September 21, 2016
Multifamilies for Retirement Income
Financial Advisor quoted me in More Retirees Turning To Multifamily Homes For Income. It opens,
Many clients are investing in multifamily residences as a way to generate retirement income.
“A common way for people nearing retirement is to buy a triplex or fourplex, live in one unit and rent out the others,” said Keith Baker, a financial advisor and professor of mortgage banking at North Lake College in Irving, Texas. “They sell their home and use the equity they have built up to do this, and if they still owe some debt, it will be paid down more quickly.” Among the best multifamily properties to acquire for supplemental income is one that has separate entrances with no shared common areas so that each family has their own space, according to Michael Foguth, a financial advisor in Brighton, Michigan.
“Townhomes are very popular,” Foguth told Financial Advisor. “Also popular are duplexes where you have one unit on the ground level and one unit on the second level.”
But clients should not spend so much money to acquire a property that their retirement income ends up undiversified. “If the bulk of your retirement income is tied up in one property, you are exposed to natural disasters like floods as well as economic downturns in that market,” said David Reiss, a professor at Brooklyn Law School who teaches real estate finance.
An alternative to buying a property is modifying an existing residence with the intent of renting out rooms on websites like AirBnB or HomeAway. “You would need to make sure that deed restrictions, zoning and city ordinances allow this,” Baker said. “It also will require property insurance and additional liability coverage.”
When a multifamily rental property is also a primary residence, a portion of the mortgage is tax deductible, according to Carla Dearing, CEO of SUM180, an online financial planning service. There may also be the opportunity to leverage tax benefits like depreciation.
“Selling your home and taking out a loan on a rental four-unit apartment complex allows you to deduct from your income the pro-rated interest expense along with the depreciation expense of the portion of the units you don’t live in so that much of the income is sheltered,” Baker said.
Over time, the income support received from a rental property can be greater than the interest income from investing in the stock market. “You’re likely to receive a nice stream of income when you are renting to people with guaranteed incomes,” said James Brewer, CFP, in Chicago. Nationally, the average price-to-rent ratio is 11.5, meaning that the average property owner is buying a property for a price of 11.5 years worth of rent, which is an estimated 8.7 percent yield on her investment, according to data from Zillow.
A house that cost $200,000 should bring in $1,450 per month in rent using the national price-to-rent average, according to Matt Hylland, an investment advisor with Hylland Capital Management in Virginia Beach. That’s compared to 10-year government bonds, which yield 1.7 percent and the S&P 500 index, which yields about 2 percent.
“But this 8.7 percent is before any costs,” Hylland noted. In other words, clients who add rental property to their portfolios should also add cash to their emergency funds so that have money on hand to maintain and repair the house. “If the roof needs replacing, do you have $5,000 available to fix it?” asks Hylland.
Ideally, a multifamily acquisition will be move-in ready. “Homes that require construction or renovation can easily turn into a money pit, costing twice what you estimate up front,” Dearing said.
September 21, 2016 | Permalink | No Comments
Wednesday’s Academic Roundup
- In a paper titled, “Sales of Distressed Residential Property: What Have We Learned from Recent Research,” the authors summarize research findings on three topics: the impact of changes in housing prices on foreclosures; the impact of foreclosure on the sales price of the foreclosed house; and the impact of foreclosure on the sales prices of nearby houses.
- A paper titled, “The Effect of Housing on Portfolio Choice,” shows that characterizing the effects of housing on portfolios requires distinguishing between the effects of home equity and mortgage debt.
- An article titled, “A Dynamic Model of the Housing Market: The Role of Vacancies,” highlights the need for a better understanding of the dynamics of the housing market and the mechanisms that drive and sustain periods of disequilibrium. In this analysis, I develop and estimate a dynamic model of the housing market where vacancies naturally arise as the error correction mechanism.
- A paper titled, “The Role of foreclosures in Determining Housing Capital Expenditures,” studies how foreclosures affect capital expenditure investments in residential properties.
- A paper titled, “Housing Market Dynamics: Disequilibrium, Mortgage Default and Reverse Mortgages,” is an introductory paper which serves to set the stage by relating the papers in the 2013 FSU-UF Critical Issues Symposium entitled “Housing Market Issues: Initiatives, Policies and the Economy” to previous literature. It provides both a clear picture of the state of knowledge in these critical areas and the significant contributions of these recent studies.
- A paper titled, “If We Build it, Will They Come? The Housing Stock and the Socioeconomic Integration of Elementary Schools,” shows that increasing the stock of rental and affordable housing units in middle- and high-income neighborhoods has an important effect on the number of poor children attending schools. Our results also reveal the types of housing units that have the largest impacts.
September 21, 2016 | Permalink | No Comments
September 20, 2016
Comparing Rental Housing Across the Atlantic
The Harvard Joint Center for Housing Studies has released a working paper, Rental Housing: An International Comparison. The abstract reads,
This report compares rental housing in 12 countries in Europe and North America, using individual records from household surveys. Differences in housing characteristics, conditions, and costs across countries reflect a number of factors, including demographics, geography, culture, and government policies. A lack of comparable data can make international comparisons difficult to execute, but such analysis is valuable for understanding and contextualizing differences in affordability and other characteristics of renter households and housing.
The analysis revealed the US, along with Spain, as notably unaffordable for renter households, based on a number of measures. The greater apparent cost burdens reflected a variety of factors, including differences in characteristics of the housing stock and differences in tax burdens, as well as measurement problems.
However, two major influences – differences in the size and availability of housing allowances and the degree of income inequality – emerged as the main drivers of differences in housing affordability. The effects of supply-side factors such as the extent of social housing supply, supply subsidies, and rent controls were unclear, due to problems with the identification and description of below-market rentals in the household survey data. (1)
The housing stock and political context is so different among countries, but this type of analysis is still very useful and can offer valuable lessons to the United States:
One factor that appears to contribute to the pervasive affordability problems in the US is the degree of income inequality. That is not a feature of the housing market per se, but there may be opportunities to address the consequences of income inequality through appropriate housing policies.
Other countries have devoted more resources to ameliorating the problems of unaffordable housing. The US provides fairly generous housing benefits to only a small share of needy households. In the UK, a broadly available system of housing allowances offsets what would otherwise be a much more severe affordability problem than exists in the US. In other countries, affordable rental housing supplied by governments or nonprofits helps to address affordability issues, although the efficiency of that practice, relative to the provision of housing allowances, has been questioned, as it has been in the US. The EU-SILC data used in this analysis did not adequately identify or describe below-market-rate housing, making it impossible to adequately assess the effects of such housing.
The somewhat larger size and perhaps higher quality of units in the US rental stock also affects relative affordability, although relative quality and its effect on cost differences are difficult to assess using the available data. The large share of single-family detached rentals in the US reflects preferences, the demographic mix among renters, land availability, etc., but it could also reflect zoning and other regulations limiting the supply of less expensive multifamily rentals. It is hard to imagine that regulations are more stringent in the US than in some of the more dirigiste nations of Europe, but regulations elsewhere may dictate, rather than constrain, density and cost reductions. The size and quality of the housing occupied by low-income renters in the US reflect the fact that most of those units were originally built for owner occupancy or for higher-income renters. That’s probably true in other countries as well. Whether the extent of such filtering is greater or less in various countries is perhaps worth exploring in the future. (37-38)
Income inequality, housing subsidies and land use reform — the report hits on a trifecta of key issues that housing policy should be dealing with. While I do not see much of an appetite for major reform of the first two items in today’s political climate, there might be support for some loosening of land use restrictions on housing construction. I wonder if there is some room for movement on that third front. Can local jurisdictions be incentivized by the federal government to build more housing?
September 20, 2016 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Roundup
- An article titled, “Patchwork of state laws hurts U.S. effort to modernize mortgages,” describes how the financial industry is pressing for change in the form of “remote notarization.”
- The U.S. Department of Housing and Urban Development (HUD) today published a final rule to ensure that all individuals have equal access to many of the Department’s core shelter programs in accordance with their gender identity.
September 20, 2016 | Permalink | No Comments
Monday’s Adjudication Roundup
- Deutsche Bank has said it will reject a $14 billion settlement proposal from the U.S. Department of Justice to put to rest claims the bank misled consumers into buying risky mortgage-backed securities in the lead-up to the financial crisis in 2007.
- JPMorgan Chase Bank NA asked a New York federal judge on Wednesday for a quick win in a putative class action over the bank’s alleged failure to properly file papers giving notice mortgages had been paid off for thousands of New York state homeowners.
- PNC Financial Services Group has agreed to pay at least $24 million to settle a class action in Pennsylvania federal court brought by homeowners alleging a bank it acquired overcharged fees and interest for its secondary mortgages and didn’t accurately disclose business arrangements or the terms.
- The Eleventh Circuit on Monday upheld a U.S. Tax Court decision that a married couple wrongly characterized the $8.5 million sale of their Florida property as a capital gain rather than an ordinary business expense, but struck down a penalty for understating their income tax.
September 19, 2016 | Permalink | No Comments
September 16, 2016
What Is a Probate Sale?
Charles Dickens’ Bleak House
Realtor.com quoted me in What Is a Probate Sale? A Home You’ll Have to Win in Court. It opens,
If you’re looking to buy a home on the cheap, you might have stumbled across a probate sale. But what exactly is a probate sale? Basically it means that the homeowner died without a will bequeathing the house to an heir. In most cases, this means that an estate attorney or representative has to sell the property in order to liquidate the asset and distribute the money to family members—and that can spell a major bargain for you.
Probate sales can be attractive to buyers because they’re often priced below their market value, much like foreclosures. But since a court has to supervise and approve the home’s sale, the process is more complicated—and lengthier—than usual.
Here’s a look at the legal hoops you’ll have to jump through to make a probate sale happen.
How A Probate Sale Works
In a probate sale, the estate attorney or other representative hires a real estate agent to post the listing and sell the home. While buyers may be drawn in by the budget-friendly price, probate homes are not for everyone, starting with the fact that the homes are typically sold as is.
“Usually the estate doesn’t have an interest in renovating the property, either because of logistics, timing, or available funds,” says Richard Witt, owner of Long Island Cash Home Buyer. So, don’t expect the estate owners to make any repairs before you move in; what you see is what you get. That said, those in the know advise getting a home inspection just to make sure there aren’t major problems that would deter you from moving forward.
Here’s another difference with probate sales: If you decide to make an offer, that must be accompanied by a deposit totaling 10% of the price of the home. That’s in addition to your down payment, although this deposit can be folded into your down payment if the deal goes through.
Once your offer is accepted by the estate’s representative, that’s not where the negotiations end. From there, the estate attorney has to petition the court to approve the sale. And as you might expect, courts move at their own pace; expect to wait 30 to 45 days (or even longer) for your day in court when you can claim your home.
Playing the waiting game isn’t the only frustrating aspect of probate sales. In certain states, even as your offer is making its way through the courts, the home can remain listed and be open to other bidders who may be allowed to show up at your hearing and outbid your offer.
“In California, for instance, probate homes typically do go up for auction at the courthouse after the offer comes in,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “This builds a lot of uncertainty into the process for the bidder who gets the ball rolling in the first place.” All that said, you also have a right to counteroffer and, even if you do lose out, you should at least get your 10% deposit back.
September 16, 2016 | Permalink | No Comments
September 19, 2016
Subprime v. Non-Prime
By David Reiss
The Kroll Bond Rating Agency has issued an RMBS Research report, Credit Evolution: Non-Prime Isn’t Yesterday’s Subprime. It opens,
Following the private label RMBS market’s peak in 2007 and the ensuing credit crisis, non-agency securitizations of newly originated collateral have focused almost exclusively on prime jumbo loans. This is not surprising given the poor performance of loosely underwritten residential mortgage loans that characterized certain vintages leading up to the crisis. While legacy prime, in absolute terms, performed better than Alt-A and subprime collateral, it was apparent that origination practices had a significant impact on subsequent loan performance across product types.
Many consumers were caught in the ensuing waves of defaults, which marred their borrowing records in a manner that has either barred them from accessing housing credit, or at best made it extremely challenging to obtain a home loan. Others that managed to meet their obligations have been unable to qualify for new loans in the post-crisis era due to tighter credit standards that have been influenced by regulation.
The private label securitization market has not met the needs of these consumers for a number of reasons, including, but not limited to, reputational concerns in the aftermath of the crisis, regulatory costs, investor appetite, and the time needed for borrowers to repair their credit. The tide appears to be turning quickly, however, and Kroll Bond Rating Agency (KBRA) has observed the re-emergence of more than a dozen non-prime mortgage origination programs that intend to use securitization as a funding source. Of these, KBRA is aware of at least four securitization sponsors that have accessed the PLS market across nine issuances, two of which include rated offerings.
Thus far, KBRA has observed that today’s non-prime programs are not a simple rebranding of pre-crisis subprime origination, nor do they signal a return to the documentation excesses associated with “liar loans”. While the asset class is meant to serve those with less pristine credit, and can even have characteristics reminiscent of legacy Alt-A, it is expansive, and underwriting practices have been heavily influenced by today’s consumer-focused regulatory environment and government-sponsored entity (GSE) origination guidelines. In evaluating these new non-prime programs, KBRA believes market participants should consider the following factors:
■ Loans originated under sound compliance with Ability-To-Repay (ATR) rules should outperform 2005-2007 vintage loans with similar credit parameters, including LTV and borrower FICO scores. The ATR rules have resulted in strengthened underwriting, which should bode well for originations across the MBS space. This is particularly true of non-prime loans, where differences in origination practices can have a greater influence on future loan performance.
■ Loans that fail to adhere to GSE guidelines regarding the seasoning of credit dispositions (e.g. bankruptcy, foreclosure, etc.) on a borrower’s credit history should be viewed as having increased credit risk relative to those with similar credit profiles that lack recent disposition activity. This relationship likely depends on, among other things, equity position, current FICO score, and the likelihood that any life events relating to the prior credit issue remain unresolved.
■ Alternative documentation programs need to viewed with skepticism as they relate to the ATR rules, particularly those that serve borrowers with sub-prime credit histories. Although many programs will meet technical requirements for income verification, it is also important to demonstrate good faith in determining a borrower’s ability-to-repay. Failure to do so may not only result in poor credit performance, but increased risk of assignee liability.
■ Investor programs underwritten with reliance on expected rental income and limited documentation may pose more risk relative to fully documented investor loans where the borrower’s income and debt profile are considered, all else equal. (1, footnotes omitted)
I think KBRS is documenting a positive trend: looser credit for those with less-than-prime credit is overdue. I also think that KBRS’ concerns about the development of the non-prime market should be heeded — ensuring that borrowers have the ability to repay their mortgages should be job No. 1 for originators (although it seems ridiculous that one would have to say that). We want a mortgage market that serves everyone who is capable of making their mortgage payments for the long term. These developments in the non-prime market are most welcome and a bit overdue.
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September 19, 2016 | Permalink | No Comments