Simplifying and Automating Commercial Mortgages

/in , , /by

By Rick Tobin

Why can’t commercial lending be as flexible as residential lending? Residential mortgage lending for one-to-four unit properties has become more automated and streamlined for investors as we move forward here in the 21st century. More homeowners and investors are seeking out experienced independent mortgage brokers who may have relationships with numerous financial institutions, nonbank lenders, or private money sources. With a few clicks of a button, the mortgage professional can quickly find the best financial solutions available for their clients and get approvals within minutes, hours, or days.

Commercial property lending, on the other hand, still seems stuck in the 20th century for many commercial applicants. It can be perceived as a “good ol’ boy/girl network” in that the commercial loan applicant needs to have some sort of a long-established personal relationship with their local community banker dating back to high school, college, or as fellow members at the local golf club before their loan requests are approved. If so, will they be types of friendly handshake approvals or not-so-friendly “take it or leave it” approvals?

ADVERTISEMENT

If the commercial loan applicant is fortunate to find a banker who may consider their deal, this same banker may request that the borrower move their deposits from other financial institutions to their bank before considering the applicant’s loan request. Should the loan be rejected either quickly or months later after a rather brutal loan underwriting process that may include a footlong stack of paperwork, the disheartened customer may give up hope and not know where to turn for another lending option.

Today, non-owner occupied residential properties (one-to-four units) offered as short-term or long-term rentals, multifamily apartments (5+ units), mixed-use, office, industrial, retail, and special purpose (auto repair shops, etc.) can all be viewed as a “commercial loan” by certain nonbank lenders that don’t collect customer deposits like traditional banks. With lower loan-to-value (LTV) ranges for certain asset-based loan products, the risk of default is lower for the nonbank lenders.

Wealth Creation from Commercial Property Ownership

Let’s take a look at commercial property trends and how much wealth was created for those fortunate owners who learned that it’s much better to let their money work hard for them than vice versa:

  • The estimated total dollar value of commercial real estate was $20.7 trillion as of Q2 2021. (Nareit and CoStar)
  • By 2050, commercial building floor space is expected to reach 124.3 billion square feet, a 33% increase from 2020. (Center for Sustainable Systems, University of Michigan)
  • 72% of commercial buildings in the US are 10,000 square feet or smaller. (National Association of Realtors)
  • The typical length of a building lease in the US is three to 10 years. (DLA Piper)
  • Commercial property prices rose by 20% between May 2021 and May 2022. (Green Street)
  • An estimated one-third of industrial space in the US is more than 50 years old. (NMRK)
  • For every $1 billion of growth in the e-commerce sector, it requires an extra 1.2 million square feet of new warehouse space. (Prologis)
  • Self-storage commercial unit REITs produced a 70% market return in 2021 (REIT)
  • Approximately 69% of all commercial buyers in the US need financing to purchase properties. (National Association of Realtors)
  • Sales of multifamily apartment buildings increased by 22.4% year-on-year in 2022 (Colliers)
  • Prior to the March 2020 pandemic designation, the industrial real estate sector had grown for 40 consecutive quarters or over 10 years. (NMRK)
  • Industrial vacancy rates nationwide fell below 3.7% at the end of 2021. (Cushman & Wakefield)
  • The Inland Empire (Riverside and San Bernardino counties) in California averaged an incredibly low 1.2% vacancy rate for industrial space. (Commercial Edge)
  • California had 27 of the 50 highest office rental prices in 2021. (Commercial Search)
  • The average annual return for commercial real estate investors is approximately 9.5%. (Mashvisor)
  • For every retail unit that closes, five new stores open up. (NRF)

Technological Advances for Commercial Loans

What if the commercial lending process could be digitized, sped up, and completed on a secure online loan application with just one point of contact? Your odds of success for getting a commercial property loan approved for a multifamily apartment building, mini-storage site, or small retail center will be much higher if your financial contact person is very experienced with commercial lending and has access to numerous lenders.

Commercial loans are somewhat like giant jigsaw puzzles. While the applicant’s loan package may not fit the guidelines required at one, two, or 10 different lenders, there are other lenders that have more flexible guidelines which allow lower positive, break-even, or even negative DSCR (Debt Service Coverage Ratio) with or without income verification.

Properties with lower positive cash flow or even negative cash flow estimates will likely not qualify at a local community bank or credit union. Yet, they may qualify with other nonbank lenders that do allow break-even or negative cash flow. Some of our lending partners are asset-based lenders that don’t review the applicant’s tax returns as well as provide financing for property improvements. These types of incredibly flexible lending guidelines can make the commercial loan application process much easier for the borrower.

ADVERTISEMENT

An Imploding Financial System and Increasing Bank Restrictions

In 2008, the Credit Crisis (aka Financial Crisis, Subprime Mortgage Crisis, or Global Financial Crisis) default risks became more readily apparent as these prominent financial institutions or government entities collapsed and/or were bailed out:

  • Bear Stearns: The fifth largest investment firm in the world that was heavily invested in mortgage-backed securities, collateralized debt obligations (CDOs), and other complex securities or derivatives instruments.
  • Lehman Brothers: The biggest bankruptcy ever involving over $600 billion in assets.
  • Washington Mutual (WAMU): Largest bank implosion in US history with almost $328 billion in assets.
  • FDIC (Federal Deposit Insurance Corporation): They only held $40 billion in cash reserves at the time of WAMU’s collapse, so the government had to silently bail them out to prevent bank runs.
  • Countrywide Mortgage: Once America’s #1 residential mortgage lender that almost imploded prior to being bailed out by Bank of America.
  • American International Group (AIG): They were the world’s largest insurance company and were bailed out by the US government starting with $85 billion while growing to more than $182 billion several years later.
  • Merrill Lynch: The world’s largest stock brokerage firm at the time with $2.2 trillion under management and 15,000 brokers that was taken over by Bank of America.

A derivative is a complex hybrid financial and insurance instrument which “derives” value from underlying assets or benchmarks like interest rate direction trends. Some financial analysts have stated that the total value of all global derivatives may be somewhere within the $1,500 to $3,000 trillion dollar region. If so, these derivatives dwarf all combined global assets by a significant multitude.

Because so many banks, investment firms, and insurance companies are heavily invested in one another partly by way of derivatives, this was why the Federal Reserve, the Bank of England, and other central banks around the world had to step in and bail out these multi-billion or multi-trillion dollar financial or insurance entities, directly or indirectly through others like Bank of America. If not, the global financial system would have fallen like a dominoes chain reaction.

Later, the LIBOR (London Interbank Offered Rate) Scandal, which came to light publicly in 2012, gave us a glimpse of the sheer magnitude of the derivatives market. This financial scandal was about how certain financial institutions invested or bet on the future direction of interest rates tied to LIBOR (the benchmark interest rate at which major global banks lend to one another) while being claimed to be rigged or known ahead of time so that the derivatives bets had a better chance of success.

Several publications like Rolling Stones Magazine wrote articles about the LIBOR Scandal potentially being the largest financial scandal in world history that affected upwards of $500 to $700 trillion in global assets. The named financial institutions in various publications or lawsuits which were alleged to have benefited, directly or indirectly, in the LIBOR Scandal included Deutsche Bank, HSBC, Barclays, Citigroup, JP Morgan Chase, and the Royal Bank of Scotland.

What’s important to understand is that many of the best known banks in the world may only have a few trillion of depositor assets in their checking and savings accounts today. However, they may have exposure to upwards of $50 + trillion in derivatives. As a result of their financial exposure to derivatives, these banks may be unwilling or unable to make investment property loans to even their most creditworthy clients partly due to tighter lending restrictions that came from the passage of the Dodd-Frank Act back in 2010.

This is why mortgage brokers and their non-bank lending partners became the better funding solution for investors while “handshake deals” at local banks don’t matter as much because so many banks may be technically insolvent.

Ironically, it was claimed that delinquent subprime mortgages represented less than 1% of all financial losses related to the Credit Crisis or Financial Crisis. Rather, the complex derivatives investments that were leveraged 50+ times the original amount of investments such as interest-rate options were the root cause. Sadly, mortgage professionals and stated income subprime loans still continue to be primary scapegoats. As a result, fewer banks are willing to offer more flexible residential or commercial property loans that don’t verify income.

Value Analysis for Commercial Properties

How lenders analyze income and expenses for commercial properties can be quite complex and overwhelming. Properties that do not meet most or all of these stringent underwriting guidelines may be prime candidates for asset-based loans.

Let’s try to review and simplify some key valuation terms that lenders may consider before approving or denying a borrower’s request:

Loan-to-value (LTV): The proposed loan amount as a percentage of the estimated property value. Many lenders prefer a loan-to-value range somewhere within the 50% to 75% LTV range. For purchase deals, these same lenders prefer that their clients put upwards of 25% to 50% of the purchase price as a cash down payment, depending upon the creditworthiness of the borrower and the property type.

Net Operating Income (NOI): The NOI for a commercial property can be summed up as follows: Gross Income – Operating Expenses = NOI

The property’s operating expenses include insurance, property management, utilities, and other day-to-day costs related to maintaining the property. However, the mortgage payments are not included within the NOI calculation.

Cap or Capitalization Rate: It’s a mathematical formula used to calculate the real or projected future rate of return on a property based on the net operating income that the property generates. The lower the cap rate, the better the property. Higher cap rates, in turn, are viewed as riskier investments. Cap Rate = NOI / Current Market Value

Property values and cap rates are inverse to one another like a seesaw. Decreasing cap rates as seen with prime downtown properties that are fully occupied leads to increasing property values. Conversely, rising cap rates for older rundown commercial properties usually correspond with falling property values.

Value Estimate: The property’s value estimate can be determined by way of the following formula: NOI / Cap Rate

For example, let’s look at two multifamily apartment buildings located in different cities with the exact same NOI but cap rates that are not nearly the same:

Building 1: $160,000 NOI divided by an 8% cap rate ($160,000 / .08%) = $2,000,000 value

Building 2: $160,000 NOI divided by a 4.5% cap rate ($160,000 / .045%) = $3,555,556 value

Generally, multifamily apartment rates have the lowest cap rates for income-producing properties that aren’t considered to be residential (one-to-four unit) properties. As per an analysis for the 2nd quarter of 2022 by Real Capital Analytics and the NAR, here are their numbers:

Property Type
Apartments
Industrial
Office
Retail

Cap Rate
4.5%
5.7%
6.3%
6.3%

DSCR: The easiest way to remember the debt service coverage ratio (DSCR) is that it’s used to determine whether or not a property has positive (1.25x), neutral or break-even (1.0x), or negative cash flow (0.75x). The DSCR is the ratio of operating income that’s available on a monthly or annual basis to service or cover the monthly mortgage payment (principal, interest, property taxes, insurance, etc.). As a mathematical formula, the DSCR can be visualized as follows: NOI / Debt Service

A small retail center that generates $10,000 per month in operating income and has a projected $8,000 per month in total mortgage payments would be calculated at 1.25x DSCR because the monthly or annual cash flow is 25% higher than the debt service ($10,000 / $8,000 = 1.25x). The net difference between $10,000 inflow and $8,000 debt service outflow is $2,000. This can also be calculated as $2,000 divided by the $8,000 in debt service ($2,000 / $8,000) which equals 25% more net cash flow to arrive at 1.25x DSCR.

Debt Yield: The commercial property’s NOI as a percentage of their total loan amount. The mathematical formula is as follows: NOI / Loan Amount = Debt Yield

For example, a small industrial building owner collects $100,000 NOI each year. His existing mortgage loan balance is $1 million, so his annual debt yield is 10% ($100,000 NOI / $1 million mortgage balance).

Multiple Underwriting Approval Solutions

As you better learn how lenders analyze properties, you will clearly understand that you have more than one loan program available. Some properties and owners will easily qualify after sharing tax returns, liquid assets, profit-and-loss statements, and a detailed income and expense history for their property. Other investors, however, know that their property’s cash flow is break-even or negative, but the future upside for these properties can be tremendous after occupancy rates are pushed higher.

Many commercial property owners experienced unusually high vacancy rates in recent years due to the combination of the pandemic, skyrocketing inflation, rising tenant payment delinquencies, and increasing rates for consumer debt. If so, the income and expense numbers for these commercial properties will probably not qualify at a traditional bank.

Commercial borrowers are more likely to qualify with asset-based nonbank lenders that may not closely review the income and expense numbers for the property. The verifying of income for asset-based, nonbank lenders isn’t necessary because these loans are based more on the appraised value of the subject property and its future income potential. At a later date when the income and occupancy rates are higher while the operating expenses decline, the owner can refinance into a much longer loan term at a lower rate and monthly payment.

Remember, it’s much better to have multiple lending options available for your property purchases or ballooning loan or cash-out refinance needs than just one local bank. The more efficient and flexible the mortgage broker’s technological systems and nonbank lending sources, the more likely you will close your loan and create significant income and increased wealth.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Converting Home Equity to Cash

/in , , , /by

By Rick Tobin

The average American homeowner has the bulk of the household’s net worth tied up in the equity in their primary home where they reside. As noted in my past Equity Rich, Cash Poor article, the average US homeowner at retirement age has 83% of their overall net worth tied up in home equity (or the difference between current market value and any mortgage debt if not free and clear with no liens). As a result, the typical homeowner only has about 17% of their overall net worth available for monthly expenses.

Real estate isn’t as liquid, or the ability to quickly convert to cash, as a checking account. We can’t just go to our local grocery store and ask the cashier to deduct the full grocery cart from our debit account tied to our home’s promissory note or deed of trust. Yet, we all have to eat, so what are some ways to gain more access to cash that originate from the equity in our primary home or investment properties?

ADVERTISEMENT

Let’s take a closer look at ways to convert equity in real estate into spendable cash:

● Sell your primary home or rental properties: If so, where will you live? Are rents nearby lower or higher than your current mortgage payments if you need to move? Are there any potential unforeseen tax consequences or benefits? Will you miss the monthly rental income from your investment properties?

● Sale-and-leaseback: You find an investor willing to purchase your primary home while allowing you to stay there for months or years as a tenant.

● Cash-out 1st mortgage: Pay off some or all forms of consumer debt (credit cards, auto loans, school loans, business loans, tax liens, etc.) with a larger mortgage while possibly lowering your overall monthly expenses significantly with or without any verified income.

● Reverse mortgage: A combination of a mortgage and life insurance hybrid contract that gets you cash out as a lump sum and/or with monthly income payments to you while not requiring you to make any monthly mortgage payments. Lower FICO scores are usually allowed and minimal sourced monthly income like from Social Security may be sufficient to qualify.

● Business-purpose loan as a 1st or 2nd: A type of loan that may be tied to an owner-occupied or non-owner-occupied property for so long as the funds are used for business or investment purposes such as assisting your self-employed business or buying more rental properties. These types of loans have much less paperwork and disclosure requirements and can be funded within a few weeks with or without income or asset verification.

Declining Dollars and Rising Expenses

Although U.S. wage earnings rose 5.1% nationwide between the 2nd quarter of 2021 and 2022, the published Consumer Price Index (CPI) inflation rate reached 9.1% in June 2022 which was the highest inflation rate pace in over 40 years. As a result, the purchasing power of our dollars continues to decline while consumer goods and service prices rise too quickly.

In July 2022, credit card rates and overall consumer debt balances across the nation reached all-time record highs. This was partly due to more Americans relying upon their credit cards to cover basic living expenses to offset inflated prices.

Simultaneously, the Federal Reserve increased short-term rates a few times so far this year while making consumer debt balances more expensive. At the June and July meetings for the Federal Reserve, they increased short-term rates 0.75% at each meeting. This was the largest back-to-back or consecutive rate hike for the Federal Reserve in their entire history.

To bridge the gap between expenses and income, total credit card debt balances surpassed $890 billion in the second quarter of 2022. The increase in overall credit card debt rose 13% in the second quarter of 2022, which was the largest year-over-year increase in more than 20 years. Near the start of 2022, the average American had close to $6,200 in unpaid credit card balances as per the Federal Reserve and Bankrate.

An additional 233 million new credit cards were opened in the second quarter. This was the largest new credit card account increase in one quarter since 2008 (or near the start of the Credit Crisis). A consumer who pays just the minimum balance for a credit card with a few thousand dollar balance may need more than 30 years to pay off the entire debt partly due to the horrific annual rates and fees that are generally much higher than 30-year mortgage rates.

ADVERTISEMENT

Short-Term Cash Supplies

It would take 64.4 days for a Californian to run out of cash if they had average American savings amounts of $9,647 based upon a recent study from ConsumerAffairs.

Here’s the top 10 most expensive regions in the nation and the estimated time that it would take to run out of cash:
Hawaii (62.5)
California (64.4)
Washington, D.C. (72.1 days)
Massachusetts (73.6 days)
New Jersey (74.8 days)
Connecticut (76.3 days)
Maryland (77.9 days)
Washington (79 days)
New York (79.9 days)
Colorado (80.8 days)

Living Wages, Debt, and Wealth Creation

Another survey conducted by GOBankingRates that was published in July 2022 found that the median annual living wage, which is defined as the minimum income amount needed to cover expenses while saving for retirement, is $61,617 per U.S. household. However, the Top 14 most expensive states required much higher annual household income or living wages as listed below:

1. Hawaii: $132,912
2. New York: $101,995
3. California: $94,778
4. Massachusetts: $86,480
5. Alaska: $85,083
6. Oregon: $82,926
7. Maryland: $82,475
8. Vermont: $78,561
9. Connecticut: $76,014
10. Washington: $73,465
11. Maine: $73,200
12. New Jersey: $72,773
13. New Hampshire: $72,235
14. Rhode Island: $71,334

Nationally, the lowest required living wage income for households was $51,754 in Mississippi.

These Top 14 expensive living wage regions also share something in common in that they have some of the highest median-price home values in the nation, especially Hawaii, New York, and California. While the monthly living wages may be highest in these regions, the net worths for homeowners is probably much higher due to so many properties valued well over $1 million dollars.

Ideally, we should all focus on keeping our monthly expenses as low as possible while investing in prime real estate to boost our overall net worth. If so, you’re more likely to retire sooner rather than later while your money works hard for you (or rapidly increasing annual home value equity gains) instead of you working too hard for your money.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Inflation, Tappable Equity, and Home Value Trends

/in , , /by

Image from Pixabay

By Rick Tobin

Historically, rising inflation trends have benefited real estate better than almost any other asset class because property values are usually an exceptional hedge against inflation. This is partly due to the fact that annual home prices tend to rise in value at least as high as the annual published Consumer Price Index (CPI) numbers.

However, inflation rates that are much higher than more typical annual inflation rates near 2% to 3% can cause concern for the financial markets and Federal Reserve. As we’re seeing now, the Fed plans to keep raising interest rates to combat or neutralize inflation rates that are well above historical norms.

ADVERTISEMENT

The true inflation rates in 2022 are at or above the published inflation rates back in 1981 when the Fed pushed the US Prime Rate up to 21.5% for the most creditworthy borrowers and the average 30-year fixed mortgage rate was in the 16% and 17% rate range. Back in the late 1970s and early 1980s, rising energy costs were the root cause of inflation just like $5 to $7+ gasoline prices per gallon in 2022.

All-Time Record High Tappable Equity

Image from Pixabay

In the first quarter of 2022, the collective amount of equity money that homeowners with mortgages on their properties could pull out of their homes while still retaining at least 20% equity rose by a staggering $1.2 trillion, according to Black Knight, a mortgage software and analytics company.

Mortgage holders’ tappable equity was up 34% in just one year between April 2021 and April 2022, which was a whopping $2.8 trillion in new equity gains.

Nationally, the tappable equity that homeowners could access for cash reached a record high amount of $11 trillion. By comparison, this $11 trillion dollar amount was two times as large as the previous peak high back in 2006 shortly before the last major housing market bubble burst that became more readily apparent in late 2007 and 2008.

This amount of tappable equity for property owners reached an average amount of $207,000 in tappable equity per homeowner. If and when mortgage rates increase to an average closer to 7% or 8% plus in the near future, then home values may start declining and the tappable equity amounts available to homeowners for cash-out mortgages or reverse mortgages will decline as well.

All-Time Record High Consumer Debts

The March 2022 consumer credit report issued by the Federal Reserve reached a record high $52.435 billion dollars for monthly consumer debt spending. This $52 billion plus number was more than double the expected $25 billion dollar spending amount expectation and the biggest surge in revolving credit on record. In April 2022, the consumer spending numbers surpassed $38 billion, which was the #2 all-time monthly high.

Image from Pixabay

For just credit card spending alone, March 2022 were the highest credit card spending numbers ever at $25.6 billion. The following month in April, credit card debt figures exceeded $17.8 billion, which was the 2nd highest credit card charge month in US history.

While many people are complaining about mortgage rates reaching 5% and 6% in the first half of 2022, these rates are still relatively cheap when compared with 25% to 35% credit card rates and mortgage rates from past decades that had 30-year fixed rate averages as follows:

● 1980s: 12.7% average 30-year fixed mortgage rates
● 1990s: 8.12%
● 2000s: 6.29%

In the 2nd half of 2022, it’s more likely that many borrowers will fondly look back at 5% and 6% fixed rates as “relatively cheap” if the Federal Reserve does follow through with their threats to increase rates upwards of 10 times over the next year in order to “contain inflation” while punishing consumers at the same time who struggle with record consumer debt (mortgages, student loans, credit cards, automobile loans, etc.).

Financially Insolvent Government Entitlement Programs

There are published reports by the Trustees of both Social Security and Medicare about how the two programs are potentially on pace towards financial insolvency in the not-too-distant future. The Social Security Trustees claim that their retirement program may not be able to fully guarantee all benefits as soon as 13 years from now in 2035. Over the next decade, Social Security is calculated based upon current income and expense numbers to run budget deficits of almost $2.5 trillion dollars.

ADVERTISEMENT

As per the Trustee’s published report linked below, it’s claimed that the Social Security Disability Insurance (SSDI) trust fund may deplete its reserves as early as 2034.
Social Security report link: https://www.ssa.gov/OACT/TR/2022/tr2022.pdf

If and when the Social Security trust fund starts operating with cash-flow deficits, all beneficiaries, or Americans who receive the Social Security benefits, may be faced with an across-the-board benefits cut of 20% as suggested by the Trustees. For many Americans who struggle to get by on 100% of their Social Security benefits, the threat of a possible future reduction in amounts of 20% or more can be quite scary to think about.

The average Social Security benefit paid out nationwide in 2022 is estimated to be $1,657 per month or $19,884 per year. A 20% reduction in monthly benefits without using future inflation adjustments would be equivalent to a reduction of $331.40 per month in benefits and a new lower monthly payment amount of $1,325.60.

The Medicare Hospital Insurance (HI) trust fund is also on track to exhaust its cash reserves over the next six years by 2028, as predicted by the Medicare Trustees in their own gloomy report that’s linked here: https://www.cms.gov/files/document/2022-medicare-trustees-report.pdf

Let Your Money Work For You

Image from Pixabay

As noted in my past published articles, the bulk of a homeowner family’s overall net worth comes from the equity in their primary residence. The average US homeowner at retirement age has approximately 83% of their overall net worth tied up in the equity in their home and pays monthly expenses from just the remaining 17% of overall net worth that is held in checking, savings, or pension accounts.

While inflation usually is beneficial to pushing up real estate values at a rapid annual pace, inflation is also devastating to the value of the dollar in your pocket as purchasing powers decline. Inflation for real estate does have a ceiling level at which it becomes detrimental to housing values if the Fed starts doubling or tripling mortgage rates to slow down the inflation rates.

Equity in properties isn’t so easy to access to buy food, gas, clothing, or to pay your utilities as having cash on hand. If and when future government entitlement benefits decrease and inheritance and property taxes may increase, then being self-sufficient while earning monthly income from tenants in your rental properties or by pulling cash out of your properties near peak highs may go a long way towards allowing you to maintain the same standard of living that you’ve been accustomed to over the years.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Equity Rich, Cash Poor

/in , /by

Image from Pixabay

By Rick Tobin

As of February 2022, there was an estimated $10 trillion dollars’ worth of tappable equity in residential properties that owners can access by way of cash-out loans, home equity lines of credit, and/or reverse mortgages with no required monthly payments. The average US homeowner who retires has approximately 83% of their net worth tied up in home equity and pays their monthly expenses from just 17% of their overall net worth found in savings, checking, and/ or pension accounts.

The typical homeowner has the bulk of their individual or family net worth tied up in the equity in their primary residence where they live. It’s estimated that close to 37% of all US households live in residential properties (one-to-four units) that are free and clear with no mortgage debt. This number is approximately 5.5% higher than 10 years ago.

ADVERTISEMENT

For those Americans who are fortunate to own their own home, the massive equity gains over the past several years have likely more than offset their rising monthly living expenses. This is especially true in states like California where the median price home statewide reached close to $850,000 in March 2022. Many homeowners gained more than $120,000 in new equity gains in 12 months or less.

Rising Inflation

Inflation severely damages the purchasing power of the dollar as we’ve all seen firsthand in recent years. Many consumer product prices have risen as much as 10% to 50% over the past year alone, sadly.

Image from Pixabay

Historically, real estate has proven to be an exceptional hedge against inflation as property values tend to rise right alongside or above published inflation rate numbers like a buoy with a rising tide. In March 2022, the published annual inflation rate reached 8.5%. This was the highest inflation rate in more than 40 years dating back to December 1981.

Between December 1980 and December 1981, the Federal Reserve raised the US Prime Rate to as high as 21.5% for the most creditworthy borrowers and 30-year fixed mortgage rates hovered in the 16% to 17%+ range in order to combat or quash those high inflation rates. Here in 2022, the Federal Reserve will likely raise rates significantly yet again like back in the early 1980s in order to slow down these incredibly high inflation rates that are actually much higher than the published rates.

Falling Cash Supply

Some financial planners or wealth advisors suggest that their clients maintain at least a three month supply of “emergency” cash reserves for their clients. More than half of Americans (or 51%) surveyed had less than a three months’ worth of expense supply, according to Bankrate’s July 2021 Emergency Savings Survey. This total included 1 in 4 respondents (or 25%) who said that they had no emergency cash fund supply at all.

Image from Pixabay

A more recent January 2022 survey conducted by Bankrate found that some 56% of Americans did not have $1,000 in cash savings available to access for emergency expenses. As a result of minimal cash reserves available for many people, they are likely to use credit cards, take out personal or mortgage loans, or borrow funds from family or friends to cover their daily expenses.

Lower cash reserves also adversely affect people who are planning to lease a home. For tenants, they may need enough cash to cover moving expenses and to put up the first and last months’ rent and/or security deposit money.

For home buyer prospects, they may need at least 3% to 5%+ of the proposed purchase price to qualify for the conforming or FHA loans. With the median home nationwide priced near $400,000 in the 1st quarter of 2022, many buyers will need somewhere between $12,000 and $20,000 for the down payment and additional funds for closing costs unless the seller or other family members are gifting them some of the funds.

ADVERTISEMENT

With mortgage rates continuing to rise in recent times, the bigger challenge for many home buyer prospects is coming up with enough of a cash down payment rather than qualifying for a monthly mortgage payment that’s a few hundred dollars more per month today than several months ago.

Homeownership Trends

Let’s review some eye-opening numbers associated with housing trends across the nation as per the US Census Bureau and Statista:

  • The national homeownership rate is 64.8%.
  • There are over 79 million owner-occupied homes in the US as per Statista.
  • Approximately 65% of homes are owner-occupied and 35% are rented or vacant.
  • Real estate prices have increased at least 73% nationwide since 2000.
  • An estimated one-third (33%) of all home buyers are first-time buyers.

Mortgage Debt vs. Unsecured Debt

Debt can be like an anchor holding us back. Yet, some debt is better than others like seen with mortgage debt secured by an appreciating property. Other forms of debt such as unsecured credit cards with annual rates and fees that may be within the 20% to 30%+ range can be especially bad. The higher the rate for the debt, the longer it will take to pay it off unless the borrower later files for bankruptcy protection.

Image from Pixabay

The average American has close to $6,200 in outstanding or unpaid credit card balances, according to data released by the Federal Reserve and Bankrate. Many borrowers pay the minimum monthly payment. If so, it may take them on average more than 30 years to pay off the credit card balance in full.

With a 30-year fixed rate mortgage that may be priced near 3% to 7% (or 20%+ lower than some credit cards), the mortgage principal or loan amount decreases as the years go by and the property value is more likely than not to rise as much as the annual published inflation rate. If so, the home value may increase $50,000, $100,000, $200,000, or $300,000+ per year, depending upon the region and latest economic trends.

If inflation rates continue at a sky-high rate, then real estate investments may still be your best option as the purchasing power of the dollar rapidly falls. The future equity gains from real estate will then allow you to pay off consumer debts like credit cards, school loans, and car loans at a faster pace while your net worth compounds and grows.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Short-Term Rentals and DSCR Loans

/in , , , /by

Image from Pexels

By Rick Tobin

Over the past several years, most short-term and long-term rental property owners created the bulk of their wealth from the annual equity gains related to buying and holding their properties as values increased anywhere between 10% to 40% per year. In California alone back in 2021, it was reported that the average home statewide increased in value $11,000 per month or $132,000 for the entire year. If so, I doubt that many Airbnb or VRBO hosts collected more than $132,000 in gross or net rent profits.

Image from Pixabay

Did you know that San Diego, California was ranked as the #1 for having the highest gross revenues of any Airbnb region in the world in 2021? Please see the complete Top 10 list of the highest grossing rentals in the world later in this article.

Let’s look next at just some of the short-term rental listing companies which assist vacation rental property owners with the leasing of their properties:

  • Airbnb
  • VRBO (Vacation Rental By Owner)
  • Booking.com
  • TripAdvisor
  • Expedia
  • HomeToGo
  • Tripping
  • Homestay.com
  • Atraveo
  • OneFineStay

The prominent travel booking company named Expedia purchased VRBO back in December 2015. As a result, Expedia continues to be one of the most dominant short-term rental companies in the world.

As per published Airbnb data, here are the Top 10 states for average annual host or property owners earnings for 2021:

  1. Hawaii: $73,247
  2. Tennessee: $67,510
  3. Arizona: $60,448
  4. Colorado: $58,108
  5. California: $54,461
  6. Florida: $53,209
  7. South Carolina: $49,641
  8. Utah: $48,568
  9. Oregon: $42,964
  10. Alabama: $41,937

Image from Pixabay

If a rental property owner confides in you that he or she collected $50,000+ in gross income from Airbnb last year, this number may only represent a small percentage of their overall total revenue collected from both short-term and long-term tenants (30 days+) because they may have multiple income stream options by way of VRBO, Booking.com, or other companies that help supply them with consistent tenants. This is especially true when the property is located in a populous metropolitan region or a prime vacation getaway area like those found in San Diego, Santa Barbara, or Miami.

No Income Verification Loans for Rentals

Most real estate investors usually need third-party mortgage financing to purchase one or more rental properties even if they are very wealthy themselves. Many years ago, it was quite challenging to qualify for a rental property because you were asked to provide two years’ worth of tax returns, a detailed profit-and-loss statement, and the mortgage underwriters would only give you credit for 75% of your gross monthly rents when attempting to qualify or deny your loan request. This 75% number was due to the fact that lenders assumed that you had property management fees, vacancy rates above 0% throughout the year, and operating expenses for repairs.

As a result, that $2,000 gross rent turned into just $1,500 (75%) and many investors were later denied because few lenders wanted to lend on a rental property with negative monthly cash flow if the proposed monthly mortgage payment (principal, interest, property taxes, insurance, and homeowners association fees, if applicable) was $1,501 or higher.

Image from Pexels

Today, many investors are qualifying to purchase short-term and long-term rentals by way of non-QM or DSCR (Debt Service Coverage Ratio) programs which don’t require borrower applicants’ tax returns, W-2s, or other formal income documents to qualify. Now, some lending programs take the closest look at the subject property before determining if the rental property can at least break-even at a 1.0 DSCR number where 100% of the gross monthly rents are at least equal to the proposed mortgage payment. In these underwriting scenarios, 100% of the gross rents are used to qualify instead of just 75% like was more the norm in years past.

For a DSCR loan, it allows borrower applicants to use the market rent (actual or future, in some cases) of the property to qualify rather than the borrower’s business income. This is especially beneficial for self-employed business owners or investors who have a lot of tax write-offs and minimal net income shown on their tax returns.

Some of these DSCR program highlights include:

  • 640+ FICO
  • Up to 80% LTV
  • Available on investment properties only
  • Finance up to 20 properties
  • Loan amounts up to $2M per property

Some of my other lender programs allow negative cash-flow for rental properties up to 70% LTV for cash-out or purchase transactions while not requiring any additional income from the borrower applicant.

Airbnb Statistic

Image from Pexels

Because Airbnb is the biggest name in the short-term rental business sector, let’s review some of these shocking numbers that confirm how successful this investment property model has been for Airbnb corporate and for individual hosts or property owners.

Airbnb History

  • An average of six guests every single second check into an Airbnb listing.
  • Airbnb listings represent 19% of the total demand for lodging in the US.
  • Over 150 million people have booked over one billion nightly stays.
  • The average US Airbnb occupancy rate is 48%.
  • The average stay is 4.3 nights.

2021 Data

  • The global Average Daily Rate (ADR) was $137 per night in 2021 as compared to $110/night in 2020.
  • California properties had a much higher nightly average of $258 per night.
  • In December 2021, there were 12.7 million listings worldwide.
  • There were 2,249,434 listings in the US in 2021.
  • 356.9 million nights were booked on Airbnb in 2021.

Highest Gross Revenues Worldwide for Airbnb Properties

Image from Pixabay

Surprisingly, these populous metropolitan regions such as Los Angeles, San Francisco, New York City, Paris, London, or Hong Kong weren’t ranked #1 for being the most profitable Airbnb region in the world with the highest gross revenues. No, the honor for the most profitable Airbnb region in the world in 2021 was San Diego, California.

In 2020, seven of the Top 10 highest gross revenues for Airbnb properties were all in the US. One region that stands out is Big Bear, California, which is the best-known mountain resort community in Southern California. Listed below are the 2020 gross revenue numbers for the Top 10 regions in the world:

Compounding Wealth With Equity Gains

There are many individual or family investors across the nation who have acquired 5, 10, 15, or 20+ short-term rental properties. The bulk of their family’s net worth doesn’t usually come from the net annual rental income. No, the family’s net worth is compounding each year with double-digit appreciation rates like we’ve all seen for several years now.

To better understand how the acquisition of multiple rental properties is more likely to create the bulk of your net worth, let’s take a look at a fictional California property owner who saw each of his rental homes appreciate $11,000 per month or $132,000 for the entire year in 2021:

Investors can apply any excess net rental income each year to paying off their mortgage faster. With consistent annual rents, a 30-year mortgage or a shorter-term 5-year or 7-year interest-only mortgage with much lower monthly payments than the best 30-year fully amortizing rates can be paid off much faster as more principal is paid off with extra payments.

The sooner that your homes are free and clear, the earlier you can retire and live off of the monthly cash flow while not touching your equity gains. A fairly consistent plan of buying and holding short-term and/or long-term rental properties is a prime example of letting your money work hard for you instead of the other way around.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

The Non-Owner, No Income (NONI) Loan Solution

/in , , /by

Image from Pexels

By Rick Tobin

Are all loans second to NONI (Non-Owner, No Income) for cash flow purposes? Does your investment property give you a positive annual cash flow with or without significant vacancy rates, repairs, nonpayment of rents due to tenant moratoriums or other reasons, and costly management expenses? How many investment property owners are stuck with high 7% to 10%+ private money or an expensive 30-year fixed mortgage that creates negative monthly cash flow? The NONI interest-only loan or fully amortizing loan with 7, 10, 30, and 40-year fixed terms is an exceptional financial choice.

NONI Interest-Only Loans

First off, can you afford your monthly mortgage payment? Without positive cash flow and the ability to pay your mortgage payments on time, your investment properties may be at risk for future forbearance, loan modification, or distressed sale situations where you could later lose your positive equity in a future foreclosure. The combination of positive cash flow and compounding equity gains should be the primary goal for investors instead of having unaffordable mortgage payments.

Here’s some eye-opening NONI loan products highlights that keep customers coming back for more NONI products, especially if the investor owns 2, 5, 10, or 20+ rental properties:

  • Starting interest-only rates as low as 3.875%*
  • Designed for business purpose 1-4 unit residential loans in most states
  • No income or employment collected on the loan application
  • Loan amounts to $3.5 million for non-owner properties
  • No 4506-T, tax returns, W-2s or pay stubs
  • Qualification is based on property cash-flow, NOT borrower income
  • First time investors allowed
  • Multipurpose LLC allowed
  • Unlimited cash-out up to 75% LTV
  • As little as 0 months reserves (use cash out for reserve qualifications)
  • NONI doesn’t care how many properties a borrower owns
  • The lower I/O payment (when I/O option is chosen) is used when calculating DSCR and cash reserves
  • 85% LTV available for purchase and rate/term transactions (680+ FICO)
  • Rental income is taken from an existing lease or the rent survey from the appraisal and compared to the mortgage payment to determine debt coverage ratio. (all program guidelines and rates subject to change and qualification)

For traditional loan programs, many lenders will take 75% of your gross rents to qualify for a new mortgage loan because the lender assumes that you have vacancies, repairs, and property management fees. For easy math, a rental property with $1,000 per month in gross income is underwritten as if it were $750 per month and another pricier property with $10,000 per month in rental income is analyzed as if it were $7,500 per month.

Image from Pixabay

For NONI, on the other hand, you can qualify at 1.0 DSCR (Debt Service Coverage Ratio) or break-even levels. For example, your rental home averages $2,000 per month, so your newly proposed mortgage payment (including property taxes, insurance, and homeowners association fees, if applicable) must be equal or lower to that same gross rental income. As a result, it’s much easier to qualify for a NONI loan product than any other residential mortgage loan that I know of today.

30-Year Fixed vs. 10-Year Interest-Only

A 30-year mortgage payment doesn’t usually begin to pay down any significant amount of loan principal until after the 7th year. The average mortgage borrower keeps their loan for nearly 7 years, so an interest-only loan product can be a much more solid choice today for many borrowers.

Let’s compare the fully amortizing 30-year fixed payment with a 10-year interest-only payment with cash-out options to see the difference for the same 3.875%* rate:

Loan amount: $250,000
30-year fixed rate payment: $1,175.59/mo. (principal and interest)
10-year fixed interest-only: $807.29/mo.

Loan amount: $500,000
30-year fixed rate payment: $2,351.19/mo. (principal and interest)
10-year fixed interest-only: $1,614.58/mo.

Loan amount: $750,000
30-year fixed rate payment: $3,526.78/mo. (principal and interest)
10-year fixed interest-only: $2,421.88/mo.

Loan amount: $1,000,000
30-year fixed rate payment: $4,702.37/mo. (principal and interest)
10-year fixed interest-only: $3,229.17/mo.

Loan amount: $2,000,000
30-year fixed rate payment: $9,404.74/mo. (principal and interest)
10-year fixed interest-only: $6,458.33/mo.

Loan amount: $3,000,000
30-year fixed rate payment: $14,107.11/mo. (principal and interest)
10-year fixed interest-only: $9,687.50/mo.

*APRs from 4.79%: The 10-year fixed loan converts to an adjustable for the remaining 20 or 30 years with 30-year and possible 40-year loan term options. There are also 30-year and 40-year fixed interest-only loan programs at higher rates (all rates and programs subject to change)

Increasing Inflation and Rates, Decreasing Dollar Value

The more money that is created together between the US Treasury and Federal Reserve, the lower the purchasing power. Inflation can severely damage the purchasing power of the dollar while generally benefiting real estate assets.

US M1 Money Supply (February 2020): $4 trillion
US M1 Money Supply (March 2020 – October 2021): From $4 to $20 trillion

Image from Pixabay

Or, 80% of today’s M1 Money Supply, or an additional $16 trillion dollars in circulation, was created within just 22 months (March 2020 to October 2021).

Most Americans create the bulk of their family’s net worth from the ownership of real estate, not hiding cash under their mattress or holding stocks or bonds. Inflation is also a hidden form of taxation. One of the best ways to offset weaker dollars is to buy and hold real estate as a hedge against rising inflation while also generating monthly cash flow.

Today’s younger investors may not remember 10% to 20% fixed mortgage rates from years past. If your rental properties are losing money at a 3% or 4% fixed rate today, then any future properties purchased with higher rates will lose even more money unless you select a much more affordable interest-only loan product.

Let’s take a look next the average published 30-year fixed rate for owner-occupants who qualify with full income and asset documentation by decade:

● 12.7% in the 1980s
● 8.12% in the 1990s
● 6.29% in the 2000s
● 4.09% in the 2010s

The common link between each of these decades was that perceived inflation risks were usually a core reason why the Federal Reserve increased interest rates in order to quash inflation. Today’s published inflation rates are at 40-year highs. Yet, they are still underreported and are actually much higher as partly noted by annual used car prices rising almost 48% in just 12 months near the end of 2021.

Doubling Asset Values

If you keep the old Rule of 72 (how long it takes to double an asset value by the annual gain or interest return projections) in mind with rising inflation trends continuing to boost housing prices, you will clearly see the potential to boost your net worth. For example, a home doubles in value based upon the gains such as a 7.2% annual increase that will take 10 years for the home to double in value (72 / 7.2% = 10 years).

Image from Pixabay

Between November 2020 and November 2021, it was reported that the average home price, including distressed properties, increased more than 18%. If that home price gain trend continued at the same annual pace, the average home price could double in value every 4 years (72 / 18 = 4 years). In many pricey coastal regions, homes have appreciated 30% to 35%+ per year over the past few years. As a result, many investors have seen their home values double in just two or three years.

As rates are more likely to increase than decrease in the future, the interest-only loan products that can be fixed for 7, 10, 30, or 40 years make more sense from a cash flow and peace of mind standpoint.

While NONI keeps your payments low, your net worth may be boosted sky high as the soaring inflation trends continue and properties may double or triple in value!

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Forbearance Bailouts and Refinances

/in , /by

Image from Pexels

By Rick Tobin

The 2020 and 2021 years have been two of the most unusual time periods in world history, especially for the real estate sector. For example, millions or tens of millions of homeowners and tenants have been severely delinquent with their mortgage and rent payments while unemployment numbers rose incredibly high. However, home values have absolutely skyrocketed to all-time record high annual percentages and prices.

How is it possible for us to see record delinquencies with or without approved forbearance (“no mortgage payments paid and the lender agrees not to foreclose”) or loan modification agreements in place and record price growth at the exact same time? Don’t these two opposing situations contradict one another in a cognitive dissonance sort of way? In past years, record mortgage delinquency numbers would typically cause declining property values nearby because these home delinquencies or foreclosures would become the latest lower sales comparable for the neighboring homes.

The true irony of record delinquency numbers is that most homeowners created much more equity in their properties by just sitting there and not making any mortgage payments. As reported by CoreLogic’s Homeowner Equity Report, the total US homeowners’ annual equity grew $2.9 trillion between the second quarters of 2020 and 2021 with an average individual mortgage borrower’s gain of $51,500 in just one year. A deferral of 12 months’ worth of $2,000 per month payments that totaled $24,000 would still be less than half of the new equity gains.

Image from Pexels

In this article, you will learn about how you can refinance out of a forbearance or loan modification plan instead of losing all of your equity in a future foreclosure sale. For most American families, the bulk of their net worth originates from the equity in their owner-occupied residential property (single-family home, condominium, townhouse, duplex, triplex, or fourplex), so this topic point is quite relevant to millions of people today.

Let’s review next some of the most mind-blowing delinquency data that’s been published here in 2021:

$833 Billion in Unpaid Mortgage Balances

  • An estimated 15 million people lived in households that owed more than $20 billion in unpaid rent as of July 2021.
  • 7.43 million rental property units were not current.
  • 5.95 million owner-occupied housing units weren’t current.
  • 8.71 million lived in owner-occupied homes where the homeowners have little or no confidence in their ability to pay their mortgage.
  • 12.71 million lived in rental properties where the heads of household had little or no confidence in their ability to pay their rent.
  • Serious mortgage delinquencies were up 20% in July from June and were the highest recorded since 2010.
  • By mid-August 2021, 3.9 million homeowners were in active forbearance, which represented 7.4% of all mortgages nationwide and $833 billion in total unpaid principal.
  • An estimated 11.6% of all FHA and VA loans were in active forbearance.

Sources: U.S. Census Bureau and Black Knight Mortgage Monitor

How Hyperinflation Creates Wealth

Most people should know by now that historically low mortgage rates for borrowers is one of the main reasons why real estate values have boomed since 2013, depending upon the region. The vast majority of homeowners need third-party loans to buy their properties. Over the past decade, a very high percentage of homebuyers purchased their homes with 0% to 3.5% down payments with or without their own personal funds for loan programs like FHA, VA, or conforming that allowed gifted funds from family or seller credits.

Image from Pixabay

Historically, 7-year to 10-year boom cycles for real estate have been the norm. Yet, we haven’t seen significant price drops in a major metropolitan region, state, or across the nation. Do we still have at least another few years of potential double-digit home appreciation growth in our future or not?

Few investments have been a better hedge against inflation than real estate. On an annualized basis, home values generally increase in value on average at least as high as the published annual rates of inflation. The Federal Reserve must continue to keep rates artificially low or they may risk causing the housing bubble to pop.

The Federal Reserve’s ongoing policy of Quantitative Easing (create more money to boost asset values related to housing and stocks, especially) and their lesser-known Operation Twist policy (the simultaneous buying and selling of long-term and short-term bonds to artificially drive down mortgage rates) that they seem to turn on and off as needed with or without notifying the general public. With record high government debt levels today, the Fed has really no choice but to keep pushing inflation higher because one of their biggest fears is massive asset deflation like seen in Japan in the early 1990s after their own Quantitative Easing program failed miserably.

Rising inflation trends for various consumer goods and services like food, clothing, cars, and gasoline are not usually viewed favorably. However, rising home values tied to meteoric inflation trends are welcomed by homeowners who see their home values rise $50,000 to $100,000+ in a year.

Year-over-year inflation trends for August 2021:

  • Used vehicle prices: +31.9%
  • Energy costs: +25%
  • Southern California home prices: +22.1%*
  • National home prices: +19.7% (a new annual US record)*
  • Export prices: +16.8%
  • Apparel / clothing: +15.52%
  • Import prices: +9.0%

*July year-over-year housing price trends

Sources: U.S. Bureau of Labor Statistics, CoreLogic, and California Association of Realtors

Forbearance and Loan Modification Refinance Solutions

A homeowner who hasn’t made a mortgage payment in several months, a year, or almost two years probably has a few options to exit out of this dire financial situation. First, they can sell the home and lease another property if their credit scores aren’t too negatively impacted.

In September 2021, multifamily apartment units reached an all-time record high of $1,558 which was an all-time record annual 11.4% increase, according to Yardi Matrix. For single-family home rentals, the monthly rents are normally much higher in the $2,000 to $5,000+ per month range, depending upon how close they are to an ocean or prime metropolitan region.

Image from Pixabay

Or, the homeowner can attempt to save their home and end their existing approved or unapproved forbearance (“no payment, no foreclosure”) or loan modification situation, and refinance with a new loan that may allow cash out, a lower rate, and better monthly payments. The mortgage companies or lenders that will consider refinancing a mortgage which is severely delinquent are likely to request that the homeowner exit out their forbearance agreement, make a few payments, and then complete the new refinance closing.

Oftentimes, a homeowner who has been in forbearance cannot provide tax returns or more formal income verification. As a result, more lenders today may consider qualifying the borrower applicant with anywhere between zero and 24 months’ worth of bank deposits while closely analyzing the averaged bank deposits. In some cases, a government-backed mortgage product may allow an almost “No Doc” loan program with a financial hardship letter that may reduce the monthly principal and interest amounts by 25%, as recently announced by the Federal Housing Finance Agency (FHFA) and the Federal Housing Administration (FHA).

For more details in regards to these new financial solutions to exit out of forbearance and loan modification programs, refinance, and save your home, please visit my website at www.realloans.com.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Homeowners’ Financial Solutions for 2021 and Beyond

/in , /by

Photo by Olya Kobruseva from Pexels

By Rick Tobin

Between 2006 and 2014 during the depths of the Credit Crisis, there were 10 million Americans who lost their home to foreclosure over this 8-year span. Within just a few months in 2020 (March to May), we’ve seen almost 50% of that 10 million foreclosure number with at least 4.7 million mortgages delinquencies. For most Americans, the vast majority of their family’s overall net worth is tied directly to the equity in their home rather than in any stocks or other investments.

The good news is that national existing home sales climbed an all-time record +20.7% month-over-month increase between May and June 2020 partly due to fixed mortgage rates repeatedly reaching all-time record lows. In spite of record unemployment claims filings, home prices are still at or near all-time record highs in most major metropolitan regions.
pexels-burak-k-187041

Photo by Burak K from Pexels

In spite of one of the most chaotic years ever in world history, national home equity grew $1 trillion in value due to the combination of historic all-time low 30-year fixed rates and unusually low home listing inventory. For example, there were 1.42 million existing homes on the market nationwide at the end of October 2020, which was a 19.8% drop compared with one year earlier. Some analysts claim that the median home price nationwide increased by a 16% year-over-year growth during the same October 2019 to October 2020 time range. In many metropolitan regions, listed homes are selling within one to two weeks.
The primary difference between now and the last negative economic time period is that more homeowners today have much more equity in their homes than back in the 2008 to 2012 years. As such, any distressed homeowners who need to sell should be able to do it rather quickly due to the strong buyer demand and record low mortgage rates.

Homeowners, Tenants, and the CARES Act

Back on March 27, 2020, the CARES (Coronavirus Aid, Relief, and Economic Security Act) was passed by Congress as a response to the worsening US and global economy due to the fallout from the ongoing virus pandemic designation. Subsequent to the passage of the CARES Act, governors in states like California and elsewhere signed mandates or legal orders that attempted to prohibit lenders from foreclosure on delinquent homeowners and landlords from evicting tenants through the end of December 2020 or January 2021 (dates subject to change).
pexels-joshua-miranda-4027658

Photo by Joshua Miranda from Pexels

Additionally, the CDC (Center for Disease Control) issued their own guidelines that referenced the possibility of civil fines and/or criminal prosecutions for any landlord who attempted to evict a delinquent tenant before the end of December 2020 partly due to claims that it may increase potential health risks for the general public. In US history, this may be the very first time that the CDC has claimed authority to directly affect landlords and tenants. In recent times, these foreclosure or eviction moratoriums have been extended to January 2021 or beyond. At a later date, these moratoriums may continue to be extended, but few people are fairly certain at this point.

Risks and Financial Opportunities

Let’s take a look below at the potential risks, market changes, and financial solutions for homeowners, landlords, tenants, and real estate professionals due to Covid-19’s impact on the economy: * Adverse Market Fees: As of December 1st, 2020, the largest secondary market investors, Fannie Mae and Freddie Mac, are scheduled to assess a 0.50% “adverse market fee” to at least all refinance (and possibly purchase) loans that are designated as “conforming” fixed mortgage rates. Generally, these are some of the lowest 30-year and 15-year fixed mortgage rates in the nation for the most creditworthy borrowers with usually very solid FICO credit scores. This market fee adjustment may increase the overall 30-year fixed rate by anywhere between .125% and .25%, depending upon the lender. * Non-conforming mortgage loans: Borrowers may consider easier qualifying non-conforming loans that aren’t purchased in the secondary markets by Fannie or Freddie which include: FHA (FICO credit score allowances in the 500 range), VA, Non-QM (Qualified Mortgage), and Private Money that may allow much higher debt-to-income ratio allowances and/or no formal income documentation requirements such as with Stated Income products (bank statements or profit and loss statements in lieu of W2s or tax returns). * Forbearance agreements: The lender agrees to postpone or delay their foreclosure actions with the delinquent borrower. Sometimes, these foreclosure postponements may last months or years.
purchase-3347053_1280

Image by Gerd Altmann from Pixabay

* Deferment: The lender agrees with the borrower’s request to delay or defer their delinquent payments until a later date. In some cases, the late payments and penalties are added years later when the loan may become all due and payable. * Loan modification: The lender or mortgage loan service company agrees to reduce the existing interest rate and/or monthly payment amount so that the mortgage is more affordable as a way to avoid foreclosure. * Loan repayment plan: Both the lender and borrower mutually agree to add unpaid delinquent payments and late fees to the existing mortgage which may slightly increase their monthly payments or increase the loan term to give the borrower more time. * Reinstatement: After the borrower and lender agree to modify the monthly payments to avoid foreclosure, the loan is removed from foreclosure status and reinstated in “good standing.” * Seller-financed sales: If the homeowner needs a quick sale to a new buyer who can effectively take over his monthly mortgage payments and give the seller some much needed cash, the seller may consider creating some type of wraparound mortgage {i.e., contract for deed or all-inclusive trust deed (AITD)} or “subject-to” property transfer in which the buyer receives the deed to the property that is “subject-to” the existing mortgage still secured by the property. * Short sale: If and when the mortgage debt is greater than the current market value for the property (aka “upside-down” mortgage), the homeowner may consider contacting an experienced local Realtor who can help negotiate a discounted mortgage payoff with the lender when they find a qualified new buyer.
keys-5238834_1280

Image by Tumisu from Pixabay

* “Cash for Keys”: During the depths of the last major national foreclosure crisis between 2009 and 2013 especially, lenders were offering delinquent homeowners upwards of several thousand to $25,000 + to vacate the home while not damaging it or removing appliances. Quite often, the homeowner hadn’t made a mortgage payment for months or years up until this “Cash for Keys” offer. For many lenders, this cash payment to struggling homeowners was considered more affordable for the lender than fighting the homeowner for months or years longer. * Bankruptcy: For homeowners who are days or weeks away from losing their home at the final lender auction sale, they may consider filing Chapter 7 (complete liquidation of most debts) or Chapter 13 bankruptcy (a longer term workout payment plan) either on their own with online companies for just a few hundred dollars or with the assistance of an experienced bankruptcy attorney. The bankruptcy filing could delay the foreclosure auction date by weeks, months, or longer. Please seek quality legal assistance first. * Foreclosures: Please note that the typical foreclosure date timeline is close to four months from the start to finish. In California (a trust deed or non-judicial foreclosure state), the lender may first issue some warning letters to the delinquent mortgage borrower up to several months. The lender will then file a Notice of Default to start the foreclosure process. Ninety (90) days later, the lender will file a Notice of Trustee’s Sale while advertising one day a week in a local legal newspaper for three consecutive weeks. If the loan hasn’t been cured or paid with some new installment or workout plan, the lender could hold the final Trustee’s Sale (or auction) approximately 120 days (4 months) after the Notice of Default was filed.
In other states that are considered judicial foreclosure states, the foreclosure timelines may be similar or much longer, depending upon the caseload for nearby local courtrooms.

Focus on Opportunities, Not Obstacles

opportunities
It’s your ongoing perceptions of these negative financial, health, and overall national and global situations that may best determine whether you succeed or not. “Truth” is just your personal perspectives based upon life experiences. In the well-known Five Stages Of Grief description about emotional reactions to traumatic and painful experiences which was first written by Elizabeth Kübler-Ross and David Kessler about the fear of death, the five stages are described as: ● Denial ● Anger ● Bargaining ● Depression ● Acceptance
The faster that you get through the first four states of grief, the faster that you will get to the “Acceptance” stage and your focusing on the potential opportunities and solutions.
What we tend to focus on in life is usually what we end up with later because our minds are like giant magnets, for better or worse. Please keep your eyes on your personal goals because the solutions will appear sooner rather than later if you’re willing to focus with 20/20-like perfect vision. For many real estate investors, they will find incredible buying opportunities in 2021 and beyond if they keep a positive mindset.
Rick-Tobin-Professional-Pic-sharper

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

How FHA Benefits Buyers, Sellers, and Brokers

/in , , /by

By Rick Tobin

Since 1934, FHA has insured over 34 million home mortgages nationwide. For buyers, sellers, and advising real estate brokers or other licensees, they should all learn more details about how the use of FHA mortgage loans can help each of them to buy and sell properties at potentially a faster and more profitable pace today.

Easier Mortgage Underwriting Guidelines for FHA Loans

pexels-lukas-684385 digital
Because FHA mortgages are insured by the federal government in case of future default or foreclosure risks, mortgage lenders are more likely to offer much easier loan approval requirements for their interested borrowers. Let’s take a look below at some of the best FHA mortgage loan benefits that include:
  • Loan-to-value loan amounts up to 96.5% LTV for owner-occupied properties.
  • FICO credit score allowances as low as 580 for some lenders up to 96.5% LTV loans.
  • Sellers, family members, and other interested parties may be able to contribute up to 6% of the sales price towards closing costs, prepaid expenses, discount points, and other financing costs or concessions to greatly reduce total out-of-pocket cash contributions for the buyer.
  • Borrowers who invest at least 10% towards a down payment may qualify with a FICO credit score as low as 500 in some cases.
  • Debt-to-income (DTI) ratio limit allowances that may exceed 50% for borrower applicants.
  • Interest rates for FHA loans are usually priced at or better than the most attractive interest rates for loans that aren’t government-insured, which allows borrowers to qualify for much larger loan amounts.
  • Maximum loan amount limits for one unit ($765,600), two unit ($980,325), three unit ($1,184,925), and four unit ($1,472,550) properties are much higher now in 2020 than most people realize.

FHA Loan Amount Limits for 2020

Each year, the Federal Housing Finance Agency (FHFA), Federal Housing Administration (FHA), and the Department of Veteran Affairs (VA) revise their maximum loan limits for one-to-four unit residential properties by county regions across the nation.
limits digital
The FHFA establishes the baseline conforming loan limit that meets or “conforms” to certain qualifying underwriting guidelines that are established by the two largest secondary market investors or Government-Sponsored Entities (GSE’s) named Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation).
After a mortgage company, wholesale lender, or bank funds a loan, they usually need to sell it off into the secondary market to Fannie Mae, Freddie Mac, or to another secondary market investor so that the financial institution doesn’t run out of money. As a result, the lender will underwrite and approve borrower’s loan applications that both meet their own guidelines as well as the secondary market investor’s requirements. If not, the financial institution might be stuck with the funded loan, and will not be able to transfer it to another secondary market investor.
A conforming loan that is saleable or transferable to Fannie Mae or Freddie Mac and FHA loans are typically based upon median home prices in each county region. California, and other expensive states to live in that are typically near ocean locations or prime metropolitan regions, have “high-cost” county loan limits that can reach as high as 150% of the baseline mortgage limit that is derived from local median home prices in that same county region. FHA has a minimum loan amount or floor limits that go as low as $331,760 for a one-unit property (single-family home, condominium, townhome, etc.) as of January 2020. FHA has maximum loan amount limits that rise to as high as $765,600 in pricier county regions in California that include: * Alameda * Contra Costa * Los Angeles * Marin * San Benito * San Francisco * San Mateo * Santa Clara

Maximum Residential (One-to-Four Unit) Loan Limits in 2020

real-estate-3297625_1280
For so long as the owner lives in one of the units for a duplex, triplex, or fourplex property, the same owner may qualify for the maximum residential LTV ranges just like he or she would for a single-family home. Many times, the adjacent tenant or tenants will pay enough in monthly rent to cover the owner’s monthly mortgage payment. Single (single-family home, condo, townhome) – $765,600 Duplex (two units) – $980,325 Triplex (three units) – $1,184,925 Fourplex (four units) – $1,472,550

Mortgage Insurance Premium (MIP) Fees

Because FHA mortgage loans tend to be at higher loan-to-value levels up to 96.5% LTV, these government-insured loans will include a mortgage insurance premium fee when the LTV exceeds 80% of the purchase price or appraised value for a refinance. The pooled insurance fee payments will act as future protection against any default risks. Generally, the MIP funding fee equals 1.75% of the loan amount that’s due at the time of closing. The official title for this MIP funding fee is the Upfront Mortgage Insurance Premium (UFMIP). Many times, the borrower can add this MIP finance charge to the loan amount if all underwriting guidelines are met and approved by the lender.
pexels-karolina-grabowska-4386393 digi
Additionally, there will be an annual mortgage insurance premium (MIP) fee that varies depending upon factors such as the loan-to-value and loan amount size. Loans with a higher LTV range at 96.5% are generally considered much riskier than loans with lower 90% LTV ranges. As a result, the annual MIP fee percentage amounts will differ and range from a low of 80 basis points or .80% (at or below 90% LTV for loan amounts below $625,500) to as high as 105 basis points or 1.05% (at or above 95% LTV for loans greater than $625,500). Please note that 15-year FHA mortgages generally have lower interest rates and much lower annual MIP fees to as low as 45 basis points or .45%. Source: https://www.hud.gov/sites/documents/15-01MLATCH.PDF

FHA Monthly MIP Payment Example

Let’s quickly review a fictional $600,000 home purchase deal for a borrower who wants an FHA mortgage that’s fixed for 30 years with the lowest down payment possible:
  • Purchase price: $600,000
  • Maximum 96.5% LTV with just 3.5% down: $579,000
  • Upfront Mortgage Insurance Premium (UFMIP): $10,132.50 (1.75% of $579,000)
  • Annual MIP fee: $4,921.50 (.85% of $579,000)
  • Monthly MIP fee paid: $410.12 ($4,921.50 / 12 months)
The monthly MIP fee is paid in addition to the homeowner’s principal, interest, property taxes, and homeowners insurance. The faster that the homeowner can eliminate this monthly MIP fee requirement, the more affordable the future monthly payments will become for the borrower.

FHA Streamline Refinances

percent
Two or three years after buying a property with a 96.5% LTV FHA loan, a borrower may be able to qualify for the FHA Streamline refinance program if the new loan amount will be at 80% or below of the most recent estimated market value. Over the past several years, many homes have appreciated at 7% to 10% per year. If so, it may only take a few years for a property owner to reduce their LTV range from 96.5% with monthly MIP requirements to 80% LTV or below with no monthly MIP payments. Ironically, these “fast track” refinance programs may allow the borrower to not provide any formal documentation for their current income, credit scores, or even need a formal updated appraisal. If the monthly MIP payment can be eliminated with the new FHA Streamline loan, the borrower may also get a partial refund of their upfront MIP payment that was due at closing when the home was purchased.
A new FHA Streamline loan could save a borrower $500 to $1,000 per month, depending upon how much their interest rate is reduced, their loan amount, and whether or not their monthly insurance premium was eliminated.
Whether you are a buyer, seller, or a real estate broker, the FHA loan option might be the best financing option of them all for the parties involved. This is especially true as both the 30-year and 15-year fixed mortgage rates hover at or near all-time record lows!
Rick-Tobin-Professional-Pic-sharper

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

How Deferment of Mortgage Payments May Affect Borrowers in the Long Run

/in , , , /by

By Edward Brown

When Congress passed Section 4021 of the CARES Act in response to the effects of COVID-19, their intent was to help borrowers who were having problems making their mortgage payments. Little did Congress realize that they were potentially setting up borrowers for trouble in the future when it comes to credit worthiness as assessed by the lending community.

hammer-1537123_1280

According to Mark Hanf, president of Pacific Private Money, “Section 4021 of the CARES Act contained a regulation that loan servicers “shall report the credit obligation or account for those participating in forbearance as current”. In other words, those participating in a forbearance program should not see their credit scores drop. However, there is a loophole that allows lenders to discover whether or not a borrower is actually making payments. It is the “comments” section of a credit report. The CARES Act does not mention the comments section of credit reports, and that’s where forbearance notations are going.” What borrowers are not being told is that any reference in a credit report to forbearance can be a Scarlet Letter for an applicant seeking a new mortgage, according to Kathleen Howley in an article she wrote in early May 2020.

According to Hanf, within a week of Howley’s article, his company received a loan request from a home buyer who was denied credit from a major bank for just this very situation. Although the bank sees the existing mortgage as “current” the forbearance has let the world know via the comment section that this borrower has requested a deferment. The major bank involved would most likely not deny the loan on its face due to the deferment, as this would violate the law; however, banks are notorious for coming up with a myriad of reasons for denying a loan and still stay within the guidelines set out for them.

crop-businesswoman-counting-money-while-sitting-at-desk-4475525 small

Conventional lenders desire to have plain vanilla borrowers who pay back loans in a timely manner. When a borrower changes terms of the loan by requesting principal forgiveness or other aspects of the loan, the lenders generally do not usually extend credit again to these borrowers and can negatively affect the borrower’s ability to borrow again from unrelated lenders. Such is the case back during the Great Recession wherein some borrowers took advantage of the economic climate by asking their lender to reduce the principal of their loan [total forgiveness rather than just a deferment]. The borrowers may have gotten a reprieve, but the long-term effects may have been more drastic. Similarly, to when a borrower files bankruptcy. The borrower may get out of paying creditors, but their ability to borrow in the future is usually severely hampered.

In one case, back in 2009, during the heart of the Great Recession, one banker tells a story of how a wealthy borrower first asked for a principal loan reduction of $500,000 because his collateralized real estate had decreased and his request was granted. But, when this borrower was faced with the prospects of having this reduction reported on his credit report or the fact that he would have to inform any new lender that he requested a principal reduction [as this question is usually on bank applications], he voluntarily requested that the $500,000 abatement be reinstated. He decided his ability to borrow in the future was worth more than the $500,000 principal reduction.

Borrowers will have to decide if requesting deferments is worth the risk of potential future lending restrictions based upon the lender desire to lend to borrowers who choose to defer mortgage payments when the opportunity arises. Whoever said, “there’s no free lunch” must have been talking about these very situations.

edward-photo-from-2006-2-200x300

Edward Brown

Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company. Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.