Here is the Nelsonian Theory on things to do RIGHT NOW….

1.  Evaluate your investment portfolio

a.  What is your ANNUAL YIELD:

i.  for each property

ii.   for the entire portfolio

b.  What is each property doing for you?

Restated: Why own it?

c.  Would performance be enhanced by refinancing it?

Restated: Do you have any interest only loans or variable rates loans that will adjust soon and have an impact on cash flow

d.  What is the “runt of the litter”?

i.  Should you hold it or trade it off?

ii. Can use it as a “down payment”

2.  Evaluate your LIQUIDITY (“staying power”)

a.  Make sure you can survive

b.  3-6 months of “survival number” or an extremely safe life of credit

3. Consider buying “foreclosures” and “the walking wounded”

Fannie Mae (FNMA) has a special program called Home Paths which allows an Investor to purchase a FNMA repossessed property and finance it with as little as 10% down payment. Special restrictions apply so check with you a knowledgeable lender regarding the financing options.

These special financing programs will not last forever!!

Several new loan programs are available for “residential” rental properties. A “residential” property is one that does not exceed four units in size. Thus, a house, duplex,triplex or fourplex would qualify.

Basic Concept: The Cash Flow ARM

The lender makes a loan that has four repayment options. With each monthly payment, you get to select the payment option that makes the most sense to you.

Payment Option One: Make a monthly payment that would amortize the loan over 15 years. If you consistently select this payment option, you will own the property free and clear of debt in 15 years. Own enough of these rental properties free and clear, and you are the cash flow master of your own destiny! People will call you the real estate guru!

Payment Option Two: Make a monthly payment that would amortize the loan over 30 years. The size of the monthly payment will be less than that of a 15 year loan repayment term, but is still paying off the loan (if that is important to you).

Payment Option Three: Make a monthly payment that only pays the interest that has accrued since the last payment. This repayment option will result in an even smaller monthly payment than the 30 year loan repayment option. If you consistently use this payment option, you will still owe as much money as the day you put the loan on the property.

Payment Option Four: Make a monthly payment that only covers part of the lender’s requiredyield. The remainder of the unpaid interest payment is added back to the loan balance. If you consistently use this payment option, the loan balance will increase with each passing month. If the loan grows to 115% of its original amount, then the lender will require that the loan be re-amortized to avoid a potential financial catastrophe. However, it does allow you to own the property with the lowest possible monthly payment, and either the highest possible cash flow or lowest possible negative cash flow.

The Thought For The Day…

With Payment Option Four (the one that causes the loan to increase over time), what happens if the property increased in value by 15% and the loan balance increased 1% this year? I think you are the big winner in this game of equity growth!

This is a great option for those who are looking to buy fixer properties, and then hold them vacant while they are up-grading the property. You are a winning with this program!!

WHAT DOES THIS ALL MEAN?

1. Lower exposure to negative cash flow.

If you want to acquire a property using maximum leverage…. restated, if you wish to make your down payment buy as much property as possible, then this program may have high interest to you.

Buy a large property, but still have tolerable cash flows.

2. More property means more value appreciation.

Q: If property values increase at 10% to 15% or more per annum, then how much property would you like to own?

A: As much as possible…. if I can control my exposure to negative cash flow.

ARE THERE RISKS IN USING THIS PROGRAM? ABSOLUTELY!

If you select the lowest allowed monthly payment plan, then you are trading off cash flow against equity growth.  This may not be a big deal if you only plan to own the property to capture its high rate of value growth. However, what if the value appreciation rate in your area starts to flatten or even fall?

You can find that an increasing loan balance is gobbling up your invested equity.

But, as you see this start to happen, you can still either refinance into a more conventional program, or even sell the property to someone else. Market changes do not have to produce a terminal result. Just keep your head down and your eyes open as you go.

THINK THIS MAY FIT YOU?

If this loan program has intrigue for you, then contact Rene’ Nelson.

It pays to deal with the best… those who understand all available options.

First Problem: Prices have increased much more rapidly than have rents. Prices are increasing and investment returns have dropped.

Second Problem: It has become too easy to buy those small rental properties. First: Mortgage
interest rates for those small rental properties (houses, duplexes, three-plexes and four-plexes) are extremely attractive. Second: Residential lenders allow purchases to be made with very small cash down payments.

Result: Many small rental property investors have been lulled into a false security when buying smaller rental properties. They are attracted by big price increases, but they are not paying much
attention to the bottom line performance of the property.

Concern: Rents for smaller rental properties have not increased much in the past three years. First time homebuyers have moved out of rentals and into homes of their own. New apartment complexes have increased the supply of competing rental units. Consequently, vacancy rates increased substantially in that same period. Only recently have vacancy rates dropped to a point where rents can be increased without a fear of a move-out disaster.

Point: The extremely high available leverage generates the opportunity for even greater negative cash flow even in more normal times. However, the inability to increase rents has resulted in some serious negative cash flow for small property investors.

BIG QUESTION: How Do You Cope With Negative Cash Flow?

You have several choices:
1. Sell one or more of your properties. Then use the net equity as a cash flow reserve to cover other negative cash flow properties. While this will eliminate the negative cash flow, this is not very exciting. Without property, your net worth will not grow as quickly to a point of financial independence. Keep the properties, and you will need a second job to support your investing habit.

2. Increase your rents. This is only really possible when other landlords for similar properties are doing the same thing. If you move substantially ahead of the market, you will increase your probability for vacancy, and even more negative cash flow.

MORE REASONABLE SOLUTIONS

1. Set a cash flow reserve from the on-set. There are several options:

a. prepay several months of mortgage payments; and,
b. set a cash flow reserve equal to at least two months worth of PITI payments.

This strategy will give you at least a six month holding period, even if your income have been reduced to zero.

2. Seek out a trusted person to become your tenant-in-common “joint owner” in the negative cash flow property. In lieu of a cash down payment, your co-investor will be required to make a monthly payment equal to the negative cash flow.

This strategy will allow you to retain a large portion of the property, while eliminating the negative cash flow during the holding period.

3. Refinance your loan will more attractive repayment terms. Rene’ Nelson is our go-to source for residential mortgage loans for rental houses, duplexes, triplexes and fourplexes

FOR THE LATEST INVESTMENT PROPERTY LOAN PROGRAMS

Contact:

Rene’ Nelson, CMPS
Certified Mortgage Planner Specialist
Pacwest Mortgage Group, LLC
Direct: (541) 912-6583
rene@1031guru.com