Personal Finance Blog by Debit versus Credit

Investing in Rentals

September 15, 2008 | Filed in: Investing | 2 comments

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Today we’ll be featuring a guest post from Ed Kirkland, who is a Realtor in Florida. He’ll share with us some ideas and tips for investing in rental properties.

Investing in rental properties has proven over the years to be a fantastic way to make money. Not only does owning rentals increase your equity and thereby your ability to acquire additional properties but it also provides a nice monthly income. So what is the best way to go about securing the right property and finding the right tenants? There are a few agreed upon steps that one can observe, the rest is up to you.

The first step of proper investing is the same as any other home purchase: ensuring that your finances are in order and your debt load is minimal. If you have a high debt load then this may not be the right time to start investing. High debt = less mortgage options, and finding the right mortgage for an investment property is going to be critical. You will want to try to find a mortgage that has a reasonable monthly rate that will still allow you to see a monthly profit and have funds left over if there are any repairs that need to be done. After all if you are not seeing a profit on a monthly basis then something is amiss.

Be careful in selecting the location for your rental. Be sure to spend some time investigating the areas first. Many areas and complexes have strict rules regarding rentals, this is especially true in condos. Some places do not allow vacation rentals at all, so be sure to do your homework The kind of location you choose will vary depending on your target market. Here in Florida, the vacation rentals market is thriving like never before and this type of rental accounts for a huge percentage of the market. That being said, there is a definite security to long-term renters. Vacation renters are going to be looking for access to major attractions, things such as theme parks, beaches, restaurants and shopping. On the other hand; long-term renters will be more interested in things like proximity to major business centers, schools, sporting activities and quality of the neighborhood.

One thing to make sure of is no matter which type of rental property you choose, that you have written agreements with the tenants. This is especially important in long-term rentals as a tenancy agreement can go a long way to the protection of your investment. It also protects your rights as a landlord, and the tenants rights as a renter. It simply makes things easier and safer all around.

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Ed Kirkland is a realtor specializing in the Destin, Florida real estate market. For years Ed has made it his life’s work to bring buyers and sellers together. Contact Ed today for more information or visit the team at www.edkirkland.com

Tags: Investing in Rentals, Real Estate

The Bailout of Fannie and Freddie

September 9, 2008 | Filed in: Miscellaneous | 1 comment

The United States of America has officially become a nation of bailouts.  With the government takeover of Fannie Mae and Freddie Mac on Sunday, September 7 they have also become the nation’s largest mortgage provider.  They now own (or back) around $5-6 trillion in mortgage loans, which is roughtly half of the existing mortgages in the U.S.  What does this mean for the taxpayer?  For the homeowner?  For the investor?  For the financial markets as a whole?

Expect To Pay More In Taxes

Fannie Mae and Freddie Mac are HUGE companies.  They alone service over half of the mortgages in the U.S.  They have trillions of dollars worth of liabilities as well.  In fact according to the former president of the Federal Reserve Bank of St. Louis, William Poole, they have up to $6 trillion dollars in liabilities (as reported by the Wall Street Journal Online).  He believes that it would not be unreasonable to assume that they may end up taking a loss on as much as 5% of their loan portfolio which would provide taxpayers a burden of some $300 billion dollars.  While this would more than likely just be added to the national debt of almost $10 trillion dollars it would eventually have to be paid off and those who are ultimately responsible for this debt are the taxpayers.  You, me and your neighbor.

Mortgage Rates May Finally Drop

The rising level of defaults on mortgages over the past year or two has forced Fannie and Freddie to get more defensive and stop buying up so many mortgages.  This has led to an increased risk for mortgage originators, as they might not be able to sell off their risky loans.  It has also decreased the amount of cash flowing through the mortgage market and as such has had a strong effect on mortgage rates.  Because of the increased risk and the limited capital mortgage lenders have been forced to raise mortgage rates and keep them high.  Now that the U.S. has virtually guaranteed the success and liquidity of Fannie and Freddie mortgage originators are likely to have a less difficult time securing cash and selling off their loans.  This should lead to a drop in mortgage rates over the next six months or so.

Start Investing Now If You Haven’t Already

The markets rebounded on Monday with the Dow Jones Industrial Average ending up almost 300 points (or 2.59%).  Investors are excited about the future now that they don’t have to worry about Fannie and Freddie.  If the Treasury Department and Paulson are right (and I personally doubt they are) then this bailout should fix everything.  After all the housing market is the primary cause of the “recession” that we are currently facing.  By shoring up the two largest mortgage companies and providing much-needed capital to the mortgage industry they’re hoping to end this downturn once and for all.  Things aren’t quite that black and white however but we’ll come back to that in the next section.  In the meantime for the purposes of investing they (the feds) may be right about one thing.  By taking over Fannie and Freddie they should increase investor confidence and lower mortgage rates.  This should have the effect of a declining bear market if not the return to a bear market.

The Financial System Is Nowhere Near A Full Recovery

It is true that the primary cause of the economic turmoil that the U.S. is currently facing is due to the uncertainty in the mortgage markets.  It’s also true that the decreased cash flowing into these markets due to Fannie and Freddie’s cutbacks was having a negative affect on the entire market.  However one would have to be nieve to assume that by taking over Fannie and Freddie and providing capital to the mortgage markets that this mess will clean up quickly.  The fact is that homeowners are not walking away from their houses because their mortgage lender was unable to sell their mortgage to Fannie - they are walking away because they are upside down on their house by a lot of money and they are unable to afford the payments.  Losses will continue to come.  The process may be slowed down and stopped sooner than it might have without this bailout (due to the increased affordability of purchasing a home) but unfortunately home values have not reached their lows, as most would-be homeowners are not ready to jump into the market even with today’s home prices!

The fact is that homes are STILL unaffordable in many markets across the U.S.  Homeowners are losing money and are bailing ship which is slowly decreasing home prices but there is probably quite a ways to go still before the buyers start to line up.  Bailout out Fannie and Freddie may help some, but as I stated already, the financial system is nowhere near a full recovery.

Technorati Tags: Fannie Mae, Freddie Mac, mortgage news, stock market, investing, taxes

Tags: Economy, Fannie Mae, Freddie Mac, housing bust, housing market, Rants, Real Estate

The Automatic Millionaire: Ch 6

July 11, 2008 | Filed in: Friday Book Club | No comment

Chapter 6 of The Automatic Millionaire is entitled Automatic Debt-Free Homeownership

David Beck stresses three principle goals in The Automatic Millionaire.  As we’ve previously covered the first two goals are to decide to pay yourself first 10 percent of your pretax (or gross) income and the second is to make it automatic.  The third principle goal which he stresses as very important to the ultimate goal of building wealth and financial independence is to buy a home and pay it off automatically.  As David says this chapter of The Automatic Millionaire is all about why you should own a home and “how you can pay for that home automatically so you can be debt-free before you’re too old to enjoy it.”

The fact is, you aren’t really in the game of building wealth until you own some real estate.

Mr. Bach is so passionate about his belief that owning your own home is most important to becoming financially independent that he even went so far as to say: “The fact is, you aren’t really in the game of building wealth until you own some real estate.”  I will be quick to point out that I have a problem with this statement of his, although I do agree with the idea that owning your own home can be beneficial to building wealth.  I’ll come back to this later.

Six Reasons Why Homes Make Great Investments

David brings up six reasons why he thinks that homes make great investments.  I’ll list them here for your reading pleasure.

1. Forced Savings
2. Leverage
3. OPM (Other People’s Money)
4. Tax Breaks
5. Pride of Ownership
6. Real Estate Has Proven to be a Great Investment

Some of these are easier understood than others.  I’ll briefly explain what he says about each of these reasons for homeownership.  Forced savings refers to the fact that (in a good market anyway) buying a home forces you to save in that as you pay down the principle balance of the loan you’ll gain equity in your home.  Leverage is the ability to use money that is not yours to your advantage.  Basically if you purchase a home for $100,000 but only put 10,000 down and then five years later your home is worth $150,000 dollars you’ve gained $50,000 off of only a $10,000 dollar initial investment.  OPM is essentially the same as Leverage in that it refers to using other people’s money to your financial advantage.  Tax Breaks are relatively obvious: the government allows you to write down interest and other related home ownership expenses from your taxes.  Pride of Ownership is not exactly fiscally related, but nonetheless a nice benefit of home ownership.  David’s final reason that Real Estate is a great investment is disputable by many especially during hard times such as those we’re currently experiencing.  However it should be said that I believe that over the long run it is at least a good investment, but not necessarily a great one.

I Can’t Afford To Buy A House

So many people have used this excuse that it has become old and tired.  If you can afford rent there is a decent chance that you might be able to afford a house as well.  I won’t go into the specifics here for the sake of space and time, but basically David makes the point that with mortgage rates so low owning a home doesn’t cost (usually) much more than typical rents in your city or town.  He tries to back this thought up with informational charts showing how much a typical mortgage would cost for a certain amount spent on a house.  He also makes the point that there are several government programs in place which help first-time home buyers in their quest to own their own home.  These programs range from informational to actually providing help with a down payment or closing costs.  In short?  Research before you decide that you can or can’t afford to buy a house.

Why This Logic is Partially Flawed

As I mentioned previously David said that “you aren’t really in the game of building wealth until you own some real estate.”  This logic is flawed.  I agree that owning real estate can build wealth, but the act of building wealth does not require the ownership of real estate.  If someone preferred to live in a luxury apartment, for example, over owning their own home there would be nothing to stop them from building wealth.  They could still save a good chunk of their income and wisely invested there would be no reason that they could not build even more wealth than someone who chose to own a home.  It’s all circumstancial and basically I think it’s wrong to assume that unless you own real estate you won’t really be building wealth.

The Rundown

Essentially the point that Mr. Bach is trying to make throughout this chapter is that with just a little bit of planning and hard work anyone can become a homeowner.  He also brings up that if you make it automatic and pay even 1 extra payment a year towards your mortgage that you can cut off somewhere between 5 - 10 years off a traditional 30 year fixed mortgage.  If done with a little bit of foresight and planning owning a home can allow you to be able to build more wealth than you normally might.

Tags: Friday Book Club, Home Ownership, Real Estate, Wealth Building

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