecture’s finest moment.  Don’t overlook some of these hidden gems though — with a little creativity, and the right contractor, your dream home could be right in front of your eyes.  Take a look at this transformation on a North Arlington home similar to one pictured at left.

After!

Hard to believe, isn’t it?  But look closely and you’ll see the remains of the original home. On the main level, the owners added a welcoming front porch, and swapped the window out for a bay window.  Then they “popped the top” and added a second floor, and extended the chimney up.   Then they painted the brick and trim for an entirely new look!

After - Bump Out View

Obviously adding a second floor provides a lot more square footage to the house, but the existing floorplans on a lot of these older homes don’t allow for the circular flow and open floorplan that most of today’s homeowners love…unless you also do a “bump out” like these owners did, which you can see clearly in this side view photo.

But be warned, Arlington has very strict lot coverage rules so if you’re intending to do a large scale renovation like this, do your homework before you sink too much money into the process.

Obviously a transformation like this one doesn’t come cheap or easy, but if you can pick up a house in a great location for the right price, you can throw in a creative eye, some patience, and a great contractor and have the home of your dreams!

For recommendations on great contractors, or to get started finding your own hidden gem in Arlington, contact me!

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Up and Coming In Petworth

I happened to stop by a client’s new house today–a fantastic renovation of a rowhome in Petworth–and whom should I see walking down the street but Mayor Fenty himself! He was checking out the neighborhood, shaking hands, etc.–no doubt checking up on all the recent development in the area!  He was very interested in the recent sales in the neighborhood, which obviously has been undergoing a lot of changes lately, so we chatted for a few minutes.

Park Place, the new apartment and retail complex, is now open for business and
includes a rooftop terrace with bocce green lawn (yes, seriously).  A new Yes! Organic Market is also now open at 4100 Georgia Avenue, and a variety of other apartment and retail projects are underway as well.

Realtor Katie Wethman & Mayor Adrian Fenty in Petworth

Realtor Katie Wethman & Mayor Adrian Fenty in Petworth

Many homes in Petworth are older 3 level rowhomes with welcoming front porches, similar to the one shown here. Many are in need of renovation, but occasionally a builder will come in to “flip” one so you can have a home that’s been completely renovated and is move-in ready.  Buyers love the space (often 3 finished levels) and quality that you can get for the price while being so close to metro and with so much development happening nearby.

Search for Homes in Petworth

If you’re interested in learning more about the area, or starting your home search, please contact me to learn more.

Update 11/17: There’s an interesting discussion going on over at UrbanTurf about buying rowhomes in Petworth vs Mount Pleasant.

Read More:

Rehabbing Properties using FHA 203k Financing

DC Neighborhood Map (in progress)

DC Real Estate Market Stats

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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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Guest Post: Rehabbing Properties Using the FHA 203K Program

Thanks, Cindy Fox of SunTrust, for information on this program which can really help buyers who have found their diamond in the rough! You can find Cindy’s contact information at the bottom of this post.

Looking for a bargain in the real estate market?

Have you seen the perfect place for you and maybe your family – but then the inside of the place has been trashed? Or is simply is older, outdated, and in need of updating and/or repair?

Sometimes you just need to see beyond to cosmetic abuse to the eye, and maybe structural deficiencies, and envision a place after tender loving care – and a lot of tear down, build up and sweat has been applied!

So – you have the vision. Great! Now – how to pay for putting that vision into action to bring to a reality that vision?

There is an option for you! The FHA, which is a part of Housing and Urban Development (HUD), has a program that will help finance the purchase of such a dwelling, as well as the financing of rehabilitation of the house.

203(k) – How It Is Different from Conventional Construction Financing

The 203(k) program is a section of HUD’s home financing guidelines and its primary program for the rehabilitation and repair of single family properties. The program was designed to promote and facilitate the restoration and preservation of the Nation’s existing (and aging) housing stock. Most of the time lenders will only lend money to purchase homes that are complete. The condition of the property must meet certain standards. Under normal purchase transactions (or refinance transactions) properties that are complete and meet a certain property condition provide the necessary collateral for the lender to lend with confidence. Additionally, most loan programs require that if there are repairs, or renovations to be completed, this must occur before the lender will release funds to complete the purchase and close the loan.

Under conventional guidelines, when a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods.

The 203(k) program through HUD was designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work.

Eligible Improvements:
Luxury items and improvements that do not become a permanent part of the real property are not eligible as a cost of rehabilitation. However, the homeowner can use the 203(k) program to finance such items as painting, room additions, decks and other items even if the home does not need any other improvements. All health, safety and energy conservation items must be addressed prior to completing general home improvements.

How the Program Works:
The improvements, repairs, and rehabilitation proposals must be part of the loan package and can be prepared by a builder, or a consultant and show the scope of the work to be done. Cost estimates must include labor and materials sufficient to complete the work.

The scope of the work as presented in the proposal determines the amount of the loan. Usually, an appraiser will evaluate the proposal in conjunction with the current value of the property and determine an “after-improved” value which will determine the amount of money available for the repairs and rehabilitation.

For More Information: For more information on eligible properties, how the program can be used, required improvements, how the program works, and the application process, contact Cindy Fox at SunTrust Mortgage at (703) 464-4345, or email Katie (info in right hand sidebar) for more information.

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