Welcome to Apartment Building Trader

On Tuesday the Federal Reserve announced a three-quarters cut to the federal funds rate. This comes just two days after a surprise weekend decision to cut the discount rate by a quarter point. Tuesday’s cut sent the stock market into a frenzy as many investors had been anticipating a decrease of a full percent. However by close of day the market had basically leveled out.

Several banks have started to implement the new conventional loan limits. As it looks now, those seeking a new higher amount “conforming” loan should expect to receive a rate anywhere from 1% to 3% higher than what is available for loans that fall under the terms for standard conventional loans.

Rates for short-term fixed multifamily loans remain extremely competitive. Currently we have access to a 3-year fixed program at 5.29%, for loans $200,000 and up. This program is amortized over 30 years and features a rate floor of 4.326% as well as low fees.

~Sam Nelson, Venture West Funding: Website

Just as banks begin to unveil their plans for implementing terms of the Economic Stimulus Package (with some banks anticipating changes as early as mid-March), we hear that this Spring could bring more good news for those seeking a subprime mortgage.

According to CNN.com, Congress is expected to pass a bill by mid-April that would expand the reach of the FHA. Highlights of the bill include making the temporary loan limit increases permanent, as well as reducing down payment requirements to as low as 0%.

Over in the multifamily sector, interest rates have remained fairly stable. I have had a lot of inquiries recently regarding long-term fixed loans. Currently we have access to 7- and 10-year fixed programs as low as 6.15%, with the option of up to 80% loan to value.

Author
~Sam Nelson, Venture West Funding: Website

Both Fannie Mae and Freddie Mac reported fourth quarter losses ($3.6 billion and $2.5 billion, respectively.) Since the two entities have sustained such large losses, they have said they may sell additional stock or need to come up with other ways to raise new capital. Until they have the extra money to buy any substantial amount of new loans, the lifted restrictions are going to have very limited impact on the mortgage market.

Bernanke’s gloom report on the state of the economy Wednesday left many predicting another .5% rate cut. The Fed’s next monetary policy meeting is on March 18.

In the multi-family sector, rates remain good. We currently have access to short term fixed programs with interest rates in as low as 5.4%.

Author
~Sam Nelson, Venture West Funding: Website

Question:

I plan on renovating my building, which is under rent control for the city of Los Angeles. Is it proper grounds to request that my tenants vacate? The building is really dilapidated and this renovation is quite necessary. I need to upgrade all the plumbing, electrical and roofing. The heating system must be replaced in addition to painting and replacing old appliances. This work cannot be performed with tenants in possession.

Answer:

Incredulously, that is not grounds for eviction for the City of Los Angeles. The City, by its actions, is encouraging buildings to become degraded. You can ask the tenants to leave for a temporary period of time. You would have to apply under the program entitled, “Tenant Habitability Plan”. You would have to pay for your tenants to be relocated. This would entail paying for alternate housing and other accommodations. After the tenants return, you would have to apply for a capital improvement rent increase. This is based on the cost of your renovation, amortized over a five-year period and divided between the units in the building. There is limitation to the amount of this increase. Based on these criteria, there is not an economic incentive for a landlord to upgrade.

Author
~Dennis Block: Source

Whether or not you believe we are in a recession, there is no denying that the word recession is now a part of our vocabulary.  Whether you are out and about shopping, listening to the radio or watching television, it seems like that word is inescapeable.  The Los Angeles Times recently ran an article titled “Shoppers play it cool in January.” Guess what word appeared in the article over and over again? That’s right, “Recession!”

The article examined the retail market, analyzed sales numbers for January and predicted what will come for the year ahead.

“Discounter Wal-Mart Stores Inc. said shoppers held on tight to the gift cards they received over the holidays or used them to buy milk and bread rather than toys or iPods. High-end Saks Inc. said customers shifted more of their spending to “promotional events” - making purchases when items were specially priced.” L.A. Times

The above quotation reflects that the entire nation is feeling a financial pinch, not just a certain economic class. The working class is beginning to pull back substantially and spend their money on necessities, while the upper class are actually looking for bargains. No one is spending money like before.

“Whether we are in a recession or not, things have slowed,” said Michael Niemira, chief economist for the International Council of Shopping Centers.

The National Retail Federation said the slump would affect U.S. ports where products destined for shopping malls are unloaded. “We’re going to see little increase in cargo on the docks,” said Jonathon Gold, the federation’s vice president for supply chain and customs policy. “Container traffic at the ports is a leading economic indicator because it reflects retailers’ expectations for sales.”

So what if we are in a recession? How does that affect me as an apartment owner?

Take the above quotation for example. The VP for the National Retail Federation is stating that the decrease in sales is going to directly impact all U.S. ports where merchandise is delivered and unloaded.

Sales have been weak and retail stores are experiencing a major slow down. If you have been out shopping recently, you will notice the lack of employees in these stores. Retailers have already reduced their workforce. The next step is for them to cut down on their stock and reduce their product orders. 

That means less work for everyone. Take into account the various jobs that will be impacted due to lack of sales….sales personnel, shipment personnel, manufacturing personnel, corporate personnel, etc., etc… It’s the ripple effect.

If there is less work, then there is less money in our tenants’ pockets. As money becomes tighter, it becomes more difficult for them to make their rent payment every month. Suddenly, they find themselves forced to look for a less expensive place to live.

You suddenly find yourself with a vacancy or two. Being an owner for quite some time, this is part of the business that you are accustom to. You put your sign up, place an ad, yet the calls do not come. While driving your area, the amount of vacancies catches your attention. As you think of ways you can stand out from the others, you decide to offer 1 month free rent. The unit is going on the second month of vacancy. Last year, you had a waiting list, this year you don’t even have a call back list. Time goes on, expenses remain, maintenance issues develop, you feel desperate. Weathered by the amount of time and work you’ve invested trying to rent out the unit, frustration takes over you.  Forced  by the market, you lower the rent by $150-$200 just to fill the place.

‘What’s going on?’ you ask yourself…The Recession.

As lending guidelines continue to become more stringent, real estate investors are facing new challenges everyday. It’s now more important than ever to have a professional mortgage consultant that has an in depth understanding of lender guidelines and specializes in financing for investment properties.

Below are six important things every real estate investor should be aware of.

1. Loan to Value Changes

Some lenders have recently reduced their maximum loan to value guidelines. Very Few Mortgage Companys can still offer up to 90% financing for stated income investors, however as market conditions continue to deteriorate; this could soon become a thing of the past. With today’s favorable interest rates, we recommend not waiting any longer to take advantage of these programs.

2. Title Seasoning

There are two main issues when it comes to title seasoning. The first involves refinancing an existing property to appraised value. Most lenders require 12 months on title in order to refinance a property based on current appraised value, however, there are still some products available for non-seasoned refinances. Secondly, the length of time the seller has been on title needs to be taken into consideration when purchasing a new property. Lenders will typically require that the seller has been recorded on title for at least 90 days; however, no seasoning is still available on a limited basis.

3. Declining Markets

Foreclosures are one of the driving forces behind most declining markets. There is no standard industry definition of what constitutes a declining market, and is within the lender’s discretion to determine if the appraisal accurately reflects the current market value. If the lender determines the property is located in a declining market they may reduce the maximum loan to valve.

4. Appraisal Comparables

Many lenders are now requiring up to two closed sales within three months and one closed sale within six months. They may also require comparable pending sales validating the market is stable.

5. Stated Income

Lenders are becoming increasingly cautious regarding stated income borrowers. Many lenders want to see three to four times the monthly stated income in reserves. Although these are unwritten guidelines and typically only six months PITI is required, it is the underwriter’s discretion. This is especially relevant when stating income as a full time real estate investor.

6. Holding Title in the Name of an LLC or Corporation

Although there are benefits to holding title in the name of an LLC or corporation, few lenders will allow it. Recently, some lenders are requiring the property being held in the individuals name for a minimum of 90 days before it can be refinanced. This is something to be aware of if purchasing property in a company name with the intent of refinancing it immediately. You should always consult with a qualified attorney or CPA regarding holding real estate in an LLC or corporation.

By Rein Mortgage Co.

“If we don’t learn our history, we are doomed to repeat it.” With that said, let us use the price correction of the residential market as a possible precursor to what may lie ahead for the multifamily market.

Currenty, many residential Realtors are advising clients thinking about selling in the next few years to sell now and list their home for less than what the sales comparables show. This is known as pricing the property ahead of the market.

It has been our experience that Effective Pricing in Multifamily is also beginning to adjust with the changing market. A year and half ago our team would have priced your building as high as 50 basis points higher on the CAP Rate than any sales comparable in the area. Back then, this was the most effective way to price because we were still in a bull market. Inventory was low and demand was extremly high pushing up values accross the charts. Prices would be negotiated between buyers and sellers and the properties would end up selling as high as 25 basis points higher on the CAP Rate than any other recent sales comparables. This meant for multi-family that the sales price would be higher than what most comparables reflected for like properties.

Now, things have changed. Cap Rates have already began to creep back up. Therefore, to Effectively Price and Sell your apartment building you must be sensitive to the changing market and it’s many indicators i.e. Cap Rates discussed in this example.

Today, we advise you to introduce your building to the market no more than 25 basis points higher on the CAP Rate than what the comparables reflect. By the time the negotiation process is over your buildings value should fall right in line with the sales comparables for like properties.

So, if you are on the fence about selling, jump off now and step onto the other side. A common belief we continuously hear is that prices will continue to fall for the next 15 to 18 months. Many believe it will take that long for the price correction to fully adjust. However, this is mere speculation, the down cycle could drag on for much longer, or may pick up mid-year, no one really knows.

Yet, if you are planning on waiting this down cycle out (however long that may be), there is another issue at hand: Taxes.  In 2010, the Tax Reconciliation Act of 2003 will expire. It is expected, that the Federal Capital Gains Tax will adjust from its current 15% to 20% or more. In addition to the Federal Capital Gains Tax increase, there is lots of chatter about tax increases in general and a restructuring of the system. So if prices do begin to rise in the next 15 to 18 months, the tax consequences will be greater and thus eat into profits. -Catch 22 

The Essence of Destiny…

“Watch your thoughts, for they become words. Choose your words, for they become actions. Understand your actions, for they become habits. Study your habits, for they will become your character. Develop your character, for it becomes your destiny.”

It is estimated that the state of California’s budget gap is approximately $14-million and Gov. Arnold Schwarzenegger is expected to announce that California is in a state of fiscal emergency! As the Governor and his advisors’ strategize to find means of closing the gap, one option that is being researched to create more income for the state is revisiting Prop. 13.

 L.A.Times (Full Article)

The Sheik Mohammed bin Rashid Al Maktoum, the ruler of Dubai has been preparing his country for an undoubtable crisis: the dissipating supply of it’s most precious and fruitful resource - Oil. With an inevitable economic disaster at hand, the strategy was to create an oasis in the desert. Thus far, that oasis consists of the Palm Islands - the man-made series of islands which includes residential and commercial development projects to be built over 10-15 years, an ultra luxurious hotel - Burj al-Arab hotel and the $4 Billion, 164-floor Burj Dubai, expected to be the tallest man-made structure in the world.

The Persian nations have been actively seeking other means of revenue to replace the current income they generate from oil. The investment of $7.5 Billion in the largest U.S. bank, Citigroup, is a prime example of how they are expanding their portfolios. They are using the wealth they have generated from oil and capitalizing on a weakening U.S. dollar. Dubai based companies have vested interest in various parts of the United States from the purchase of the luxury department store chain Barney’s New York, to the $5 Billion investment in MGM Mirage in Las Vegas.

Recently, various U.S. Investment firms and Brokerages have stated that they are receiving an increase of calls from Mideast investors looking to purchase U.S. real estate. Other foreign investors are following suit and interest is beginning to stir, the weakening dollar is enticing many to scour the U.S. for opportunity. Many speculate that foreign money will begin to pour into the economy and sustain the falling real estate market. With the pound and the euro overtaking the dollar, the U.S. appears to remain a land of opportunity.

Abu Dhabi invests $7.5 Billion for up to 4.9% of Citigroup.

Mideast Governments and Monarchies Buy U.S. Office, Industrial, Apartment and Hotel Assets.