Low Risk Real Estate Investing

Issue 3 • Summer 2010

Hiring On-Site Managers That Work on Saturday

Paying Down Debt

is a Good Investment

Buy With Little or no Competition

7 Reasons Real Estate Investment

Property Values Drop

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In evaluating opportunities you have to analyze the potential debt that you are going to obtain along with the pur-chase. There is friendly debt and un-friendly debt. Always ask yourself what

is the potential downside of an oppor-tunity. Deals can always go sour. What if your deal goes wrong?. If you have a recourse loan, one of the things that can go wrong is that you can not only

lose your original investment but you may also have an obligation to make the lender whole from any losses, and costs associated with lenders losses.

If you have a choice between non recourse, and recourse, of course you would always choose non recourse. Deals that are highly leveraged and that are also recourse loans are po-tentially extremely risky. If you are going to obtain a recourse loan make sure that there you have good equity in the deal, and that there is good cash flow, and that there is minimal risk in the deal going south. You also want to make sure that the lender is giving you a good reason to sign a recourse loan. You better negotiate a very good rate and terms because on multifamily in today’s market there are options for non recourse loans at attractive rates, and terms.

In conclusion avoid recourse loans, by doing so you do much to protect yourself, your family, and your investors from potential future losses. p

2 3Apartment Market Digital • Summer 2010 Apartment Market Digital • Summer 2010www.apartmentsforsale.com www.apartmentsforsale.com

Avoid Recourse Loans

Buy With Little Or No Competition

7 Reasons Real Estate Investment Property

Values DropI prefer to buy apartment buildings with little or no competition. Proper-ties that are on the open market are usually overpriced or they are bid up. I prefer to write offers on properties that are not listed. I have found that I get a better price on the properties. Recently foreclosed properties present a great opportunity to write an offer. You know the lender is going to want to sell the property. Why not contact the real estate owned department of

the lending institution and see how much they want for the property prior to it being listed. If you can save the brokerage fee you may have just cut 6% off the purchase price.

Also follow who is selling proper-ties. If you notice a particular owner is actively selling. Do a little research. Find out what else they own. Find a property you are interested in pur-chasing. And then contact the seller regarding your offer.

A property not exposed to the mar-ket will typically result in a better price for the buyer. Investments in real es-tate are all about buying at the right purchase price, at the right time, and in the right location. Purchasing a prop-erty that is not exposed to the market will help you obtain a better price. p

Money, of course, is the primary mo-tive for real estate investing. Wealth is the essential reason why people invest in real estate, and typically the first thing people think of when they con-sider owning investment real estate is profitability.

One of the advantages of owning rental property is that income gener-ated from rent can be quite consider-able if a property is bought and man-aged correctly. If a real estate investor doesn’t overpay for a property, keeps expenses down, the apartments rented, and the building well maintained, a real estate investment can generally make the investor money even while the in-vestor sleeps!

Notwithstanding, there are there factors that can cause a real estate investment to lose value. Moreover, not unlike a perfect storm of colliding fronts, it can have a drastic effect upon a rental income property’s ability to generate profitability, despite the in-vestor’s efforts.

In this article, we will look at the sev-en worst contributors to the deteriora-tion of rental property value.

1. Neighborhood DeclineThe community surrounding the in-

come property can change in a variety of ways that adversely affect your in-come property. Increasing vacancy, for instance, can lead to reduced rents, which in turn means reduced mainte-nance causing building deterioration, in turn causing the whole neighborhood to slip into decline and therein triggering a domino effect that simply compounds

the problem. The nearby construction of facilities such as sewer treatment plants and airports will also likely have an adverse effect on the area. Also, per-haps more subtle and slower in coming, is a decline due to increased crime, per-haps resulting from an adjoining neigh-borhood spill over.

2. Impact of Adverse Infrastructure

The impact of being directly under the flight path of aircraft, for example, can have a negative impact on a prop-erty’s ability to attract (or keep) ten-ants. Likewise, construction of a major highway or intersection can limit access to the property, and cause noise and dirt by the construction to drive ten-ants out. Perhaps the result may be an increase in your investment real estate value, but construction can take up to a year or more and during that time you can expect your real estate investment value to drop.

3. Controls and RegulationsGovernmental controls and regula-

tory changes to zoning can adversely impact real estate investment property. Real estate investors that purchase raw land for development, for instance, can see their plans grind to a halt because of a building moratorium or anti-develop-ment sentiment. All of which, of course, results in a plummeting value.

4. Wear and TearSooner or later things like air and

heating equipment, roofs, electrical and plumbing, hot water heaters and boilers wear out and require maintenance and/or replacement. If not properly main-tained, the value of the investment real estate is reduced by the economic ob-solescence (out-of-date) items.

5. Supply and DemandTwo major factors of supply and de-

mand causes real estate values to go down: overbuilt and tight money. Over-built is straightforward. With multifamily property, for instance, overbuilt would imply that there are many more apart-ment units available to rent than there are tenants to rent the units. In this case, when new construction gluts and an overbuilt situation occur, the market can decrease quickly and stay down for a long time. Tight money means less availability of long-term financing from lenders and therefore less qualified buyers for your rental property.

6. Lack of Proper MaintenanceA run-down property in the neigh-

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There is only seven days in a week. Many prospective tenants like to look at properties on Saturdays, because it is there day off. Yet often managers are hired to work Monday through Friday with Saturday off. A more productive schedule would be to give one of your managers Sunday and Monday off, and have them work on Saturday.

Keeping a high occupancy is important is raising revenue and increasing the value of your apartment building. By having a manager available on Saturday’s to show units will increase your showings, and your likelihood of renting units and having a higher occupancy.

The law of averages will work on your side by having your manager work on Saturdays. The more showings will translate into more rentals. More rentals will translate into higher revenue and an increased value to your property. After your apartment building is filled you will then be able to start raising rents. Raising rents will also increase the value of your apartment building.

Hiring onsite Managers that will work on Saturday

4 Apartment Market Digital • Summer 2010 www.apartmentsforsale.com 5Apartment Market Digital • Summer 2010www.apartmentsforsale.com

Low Risk Real Estate Investing

If you can eliminate the downside when investing, the upside is great! When it comes to any kind of investing the first rule is to not lose your original principal invested. The beauty of real estate invest-ing is that you can use leverage. Lenders will loan usually somewhere between 50-80% of the purchase price on commercial investments.

Different real estate classes have dif-ferent risk levels. According to a survey by the American council of life insur-ance’s mortgage loan portfolio hotels/motels have a default rate of 0.86, mixed use 0.83, retail 0.62, industrial 0.32,

apartments 0.29, 1-4 single family homes 0.28, and lowest rate of foreclosures is tax credit properties at 0.03.

Affordable housing has the least chance of being foreclosed upon when compared to all real estate classes. So if you don’t want to lose your original in-vestment, where should you invest? The answer is affordable housing.

There is difficulty owning and manag-ing affordable housing. Affordable hous-ing is built usually with low income tax credits. As a result there are restrictions that apply to the property. Owners and managers that operate low income tax

credit properties have to stay in compli-ance with the restrictions or there are se-rious consequences.

A real estate investor that wants to take advantage of the low risk investment of affordable housing can partner with experienced managers/owners of low income tax credit properties. Preferred Capital Management, Inc. owns and op-erates affordable housing in the western united states. If you are interested in learning more about the opportunity of investing in affordable housing, please contact Darrel Dickson with Preferred Capital at 1-888-441-7355. p

If you have outstanding debt one of the safest investments that you can make is to pay down the principal outstanding loan balance that you owe. If you cur-rently are only making 1% off of a CD from a bank, and you are paying a lender around a 6% rate, paying down debt is a great investment.

It is like getting a 6% return on your investment because you are paying less interest. The money you save is money that stays in your account.

Sometimes the best investment you can make is to pay down debt. You want to make sure that you have a good amount of reserves. Once you obtain a

comfortable amount in reserves, if you can’t find an investment you feel com-fortable making, then start paying down outstanding debt. p

Paying Down Debt is a Good Investment

Look to Purchase Properties That Have Ease of Access

I have been looking for apartment deals for so long that when I do find a deal it is a gut response. I know it is a great opportunity, and I act quickly. One of the many parameters that I filter through my analysis is the ease of access

to a property. An apartment building that is hard to find, is also going to im-pact your ability to rent.

Look for a apartment buildings that are on main streets that have easy ac-cess to the apartment complex. Ease

of access to your apartment complex is going to make your property easier to rent. Higher rents will ultimately result in greater value. p

6 Apartment Market Digital • Summer 2010 www.apartmentsforsale.com 7Apartment Market Digital • Summer 2010www.apartmentsforsale.com

Losses associated with Chinese dry-wall are affecting thousands of con-tractors, property owners and prop-erty managers, as well as their lenders worldwide. In 2009 the US Consumer Products Safety Commission received more than 3,000 reports of health symptoms from drywall produced in China. An estimated 36,000 to over 100,000 homes in 37 states may now contain the imported product. Accord-ing to ARMA Network, the problem stems from Chinese drywall sulfide gas which combines with water vapor to create sulfuric acid vapor within the built environment. Most contaminated drywall was installed between 2006 and 2007 in at least 24 and as many as 41 states. The good news for Oregon companies is that there seems to be very little exposure based on the distri-bution into Oregon. However Washing-ton and California imported significant amounts of this product. Much of the litigation has been on the east coast, however this is moving west rapidly according to many legal experts.

The exposure to risks is complex and can include, direct damage, loss of use, reduced property values, health risks,

loss of reputation, and increased legal fees. “Some trial lawyers promote Chi-nese drywall as the largest construc-tion defect issue in history affecting up to 70,000 properties.”1 Commer-cial General Liability insurance policies have significant limitations to coverage for construction defect claims. Con-struction defect losses fail to meet the coverage trigger criteria of an accident in a basic CGL policy. There are limita-tions for damages to “Your Work” and “Impaired Property” in a CGL policy. If the proximate cause of the loss is ma-terials supplied by the contractor, the effect of these “operational” exclu-sions becomes more clouded and the focus shifts to Property Damage and Bodily Injury losses combined with the various pollution exclusions that are in most CGL policies. If claims arise out of pollution, contractors will have no coverage without a specific pollution liability policy.(1)

Chinese drywall claims encompass traditional construction defect insur-ance coverage issues and then super-impose various “pollution” exclusion overtones. If you have any exposure and your policy has a pollution exclu-

sion, then a separate pollution policy should be purchased. Commercial property managers/owners may con-sider amending the insurance require-ments to include some level of pollu-tion coverage.

Homeowners and building owners should pay attention to their policy provisions as there are a number of policy conditions that will come into play. There are a number of exclu-sions that can make the coverage for defective drywall claims problematic. For example, losses caused by the fol-lowing perils are typically excluded: wear and tear, marring, deterioration, inherent vice, latent defect, mechani-cal breakdown, rust, mold, wet or dry rot, release, and discharge or dispersal of contaminants or pollutants. Recent court rulings in Florida and Louisiana have mandated that homeowner’s in-surance companies pay claims regard-less of coverage. This will be an inter-esting trend to watch.

If you would like a pollution liability quote, contact your LaPorte account executive. p

WASHINGTON - As part of the Fed-eral Housing Administration’s (FHA) on-going efforts to enhance risk manage-ment practices, Commissioner David H. Stevens recently announced plans to implement a series of changes to the multifamily insurance programs that will update underwriting policies, in-crease lender and underwriter quality, and align loan application, submission and approval standards. FHA’s Multi-family Program Office consulted with stakeholders to bring these changes to market. The policy changes announced today by Mortgage Letter 2010-21 will affect all multifamily rental programs and include the following:

Revised underwriting standards to raise debt service coverage ratios, low-er loan to value and loan to cost ratios, increase project reserves and sponsor equity investment, and limit sponsor cash out. Underwriting ratios will be targeted to different property types based on their risk profiles, with lower ratios for subsidized affordable housing properties and higher ratios for market rate properties.

Enhanced verification of property financial performance to decrease op-portunities for misrepresentation and fraud.

Expanded borrower mortgage credit analysis to include a detailed review of contingent liabilities and balloon-ing term debt that could undermine a

sponsor’s financial stability. Pre-screening of proposals for early

identification of transactions that are not feasible or are not likely to proceed to a commitment, allowing staff to fo-cus on a deeper analysis of transactions that will close.

“These are the first updates to our underwriting standards since the in-ception of FHA’s multifamily programs – some of which are over 40 years old,” said U.S. Department of Housing and Urban Development Deputy Assistant Secretary Carol Galante. “These policy changes reflect many of the lending in-dustry’s best practices and standards that have evolved in the multifamily market.”

“Today’s changes are a much need-ed step to insure that FHA multifamily programs are sound. These program updates will help us to continue serving our mission of providing liquidity to the multifamily market and decent, afford-able rental housing to our nation’s com-munities,” said Commissioner Stevens.

In addition to the changes outlined in today’s mortgagee letter, FHA’s mul-tifamily programs will be pursuing addi-tional steps to update agency standards and align the programs with the Obama Administration’s broader goals for fi-nancial oversight.

Program Changes Expected Through Additional Mortgagee Letters by De-cember 2010:

• Heightened standards for lender and underwriter qualificationsAll new and existing multifamily lend-

ers and underwriters will undergo an additional screening process to insure that they are qualified and experienced before receiving approval to participate in specialty insurance programs. Under the new policy, a separate approval will be required to offer the agency’s more complex insurance programs, such as those for new construction, substantial rehabilitation and Low Income Housing Tax Credits. Results from the Multifamily Accelerated Processing (MAP) program show that these programs demand skilled lenders and underwriters with specialized knowledge. The existing system grants blanket approval to offer the full range of FHA programs without regard to special-ized expertise. We anticipate these lender and underwriter qualifications to become effective in Fall 2010.

• Update to the Multifamily Accelerated Processing underwriting guideOriginally published in 2000, this un-

derwriting guide establishes all under-writing and processing requirements for the MAP program. The guide will be updated and revised to incorporate all Mortgagee Letters, Housing Notices, and administrative guidance that have been issued since it was first published, along

Chinese Drywall Update FHA Announces Enhanced Risk Management and Increased Oversight

Of Multifamily Lenders And Underwriters Eric Torkelson, Managing Partner, LaPorte & Associates

Changes to underwriting criteria, higher standards for lenders and underwriters, and an improved monitoring system part of enhanced FHA

Multifamily Insurance Program

borhood, if left unchecked, could drive down the values of all adjoining proper-ties. A deteriorating property, whatever the reason, will have an adverse affect on your real estate investment.

7. Pressure to SellHighly motivated sellers may reduce

a property to a bargain basement prices and smart investors watch for property owners who must sell to take advantage of the owner’s strong motivation to un-load the property. Always try to avoid ever reaching the moment when you are forced to sell.

Here’s to your real estate investing success.

James Kobzeff is the developer of ProA-POD - superior real estate investment analysis software since 2000. Create an APOD in minutes! www.proapod.com

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7 Reasons Real Estate Investment Property Values Drop

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The statements and representations made in the news articles contained in this publication are those of the authors

and as such do not necessarily reflect the views or opinions of PPI Creative.

The Apartment Market - Digital is produced monthly and is published by

PPI Creative An Oregon Corporation.

PO Box 30327 Portland, OR 97294-3327.

(503) 221-1260 • (800) 398-6751 Copyright 2009. All rights reserved.

Publisher Darrel Dickson

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888-441-7355

FHA Announces Enhanced Risk and Management and Increased Oversight of Multifamily Lenders and Underwriters with new chapters on affordable hous-ing underwriting and environmental re-quirements, and expanded chapters on market studies, commercial income and mortgage credit analysis. HUD is cur-rently revising the MAP Guide to reflect these changes in underwriting standards and will publish the Guide by the end of the calendar year.

• Standardization of underwriter’s narrative and application file contentsTo assure critical analysis of the risks

of proposed transactions by MAP un-derwriters, a standard underwriter’s narrative will be used for applications submitted under all insurance pro-grams. Currently, each lender uses its own narrative which leads to uneven and sometimes inadequate analysis of transaction risks. The new policy will also require that a standard table of contents be used to organize applica-tion submissions – a simple step toward ensuring consistent and complete pre-sentation of the underwriting materials and to facilitate efficient review of the application package by HUD staff. We anticipate that lenders will be required to use these new forms in Fall 2010.

• Loan committeeA new loan committee approval pro-

cess will align Hub and Program Center commitment authority and practice to ensure consistency in underwriting throughout the regional offices, as well as to provide a platform to share best practices. Loan committees at the Hub and National levels will provide over-sight for most transactions in the mul-tifamily insurance program, depending on loan size and a project’s number of units. These reviews by the Hub and Na-tional loan committees are targeted to commence by the end of July.

Changes Being Pursued by Rule Making Process:

• Multifamily Credit WatchIn an effort to better align lending

practices across FHA programs, an ob-jective, point-based system modeled on that used in the single family pro-gram will track multifamily lender per-formance, material violations of FHA underwriting standards and the rate of loan defaults and claims paid. The cur-rent lender monitoring system identi-fies lender violations but fails to define associated penalties. Under the new monitoring system, each lender’s un-derwriting and loan performance will be compared to that of all other lenders in the MAP program. Based on that re-view, lenders may be placed on proba-tion, suspended or could have their ap-proval terminated. The new system will enhance FHA’s ability to discover and take timely action against lenders that pose unnecessary and unmanageable risk to the insurance fund. It is antici-pated that he Multifamily Credit Watch system will be published as a proposed Rule for comment in late summer with final publication scheduled by the end of the calendar year.

In addition to the multifamily pro-gram changes announced recently, the FHA’s overall risk management func-tions have been strengthened through a number of policy changes made over the last year. The agency’s new Chief Risk Officer oversees the coordination of FHA’s efforts to focus risk manage-ment in a single division devoted solely to managing and mitigating risk to the FHA insurance fund - across all FHA programs. As announced in September 2009, changes to FHA’s credit policy fo-cused on ensuring responsible lending and risk management for FHA-approved

lenders by ensuring that lenders are ad-equately capitalized and have a long-term interest in the performance of the loans they originate.

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HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD is working to strengthen the housing market to bolster the economy and protect consumers; meet the need for quality affordable rental homes: utilize housing as a platform for improv-ing quality of life; build inclusive and sustainable communities free from discrimination; and transform the way HUD does business. More information about HUD and its programs is avail-able on the Internet at www.hud.gov and espanol.hud.gov. p

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