Debt-To-Income Ratios Will be A Huge Factor In Determining How Much House You Can Afford

Banks have really screwed things up this time. Over the past 10 years, poor underwriting controls basically gave anyone with a pulse a loan. Banks have been known to throw caution to the wind when making money comes easy in a booming real estate market. In a seller's market, foreclosures are almost unheard of because home values grow so rapidly that a profit in selling is almost guaranteed. This is how the house of cards is built before reality comes in the form of a hurricane and unleashes it's furry on all that were irresponsible with their finances.

Improper lending standards have caused so much damage to the lending industry that lenders are now forced to change the way they do business. The great gatekeeper of prudent underwriting was the Debt-To-Income Ratio. This was used by lenders to keep the borrower from getting into financial turmoil. Unfortunately, this formula was altered to such an extent, that it no longer served it's original purpose.

Debt-to-income ratios are making a comeback and in a big way. There are 2 types of debt-to-income ratios. The first is the Standard or Front-End debt-to-income ratio which measures as a percentage, all of the costs associated with your monthly mortgage payment (principle, interest, property tax, homeowners insurance, PMI, etc...) against your monthly gross income. Your monthly mortgage payment should not exceed 28% of your monthly gross income.

The second type of ratio is the Total or Rear-End debt-to-income ratio. This is expressed as a percentage as well and includes all of your yearly debt (mortgage, car note, credit cards, alimony, student loans, etc...) against your yearly gross income. Your total yearly debt should not exceed 36% of your yearly gross income.

In figuring out how much house you can afford, use the ratios I've given above to give you a realistic idea of what today's lenders will approve. This is the method lenders should have chosen when making loans through the housing boom but they chose not to. Greed and a need to compete blindly with other lenders caused the deterioration of ratios and their usefulness in protecting not only the borrowers but the lenders and banks themselves. Debt-to-income ratios will be used as a main underwriting tool for current and future lending. This will translate into less house being purchased as a percentage of available income which will in effect keep more homeowners in their home and out of financial ruin. Isn't that the way it should be?

Definition Of Terms You'll Hear Daily During This Financial Crisis

Investing and financial terms are being thrown around in the media with very few people understanding what those terms mean. Many of you are left scratching your heads when you hear terms like "CDO's" and "Credit Default Swaps". I will explain these Financial Terms and others so you can clearly understand what is being reported by the financial and investment media.

The terms I will explain include: CPM-Commercial Paper Market, CDO-Collateralized Debt Obligations, Derivative, Securitization, LIBOR-London Interbank Offered Rate, Hedge Fund, CDS-Credit Default Swap, Equity, FDIC-Federal Deposit Insurance Corp., Basis Point, Debt, HELOC-Home Equity Line Of Credit, Leverage, MBS-Mortgage-backed Security, and Liquidity.

CPM- Commercial Paper Market: This is a low cost source of cash that companies take advantage of when they have short term financing needs. This funding source is preferred over bank lines of credit because it's a less expensive means of borrowing.

CDO- Collateralized Debt Obligations: This is a security backed by fixed-income assets and underlying bonds.

Derivative: A financial instrument whose value depends on its underlying assets, such as stocks, mortgages or any tradable commodities. Stock futures and Credit default swaps are types of derivatives.

CDS- Credit Default Swap: This is a contract that is a form of insurance that a debt security will be repaid in case of default.

Securitization: The practice of packaging hundreds or thousands of individual mortgages or other assets together and then selling ownership stakes to investors.

LIBOR- London Interbank Offered Rate: This is the rate that international banks charge for short term loans to each other.

Hedge Fund: These are privately held investment funds that gather investments from rich private investors, state retirement funds, pension funds and others and use techniques to try to produce high returns, usually with high levels of debt to increase leverage.

Equity: Current market value of one's home minus the amount the homeowner owes the bank on the mortgage. With stocks, it's the ownership in a company expressed in the shares of stock one owns.

FDIC-Federal Deposit Insurance Corp.: This is a government agency that insures deposits in banks and thrifts. The insured amount has temporarily been raised from $100,000 to $250,000 per qualified account.

Basis Point: A basis point equals One one-hundredth of 1 percentage point.

Debt: The money that a person or company owes a creditor through the use of bonds or loans.

HELOC-Home Equity Line Of Credit: A line of credit secured by a home. Borrowers can draw on the line of credit, With limits set by the lender, for a fixed period, usually 5 to 10 years.

Leverage: The use of borrowed money to invest or finance operations by individuals or companies. The more leveraged a company or individual is, the more risk they take on.

MBS-Mortgaged-backed Security: A bond or security backed by a pool of mortgages which provides a cash flow based on the principal and interest payments of the underlying mortgages.

Liquidity: The more quickly or easily an asset or an investment can be sold, the more liquid it is. Checking and savings accounts are examples of maximum liquidity shy of money under the mattress.

I hope I've helped you a little in understanding what these terms mean. It can be confusing, if you're not in the financial field, to get a grasp on what's going on in financial and investment markets. We are in a full fledged recession that may have dire consequences to the average household. Education is still the key to help you navigate through this critical time in our economy.

Hurt Finances? Here's An Affordable Way To Invest In Real Estate

Many real estate investors have taken a major hit in their finances due to bad timing. These are investors who got greedy at the top of the appreciation cycle and decided to buy while home prices were at record highs. Now that they are upside down in their investments, many are walking away having lost thousands of dollars in down payments and other related costs. With so much capital being lost, it can be very difficult to take advantage of today's bargain prices.

So, how do you take financial advantage of a crumbling real estate market when your pockets are relatively empty? The answer..home builder stocks and REITs! Home builder stocks and REITs are at decade lows due to the depressed real estate market. Some builders have gone bankrupt and others are being gobbled up by bigger builders. This presents a fantastic opportunity to invest in the builders that will survive this market downturn.

The following is a list of my top 3 REITs and top 3 home builders I feel will not only survive, but will be stronger due to the elimination of some of their competitors:

REITs
1) VNO - Vornado Realty Trust - Dividend Yield = 6.34%
2) BXP - Boston Properties - Dividend Yield = 4.4%
3) SPG - Simon Property Group, Inc. - Dividend Yield = 6.65%

Stocks
1) NVR - NVRLP
2) MDC - MDC Holdings, INC
3) RYL - The Ryland Group

The above companies are trading at multi-year lows as are all companies in their sector, but these companies will survive presenting substantial upside stock and unit appreciation once the real estate market starts to stabilize. Many of them also offer very attractive dividend yields of as much as 6.65%.

Stocks and REITs are a relatively inexpensive way to participate in real estate market swings. You can buy as much or as little as you can afford without having to qualify for a loan, or deal with the expenses required to maintain physical property.

THIS IS GETTING REALLY UGLY

Whether you turn on the news or open the newspaper, it's clear there is an ever growing deterioration in the mortgage industry. Fannie Mae and Freddie Mac have been taken over and bailed out by our government. On Friday, WAMU or Washington Mutual became the largest thrift bank to fail in United States history. Remember, IndyMac Bancorp was recently seized by the FDIC and OTS a few months ago, and it was considered one of the biggest bank failures in U.S. history. WAMU, like IndyMac, did not have a problem with being well capitalized but rather they suffered a blow to liquidity after depositors withdrew BILLIONS in deposits in fear the banks would not be able to weather the financial storm.

I've talked about Fear and the damage it causes at length in my blogs, and it's clear it has reared it's ugly head again. A run on the bank, as seen with WAMU, is only considered prudent if you have amounts in excess of $100,000 that would not be covered by FDIC insurance. Depositors with $100,000 or less are fully insured by the FDIC and are not at all at risk of losing a dime. This ignorance of the deposit protection offered by the FDIC has again led to liquidity squeezes that no bank, regardless of size, can bear. Even Investment Banks like Bear Sterns and Lehman Brothers have collapsed as a result of panic withdrawal of funds.

Real Estate Investors Beware. The rules are changing as you read this sentence. If you intend to take advantage of short sales and foreclosures, know that the government is passing a $700 billion bailout for the banks to supposedly unfreeze the credit markets. You and I, the tax payers, have just been hit in the gut again by what is turning out to be a very socialist style of governing. The free market place which allows you and I to invest at prices the market will bear is about to be replaced with pricing the government feels is "fair". This basically means our government is going to buy up all of the wholesale properties from the bank's books with absolutely no other competition, at tax payers' expense. You, the real estate investor, will now have to buy at much higher prices because our government is now the "middle man" with plans to get its cut off the top. I really question the government's interference with free market capitalism.

Suggestion... buy now if you're able. I really think the profit in buying low and selling high is going to be a one man show( our government ) in the near term. The novice real estate investor is going to face a more difficult investing climate with profit deterioration on the front end of the purchase of government owned properties. Deals are available NOW...go get them before our government does.

Keeping Up With The Jones' Can Have You Living In The Dog House

Investors, as well as homeowners and renters, should live beneath their means to truly enjoy financial freedom. The problem is, many individuals and families do not, and they eventually find themselves in severe debt.

Have you ever heard of the saying "Keeping up with Jones' " ? It simply means that someone is constantly purchasing material things of equal or greater value than their neighbors, friends, or family. For example, if the neighbor across the street adds a 20 foot deck to their backyard, the individual trying to keep pace with his neighbor will add a 30 foot deck to his backyard. They are more concerned with how others perceive them financially than how financially able they are to purchase such expenditures. This kind of behavior in individuals can have catastrophic results to their bank account.

Unfortunately, I know too many people who are trying to keep up with the "Jones' " with dire consequences. These are good people with lovely families and good intentions but unfortunately "debt" could care less how nice they are. Some are losing their homes, while others are being forced to liquidate many of the adult toys they've accumulated like motorcycles, Quads, boats, trailers, etc... Many have credit cards that are maxed out and very little savings to live on. You see, "keeping up with the Jones'" is a very short lived lifestyle offering only temporary feelings of grandeur.

To avoid the pitfalls of living above your means, here are several rules you should follow:
1) You should have no less than 6 months of cash reserves (living expenses) in the bank for emergency situations like an illness or loss of employment.
2) 1/4 of your income should be used to build the fore mentioned cash reserve.
3) If you have a monthly mortgage payment, it should not be more than 1/3 of your monthly household income including any impounds attached to the mortgage.
4) With the exception of a home, you should use cash for purchases or if you use a credit card, you should pay it off in full each month. If you can't pay for things you want in full, then be patient and wait until you've saved enough cash to make the purchase.
5) Create a monthly expenditure spreadsheet. When you see what you're spending each month, you'll become more sensitive to your spending habits.
6) Invest in assets not liabilities. Assets will make you money while liabilities will cost you money.

A True Story That Raised My Real Estate Investing IQ

Back in the late 80's, I had my own business in the fitness industry before attending college. The income I was bringing in was not where I wanted it to be. I knew the Physical Therapy degree I would receive after college would allow me to expand my business and afford me the opportunity to live in a nicer home and community. While attending college, I was renting a 1,000 Sq. Ft. duplex in a lower middle class neighborhood in Los Angeles, CA. I couldn't wait to graduate from college, because I knew it would be my ticket out of the "hood".

Fresh out of college, I was looking to celebrate in a big way. I wanted a much larger home and wanted to live in a nicer neighborhood. To make that happen, I grabbed a newspaper, looked in the Real Estate Rental section and called several listings in the Hollywood Hills section. Having a celebrity clientèle, I thought I should live in the neighborhood I serviced. I found a home that appeared to fit what I was looking for and so I set up an appointment with Gordon, the owner.

When I met Gordon at the home, I was surprised at what I saw. The home was simply stunning. The home was a 4 story designer home built into the side of a mountain with a list of prior celebrity residents. I thought to myself, "how in the world did this young dude acquire this property...I need to pick his brain". I moved into the home with my girlfriend at the time and signed a lease with option to buy contract. I befriended Gordon knowing he could teach me more about investing than I already knew.

The Lease Option price for the home was $450,000. Gordon, appearing a bit embarrassed, admitted he had been offered over $800,000 for the home just 4 years earlier and didn't sell it thinking it would fetch a million dollars. Thinking it may have been a ploy to justify the $450k sale price, I investigated his story and found that indeed the home values in the area 4 years earlier were in his stated price range. When I asked him why he didn't sell the property when it fell below the 800k he had once been offered, he said, "I thought the fall in price was just temporary and that it would go back up...but it didn't...it's just continued to drop and drop". After a year of renting, I decided not to exercise my option to buy the home...a BIG mistake as you will see.

My talks with Gordon marked the beginning of my research into real estate cycles. In the process of researching cycles, my investing IQ increased exponentially. I eventually began investing using this research and profited handsomely as a result. My only regret was that I didn't exercise my option to buy Gordon's home. I kept an eye on the value of his home over the years and in 2005, the home sold for a whopping 2 million dollars.

Real estate prices go up and down in the short term, but the long term trend is always to the up side. It really pays to buy and hold real estate.

Will You Succeed Or Fail? The Choice Is Yours

There is no such thing as staying the same; you are either striving to succeed or allowing yourself to fail. Real Estate investing is centered around one primary goal...the generation of short and/or long term capital gains. The failure or success of your investing efforts will depend on several factors. Some factors are beyond your control, so your focus should be on those factors you can control. A few controllable factors include education, acting on opportunities, taking advantage of timing, keeping fear under control, and preparing for worst case scenarios.

I know a lot of people who are interested in buying property, but they just can't seem to pull the trigger to make things happen. The greatest losses of all are those from missed opportunities. Unfortunately, potential investors let fear dictate their financial decisions and missed opportunities become the norm rather than the exception. Procrastination is deadly to investing because of the importance of "timing". If you don't act on opportunities that are in your best financial interest, then you will fail to reap the rewards that investing brings.

You've heard the saying, "Misery loves company". If you surround yourself with people who are financially ignorant, you can't expect their support when your ready to make a change to improve your financial picture. They just won't understand that the end (wealth) justifies the means (investing in real estate). It's important to surround yourself with financial optimists that use objective data and not emotion to invest. It is also important that they have a track record of successful investing in up and down markets. Mentors in the game of investing are extremely valuable and their knowledge and experience can help you avoid mistakes they may have made in their past.

The ultimate decision to financially succeed or fail is on you. Get off your butt and take advantage of this depressed real estate market. Stuffing your mattress with money won't make you rich, and yields on bank savings accounts are a financial JOKE! Mortgage interest rates are about to go through the roof. If you miss this buying opportunity, you may never again have the opportunity to have the combination of low interest rates and cheap housing all in one cycle.

18% Mortgage Interest Rates Are Going To Make A Comeback

Don't believe me? Then you my friend have forgotten your history. From late 1978 through 1986 , mortgage rates were in the double digits. In October of 1981, the average 30 year conventional mortgage rate had reached a whopping 18.45% according to the Board of Governors of the Federal Reserve System.

The Question you may be asking is "Why in the world would interest rates hit 18% again?". That's an easy question to answer. To explain it in a very simplistic manner, it goes a little something like this: When home prices drop, foreclosure rates rise. When foreclosure rates rise, banks lose a lot of money and their stock price gets hammered. When bank stocks get hammered, they can fail (IndyMac for example), get acquired (Countrywide was acquired by Bank of America), or continue with operations with a focus on boosting profits to get back on track. Bank profits come from the interest rates they charge the borrower. Now put yourself in the bank's position...fewer loans are being approved due to tighter lending rules. This means fewer customers to make a profit off of. So how do you increase your profits to make up for the billions lost in the housing bust? You increase the interest rates on the limited supply of borrowers that will qualify for a loan. This equates to higher and higher mortgage interest rates with each year to come. 18% interest rates on conventional mortgages a reality? Ohhh yes! It's coming and faster than you might think.

The Prime rate on December 19, 1980 was 21.50%. According to the Wall Street Journal, the "Prime Rate"can be defined as "the base rate on corporate loans posted by at least 75% of the nation's 30 largest banks". Still think this is a far fetched idea of mine? History doesn't lie. It is what it is and I can tell you we're in for a major interest rate explosion.

The question real estate investors should ask is, "Do I buy now when rates are in the low 6% range or do I wait a little longer for a better purchase price and risk a higher interest rate?". That will be the mantra heard throughout investor circles all over the country.

Just my 2 cents: Buy now and don't wait for interest rates to hit astronomical levels. Prices are incredible right now and with current rates in the 6% range, you'd be crazy not to rap up your last few investments before the tide turns.

Investing And Failing Banks Don't Mix Well

IndyMac Bancorp was seized by the Office Of Thrift Supervision and taken over by the FDIC on Friday. This is one of the largest bank failures in U.S. history. There are at least 300 other banks that may suffer the same fate due to liquidity concerns and mounting foreclosures. Depositors are insured up to $100,000 by the FDIC, but for those with accounts over $100,000 it's bad times.

When banks fail, heightened lending restrictions from other banks tend to follow. These restrictions can have a devastating effect on Real Estate investors looking to borrow money. Fewer lending options are in the near term future as banks tighten up their lending practices. The days of exotic mortgages are over. The same can be said for stated income and negative amortization loans. I mentioned in a prior post that cash is king because cash investors don't have to worry about banks to fund their investments. With the current sign of the times, this could not be more true.

Property values are very attractive nowadays, but getting a loan is about to get really ugly as the potential for more bank failures exist. My advice to those of you interested in getting an investment loan is to get pre-approved as quickly as possible. Underwriting terms are about to change dramatically and current loan products may not be available in the coming months.

My Blog's 1 Year Anniversary

Today marks the 1 year anniversary of my Blog site. There have been 2,000 views of the site over the last 12 months. That's an amazing number of views considering it has all been word of mouth with no advertising.

To be honest with you, I wasn't sure I would be blogging beyond a month or two let alone a year. It is far more time consuming than I thought, and it doesn't help that I still type using only 2 of my fingers. Don't laugh, I'm probably the fastest 2 finger typer you'll ever know.

I plan to continue blogging in hopes that I can still offer a little insight for those looking to invest in real estate. Times are challenging now, but this is the time to take advantage of some of the best values in years.

Real Estate Cycle Trends Can Be Your Friend.

I've researched Real Estate cycles, trends, and related data for a number of years. It's fascinating to uncover the anatomy of real estate and expose what makes it tick. While doing a little research on trends, I found some interesting figures on median prices. In the United States, the median price of a home based on year was as follows: In 1960 $15,000; 1979- $50,000; 1987- $75,000; 1997- $100,000; 2000- $125,000; 2002- $150,000; 2004- $175,000; 2005- $200,000, and in 2006- $230,000. It is clear to see that real estate has been a great investment over the years, but down cycles do exist within the matrix of the ever growing up-side trend.

Throughout the course of history, there have been real estate corrections which have given back a portion of the gains made with each and every appreciation cycle. The long term trend however is always to the up side. These up and down cycles are very predictable because history details this predictability. Unfortunately, if you don't know your history, you may find yourself trapped in a cycle that can destroy a portion of your net worth.

The typical real estate cycle ratio is 5:2. This means for every 5 years of appreciation, we have 2 following years of correction. This is a very healthy part of the real estate cycle because it helps to prolong the affordability of homes. If homes only went up in value, the average person would not be able to afford the cost of homeownership. This correction also allows incomes to "catch up" with the cost of inflation thus allowing more potential homeowners to participate in the home buying process.

The most recent appreciation or "up" cycle was extremely stretched out. It technically started near the end of 1996 and terminated in late 2005 early 2006. This 10 year "up" cycle doubled the norm. One of the reasons for this record setting appreciation cycle was Interest rates. Interest rates were at 45 year lows thanks to the then Fed. Chairman Allan Greenspan who managed to keep the federal fund rate at 1%. Speculators also drove up prices resulting in multiple offers and lotteries. But what goes up does come down, and the ever growing bubble was destined to pop. By late 2005 early 2006 the signs of a correction were underway, and we have since been experiencing that which is known as a down cycle. Because we had an overextended appreciation cycle, the correction will be proportionate. This cycle if played right can be the buying opportunity of a decade because the homes are selling at 20% to 30% discounts compared to just 12 months ago. By buying in corrections, you stand to benefit from the future continuation of the median home price trend.

The Cash Investor V.S. The Leveraged Investor...Who Wins?

Other than inheritance, there are 2 main ways to acquire real estate...pay cash or get a loan. There has always been an ongoing debate by investors as to which is the better method. The truth of the matter is, both have their strengths and weakness' depending on the real estate cycle we're in. My bias is to the Cash investor methodology because it is my method of choice as it has allowed me to thrive in what has been a very difficult real estate climate for most. My Leveraged investor friends and associates have struggled in this climate and in some cases have failed to survive. For those of you fortunate enough to have a choice in you purchase method, I will lay out cases for each.

The Cash Investor: Have you ever heard of the saying, "Cash is king"? Cash is "King" and for good reason. A cash buyer doesn't have to worry about qualifying for a loan which could make or break his investment. Timing is everything and without cash, your time table is at the mercy of the lender's underwriting team and associated loan processing departments. Inversely, the seller doesn't have to worry about the buyer not being able to fund the purchase which adds a sense of seriousness and legitimacy to the Cash buyer's offer.

Cash investors who buy real estate for the purpose of generating rental income will be at an advantage over the leveraged investor due to lower overhead. If you take out a loan to purchase a rental property, you will have to come up with the monthly mortgage whether you have it rented out or not. Most mortgage payments are amortized which means the banks get their profits upfront with each and every payment (most monthly mortgage payments are comprised of 95% interest profit to the bank leaving only 5% going to decreasing your loan balance). If your rental is vacant, this money will come from your own reserves and when you include Property tax, insurance, maintenance, HOA dues, advertising, Property management fees, utilities and Misc. assessments, you can be out of pocket a pretty penny. The Cash investors in this situation have no monthly mortgage expense which allows them to save the profits the banks made on the Leveraged investor. Cash buyers can also be more competitive with their rents over the Leveraged investor since they don't have the additional monthly mortgage payment. The investor who has to get a loan will try to set a rent that covers the mortgage which may be quite high. Being a Cash investor allows far more price flexibility, and lower rents reduce rental vacancy periods which increase investor profits.

The Leveraged Investor: Donald Trump is famous for his ability to leverage (borrow) money for his Real Estate investment purposes. Although this technique has put a few bankruptcies in his file, he has managed to master the art of leverage and remain a dominant force in real estate. The idea behind borrowing other people's money to buy real estate is that you can make a profit from the sale of property purchased with the bank's money and not your own. This is a very attractive method for those investors with limited liquidity. In some cases, this is the only choice the investor has to invest in property but it must only be done when we're in an appreciation cycle. When the real estate market cycle is appreciating, money can be made if the property goes up in value enough to offset the following: Interest that you paid to the bank via mortgage payments, commissions to the Real Estate agents, escrow fees, closing costs on the buy and sell side, Capital Gains tax due to state and federal authorities, and any other costs related to the disposition of the property.

Leveraged buying in the right conditions can allow an investor to invest in many more properties than would have been possible otherwise. The profit potential can be substantial if timed right. If timed wrong though, it could lead to financial ruin. When you borrow from a lender, someone other than yourself is setting the terms of the contractual obligation. If these obligations aren't met, you could lose the property(s) to foreclosure. This is what is currently happening to investors all over the country. Putting someone else in control of your investments (the Banks) can be a blessing or a curse depending on market conditions beyond your control. I personally like to be in control over my investments making leveraged investing very unattractive for me. Time is not on the side of the Leveraged investor because payments are due the bank regardless of market conditions. If you don't have the reserves to weather the storm of market corrections and volatility, you should limit your risk by being conservative with the number of properties you buy through leveraged investing.

I believe the Cash investor wins over the Leveraged investor if the goal is to manage overhead expenses and reduce investment risk. The Leveraged investor has the potential to make substantially more money than the Cash investor due to the volume of investments that can be achieved but has a risk potential that can lead to financial ruin if the market drops in value. The choice is yours, make your decision wisely.

Picking Good Tenants Requires Some Discipline.

Finding a qualified tenant for your rental property can be a challenge at times. Although I've come close, I've never had to evict anyone from my rental properties. When talking to fellow investors about tenants and eviction, it's clear that my track record does not fall within the norm. I'd like to share with you a few guidelines I use in the tenant selection process. These guidelines may help you avoid the hassles involved in evicting future tenants.

1) One-Third Rule: People will often try to live beyond their means. The rent should not be more than 1/3 of the tenant's gross income. Requiring your future tenants to earn 3x the monthly rent will help assure consistent and timely rent payments. Tenants that live beneath their means tend to be the best tenants.

2) Landlord Reference: I've never understood the value of personal references on rental applications. Why would the applicant put down a reference that would speak badly of them? Right? References should be chosen by the landlord. You should always ask the applicant to list their last landlord as one of the references whenever possible. If the applicant can't give you this information, clearly this is a RED FLAG.

3) The Subtle Oral Interview: Liars will be very inconsistent with the things they tell you. During rental property showings, I ask many questions. Often, I will ask the same question in many different ways. It's amazing how often applicants will give you different answers to the same question. Again, another RED FLAG to watch out for.

4) Distance From Employment: Renting can often be an emotional decision for tenants and lack logic. If an applicant works 45 minutes to an hour away, there's a good chance they will tire of the drive and eventually want to live closer to their employment. This may not lead to eviction, but it may force the tenant to try to get out of their lease early.

The more common methods for assessing a tenant's qualifications such as credit score and criminal background checks are obviously useful, but the fore mentioned guidelines can be easily implemented to assess the likelihood of future problems.

You Can Bend, Twist and Skew Numbers, But You Can't Fool Me!

Turn on the news, radio, or open a newspaper and you'd think the majority of homeowners are out on the street or close to losing their homes.

Hmmm, something is very, very fishy here. You see, I like to engage in this little thing called "Fact Finding" before I get my underwear all up in a bunch. In 2007, there were 2.2 million households going through foreclosure. Now you may be saying, "WOW, that's an incredible number of people losing their homes", but what you should be asking is, "What percentage of American homeowners does that figure represent?". At the end of 2007, there were 128.6 million homes in the USA. The 2.2 million households losing their homes to foreclosure in 2007 made up only 1.7% of all homeowners. Do you see how unimpressive the true number of foreclosures are when compared to the overall number of households?

Truth in numbers doesn't make for exciting headlines, so the media will bend, twist and skew numbers to support their agenda which is sensationalism. Foreclosure numbers are just one example of how things aren't always what they seem. In 2007, 98.3% of Americans were not in default on their mortgages...WOW, 98.3%...now that's impressive, but you'll never hear or see that figure in the media. I'll make sure to give you the truth when I blog not sensationalized fiction. Trust me, there is a lot of hype out there that is presented with no relativity.

I've mentioned before that "fear" is to blame for real estate collapses. If you think a home you're interested in buying is going to be worth less next month than more, you will probably wait on the side lines hoping for a better price. When everyone interested in buying thinks the same way, this can cause a domino effect of declining prices that can snowball out of control. Now why would potential home buyers think a property they're interested in would be worth less in the future? I have the answer...they believe the ratings motivated twist on numbers put out by news sources that leave them feeling like a housing crisis is either here or eminent. This fear becomes a self fulfilling prophecy that is responsible for each and every down cycle in recorded history. There lies the opportunity for the Real Estate Investor. When Warren Buffet, arguably the greatest investor of our time, says "Be fearful when people are greedy and greedy when people are fearful", what he's saying is fear is temporary and in fearful times, the best investment opportunities lie in it's wake.

When people make their way out of the cloud of fear, it can be a very painful reality. They will have a front row seat to the price appreciation cycle that follows every down cycle and in more cases than not, they will witness their once owned property rise rapidly in value, potentially costing them hundreds of thousands of dollars in lost equity. When a homeowner buys a property for lets say $300,000 and sells it for $250,000 because of fearful market conditions, it can be very painful to see the new owners enjoy a rise in value to $400,000 or more during the following appreciation cycle. That's when the second guessing comes in and you start to get this sick feeling in the pit of your stomach. I've talked to many homeowners that have experienced the mistake of selling into fear and I can tell you it has left an indelible mark on their lives.

Don't make the mistakes others have made when it comes to your real estate investments. Do your homework and invest with facts not emotion or media twisted numbers. This will separate the successful investor from the money losing speculator.

The Questions Keep Coming

"Is it time to buy?"; "Is this the right time to invest in property?"; "Are you doing OK in this real estate crisis?"; "Are you upside down on any of your properties?"; "Should I sell my property or try to rent it out?"; "Are you buying now?".........these are just some of the questions I hear on a daily basis.

From Donald Trump to the small time investor, there is a uniformity of thought that this is the right time to buy. I wish I had a nickel for every time I've said, "Buy low and sell high". Doesn't it just make sense to buy real estate when it's substantially lower than it once was? I've said this before, "God isn't making any more land and the population is growing exponentially". This is the perfect recipe for making money.

Real estate is cyclical; it typically goes up in value for 5 years then corrects for 2 years. When I say, "corrects", I mean it gives back some of the appreciated value (usually 15 to 20%) from the current uptrend. This is actually a healthy part of the cycle because without corrections, real estate would be out of reach for the average person. Imagine if real estate went up each and every year. Homes would be in the millions making home ownership an elite only possibility. Granted, it sucks if you're trying to sell a property in a down market, but remember, if you're selling in a down market, you can purchase in the same environment which will save you thousands of dollars.

In my opinion, YES...this is the time to buy!

Investing With A Partner Can Be A Smart Move

I try to invest in Real Estate in different areas to avoid putting all of my eggs in one basket. Spreading your investments around can help you hedge against the possibility of declining value in a particular neighborhood. If you were to buy all of your Real Estate in one area, and it became a bad neighborhood over time, it could present disastrous results to your Investment Portfolio.

An Investment Partner could be the key to multi-property diversification. A partner can cut your expenses in half allowing more property deals to take place. For example, lets say you had $200,000 cash to invest. You could buy 1 moderately sized home using all of your capital or you could use the money to buy 2 small homes for $100,000 each. An Investment Partner contributing 50% of his own capital would allow you to double the number of homes in the fore mentioned example thus allowing you to spread your capital investment over a wider area. The cost of ownership is also cut in half making this type of investing attractive to those with limited cash reserves.

It is important to note that Partnerships don't always work out. It is important to find a partner who thinks the way you think. If your partner's personality is very different from your own, it could spell trouble. A plan should also be implemented so all parties know what their responsibilities are. Someone will usually take the lead due to location of the property or because they have an expertise or skill the other may not have. Accounting is a major area of importance with Partnerships. Tax liabilities are split between both parties as well as profits. Record keeping becomes crucial when 2 parties are involved.

Investing with a partner can be a smart move but make sure you pick your partner wisely.

Current Housing Unit Numbers

At the end of 2007, there were 128.6 million homes in the good ol' USA. 17.7 million of those homes were vacant, 75.2 million of those homes were homeowner occupied, and 35.7 million were occupied by renters.

Note that 35.7 million were occupied by "Renters". As I mentioned in earlier posts, people are being forced to rent as a result of losing their homes or having less than perfect credit making it difficult to buy a home. This is a factual overview that supports the notion that renting your investment property can be a great alternative to trying to sell it in this depressed market.

Rents are on the rise, and an investment in rental property now will not only allow you to capitalize on the cheap prices, but also allow you to make an 8% to 10% return annually from the rents you can now command.

Home Sales...1st Gain In Seven Months

The National Association of Realtors reported today that for the first time in 7 months, home sales increased 2.9 percent. In February, 5.03 million units sold compared to 4.89 million units sold in January. In my opinion, this is another signal that the housing correction is plateauing and an appreciation cycle is on it's way.

The Federal Reserve has been very proactive in recent weeks to help stimulate the economy. Last week, Fed. Chairman reduced the Fed Fund Rate by 3/4 basis points.

The Congress has pushed through the new Conforming loan limit which has been raised from $417,000 to $625,000. This should stimulate the refinancing sector as those with higher Jumbo rates look to reduce their interest rate to a conforming one.

If we get another increase in home sales next month, I think it'll be the confirmation that the bottom has not only been reached, but an appreciation cycle is on it's way.

Lower Home Values Have A Tax Benefit

Property Tax is based on the County Assessor's valuation of your home. Typically, Property Taxes go up each year as the value of your home appreciates, but what happens to your tax bill when property values decline? Typically, the average Property Tax bill will still go up in a declining market. Doesn't seem fair, does it?

There is a way around this unfair Property Tax increase in a declining market. Did you know that most counties have an appeal process to inform the county that your home is being taxed on an inaccurate valuation? It's true...The "Petition for Review of Valuation" form can be picked up from your local County Assessors office. There is usually a deadline to file the petition so don't procrastinate. The county will then notify you of their reassessed valuation of your property. In most cases, your property taxes will be substantially lower saving you money.

Home Rental Prices Are On The Rise

If people can't get loans to buy homes, they're forced into the Rental market...whether they like it or not!. Hundreds of thousands of potential home buyers have been shut out of the home buying experience as a result of the Sub-prime crisis. Foreclosures have forced banks and mortgage companies to tighten up their Underwriting guidelines and abandon the once sought after Low to No Documentation loan programs. Although this is quite unfortunate for those wanting to buy a home, it provides a JACK POT of opportunity for investors with homes to rent.

Over the last 12 months, I've noticed a 25% increase in the number of calls I get when I advertise a vacancy. I've also noticed an increase in home rental prices from my competitors as more and more people compete for the rental home inventory that remains. The volume appears to be coming not only from those unable to get a loan, but from those losing their homes to foreclosure.

Apartments are an option for renters, but homes offer many more advantages such as increased square footage, yards for kids to play in, and garages to park vehicles or provide storage. Rental Homes also offer renters the possibility of future home ownership through Option To Buy programs. These programs often give renters a credit from rents paid toward the purchase. Apartments just can't compete with that.

This a great time to buy an investment property for purposes of generating rental income. The added benefit will be the increased gain in property value as we move into the next appreciation cycle. This is a Win-Win situation for most investors.

The Bottom Of The Real Estate Cycle Has Finally Arrived.

Finally...the signs of a Real Estate cyclical bottom have arrived. In December of 2007 Home Builder stocks across the board hit 52 week lows. In January of 2008, about a dozen Home Builders saw their stock increase as much as 100% off their December lows. This is one of the first signs that the tide is turning. Stock Investors feel the worst has already been factored into Real Estate stocks. This psychology leaves investors seeking very attractive entry points in home builder stocks which in turn drives up stock prices.

The Federal Reserve Board, led by Fed. Chairman Ben Bernanke helped stimulate the economy by lowering the Federal Fund Rate and the Discount Rate by a total of 125 basis points in less than 2 weeks. This bodes extremely well for real estate recovery. Homeowners on the cusp of foreclosure may now refinance at lower rates which may reduce the number of inventory homes on the market. High home inventories put downward pressure on home values, so anything that reduces inventory is a good thing. There is also a move by congress to increase the conforming loan limit of $417,000 to $625,000. This will move home buyers out of higher interest Jumbo loan rates into lower interest conforming loan rates. Again, great for a housing recovery.

A cyclical bottom doesn't mean that home prices will not drift lower in some areas, but what it does mean is that the bias is to the plateauing of the market which will soon be followed by a trend to the upside. I believe the second quarter of 2009 will be the beginning of a 5% - 7% upward move in home prices. There is still a substantial number of inventory homes to work through and foreclosures yet to come, but the worst is behind us.

To paraphrase Warren Buffet, "Be fearful when people are greedy and be greedy when people are fearful." In other words, the best time to invest is when prices have been driven down by mass fear. When people are no longer fearful of continued price depreciation, values will begin to rebound. By investing during the lows of the market, you stand to profit greatly from the rebound. This is how REAL wealth is achieved. Wealthy individuals tend to do the opposite of whatever the masses are doing. I have personally benefited from this contrarian point of you, and I frequently tell friends and associates to adopt this way of thinking.