New Rules (Or Should We Say Old, Modified Rules…)

Friday, Fannie Mae rolled-back one of its least popular mortgage guidelines updates of the last year.

Starting March 1, 2009, real estate investors can once again own and finance up to 10 individual properties.  Before that warm-fuzzy feeling takes over, there is a catch.

The Additions to the Old Rules

Homeowners buying a 5th, 6th, 7th, 8th, 9th or 10th home must meet the following standards, as set by Fannie Mae:

1. 720 credit score
2. 25% downpayment for a 1-unit (for 2-4 units you must have 30%)
3. No mortgage delinquencies in the last 12 months
4. 6 months of reserves for each investment property

Making Credit Available to Those Who Should Have It

In other words, Fannie Mae is re-opening the lending spigot for real estate investors with good credit, a sizable downpayment and ample reserves.

According to Fannie Mae, the change rational behind the move is that (and I quote) “Investors can play a key role in the housing recovery”.  Until now, foreclosure auctions have gone at a turtles pace because investors that are cash poor have been unable to secure financing because of Fannie Mae’s four property limit.

I’d expect more investors to jump back into the market and soaking up some of the foreclosures in the market after this rule kicks in.

Don’t Forget About Existing Properties Too!

Some homeowners got caught in this fiasco and couldn’t refinance their property because of the new number of property rules that Fannie Mae had in place.

Good news, now the refi-boom helps you too!

And lastly, not to be forgotten, homeowners with more than 4 properties can finally participate in the ongoing conforming mortgage Refi Boom. Until now, they’ve been stymied by the 4-property restriction, too.

It’s a Great Time To Be An Investor

With home prices falling across most parts of the country, investors in real estate are finding good value in certain rental properties.  Unfortunately, they’re also now finding it harder to get approved for a home loan.  Things have definitely changed over the past year.

It’s Been a Tough Time To Be a Mortgage Lender

After getting hammered by defaults, conforming mortgage requirements for non-owner occupied home loans tightened dramatically the last six months.

Lenders Want Less Exposure

One major change was the reduction in the total number of homes Fannie Mae or Freddie Mac will finance for any one borrower.

Prior to the change, the number of financed properties could be as high as 10.  Today, that number is 4, immediately hurting investors with large real estate portfolios.  Going forward, buying properties isn’t the problem; financing them with conforming mortgage money is.

Keep in mind this is not a limit of 4 properties per lender.  It’s 4 financed properties total.

More Skin In the Game

Another guideline change mandates larger downpayments on loans.

Back in early-2008, a real estate investor could buy a home with 10 percent down.  Today’s investor is required to pay 15%.  But, as an added wrinkle, few private mortgage insurers write policies against rental homes anymore.  Thus making the 15% downpayment insufficient.  If you cannot get PMI to protect the lender, you’re then left with 20% down payment required.

Ouch.

Higher Risk Assessment

When a lender sees a larger risk on a ‘pool’ of loans, they tend to charge a higher interest rate in exchange for providing a mortgage.

As part of this “pay-for-risk” pricing model, Fannie Mae added mandatory fees to all of its investor property mortgages this year.  Based on loan-to-value, the fees are:

• 75% LTV or less: 1.750 percent of the borrowed amount
• 75.01 – 80.00% LTV : 3.000 percent of the borrowed amount
• Greater than 80% LTV : 3.750 percent of the borrowed amount

Don’t look at the rates normal homeowners are getting on mortgages (i.e. 4.75%) when considering purchasing an investment property.   They are vastly different.

Now You Know!

So, if your personal plan includes the purchase of investment properties in 2009, consider the impact that tighter conforming guidelines, larger downpayments and higher fees will have on your bottom line.

All things considered, now may be a good time to make that rental property bid.  Sure, prices may fall going forward, but increased acquisition costs may wipe out the long-term gains.

Let’s talk if this is a part of your plan.  I’d be happy to help you put together the figures and make sure that buying investment property is a decision that will cash flow for you.

You’re Not The Only One

It’s not uncommon to be a property investor and be ‘unsure’ of what market rent is.  Honestly, market rents can change as quickly as our housing market changes.  I’ll let you process how crazy that could be….

When deciding how much to charge for rent, most investors are trying to weight out two (painfully obvious) concerns:

1. What is the most rent that I can get out of this property each month to maximize my cash flow?
2. What amount of rent will keep my property occupied with a good tenant that won’t leave for a ‘better deal’.

Yea, there are many other questions going through an investors mind.  The main obstacle though is finding a happy medium between maximizing cash flow but also keeping the property rented out to a good tenant.

Where Can You Go?

Believe it or not, there are a lot of resources online where you can do your ‘shopping’ for comparable rents. I’ve found one in specific I’ll recommend:

Rent-O-Meter – This is a website designed to collect information while you’re searching for information.  It’s been a great resource for myself and other investors I work with.  I’ve also found it to be extremely point on in my market (I can’t say anything for others.. because I don’t rent outside of my market).

You’ll need the following information to get the comparable rents:

1. Property Address
2. Property City & State or Zip Code
3. Current Monthly Rent (What You’re Charging/Thinking of Charging)
4. How Many Bedrooms?
5. Units in Building (In case it’s an apartment complex)

From there, you’ll get your results.

What Do You Get?

1. You’ll get a map of the rental properties being used to give you a comparable rent schedule.
2. You’ll see a scale of the rents.  Low-Medium-High.  The needle represents where you lie in that scale.
   Here are examples:

There Are Other Choices

Although I’ve come to really like Rent-O-Meter, I’ve also found success with other techniques.  Here are a few other favorites:

1. Calling other property management companies in the neighborhood.
2. Looking on Craigslist.org to see what else is for rent and what they’re looking to rent places out for.
3. Newspaper advertisements.
4. Contacting local Realtors that have experience with investment real estate (I can connect you to someone on this one).
5. Contacting appraisers in town that may have experience inspecting investment properties (they have to do a comparable rent schedule on an investment property appraisal).
6. Join a local property investor association and ask around.

Make Educated Decisions

It’s not always easy to be an investor.  However, with the right people and resources – it can be a pretty fun business to be a part of.  Me and my team are always available for questions and if you need connected with someone, we can always help with that too!

As long as you take the time to examine what’s taking place in your local market, you’ll be able to make smart decisions and really avoid the ‘riskiness’ of real estate investment.  At this point, hopefully it will be a simple calculated risk and you can move forward!

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