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February Twin Cities Market Update

by Steve Westmark

http://www.TwinCitiesUSA.com/video/Real-estate-January-2011-Market-Update

STEVE:  Hi, welcome to my video blog.  I’m Steve Westmark.  It’s January of 2011.  In fact, we’re into February and the stats have come in for January, and here’s a few things we’re going to learn.  The first thing that you can look at is how the listings are coming out.  On this chart is that you’ll see for January they’re slightly lower or the beginning of 2011 compared to last year.  The next chart is looking at pending sales, and I find this to be really interesting. 

It shows over the last three months that in fact where there was a greater amount of difference towards the end of 2010, it’s getting closer and closer as we go into December and January of 2011.  The third chart you’re going to look at is showing active listings.  And what you can see with the pending sales not being maybe as strong and even though the inventory is lighter, you’ll see that our total listings on the market are slightly higher than last year at 10%. 

The next chart is showing the inventory of housing.  Now back in 2009, we had about an 8-month inventory.  Because of the tax credit in 2009 and 10, it was driven down to about a 6-month inventory, but with the tax credit going away, we’re at about a 7-month inventory as we move into 2011.  The last chart is our affordability of housing, and you can see that because of lower interest rates, a lowering of prices, and a better group of inventory that’s out there, affordability for housing has never been better.

It’s a great time to be buying real estate in the Twin Cities.  I hope you enjoyed this quick update on what’s happening in our real estate market and look forward to a positive 2011.

Bob Molitor Discusses the Role of a Property Manager

by Steve Westmark

http://www.TwinCitiesUSA.com/video/Bob-Molitor-Discusses-the-Role-of-a-Property-Manager

STEVE:  Hi, this is Steve Westmark.  Thanks for watching my video blog this week.  As a continuance of my series on investment real estate, I’ve brought in today a property manager who manages and rents real estate for people.  And it’s Bob Molitor of Molitor & Associates.  Welcome, Bob.

BOB:  Thank you, Steve.  Appreciate being here.

STEVE:  So Bob, how do you help someone determine a fair market rent on their property when you go to rent it for them?

BOB:  Thank you, Steve.  That’s a good question.  At the end of the day, the amount of rent that a property can earn is supply and demand function of the rental market.  And the general trend is, as you can see from a newspaper story recently, is up.  Rents are up pretty substantially in the last few months.

STEVE:  So in rental of houses and townhouses, why does someone pick that over renting an apartment?

BOB:  That is a good question.  Many times people envision someone living in a house that’s far different from themselves, but they’re really not.  It’s a lifestyle choice.  Once someone has lived in a single-family home, it’s very difficult to take your whole kit as the English would say.  You’re compacted into a smaller space in an apartment and so for many people when they recombine families in a yours, mine, and ours situation, they need all the space that they can get in a house.  Storage space is very important.

STEVE:  Now sometimes people have heard about real estate taxes being a lot higher on single-family housing.  Is that still true today?

BOB:  Thank you Steve.  That’s an excellent question and commonly people when they guess at the answer they’re very mistaken.  The ____ [1:43] people tell us that the average property’s taxes only increase by about $200 per year when they no longer have a homestead credit, in other words when the property is rented.

STEVE:  Well, Bob, I know you have two divisions in your company.  One is renting.  The other one is management of it after it’s rented.  Talk a little bit about some of the things that you do in the rental area in helping someone get their property rented.

BOB:  Thank you, Steve.  That’s a good question.  First things first, of course a property needs to be ready for a tenant.  Sometimes it requires some cleaning.  It may require painting.  We can refer the owner to vendors who do that sort of thing at reasonable prices.  Or if we’re managing the property, we can take that on.  The leasing of the property or renting of it is primarily marketing the property.  We help the owner price it.  We take photos of the property, prepare materials in order to find tenant prospects, and then we begin advertising it and marketing it and show the people through who are interested and have called on the property.

Those who are interested submit an application.  We check their credit.  Sometimes we check if they have a criminal background and check their other credentials before we talk to the owner.  Then we speak to the owner and make a recommendation.  And if the owner is inclined to go forward, we negotiate a lease with the people, get it executed.  And at that point, the leasing service is pretty much been completed.

STEVE:  As you can see, there’s a lot of technicalities that happen within that and even putting the lease together I know is a big undertaking.  And a well-written lease is a great lease.  What do you do to help people, especially even people who want to have the property managed?  What happens as you manage a property for a person?

BOB:  Well, the management, Steve, involves the basics.  Once the property has been leased, we begin collecting the rent each month.  We’re paying the obligations on the property.  For example, many owners have a service agreement on the furnace and water heater and those appliances to one of the utility companies.  We pay the monthly charge for that.  We pay other repair bills and bills on the property.  For example, the mortgage taxes, insurance.

And each month, the owner gets a monthly statement showing receipts and dispersements for that month.  At the end of the year, we can put together a spreadsheet so they can have it all on one piece of paper in front of them or one electronic screen full of information.  When we’re managing the property, before the people move in, we do a lengthy inspection on the condition of the property, noting cleanliness and condition, so that at the end of the tenancy we have some way to judge whether they’re performed properly or not.

Along with that, of course at the end of the tenancy, we go through and check the tenant out of the property, a final walk through.  It’s anything but a walk through.  It takes a couple of hours in many cases, but we go through to check and see if they’ve done what they said they would do, hold them accountable in other words.  Each day and each week, we’re available 24/7 every day of the year for emergencies.  If the tenant has an ice dam, which we’ve heard a bit about this winter, or any other problem, we’re available to respond immediately to that on the owner’s behalf.

In many cases, the investor may not have the wherewithal to repair many of the things that arise.  So it’s helpful having someone who’s experienced that they can call on.  And of course if it’s a leasing client, we’ll be happy to give them a referral to a competent professional.  Sometimes there’s after initial leasing.  For example, the tenant may purchase a house and ask to be relieved from their obligations a couple of months early.  Usually, we call that a sublet situation.  And so we market the house.  You don’t want to have the home rented to two people at the same time and so we make sure that the old and the new are coordinated properly.

And we handle myriad calls from the tenants and other concerned individuals, anyone from city councilmen to neighbors and other interested parties.  So we’re the landlord for hire.

STEVE:  I’m grateful to have a partnership with Bob, and Bob can both help in managing of investment properties but also in helping as a person as maybe an expatriate and I know that you can do both those things for people.

BOB:  Yes, we do.  We handle many homes for expatriate employees.  They’re on a job in another country and they hang onto their home.  In many cases, they can’t find a similarly situated home or a home that exactly meets their requirements on a two-week house hunting trip or a one-week house hunting trip.  So they may decide to retain their home.  And investors appreciate our services and our advice over the years.  We’re ready and willing and happy to help any of your investors with their property management or leasing needs.

 

Phil Kronlage discusses Investing in Rental Property

by Steve Westmark

http://www.TwinCitiesUSA.com/video/Phil-Kronlage-Discusses-Investing-in-Rental-Property

STEVE:  Hi, this is Steve Westmark.  Thanks for watching my video blog this week.  In the series that I’ve been talking on investment, I’m bringing in different people to help you understand how to invest in real estate.  And today, I’ve brought in Phil Kronlage of Blanski Peter Kronlage & Zoch, and I assume that Kronlage is you.

PHIL:  That’s correct.

STEVE:  So Phil, as a CPA, how do you help the people as they come into your office look at investment property and what are the advantages that they look at both tax-wise, cash flow-wise?  I’ll just leave it open.

PHIL:  The first thing we do is kind of do a forecast of what the client would expect for cash flow.  So we estimate what rental income is going to be each month.  Then we list out the potential expenses that they’re going to have.  And those expenses or cash outlays would include an amount for principal and an amount for interest.  And included with that, the bank is probably going to require that you escrow your real estate taxes and your insurance.  So that’s probably going to be your largest outlay of cash.

Now if you buy a property that’s in an association, you have to take into consideration the association dues, which is something that a lot of people I think seem to forget about when they’re looking at buying the property is that they’ve got to make that association dues payment every month.  So in addition to that, most likely in a single-family residence or in a multifamily area, you’re going to be responsible for the repairs and so forth on that property.  And that’s probably about it for cash outlays.

So you compare that to the rental income coming in and does that exceed, as a rental income, exceed your cash outlay or are your expenses, including your mortgage payment, greater than the cash that you’re receiving from your tenant?  So if it’s greater, the big question is: Where’s the rest of that money going to come from?  And so you need to plan to have that money available on a monthly basis to pay those expenses.  So once we’ve calculated cash flow on this, and if it still looks like a deal that they want to get involved in, then we start talking about the tax ramifications of owning rental property.

And in addition to the expenses that we talked about previously, an additional expense that you can take for tax purposes in determining your taxable income is depreciation.  And that’s basically depreciating the value of the building.  You can’t depreciate the land, so you have to break down the value of the building and land.  And you can only depreciate the building over basically 39 years.  And that gives you an additional deduction and reduces your taxable income.  Once we take a look at the tax ramifications, then we really have a full picture of what your cash flow needs are going to be.

STEVE:  Well, then Phil, after owning the property for quite a few years and having a cash flow with it, which we strongly believe in, there’s usually some type of appreciation.  In fact, over the last 40 years we’ve seen a compounded inflation of about 5%.  What are the tax consequences that a person looks at at that point when you go to sell?

PHIL:  The tax issues that we take a look at at the time of sale is comparing the sale price to what is now your adjusted tax basis.  So your adjusted tax basis is the original cost of purchasing the property, the building and the land, less the depreciation that you’ve been able to expense over the previous years that you’ve owned the property.  And that will give you your cost basis that is deductible for tax purposes.  So you compare that to your sale price and determine whether you have a gain or loss.  If you’re in a gain situation, that gain is going to show up on your tax return as taxable income.

Some of if it recapture of depreciation, which is going to be taxed at a different rate.  And some is going to be potentially capital gain, is what we hope, if there’s appreciation in the property.  So you definitely need to work with your tax accountant to determine what that is going to cost you as far as a gain is concerned, the tax on that gain.  There is an option to defer paying the tax on that gain, and that is getting involved in what’s called a 1031 exchange where you exchange the property that you’re selling for another property that you would want to purchase and start this all over again.

So the property that you are purchasing has to be at least greater or equal to the property that you’re selling to defer the full gain.  So there are ways to not pay any taxes, and if you don’t want to use that 1031 exchange feature, then you will pay capital gains and maybe some recapture of depreciation gains. 

STEVE:  Well, I appreciate you, Phil, being my tax counselor through the years, and I’m sure that you could help many a person whether it be with investment real estate or any type of tax work.

PHIL:  Well, thank you Steve.  I enjoyed the opportunity to meet with you today, and you’re absolutely right.  We work with many, many individuals who invest in real estate through the last 35 years that I’ve been doing it.

 

Mortgages for Investment properties, Al Gelschus

by Steve Westmark
Video Video

 STEVE:  Hi, this is Steve Westmark.  Thanks again for watching my video blog this week.  This week, I’m bringing in a loan officer who has a great amount of knowledge in the area of investment real estate and purchasing investment property.  Welcome, and his name is Al Gelschus, and he’s with Guaranteed Rate Mortgage.  Welcome, Al.

 AL:  Thank you, Steve.  I appreciate the opportunity to visit with you.

STEVE:  Well, Al, as a first-time investor, how do you help that first-time investor with down payment and helping them understand interest rates and getting a mortgage?

 AL:  Thanks, Steve.  Really, there’s two types of investment properties that can be financed via the Fannie Mae/Freddie Mac residential mortgage method.  One is a single-family residential and the other are two to four unit residential.  To begin with, the single family is the easiest to finance.  That has a minimum down payment of 15%, but you get better pricing and better options if you put 20 or 25% down.  The 15% down payment does require that you have mortgage insurance or have secondary financing in the amount of 5% to cover the 20% from a primary mortgage lender.

The pricing, i.e., your interest rate that you can receive on this are very attractive but get better with improved credit scores.  A credit score of 680 will have one interest rate versus a credit score of 760 will have a much better interest rate.  The same thing applies to how much money you put down.  A 25% down mortgage would have a far better interest rate than somebody that puts 15% down.  A two to four unit property is a little bit more complicated because it obviously has more units to manage.  They require 25% down in those kind of scenarios.

STEVE:  So what other things are of an impact in underwriting as you go to put that mortgage together?

AL:  Steve, if you’re going to buy a single-family investment property, there’s a couple of complicating factors.  One is if it’s a first-time investment property, you have to qualify with both mortgages, both on your current primary home and then on the new home that you’ll be buying in the future without the benefit of the rental income.  There is an exception to that, however.  If you have 30% equity which is established by an appraisal on your current home, then we could offset some of the cost with the rental income that you’ll be receiving on your new home.

The other issue you need to be concerned with is, in most cases but not all, you’ll need to maintain a rent loss insurance policy of at six months.  That can be a bit complicated, but it’s certainly available in the marketplace.  So those are the two primary considerations that you have to have when buying investment property.

STEVE:  So Al, what would be the terms that might be able to be done with a mortgage like that or even the going interest rates currently?

AL:  Well, Steve, that’s what’s exciting about this.  This is a 30-year fixed rate, 20-year fixed rate, 15-year fixed rate, very boring mortgages.  When you’re talking about personal finance, sometimes boring is always good.  I’d rather have the safety and security of a fixed rate than some of the difficult mortgage vehicles we’ve seen in the past such as ____ [03:14].  These are just plain, simple, fixed-rate mortgages.  The other thing is today interest rates are still very acceptable.  A little higher than we were probably about six months ago, but depending on your credit score, your loan to value, and some other little tricks of the trade that we might do, your rate could be anywhere from 5% to 5.75% on a 30-year fixed rate in today’s market.

Again, you need to talk to your mortgage professional, make sure that we get the annual percentage rates calculated and all the closing costs disclosed to you properly.  But again, it’s a great time to finance and buy. 

STEVE:  Well, thanks Al for coming in.  This is great information I think for people who want to invest in real estate, and I look forward to them giving you a call and figuring out how to make money in buying real estate.

AL:  And Steve, I really want to thank you for the opportunity to educate your customers, and I look forward to doing that as well.

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The Steve Westmark Team
RE/MAX Advantage Plus
14451 Highway 7 Suite 100
Minnetonka MN 55345
612-978-7777
877-SOLDING
Fax: 952-241-1600