RE investors input wanted.

[BMF]

I was born and raised in Orlando, but in spite of piving in Cullman for the past 30 years I dont really know many people here. I commute to work in Madison, Alabama....have always been a commuter so I know more people outside of Cullman than in except for family.

Anyway, I have these on what I consider to be crappy terms....6% over 20 years, but had to move fast. Now that I have time I want to find a lender that can do terms closer to typical rates in the 3-4% range if im not going to pay them off. Im leaning towards paying them off even though i know using someone elses money to expand could be far more lucrative

There's absolutely nothing wrong w/ paying them off. "Savvy" investors will tell you not to pay them off and use the money for this or that....but small time investors (like myself, and seemingly you - not to offend you) have nothing to worry about w/ having it paid off. My only rental (which we use as an airbnb) is paid off, worth maybe $180k. I've had people tell me to take out a mortgage on it - and I've told them to f*ck off. I own it outright!

Interesting about where you live. If you get bored, read "Rich Dad, Poor Dad" - it's basically a book about real estate and starting your own business (the benefits of tax write offs, etc). He talks about the "1% rule" - which is basically being able to rent a property for 1% of what you bought it for per month (such as paying $200K and getting $2000/month in rent). The 1% rule is getting harder and harder to come by. So if you're finding properties where you can hit the 1% rule you're doing very well. I had a house two doors down from me sell in January for $640K, the buyer immediately put it up for rent for $3000 - that just doesn't make sense to me. There's rural areas of Florida that you can get the 1% rule, but not many urban/cities. Good luck.

Also, you should easily be able to refinance the properties, especially since you have well over 20% equity.

 

[Concrete Helmet]

I own it outright!

There is an ungodly amount of power in those 4 words.

 

[Concrete Helmet]

There's absolutely nothing wrong w/ paying them off. "Savvy" investors will tell you not to pay them off and use the money for this or that....but small time investors (like myself, and seemingly you - not to offend you) have nothing to worry about w/ having it paid off.

To me it all boils down to being comfortable enough letting go of a pile of cash in order to have it paid off. In my position I COULD pay off my rentals BUT I'd end up depleting nearly 35-40% of my retirement savings to do so. Then I'd end up having to race even harder than I already am to get to where I need to be in 10 years or so. If I let tenants paydown the mortgage I can continue to sock away income, use the tax deduction on interest..I've got very good terms on these rate wise at 3.875%@15 years. Both houses are around 60% equity at this point and have less than 10 years remaining minus the additional principal payments of my normal tax return and cash throwoff and both should be paid off in about 6 years or so.

Still if I had another 25% in retirement at this point I'd probably pay both of them off

 

[Gatormac2112]

To me it all boils down to being comfortable enough letting go of a pile of cash in order to have it paid off. In my position I COULD pay off my rentals BUT I'd end up depleting nearly 35-40% of my retirement savings to do so. Then I'd end up having to race even harder than I already am to get to where I need to be in 10 years or so. If I let tenants paydown the mortgage I can continue to sock away income, use the tax deduction on interest..I've got very good terms on these rate wise at 3.875%@15 years. Both houses are around 60% equity at this point and have less than 10 years remaining minus the additional principal payments of my normal tax return and cash throwoff and both should be paid off in about 6 years or so.

Still if I had another 25% in retirement at this point I'd probably pay both of them off

Thankfully I can pay them off without touching my contribution to my 401k and 457b including 50 year old catch up contributions which comes to about $52k per year pre tax. I think as close to retirement as I am it makes more sense to pay them off and then snowball as many properties as I can before retiring. I may not end up with as many properties, but the cash flow per property will be greater and as BMF said, "I own it outright"!

EDIT: To anyone nearing 50 that wants to make catch up contributions to your retirement plan, DO NOT WAIT UNTIL YOU ARE 50! I made that mistake and then realized the IRS allows you to start making catch up contributions in the year you will turn 50, yet are still 49. As my birthday is in December, I missed out on an entire year of catch up contributions.

 

[Bushmaster]

I try to do better than 1%. I didnt know about that rule just came up with a rule of thumb for what works for us. 1.2 is about the bottom i will go.

Just purchased a mobile home for 20k. Will have 10k in moving, permitting, septic, etc. Willnrent it for 725 a month. That is a 2.4. I consider anything in the 1.5 range to be rolling naked in a pile of money.

 

[Gatormac2112]

I try to do better than 1%. I didnt know about that rule just came up with a rule of thumb for what works for us. 1.2 is about the bottom i will go.

Just purchased a mobile home for 20k. Will have 10k in moving, permitting, septic, etc. Willnrent it for 725 a month. That is a 2.4. I consider anything in the 1.5 range to be rolling naked in a pile of money.

Yeah Ive looked at mobile homes around here and you can do better than 1%, but not easily more than 2%. Im also worried about depreciating value versus appreciating value of a house. If you can find one cheap enough in great shape it’s definitely an option. I thought about putting mobile homes on the extra acreage of my first rental, but Ive never developed land for anything and am kind of afraid to do so

 

[BMF]

Thankfully I can pay them off without touching my contribution to my 401k and 457b including 50 year old catch up contributions which comes to about $52k per year pre tax. I think as close to retirement as I am it makes more sense to pay them off and then snowball as many properties as I can before retiring. I may not end up with as many properties, but the cash flow per property will be greater and as BMF said, "I own it outright"!

EDIT: To anyone nearing 50 that wants to make catch up contributions to your retirement plan, DO NOT WAIT UNTIL YOU ARE 50! I made that mistake and then realized the IRS allows you to start making catch up contributions in the year you will turn 50, yet are still 49. As my birthday is in December, I missed out on an entire year of catch up contributions.

I turned 50 in August and upped my contribution in January. I plan to work at least 5 more years, so I want to reach that $26K every year (plus a 5% match). It's definitely something those in their 40's should plan for.

 

[Bernardo de la Paz]

Most people look at the return % wrong as well. A 50k investment may equi 10k down. Financed fr 15 years, you should knock down on average 3500 a year year in principal. I see that as a 35% return on my money, not 7% as some will.

This is exactly how to look at it, and keep in mind that these numbers change over time. As you continue to build equity in the home, that principal payment continues to shrink relative to the total equity in the home thus eroding your return. So that's why it often makes sense to refinance or even start with an interest only loan. You just have to be disciplined about investing cash taken out.

The corollary in business is when you look at the financials for just about any public company you will see that they continue to take on debt even as they pay out dividends to shareholders. That's because they can borrow money at a lower rate than their return on equity and at the same time they don't want the equity to grow beyond the available market opportunities that meet their current return.

 

[BMF]

@FireFoley - any RE updates?

My buddy that does the low-cost housing projects (who I invest with) has slowed down his business. He has buyers, but is having a hard time finding target lots (in low income areas) - they are priced too high, and along w/ the increase cost of lumber & building supplies, he wants to hold off on any new starts. I'm really surprised because he was doing well and has a niche product (most builders don't want to do low income housing).

 

[BMF]

Housing market is out of control! This article says not to expect any slowdown until at least into 21:

Home price growth in the US accelerates

U.S. home price growth accelerated in July as the nation continued to grapple with the coronavirus pandemic.

Standard & Poor’s said Tuesday that its S&P CoreLogic Case-Shiller national home price index posted a 4.8% annual gain in July, up from 4.3% in June. The 20-City Composite posted a 3.9% annual gain, up from 3.5% the previous month — beating analysts’ expectations of 3.6%, according to Bloomberg. The results for the first time in five months, now include Wayne County, Mich.

“The National Composite Index gained 4.8% relative to its level a year ago,” said Craig J. Lazzara, managing director and global head of index investment strategy at S&P Dow Jones Indices, in a press statement. “The strength of the housing market was consistent nationally – all 19 cities for which we have July data rose, with 16 of them outpacing their June gains.”

For the 14th straight month, Phoenix led the 20-City Composite posting a 9.2% annual gain for July. Seattle and Charlotte followed with 7% and 6% annual gains, respectively.

“A sharp deceleration [in home prices] appears unlikely despite the ongoing pandemic,” Nomura wrote in a recent note. “Recent data such as y-o-y growth in volumes of mortgage loan applications have remained elevated as reopening continued. Moreover, an insufficient supply of previously-owned homes for sale appears to have dampened the negative demand shock.”

“The recent boost in the number of people listing their homes for sale still falls far short of demand from folks looking to buy homes right now," said Redfin chief economist Daryl Fairweather, in a press statement. “Unfortunately, that means little relief for homebuyers, especially those seeking an affordable home. I don't expect the double-digit home-price increases to subside before early 2021.”

The lack of lumber as a result of the California wildfires has also been impacting the price of homes. “Over recent months, we have seen lumber prices surge dramatically,” NAR Chief economist Lawrence Yun said in a press statement. “This has already led to an increase in the cost of multifamily housing and an even higher increase for single-family homes.”

The housing market is booming and has been a “shining star” in the economy. Existing and new home sales surged to 14-year highs in August as record low mortgage rates and a shortage of inventory fuel activity. Total housing inventory at the end of August was 1.49 million, down 18.6% from the same time last year and and there’s just a three-month supply at the current pace of sales, according to the NAR.

Even homebuilders are feeling really good about the market, homebuilder confidence reached an all-time high in September, according to the NAHB/Wells Fargo Housing Market Index (HMI). Some homebuilders are even holding back sales to preserve supply for 2021.

“The U.S. housing market has been caught up in a ‘perfect storm’ during the COVID-19 pandemic,” said CoreLogic Deputy Chief Economist Selma Hepp in a press statement. “The substantial swing in demand is driven by a need for indoor and outdoor space met by record low mortgage rates and a wave of millennials who were on the verge of buying — all competing for fewer and fewer homes on the market.”

 

[Concrete Helmet]

All I know is were blowing up at the office. Our numbers volume wise have returned to pre pandemic levels, 220-250 a month, and sales are exploding. Almost all of them are paid off in trust or properties that were passed through probate and are being cashed out on by non resident or non homestead owners. Many are cash purchases on the buyer side also...still almost no HELOC's to speak of which is pushing our revenue through the ceiling. That part is great....except every GD'ed file is title insurance which requires a policy which is my job ....one legged man in ass kicking contest....meet Crete....

 

[Bernardo de la Paz]

Almost all of them are paid off in trust or properties that were passed through probate and are being cashed out on by non resident or non homestead owners.

Should this have been posted in the taking advantage of coronavirus thread?

 

[Concrete Helmet]

Should this have been posted in the taking advantage of coronavirus thread?

Yeah it's funny but none of the DC's that I get in my files on nearly a daily basis have Covid list as cause of death...but hey since Covid only kills the impoverished non RE owning mostly minority crowd I shouldn't be suprised, right?

 

[BMF]

This is a good read, 2021 will be interesting w/ all these people behind on their mortgages. Florida is at 8.6% delinquency rate. This article shows 90 day and 120 day delinquencies. 2 million loans in 21 will be "seriously delinquent":

Mortgage delinquency rate hits 21-year high

Mortgage delinquency rate hits 21-year high

The share of homeowners four months behind on their mortgage payments hit a 21-year high in July, according to the latest figures from CoreLogic, a financial data and analytics firm.

The 120-day delinquency rate stood at 1.4%, up from 0.12% in July 2019 and the highest level since CoreLogic started tracking delinquencies in 1999.The rate includes those homeowners who declared forbearance as a result of the CARES Act.

“What we’re seeing is a ‘pig in python’ effect with a spike in June for 90-day delinquencies and now in July with 120-day delinquencies,” said Dr. Frank Nothaft, chief economist at CoreLogic. “I think it’s a big concern especially as the CARES Act provided forbearance, but homeowners will still have to owe every payment.”

‘We will see 2 million loans seriously delinquent in 2021’
The report’s other findings also demonstrate the severity of the cash crunch.

The rate of those at least 90 days past due jumped to 4.1%, up from 1.3% in the same month last year and the highest level since April 2014. All 50 states experienced an uptick in seriously delinquent mortgages, those characterized by payments 90 or more days late. But some bore the brunt more than others.

In New York, that rate climbed to 10% in July, up from 4.3% the year before. New Jersey’s rate hit 9.6%, up from 4.5%, while the delinquency rate in Florida increased to 8.6% from 4.1% in July of last year.

“If there continues to be financial stress we can see at least 2 million loans seriously delinquent by the end of 2021,” Nothaft said.

‘Additional fiscal stimulus will likely be needed’
As the next round of stimulus talks remain unresolved between Democrats and the White House — including additional unemployment benefits and direct payments — many Americans will be forced to stretch their dollars as far as they can.

Those who have chosen forbearance offered by government-backed mortgage guarantors still face the prospect of paying back months of past-due mortgage payments when the forgiveness period ends.

 

[FireFoley]

Good article @BMF, that is a good read regarding mortgage delinquency. Just last week the numbers showed that people had dropped out of the forbearance program and they implied that it meant people were paying their mortgages. I asked whether that was the case or did they just not renegotiate b/c these agreements are in 3 month increments. I think it was a bit of both, but having seen all the bank earnings this week, everyone of them put less into loan loss reserves than was forecast. My hunch is that they will extend more mortgage forbearance and thus push these problems farther into the future, 2021 and beyond,

 

[BMF]

Good article @BMF, that is a good read regarding mortgage delinquency. Just last week the numbers showed that people had dropped out of the forbearance program and they implied that it meant people were paying their mortgages. I asked whether that was the case or did they just not renegotiate b/c these agreements are in 3 month increments. I think it was a bit of both, but having seen all the bank earnings this week, everyone of them put less into loan loss reserves than was forecast. My hunch is that they will extend more mortgage forbearance and thus push these problems farther into the future, 2021 and beyond,

If it's at 8.6% in Florida, that means 1 in 12 homeowners is default. That's hard to believe.

From my recollection in the 2005/2006 time frame, just before the crash, it seems like it took at least 18 months for things to go south - prices were rising and rising...then it seemed to slow down, people started cutting the sale price, then it nobody was buying...then people started losing their asses (investors who had over leveraged).

I think people are in better shape now than back in 2007/2008. So I'm not expecting a huge crash, but I am expecting home prices to fall at least 10%. My wife tracks home prices like it's her job. She was showing me houses in Key West, several of them, that were bought in 2017, 2018, and even 2019 that are listed for 30% or more than they sold for (just a year or two ago) with VERY little upgrades/renovations (if any). Most of these homes were sold already renovated and people are just flipping them after a year or two. It's crazy. So...I think by mid 2021 these outrageous prices will level off and start falling (at least I hope so!).

 

[Bushmaster]

Do these numbers differentiate between those with forbearance agreements and those who are truly behind?

 

[FireFoley]

If it's at 8.6% in Florida, that means 1 in 12 homeowners is default. That's hard to believe.

From my recollection in the 2005/2006 time frame, just before the crash, it seems like it took at least 18 months for things to go south - prices were rising and rising...then it seemed to slow down, people started cutting the sale price, then it nobody was buying...then people started losing their asses (investors who had over leveraged).

I think people are in better shape now than back in 2007/2008. So I'm not expecting a huge crash, but I am expecting home prices to fall at least 10%. My wife tracks home prices like it's her job. She was showing me houses in Key West, several of them, that were bought in 2017, 2018, and even 2019 that are listed for 30% or more than they sold for (just a year or two ago) with VERY little upgrades/renovations (if any). Most of these homes were sold already renovated and people are just flipping them after a year or two. It's crazy. So...I think by mid 2021 these outrageous prices will level off and start falling (at least I hope so!).

I want to make it quite clear what my own views are regarding this whole scenario. As someone who sold his own house at the end of 2005 thinking I knew what would happen, I predicted house prices would come in at least 30%. Well they came in a lot more than that 50%+ in some instances, so that exceeded my expectations. @BMF you are correct that people are in "better shape" or a "different position" this time around. We are not going to see a 50% drop for lots of reasons. First off people are not able to buy 5, 10 or more houses at a time with no money down. You now have to have a little more than a pulse and even tho there are still no money down mortgages, they are not as easy to secure. Secondly interest rates are zero at this time, so anyone wanting a mortgage can get a sub 4% 30 yr. mortgage no problem. but 15 years ago rates were higher, and most people were taking an ARM, b/c they could not afford 5.6 or 7% mortgage. They got a 1 yr teaser rater at like 2.5% and just figured they could continue to cash out refi each year. They had no clue what LIBOR +2.5% meant.

this time around it will be more b/c people lose their jobs, etc. And those that bought a 1200 sq. ft. house for 500K will have to sell. But someone will be there to pay 450K etc. b/c rates will still be ZERO. The difference is that 110% mortgages on 10 or more homes to the same owner do not exists. Most are in long term fixed rate mortgages and less ARM's are being used just to get into a home. I agree we will have a pullback, but you have to be extra patient. This KUNG FLU will take a lot longer to work thru the system given all the GOV. stimulus and all the programs designed to help renters and owner's.

 

[BMF]

Do these numbers differentiate between those with forbearance agreements and those who are truly behind?

It says that it includes those who were given forbearance. So once the free-pass period ends, many of these people are f*cked. They still owe the payments, they were just given time to make the payments (and the banks are not allowed to throw them out - yet). So, 2021 will be interesting. I'm sure they government will pass some sort of relief - after the election? I'm curious what happens if the Dems win....or if the GOP wins? If there's another "spike" in cases will we shut down again?...then pass another $3 trillion stimulus?

@FireFoley - good breakdown. I actually bought a rental in 2005...I ended up losing a sh*tton on it, but got lucky because there was a program for the military, run by the Army Corps of Engineers - if you get transferred more than 50 miles from where you bought, they would pay the difference in what you owe. I bought it for $240K, sold it for $126K. I owed $225k, so they paid the $99k I owed. No hit on my credit or anything, no taxes on the $99K, etc. It was a great deal. But I lost about $30K. I put 5% down when I bought it, the tenants over the years paid less than the mortgage, and I did some upgrades (hardwood floors, tile, window treatments, etc). But, I got out of it free and clear.

I'm expecting at least a 10% drop in prices - mainly because home prices have shot up 15-25% in just the last 18-36 months. I think we go back to 2018 prices. We're still planning the move back to Florida in 21, hopefully be May or June. I'm working at the Treasury, hoping they'll let me telework 3 weeks, 1 week in the office.

 

[Concrete Helmet]

I'm not sure about all the forbearance at least in our area. Something has caused a MASSIVE push of orders over the last 3 weeks. I'm not sure if it is election fear and/or them closing out their fiscal year but our largest client is pushing hard for turnaround times....which is great other than working 7 days a week. Also still a good amount of investor selloffs which are almost all of our sales right now....

Another interesting thing I saw this week was a 15 year investment refi close at 3%...hmmmm.