Austin Real Estate Team Selling Homes, Condos, Investment Properties and Real Estate Listings

LEVERAGE – The Double Edged Sword of Investing

February 6, 2012 By Jarrod Weaver

A friend and I were investigating a few investment properties targets on the HUD repo list. When I asked how he planned to acquire the property, I was stunned by his answer. CASH. The mostly green stuff that you can put in your wallet.

My knee-jerk reaction was that he was wasting valuable ROI by not using borrowed funds to purchase the investment. LEVERAGE, as I have always been led to believe, had to be the only way to buy an investment property.

I put this thought into the space in my brain that still works and doesn’t have any dust or spiders living in the corners. As uncomfortable as the thought of paying cash was, I could feel a paradigm shift coming on…

If you grew up in the same era as me (Stetson University – Class of ’91) you were probably conditioned to believe in leverage, just as I was. It’s what I was taught in college; it’s how my online brokerage margin account works; Danny DeVito even made a movie about it. Leverage is the key to getting ahead quickly in the financial world. Or so I thought.

Out came a legal pad and my handy HP 10BII calculator (CCIM approved) to factor rates of return on investment.

Generally, the properties we looked at were 3-bedroom, 2-bath, single-family homes that were bought new, 3-3½ years ago, for around $120,000. Remember when 80/20 zero-down mortgages were the way to go? Now they are back on the market after being foreclosed and could be bought for $60,000 – $75,000.

So which is better, buying one investment property and actually owning it or buying several leveraged properties for the same amount? It’s still just $75,000, right?

If an investor pays CASH, he would pay approximately $320 in closing costs. When financed the same property would cost about $2,800 more. Or a whopping $12,488 for four properties.

Because of the addition of the closing costs, the fair comparison is only four properties instead of five, to equal a (roughly) $75,000 investment.

The costs associated with closing a financed property also erode a substantial portion of the property’s ROI. (In this calculation 11½ month’s worth of cash-flow.)

The bottom line is, (without regard to vacancy) if you own the property you can expect a positive cash flow of just over $765/month. Which has an annual ROI of about 12.2%. Not bad.

If you leverage the purchase and have four properties the cash flow jumps up to $969/month and the ROI is approximately 16.0%. Definitely higher than the 12.2% expected when paying cash. Is more is better?

When you consider the potential management fees, repairs, and other expenses involved with keeping four properties leased the additional $204/month cash flow you could realize with leverage, will likely be shot.

Operating one income property is far easier than four. When a month passes without a tenant it the one property you own, it will interrupt your income for that period of vacancy. When a month passes in a leveraged property without a tenant, the mortgage is still due. If vacancy occurs in multiple properties or for multiple months, beyond what you have planned, it could collapse your complete investment portfolio.

I think, at least for me, I would rather own one property than leverage four.

My economics professor is probably having sharp chest pains right now. But he’s not the one trying to keep a portfolio of income properties full…

ROI-Ps Return On Investment – Properties

February 6, 2012 By Jarrod Weaver

I have always been able to stay well ahead of the markets in my (meager) online IRA by rolling a single stock that I know pretty well. Buying on dips and selling a few days later, once the fear that created the dip became old news.

This style of investing is not for the timid, diversification and balance are out the window. It has been either, all in or all out. Dangerous market exposure is limited by spending most of my time on the sideline, waiting for the xylophone alert on my iPhone to go off, telling me a buy scenario is in motion.

Unfortunately, real estate moves too slowly for this. It’s impossible for a preset trigger to start the Pavlovian rhythm telling me to BUY!

If that was the case, it would be going off right now louder than it ever has.

Many of the talking heads on television are cautiously reporting that the real estate market has actually bottomed. It certainly looks to be true in most markets outside of the bubble states - Arizona, California, Florida, and Nevada.

If you are like me, you would love to buy investment property but don’t have the liquid resources to do it. My IRA has just enough in it to buy a small position but I can’t touch it for another 18+ years. Or so I thought…

Switching to a self-directed IRA will allow you to purchase a variety of real estate investments. Commercial, residential, condos, lots, raw land, and rental properties all qualify. The only exclusions are defined in IRS Code Section 4975 which prevents your personal use of the property or use by certain other “disqualified” persons.

This works perfectly considering my short-term investment goals:

Purchase a 0% LTV income property in Q2 2010
Rehab modification <2% of purchase price
Available for occupancy within 7 days of closing
>10% ROI annual cash flow
>20% immediate ROI equity accumulation
Positioned as the Cheapest Reliable Alternative in case quick sale is preferred

If you decide that you want to make a leveraged (mortgaged) purchase, it is also possible to do inside your IRA. The note has to be non-recourse with no personal guarantees – giving you added protection. Count on having a note no greater than 50% LTV.

For some investors it’s time to explore the market, define investment goals, and secure a position in real estate.

Foreclosure Solutions

March 14, 2011 By Jarrod Weaver Leave a Comment

County Foreclosure Sale

Foreclosure
That’s right, despite the current market woes, people are avoiding foreclosure, relieving their stress and debt, and finding ways to navigate through tough times.

Don’t lose your precious assets and investments. For direct information on how I can help you contact me immediately at 512-818-1650.

There are 3 ways to stop a foreclosure
1. Pay off the mortgage balance in full
2. Bring your mortgage current and reset mortgage
3. Short Sale

The Deed in Lieu of foreclosure is the transfer of your right to the property to a lender. Some lenders may do this to avoid court costs, but in today’s fast paced foreclosure environment, your lender may not do this. The Deed in Lieu is not recommended because it is difficult to next to impossible if there is both, a 1st and 2nd mortgage.

It is our goal to have the process stopped by selling your home before you are evicted.

Foreclosure DefinedA foreclosure occurs when a property owner cannot make principal and/or interest payments on his/her loan, typically leading to the property being seized and sold.

Stages of ForeclosureThe foreclosure process is not very difficult to understand. There are several stages during which the homeowner has an opportunity to bring the loan current and avoid foreclosure.

After about three months of missed payments, the lender orders a trustee to record a Notice of Default (NOD) at the County Clerk’s Office. This puts the borrower on notice that he or she is facing foreclosure and starts a reinstatement period that typically runs until five days before the home is auctioned off.

If the default isn’t corrected (the loan must be brought current) within three months, a foreclosure sale date is established. The homeowner will receive a Notice of Sale, and this notice will also be posted on the property. In addition, the Notice of Sale is recorded at the County Clerk’s Office in the county where the property is located. Finally, this Notice of Sale is also published in local newspapers to the county in question.

The foreclosure Trustee Sale typically occurs on the steps of the county courthouse in which the property is located. The time and location of this sale are designated in the Notice of Sale. At the Trustee Sale, the property is auctioned in public to the highest bidder, who must pay the high bid price in cash or certified funds normally within just a few hours. The winner of the auction will then receive the trustee’s deed to the property.

Foreclosure Auction
At auction, an opening bid on the property is set by the foreclosing lender. This opening bid is usually equal to the outstanding loan balance, interest accrued, and any additional fees and attorney fees associated with the Trustee Sale. If there are no bids higher than the opening bid, the property will be purchased by the attorney conducting the sale, for the lender.

If this occurs, and the opening bid is not met, the property is deemed a REO or Real Estate Owned. This typically occurs because many of the properties up for sale at foreclosure auctions are worth less than the total amount owed to the bank or lender.

When you purchase property at a foreclosure sale, all junior liens other than property taxes are wiped out. Priority of liens is determined by the date of recording. When you purchase a REO property you will typically receive the property with a clean title.

How long does it take to get foreclosed on?It depends. In a non-judicial foreclosure state (Texas) the foreclosure process normally takes 21 days after notice is served. In a judicial foreclosure state (Florida) the process can take 6 months or more.
1. It will take about 3 months for the lender to file a Lis Pendens, (a law suit to take control over your property).
2. If you cannot sell your property within the 21 day or 6 month time frame, the lender will evict you from the home and auction your home off on the courthouse steps, and a foreclosure will appear on your credit record.

LEVERAGE – The Double Edged Sword of Investing

ROI-Ps Return On Investment – Properties

Foreclosure Solutions

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