Stefania Vaughan

TOPIC: Improving conditions in Denver’s market


There are some signs of strengthening in our Denver market. The metro area's inventory of available resale housing decreased 20% to 23,120 units in October from October 2007. Some of this reduced inventory is attributed to homeowners taking their properties off the market in frustration because their property is not selling, but lower inventory implies a strengthening market. Remember, the Denver area had housing inventory of 31,989 units in July 2006. Home sales rose 14% to 4,265 in September compared to the same month last year. This is due almost entirely to the lower-end of the market (under $180K) selling like hotcakes. October's median selling price for single-family homes decreased 12% to $206,000 from the same month of '07, and was down 4.7% from September's median of $216,150. Median selling price for single-family homes dropped 10.5% to $222,000 through October, from $248,000 through October '07.Prices are still falling, but at a slowing pace. This trend should continue into 2009 when it is expected to bottom out and slowly climb back. Hang on, it's gonna continue to be a wild ride!

A lot of clients ask me how to figure out what market rents are in a neighborhood. This is a critical input into the calculations an investor needs to make in order to determine what their return on investment will be on a rental property. So you don't want to screw this up! Unfortunately, this is one of the many figures new investors get wrong.

One place people go to get rents is Rent-o-Meter. Rent-o-Meter is billed as an online resource to get accurate market rents. In my experience it is anything but! However, I have a fairly simple solution. Multiply what you see on Rent-o-Meter by 80% and you'll probably be close. I can't explain why but I find rents on Rent-o-Meter to be about 25% high, so multiplying their rents by 80% will get you close (do the math, it works out).

So then, how do you get market rents? Simple: start at the subject property and drive concentric circles around the neighborhood. Call every For Rent sign you see (if you don't see any this is a good sign!). Interview the landlords. A subtle but telling sign is how polite the landlords are on the phone. If they act overly solicitous and desperate it's a sign that vacancies are high and they're desperate to get tenants - not a good sign for you. If they are breezy, abrupt, and even rude, that's GREAT! It means they have too many phone calls for their vacancy and it's a strong landlord market. This is what you want to hear!

In many neighborhoods around town today this is exactly what you'll find. I know. When the vacancy rate was 13% a few years ago I was very nice over the phone. Now that it's 4%...well, a little less nice. Nothing like good -ol' market research.

The talk around the water cooler these days is all about LOANS. Who can get them? At what price? What if I already have a few loans, do I still qualify? A year or two ago the question was at what price do I get a loan (those were the days!). Today it is "am I still in the game?"

Here's the deal: if you have an owner occupied loan and 3 investor loans you cannot buy any more properties and get Fannie Mae / Freddie Mac financing, meaning you can't get a conventional 30-year fixed loan. Now, my hope is that someone reads this and tells me I'm wrong. That would be great! But as far as I know that is the case.

Where does this leave you? You can pursue loans that are warehoused by lenders, meaning they are not sold on the backend to Fannie or Freddie. You are probably looking at a minimum of 20% down but more importantly it will be almost impossible to get a 30-year loan. But a 5/1 ARM is not out of the question. (Lenders, please start a dialogue here and let folks know who has what products available.) There is also Hard Money available. I met with a group of high-end Hard Money lenders today to discuss options and the consensus is that they are proceeding...but with extreme caution.

A final version is to contact smaller local lenders. You'll need 25% down, but if your story makes sense, you'll get your loan - and usually at an attractive rate. Let me know what your situation is and I'll try to refer you to the right person.

A few weeks ago, the first part of this series, "Getting Started", http://activerain.com/blogsview/684869/Investing-in-Real-Estate-Getting-Started-1 gave you an overview of the eight different types of real estate investments. Today we are going to learn more about this category.

What this investment is: Purchase of a residential property to be rented out to tenants, usually on a 6-12 month lease term. This is how most new landlords get started. You can hire out all of the property management functions, but in many cases you will do many of them on your own. There are smaller down payment requirements than for larger rental buildings. The purchase process and financing process is very similar to what you experienced buying the home you live in now. It's a great way for beginners to get started.

Equity needed: Currently 20% - 25% Downpayment. In some cases you might be able to do it with 10% down, but expect the second mortgage to be at a higher rate. While Freddie / Fannie lenders might only let you have four loans, smaller local lenders will let you have more than that if you have strong credit. Contact me and I'll put you in touch with the right people.

Importance of credit: Very important. A 720 FICO score would help a lot. Being able to document your income and your assets will be critical.

Importance of experience with contractors: Some exposure would be helpful, but you are not likely to encounter construction projects any more difficult than you have maintaining your own personal residence.

Important of experience with property managers: Not important; the majority of our clients manage their own rentals when they get started. We run classes on how to do this from time to time. Go to http://www.yourcastle.org/events.cfm to see when the next session is.

A few weeks ago, the first part of this series, "Getting Started", http://activerain.com/blogsview/684869/Investing-in-Real-Estate-Getting-Started-1 gave you an overview of the eight different types of real estate investments. Today we are going to learn more about this category.

What this investment is: Purchase of duplex, triplex or quadplex to be rented to tenants, usually for 6-12 month terms. Usually what the rental home / condo landlords graduate to. In most markets they cost a little more than a rental home, but are much more likely to cash flow on the average month. Less cash flow risk; if one unit is empty you have other tenants that still help you with the mortgage payment so it doesn't all come out of your pocket. Many owners will start to delegate some of the property management tasks to an on-site assistant (typically the most responsible tenant), such as yard maintenance and showing empty units. The financing process is only slightly more involved than a residential loan. Relatively small down payment requirements make it affordable. The purchase process is also very similar to purchasing a home. It's a good way for beginners to get started.

Equity needed: 20% - 30% down would be typical.

Importance of credit: Very important. A 720 FICO score would help a lot. Being able to document your income and your assets will be critical.

Importance of experience with contractors: Some exposure would be helpful, but you are not likely to encounter construction projects any more difficult than you have maintaining your own personal residence.

Important of experience with property managers: Not important; the majority of our clients manage their own rentals when they get started. If you get a property manager, you'll be able to figure it out easily on this small of a scale. We run classes on how to do this from time to time. Go to http://www.yourcastle.org/events.cfm to see when the next session is.