May 2015

In this month's Rumor Mill you are going to hear more exciting acronyms than you have since the middle school locker room -- along with crucially important information if there is any chance you will buy or sell a house in the future anywhere in the country, and why you may want to do so before July 31st 2015. Technically an acronym is a neologism; interestingly, neologism (the invention of new words) is regarded as a symptom of certain psychotic disorders, such as schizophrenia. This will make a lot of sense once you hear more about the soon-to-be-unleashed IMDR (Integrated Mortgage Disclosure Rule.)

Now you are going to need to hold firm and actually read this. This is going to affect you even though it's the most boring subject on earth. So read on!

It all began when the CFPB (Consumer Fraud Protection Board) was born out of the Dodd-Frank Act, which was born out of the 2008 financial crisis. (If this sounds like committees creating sub-committees, don't be so cynical.)

To make a very long and no doubt fascinating in certain circles story short, the upshot is that the CFPB thought long and hard, and then in 2013 released their 1888 page ruling on how to help mortgage consumers.

Note: Truly, I don't mind so much the final 400 some-odd pages, which actually outline their conclusions on practical applications and questions/answers.  It's the first 1400+ pages where they endlessly justify their existence that causes me to raise a sardonic eyebrow.  As my dad would have said, "stop milking it."

But back to our story.  The CFPB released their report and then climaxed with....wait, wait... get ready for it.... the TRID. TRID is actually itself an acronym! Standing for TILA-RESPA Integrated Disclosure. It's like acronym squared! I'm telling you, I want to party with these guys.

The TRID, besides sounding vaguely sci-fi, is supposed to address leading consumer complaints regarding the mortgage process:

#1:  They don't understand the closing documents/HUD
#2:  They don't have enough time to review the documents before a pen is shoved in their hands

Important Point: Recent home buyers around the Bay Area may be thinking "What?  I had plenty of time!" but you need to remember that these are new NATIONAL guidelines. So-called "customary practices" vary widely between states and even counties, from who pays for Title/Escrow, to who is present at loan signing. In some areas of the mid-west, for example, it's customary practice to get both buyer and seller at the same table to sign immediately together and then hand over the keys right there (horrors!) Honestly, it's not hard to imagine that buyers sitting down with the sellers at the same table for closing felt pressured. It's also not hard to imagine that the mid-west has screwed everything up for the rest of us. Just think of those deep fried cheese curds.

TRID will affect ALL loans originated on or after August 1 2015. So if you get into escrow on July 31, you will not be affected by TRID. Anything after, you will.

So What Does TRID Really Do And Why Do You Care?

1)  TRID will make loan closings take a lot longer. You almost certainly can kiss 21 and even 30 day escrows good-bye, at least for quite awhile (until the bureaucratic kerfluffle has fluff-led.) Literally, whether you are buying or selling, expect 40-45 day escrows to be the new routine.

2)  The disclosure and re-disclosure processes will have set mandatory 3-business-day review times each time. Along with set mandatory definition of delivery times of up to 3 business days. Along with all kinds of confirmation of receipts needed by all parties.  Bottom line? See what I just said above regarding escrow close times.

3)  The new CD (Closing Document) is my favorite part of the whole thing. It's clean, it's clear, and my 11-year old could understand it. Despite the fact that they allowed the IRS to help participate in creating the form, it looks like they did a really great job. It lays out very plainly all of the terms, including all changes that will occur in the future of the loan. The new CD is a total win in my book.

4)  The TRID imposes very severe fines to lenders (ranging from $5k to $1m per day) for "unknowing violations", "reckless violations", & "knowing violations."  For this reason, lenders will be very, very careful to comply. Isn't this great news? Well yes and no. Yes of course, for the rare dirt-bags who intentionally pillage little old ladies. But no, not when you are trying to get on a plane for your 3-week trip to Moscow immediately after watching the new Star Wars movie and want to sign loan docs a day early, and they flat out cannot possibly let you. Uh... Anyone know a good notary at the Kremlin?

So What Can You Do To Mitigate The Pain Of TRID, Even As You Appreciate The Actual Benefit Of The New CD?

1) BUYERS -- Respond to your lender's requests immediately.  You should anyway, but let's face it, sometimes you get busy. You really can't do that with this TRID stuff. Respond and reply if you want your loan to close promptly so that the Seller doesn't get mad and start issuing huffy ominous things like Notices to Perform and Demands to Close Escrow.

2) SELLERS -- The highest offer might not be the best offer if those buyers' agents don't have their act together.  Make sure you are choosing a buyer with a reputable realtor and lender, who are going to handle their side of the TRID bargain like pros, or else you may get a migraine after the 45 days instead of cash in your bank account.

3) REALTORS -- Are going to need to be extremely organized and on it, not only with reminding their clients of all of the above, but with other things too like last minute "Seller Credits" at close of escrow and billing items (like inspections) out of escrow. Not only will those now need to be dialed down a whopping 10-14 days in advance, but guess what else? Because of ECOA (Equal Credit Opportunity Act) rules, the lender may now need to go back to the Appraiser and ask them how the Credit now affects the value of the house.  *long suffering sigh*

At the end of the day, the new CD will certainly be an advantage to consumers even if the value of the rest of it is arguable. But I can tell you one thing for certain, I expect that the first few months at least will be tortuously frustrating and painful for everyone involved as the entire United States groans under the unfamiliar requirements as new territory, exceptions, and unforeseen problems are identified and ironed out. Will loans still close this fall? Of course they will. But if you have a choice and you are thinking of selling or buying, I'd get on it right now so that you are in escrow before July 31st. That way you are not only avoiding being a CFPB TRID GP (guinea pig), but you are also getting current interest rates before the predicted 5%+ by year end.

—Mariah

p.s. In college I once read a list of "Top Ten Reasons You Should Not Date A Girl" and #1 was "She knows what CHUD stands for." Of course that's ridiculous. Everyone knows what CHUD stands for.

Some Good Deals I See

This Townhouse is not perfect, but the price for Lafayette is. It comes with a brand new HVAC, a startlingly large master bedroom suite, and a private deck to call your own.  Extremely reasonable HOA dues of $385 gets you a pool (like anyone cares about the "greenbelt".) Most importantly, two dedicated covered parking spots and no rental restrictions. It's quite clean but not updated at all -- vinyl counters, cheap carpet, single pane windows. Guess what? Those things can be fixed. This thing is such a screamin' deal, there is no question in my mind it will go over asking. How much? Let's get serious about writing an offer and find out.
Lafayette real estate agentJust because you and only you (and the other 720 Rumor Mill subscribers) are in my inner circle of trust, I am giving you a sneak peek at my not-yet-perfect website soon to be unleashed. An archive of previous Rumor Mills will be there (gasp!) along with other tidbits as I see fit.  Check it out now, but perfection is just around the corner.
The thing that makes this house a stand out as a good deal in my book is the easy to miss in-law -- aka au-pair, aka RENTAL that is located above the garage. It is a perfectly adorable, self contained, compact studio and presently renting for $1600/mo. (note: yes, the rental market around here is even crazier than the purchase market.) With a large, entertainer friendly, gorgeous house that includes a yard, landscaping, and a chicken coop -- and a rental that can offset 20-25% of your mortgage -- I consider this house worth a strong look if you are in this price range.

I already told you Horse People about this listing last month. Well I've got two big pieces of news:
One, the price just dropped $76k.
Two, the listing agent just asked me to host the Open House this coming Sunday so I can geekily hob nob about egg-butt snaffles* and thrush treatments* with all of the would-be buyers.
So come visit me this Sunday 5/31 from 1-4pm at 1075 Bear Creek Road!!! I can't promise that I will be wearing breeches*, but I can promise that I will at least be wearing custom paddock boots* and we can always discuss the selenium* content of certain roughage* along with this years' alfalfa* prices.
*If you don't understand, we horse people can't explain.

April 2015

Mariah’s Market Update

This month's Rumor Mill is going to revolve around the ways that you are naughty. Just kidding. No but seriously, I am not kidding.

There are three things I am can almost absolutely guarantee that you do, that you need to stop doing, because you are only thwarting yourself. Why can I guarantee that you do these things? Because everyone does them. I used to do them too, back when I was a civilian.

Naughty Error #1: For Pete's to the freaking crying out loud sakes, STOP trying to bring your credit score higher on your own. GOSH. If I had a dollar for every one of you people doing that right now...

Here's the deal: Credit repair doesn't make any sense. Perfect example: You have a $172 medical bill in collections from 3 years ago, and you want to bring up your credit score so you can buy a house. The right thing to do is pay it off right? WRONG!!!! *smack* Wrong wrong wrong. Suddenly you have activated recent activity on this dead account. There may be a way that you should pay it off, but it likely involves attempting to get the account manager to remove it from your credit report at the same time.

And you also have some credit cards with $800 balance on them. You should pay those off right? WRONG!!!! *smack* Wrong wrong wrong. You are probably going to pay those down, but not actually all the way to zero.

NOW STOP. Did you see what you just did?

You just read all that and said "Hey! Now I know what to do! I am not going to pay off old collections, and I am only going to pay off 3/4 of my credit card debt." WRONG!!!! *smack* Wrong wrong wrong. See, there you go, trying to bring your credit score higher on your own again.

Please read this and believe me: Every single situation is totally different, because everyone's employment history, credit history, debt to income ratio, and income are different. I can't guarantee that you need to do those things; I can only tell you right now that I know multiple people who in the past 60 days have messed up their ability to get a loan through taking the most well meaning and seemingly logical actions.

I personally have a 2 year plan to buy a big farmhouse for my kids. I just started working with my loan agent last week, 2 years in advance, to be sure that I am doing everything right to accomplish that. If you think you want to buy or refi a house in 2 weeks or 2 months or 2 years, you need to talk to a great lender now who can advise and direct you and your borrowing profile. Everyone thinks that is the last thing, but it is the FIRST thing. Call a good lender before you even call a Realtor! (Unless you are calling a Realtor for a lender referral.) (Or unless you are calling me just to hang out. I get that a lot.) Even they cannot guarantee exactly what will happen and when during the process of your credit repair, because FICO is an evil multi-headed monster-hydra fully understood by no one, not even its' trembling creators. But it is like climbing the Mt Everest of Crappy Credit; you can strike out alone with your own directional sense, or you can use the free guide who has taken 1000 people there before and carries a satellite phone. Choose wisely.

Naughty Error #2:  Doing nothing, because you know your credit stinks anyway, and you don't need some lender to tell you that because you already know it, and besides deep down you think it would be better if we all just went back to a barter system.

There's an ancient Chinese proverb that says: "The best time to plant a tree is 20 years ago. The second best time is today."

Stop your boo-hoo party and just get the credit repair started. It takes awhile — you can't fix credit in 3 days, likely more like 3 months and occasionally 3 years — but every single credit score out there IS fixable. But it has to begin before it can end, so every day you wait is another day longer it will take. Stop kibitzing and just make the phone call.

Naughty Error #3: Getting money from anyone other than the person whose name is on the contract for your down payment/closing costs, and not telling your lender in advance.

I just had this happen last week, and fortunately my trusty escrow officer at Chicago called me up and said "Hey, uh, FYI the name on the deposit check that just arrived is not the name on the escrow. Does the lender know?" Guess what? Lender did NOT know. Fortunately, because of escrow's swift response, crisis was averted and they were able to restructure the loan. Interestingly, I was told by Chicago Title that they see this happen all the time these days, sometimes with dire effects.

Why is it anyone's business how you pay your freaking deposit? Two words people: MONEY LAUNDERING. They have all kinds of cray-cray rules about where you get your money, how you get it, the paper trail to show that it got there the way you say it did, not to mention they need that fruit to sit in the account and ripen before you spend it — just like in Great Gatsby, they don't like new money.

Make your life easier and tell everything up front to your loan officer. Even better, use a lender that your Realtor knows and trusts to be proactive with the file (the one above was a stranger to me.) Every lender is actually startlingly different with the fees, rates, and service they give you; the only one who wants your house to successfully close escrow almost as much as you do is your Realtor, so believe them when they tell you they know some good mortgage companies who will communicate and be on top of the file.

(And by the way, no actually, Realtor's aren't getting a kick back from the referral. Okay well let's face it, probably someone somewhere is. But that is way majorly illegal and few would bother to take that risk.)

It's just a fact that unless the zombie apocalypse actually happens (fingers crossed Walking Dead fans), the barter system is long gone and every single thing in your life is better, cheaper, and easier with good credit. Call, text, or email me right now if you want some great referrals to lenders who will advise and direct you for free, or if you know anyone who is thinking about moving and wants my help.

—Mariah 925-787-2490

Some Good Deals I See

SaharaDr

$45,000
152 Sahara Dr
Pacheco
2bed 2ba, 1344 sf
Mobile/Manufactured

You need to stop thinking what you think you are thinking about Mobile Homes. These places are rad, and a nice park is a nice park! In the past few months I have sold two mobile / manufactured homes (the newer ones are called Manufactured, and they are NOT your grandma's mobile home let me tell you) and I have two more on the way. You are CRAZY if you are flushing money down the rent toilet when you can own your own bigger, better place for way cheaper including your park rent. This one is a dump-o-rama (hence the price) but yes, with carpets and paint you can add value to mobile homes just like other dwellings, and this park is a great one.

SolanaCt

$1,695,000
3445 Solana Ct
Lafayette

4bed 4ba, 3359 sf
15,617 sf lot

This house is the best deal by the square foot ($505) for a 4-bed in real Lafayette (Acalanes High) on the market, and it is absolutely gorgeous — vaulted ceilings, updated, and contemporary with multiple incredibly peaceful patios. It has plenty of flat grass & gravel, along with a cool unkept lower yard perfect for your kids to play Wild Kingdom. So what's wrong with it? It has a very odd floorplan with the kitchen and living area on the top floor, the master and a second bedroom on the middle floor (along with the front door), and two more bedrooms downstairs at backyard level. Hard to picture? It's because it's weird. But the house is still really lovely, and if you are artistic you will probably adore it because it has tons of light, air, and a creative feel. My biggest concern for you is how you would get 3 floors down from the kitchen to a party in the backyard, a problem I would personally solve with a firepole. Bottom line, if you're willing to work around a non- traditional floor plan, this could be your dream house.

OliveraRd

$220,000
2041 Olivera Rd
Concord
3bed 2ba, 1086 sf
Condo

This condo is still original owner, and while they weren't into our new-fangled nonsense like fancy schmancy countertops, light fixtures, and scraping off the popcorn ceiling, they did take excellent care of the place. Two attached patios on this great ground level (no steps!) unit, and plenty of grass plus a pool and clubhouse with your very reasonable $310 HOA fees. It even has a small master suite, with one of the bathrooms/patios attached to a bedroom. Out of the 2798 active houses on the market in our area right now, this one is the least expensive 3+ bedroom anyplace except Pittsburg, Antioch, Oakley, or Oakland. Usually you have to accept a meth lab and an Indian burial ground to get a price like this for 3 beds; at $220k, this is a screaming deal as a true "cosmetic" fixer.

1075BeerCreekRd

$1,075,000
1075 Bear Creek Rd
Martinez/Briones
2bed 2ba, 1929 sf
7.45 acres

HORSE PEOPLE!
This property has a NICE two stall shedrow barn w/ oversize box stalls (about 15'x18' each), and a 160x40' well fenced FLAT paddock along with the 7.45 acres of rolling hillside pasture. The charming older 1929sf house (2bed/2ba) is just a bonus, lets face it, I know you only care about the barn. It's right next door to Poplar Place, making vacation boarding likely a snap! And if you have no idea what I'm talking about, it's because you are one of those strange non-horse people who would rather have quartz countertops than a covered wash rack & cross ties.

December 2015

As a raucous send off to 2014, this month I am going to tell you something specifically geared for YOU, no matter who you are. For the first time ever I actually collaborated with someone on this article (Angela Erves, Land Home Financial).

But before I get to that, I need to tell you about something really cool that my company (Better Homes & Gardens) just rolled out, literally* this morning.

The groundbreaking news is they have launched a bigger and better search engine that can eventually squash the daylights out of some other searches (I’m not going to name names, so I will just call them Tillow and Zulia.) I personally tested it this morning, and I can tell you it has some really innovative features. What sets it apart is that it doesn’t just do zip code/town searches (standard) and you don’t only search by property/house sizes and price (yawn), but you can actually search through additional lifestyle features like schools, parks, and public transit. (I guess they ignored my suggestion of walking distance to bars.) I especially like the fact that you can use a commute-tool to search houses and sort them by travel time at a certain time of day. For example, you can say “houses in Berkeley within 15 minutes by car from the Rockridge BART station at 8:30 am.” All of the items in purple you can change to fit your own personal search locations, times, and mode of transportation.

Test drive this thing yourself by going to BHGRE.com. It has a lot of potential, and although they still need to refine some things, the additional search features outweighs its present unwieldiness in certain areas (notably specific address and neighborhood searches). Once they dial that down, this search engine will be a really terrific tool for you to use. On the site they proudly display the slogan “The Friendliest Search In Real Estate”, by which I can only assume the consumer testing small group results must have rejected other options such as, “The Most Standoffish Search In Real Estate.”

Now on to your 2014 Grand Finale from me:  Incredible information.
As mind boggling as it seems, the lending environment has completely changed from a year ago when even Bill Gates could not get a home loan to save his life.

Remember back in my April Rumor Mill when I told you:  
“They are going to make it easier to borrow. They have to. The people with the 740 credit scores have already bought, and the people happy in their houses have already refi’d. For banks to get back their big quarterly profit reports from mortgage lending, they are going to have to find creative ways to let more little people buy again.”

Well they have gotten creative and it is here. Find your area of interest below and read a small snap shot of what is available to you. Of course my lawyer Eric would like me to include the caveat that everything in the world is subject to individual approval, every situation is different, consult an attorney, a financial advisor, your mother-in-law, a magic 8 ball, yadda yadda yadda, wear a helmet, and don’t blame me.

This one is a BIGGIE — Self-Employed Borrowers Breakthrough:  Anyone self employed can tell you it’s been absolutely impossible to get a loan to buy a house. Impossible. The fundamental problem is that if you maximize deductions and have a good CPA, at the end of the year your income shows at about 37 cents, right? Well check this out: Self-employed can now qualify their income using just bank statements from the previous 12 months for loan amounts up to $2m. It means that no tax returns need to be provided, and you can borrow based on what you really make. Minimum credit score is 680, and you can do it as a refi as well and get up to $350,000 cash out. This one is a really big deal.

Poor Struggling First Time Homebuyer:  In Contra Costa and Alameda counties as long as you make under $101,775 a year, your credit score is minimum 640, and the house you want to buy ends up under $417,000, the world is your oyster. California HFA will give you a grant (you don’t have to pay back!), Land Home Financial has 97% loan programs, and with Seller credits combined you can actually buy a house for like…and this is not a made-up number… $1000 down. I am not missing any zeros. I said one thousand dollars down. Is this ridiculous? Maybe, but it is real. This is miraculous for those who can afford the mortgage payment but haven’t been able to save up the tens of thousands of dollars needed for a down payment just a short time ago. They want the little people to own houses again, and they are putting their money where their mouth is. Hurry up and buy one before they come to their senses.  :)

Well Off Up To $1m Buyer:  With an 80/10/10 program, the bottom line is you need to have 10% down and you can buy a house. And guess what? No mortgage insurance.

Super Duper Well Off Over $1m Buyer:  Generally speaking, they want you to put 20% down up to a $2m loan, 25% down up to $3m loan. This loan also has no mortgage insurance, and you can actually do a 40 year loan (ARM) with the first 10 years interest-only. Rates for this loan are in the mid-3’s right now, and gift funds from a relative are allowed to make this happen.

Investor Buyer Thinking Of Getting A Rental Property And Living The HDTV Dream:  Generally speaking you will need at least 20% down (up to $417k) and 25% down for properties over that. However there is also a loan that qualifies just based on the cash flow of the property where you don’t need to show your own personal income at all.

Final Note — Duplex, or in-law unit you can rent: The lender will actually take about 75% of the rents and increase your net income by that amount. Simplified example: You make $4000 a month, and the house you want to buy has a separate unit that you can rent for $1000 a month. Now the bank will say your income is $4750 a month. This can really help you buy a property that you would otherwise not be able to afford.

Here’s the deal people, I could have sent you a card or some chocolate. But for your gift I gave you what you really want: A house. Hurry up and call me, I look forward to it!
—Mariah  925-787-2490

p.s. Angela Erves, Land Home Financial, will evaluate your actual situation as well as do credit repair for free. Call her directly at 510-812-2109

* As a matter of interest, the word “literally” has been so misused when actually the person meant “figuratively” ( e.g. “I am literally starving to death right now!” “I was so tired I literally could not get out of bed!” ) that the definition of literally has now, literally, been amended to include the word figuratively. True story. Merriam-Webster had recently added a second usage of the word “literally” to mean the same as “virtually,” but as hyperbole for emphasis. The Oxford English Dictionary has also included the informal definition, “used for emphasis while not being literally true,” since 2011. If you are still reading to this point you are literally avoiding doing something at work, so I am linking this article on the subject so that you can figuratively make your boss explode if they catch you.

November 2014

Naturally you eagerly read the recently released November U.S. Economic and Housing Market Outlook put out by Freddie Mac.

Oh no wait, no you didn't.

So here's what you care about most from that forecast: Looking ahead to the next year, interest rates are expected to rise, averaging 4.6% up to 5% by the end of 2015.  Across the country, houses are expected to increase in value by about 3% (which means more in the Bay Area, since of course we do everything better here.)  The rental market is projected to stay tight and strong, because vacancy rates are still low and rental rates continue to go up.

I've said it before and I will say it again — if you are thinking of buying, you gotta do it now before interest rates (that have been artificially held low) go up. The impact on your cash flow is so critically substantial. Think of this: If you buy a $800,000 house at 4% interest, you will pay $475.25 per month less than if you buy it later in the year at 5%.  That is a lot of freaking money when it's for absolutely nothing but flushing down a bank's toilet. That one percent means $5703 in actual real money out of your pocket in one year, for no reason other than you bought later rather than sooner. If you live in that house the average 9 years that most people do before selling, it would be $51,327 extra dollars spent.

But what if you want to sell?  The same thing happens in reverse -- your buyers will have less money to spend as interest rates increase.  Most people are concerned about how much their monthly payment will be, less about the actual price of the house. Check this out:

Let's say a family can afford $5000 a month for their mortgage. At 4%, they can offer $1,050,000 for your house and spend about $5000 a month. But at 5%, to spend about $5000 a month, the same buyer can only offer you $934,000 for your same exact house. Not one single thing has changed except the interest rate, and just because the rate goes up does not mean people's monthly payment amount can go up. So what changes? The house number they can afford goes down.

Will there still be someone out there that can afford your house at your desired price of $1,050,000? Sure there will. But it's just simple mathematics and logic that more buyers will be able to afford your house with a 4% loan than they will with a 5%; and the more buyers out there, the more likelihood of multiple-offers on your house.

(The complete November 2014 U.S. Economic & Housing Outlook, including the Forecast Table is here. )

Stepping back from Freddie Mac, reports are now in for housing stats around the Bay Area. Across the board, everything looks like we are getting into a more normal and stabilized market.  Housing inventory (which means how many houses are on the market) is at 45-days supply which is almost normal; a "normal" supply historically being a 2-3 months supply in the East Bay Area. (FYI, the low was December 2013, when we only had 15 days supply.)  The pending to active ratio is 0.96, which means that houses are coming on the market about as fast as they are going pending; again, a sign of a balanced normal market.

Blah, blah, normal, blah.  How does this affect you?  Bottom line:
Buyer: it's generally easier to get a house now than it was 6 months ago.  So if you gave up in discouragement after writing loads of offers, don't despair Young Grasshopper!  It's time to try again.
Seller: we get to be more sane in the sale process, instead of shielding ourselves like it's a Black Friday assault and leaving you wondering if you could have gotten even more money a month later.

Contact me in your preferred way (text, phone, email, or walk in my door) so I can meet with you about professionally marketing and selling your house, or finding you a great home or investment to buy.

—Mariah

 

October 2014

If you’ve ever thought about owning a rental property or two, then you will love this month’s Rumor Mill.  

I’m a big fan of rental properties, and have even personally owned one. New landlords are sometimes born when people are able to keep their first house after they go on to buy a second house (that is what happened to me), and sometimes people head out there with the intent of buying a rental. Obviously if you are renting your former house the choice just becomes a matter of default, but if you intentionally buying a rental you should evaluate it with a much different eye.

Professional real estate investors use a number of tools to guide their property choices, most commonly “cap rates” (the annual return expected on an investment.) They are not just relying on gut instinct or emotion and hoping that it will someday appreciate for a huge return. Because even if a property appreciates (which isn’t always a given), will it appreciate enough to cover the annual costs to hold the property? The experts don’t buy for appreciation alone, and neither should you.

Of course there’s tons of different ways to invest in real estate, but if you are looking for residential rental property, then the primary financial consideration in choosing the house should be the annual income it will generate before the time comes to sell. Unless you can, at a minimum, cover your monthly mortgage amount your property could easily turn into a drain on you and your family — financially and emotionally.

So how do you figure out Cap Rate like the big guys? Just like this:

1)  Figure out the annual rent you can expect, based on the current rent and/or looking at similar rents on Craigslist.

2)  Estimate the annual expenses you can expect, including the following:

  • projected vacancy costs, which are typically calculated at 5% to 10% of the annual rent and reflect the annual rent loss you can expect when the property is not being rented, such as when you are in between tenants
  • real estate taxes utilities that you (not the tenant) might be paying, such as water or gas property and liability insurance (a landlord’s policy)
  • repair costs over time to address the wear and tear of the home, including new roofing costs, furnace maintenance, and emergency repairs.

3. Calculate your annual net income (annual rent, minus annual expenses.)

4. Calculate the property’s capitalization rate, or “cap rate” (the annual return you can expect for your investment, arrived at by dividing the net income by the cost of the property.)

Example: You rent out a three-bedroom house for $3,000 per month or $36,000 per year. You anticipate annual expenses as follows:

Vacancy rate of 5%:    $1,800
Real estate taxes :       $5,000
Maintenance and other expenses:   $3,200
Total expenses:          $10,000
Annual net income = $26,000 ($36,000-$10,000)

In the example above, if the asking price for the property were $600,000, the cap rate calculation is: $26,000/$600,000 = 4.3%. This three-bedroom property therefore yields a “cap rate” return of 4.3% (unless you can get the property for a lower price).

The “cap rate” at which you should buy depends on the location of the property where you are looking to buy, and the return you require to make the investment worth it to you. Professionals purchasing commercial properties, for example, may buy at a 4% cap rate in high demand areas, or a 10% (or even higher) cap rate in low-demand areas. Generally, 4% to 10% per year is a reasonable range to earn for your investment property, and the higher the cap rate, the better the annual return on your investment.

If you are looking to make a certain percentage off your rental each year, you should let that drive your purchase decision. You can divide your calculated net figure by your target cap rate to determine the price you’d be willing to pay for a particular property. For example — let’s say you want to make at least 5% — $26,000/ 5% = $520,000. This reflects the top price you would be willing to pay for this house, if you require a minimum return of 5%. With the current asking price being $600,000, this is a not a good house for you, unless they come down on the price.

Whatever rate of return you are aiming for, make sure the projected income leaves you with a cash cushion after the mortgage payment has been paid. If you have a tenant who doesn’t pay for a few months, and the cap rate is just 2% or less, your property may quickly lose you money. To be safe you need to be sure you can handle carrying the property if it’s unoccupied for an extended period (or if you have to evict some dirt bag loser.)

Appreciation is awesome and over the long term in this area practically guaranteed historically, but it’s not a strategy that can put money in your bank account today. If you buy for income and use the cap rate calculation, you can find rental homes that provide bigger returns for you than just appreciation.

Besides personal residential and of course horse/ranch properties, I also represent buyers and sellers of rental properties as well as landlords in finding tenants. In fact, I have a duplex listing coming up for sale in downtown Martinez within the next couple weeks with an estimated cap rate of approximately 5.7%. Call, text, or email me today if you or your friend wants to invest in real estate.

—Mariah