No to toot my own horn here, but I think we're starting to see the emergence of an untapped or under utlized, (and oft misunderstood), segment of the real estate market. That segment is the multi-unit investment market.
For several years I've been telling my buyers, particularly those who were considering investing, to look into small multi-unit buildings. There were definitely concerns over these last few years; the biggest one was cash flow. A good number of people were put off by multi-units because they required larger downpayments and, despite these down payments, would barely break even on a yearly basis when all was said and done. I stressed to these buyers that a multi-unit investment property can really boost their portfolio long term and even if they broke even or sustained losses for a period of time, the curve would catch up with them and they profitability would eventually be there. Particularly if we're talking about owner occupied multi-unit residential buildings. It simply translated to having an apartment you live in while renting out the others. Ostensibly, this would be to offset your mortgage costs and any losses or improvements to the the rental units could be written off directly providing the owner with some distinct tax advantages.
And what came of my urgings?
Some people saw the logic and purchased properties, even if they were losing a bit of money in the short term. This is going to end up being a favorable mark in their corner at this point, no doubt, as we are seeing more and more fallout from the subprime mortgage crisis.
Currently in the real estate market, across the board, we are facing several negative factors. We are seeing home prices receeding on the heels of increased supply. That's basic supply and demand: supply goes up, prices go down until demand re-engages or meets up, (or hopefully exceeds), supply. The reason the supply of unsold properties is going up has a lot to do with subprime mortgages. These mortgages weren't just to people who had marginal credit; mortgages were, literally, being written without income verification. This basically meant that if you could prove a certain amount of money moved through your account, you could get a loan for "x" based on the amount of cash going through your account. The logic behind this, (I'm guessing), is that the lender could see cashflow that may or may not, (more than likely would not), show up on more conventional benchmarks such as the review of a buyer's income tax returns. What this did is it flooded the market with people who essentially, by their assertion, claimed to be able to afford homes they clearly could not.
The banks became greedy because these subprime loans were frequently at higher rates of interest because of the "risk." The lenders failed to recognize just how much risk there was.
The second segment of the mortgage market that has caused this monsoon of foreclosures are the ARMs or Option ARMs. These were loans that were hard for most consumers to understand. The assumption on the lender's part was that the actual realities of these loans were properly explained to the buyers and that the buyers understood the additional risk if they did not refinance their loans prior to the rate adjustment that was built into the ARM. An ARM or, Adjustable Rate Mortgage is a mortgage that has an intial fixed rate, (sometimes called a "teaser" rate), that is artificially low for a period of time. After that period of time, the rate adjusts exponentially leaving the owner with payments significantly higher than they had been paying. An Option ARM threw in the "convenience" of allowing a buyer to choose their monthly payment during the fixed period. This, allegedly, allowed the buyer to compensate for cash crunches in some months and play catch up in others. All the while, there were different fees or resettings/re-amortizations of these loans as people paid at different rates from month to month. At the end of it all loomed the big rate adjustment that would blindside the owner and put their monthly payments beyond their monthly means.
The third segment of the mortgage market that contributed to this meltdown are HELOCs or Home Equity Lines of Credit where homeowners were, basically, allowed to use whatever equity they had in their homes as an ATM or, even worse, a revolving line of credit that was designed to be next to impossible to pay down.
The result was debt, upon debt, upon debt!
All of which has lead up to people not being able to afford the homes they worked so hard to purchase. The options are foreclosure in which the bank forcibly takes the home from the former owner in a legal proceeding. The former owner is then responsible for those legal fees and, often, any difference between the price the home sells for and what is owed on the loan.
Smart homeowners who are in trouble are working with their lenders to either keep their homes or to mitigate losses on both sides. If an owner is clearly unable to financially support the home, the bank may negotiate a short sale wherein they agree to allow the home to be purchased for less than is owed on the mortgage.
The bottom line with all of this is that these mortgage issues are far from over and with another wave of mortgages due to adjust in the next 12-18months, there could be more ripples, (or tidal waves), throughout the market. Perhaps the worst part about it is that people who fall into default will cause harm to their credit which will, in turn, hurt their chances of getting another mortgage. And with the banks tightening lending restrictions we could soon see an even bigger glut of unsold homes because the pool of qualified buyers is significantly smaller.
Certainly there will come an answer or help, be it from the banks directly or in the form of governmental assistance. Regardless, the prevailing fear and the tightening of credit standards has created a whole new pool of people. . .renters.
Sam Zell announced a few years ago that he would be building the largest residential rental development in Chicago in many, many years. People thought he was nuts but if we've learned anything about Mr. Zell, he's crazy like a fox. He must have anticipated that there was going to be significant rental demand to take a gamble on investing in high end rentals. And he was right!
So if any of you out there have thought about real estate as an investment, now is the time to strike. With prices sliding back, there should be an excellent opportunity to acquire multi-unit properties that can be easily upgraded and, given the stronger pool of renters, could also provide some cash flow. Even smaller single family homes in good school districts would be ideal investment properties.
And for those of you considering purchasing, particularly if you are looking in the city; now may be the time to look at 2-4 flat multi-unit buildings. If you qualify and have available cash for a down payment, you could command significantly higher rents than in years past.
There are some great investment opportunities in the multi-unit residential market. Please contact me for details or if you have any questions.
Your urban/suburban Realtor.
Rick Doty
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment