Investment Property Insurance Image by JelleS via Flickr

Sleep Well At Night By Getting The Right Investment Property Insurance

How would you respond to the catastrophic news that your multi-unit apartment has sustained severe damage due to a tumultuous windstorm or a fire? Will you say:

“Oh! That’s bad to hear, but everything will be okay since I got it covered.”

“Shucks! Is the insurance I got sufficient to cover against the damage?”

“Oh no! I have not yet gotten insurance. How am I gonna recover from this? ”

You do not want to be uttering the last two statements, right? Sleep well at night knowing that your investment property is appropriately covered for such losses due to unwanted events like fire, windstorm, lightning, explosion, riot, and unwanted business scenarios such as loss of rents, loss of money, and the like, by getting the most appropriate investment property insurance for your real estate. However, newbie real estate investors often have difficulty choosing the right insurance for their building from among the multiple choices. These are discussed below.

Investment Property Insurance Options

1. Basic Form Policy

You can get either a standard fire insurance written either as Basic or Special Form. The Basic Form protects your property from “named perils.” So if the peril is not specified, it is not covered. Fire, windstorm, lightning, riot, aircraft, hail, explosion, smoke and vehicles are the typical named perils.

2. Special Form Policy

The Special Form coverage protects your property against any loss, except when specifically excluded. Examples of losses ruled out in both Basic and Special Form Policies are clean-up for methamphetamine manufacture or mold and mildew. Losses covered must pass as “sudden and accidental”, while those that materialize over a length of time, like leaky pipes that result in dry rot, are not protected since they do not pass as “sudden and accidental.” You can also add extra coverage to your Basic or Special policy. The extras that are typically added are general liability coverage, loss of rents or income, or an extra umbrella insurance to augment the extent of coverage.

3. Business Owners Package

Your third option to protect your rental property is by obtaining a Business Owners Package or BOP. A BOP ties up all obtainable coverage, such as loss of rents, theft of money, fire coverage (for Special Form), or loss of business property owned by the insured, into a single policy. However, not all properties may qualify for a BOP. Majority of insurance providers will not furnish a BOP on a rental property which only has three units or less. Apartment buildings that are more than 30 years old often do not get a BOP. This bundled coverage is reasonably priced, but the coverage is more moderate and is often available only for buildings of good quality. Terrorism insurance can also be part of the package but protection is usually minimal. On the other hand, wrongful termination, employment practices liability, sexual harassment, discrimination and coverage for earthquakes are ruled out from BOP. If you want to be protected from these risks, you can obtain additional insurance.

4. Specialty Markets

Special Markets are also labelled as Specialty Admitted Market, Excess and Surplus Lines, and the London Insurance Market. You can obtain a Special Markets policy to protect property with risks that are usually excluded by standard insurers, like vacant properties, old buildings, chemical storage facilities, restaurants and bars, and high-risk manufacturing. Owing to their high-risk nature and the limited options available, Specialty Markets policy are typically more expensive. Vacant property insurance and builders risk liability insurance (obtained during the rehab phase) typically can be obtained through the mainstream insurers but needs to be paid for in full upfront generally and typically covers a 6 month term.  Look to pay about $600 – $900 on s single family home for builders risk during your rehab phase.

There can be a lot more options for your investment property insurance; the key is to match your needs with sufficient policy so that you can sleep soundly at night.

See our article

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Investment Property Tax Deductions Image by Buyfixandprofit.com

Understanding The Scope of Investment Property Tax Deductions

One of the perks that attract investors to put their money in investment properties is tax incentives. No other investment vehicle offers this much tax advantage that rental property investment can offer. These deductions can significantly mean your profit or loss. However, those new to their role as landlords, and a few old-timers often unwittingly pass up on the opportunity to make tax savings from their property investments because they do not know the extent of the exemptions. Cash in on this exemptions by familiarizing yourself with what are covered in investment property tax deductions. If you own small residential rental property(s), then you can enjoy the following tax deductions:

Investment Property Tax Deductions For Owners of Small Residential Rental Properties

Depreciation. You, as a landlord, can recoup the cost of your property through depreciation. Depreciation counts the decrease of the value of your property over time. The accounting value of your property, as reflected on your financial statements, decreases because of depreciation. However, this does not make a dent to the market value of the property. By depreciating your property quickly, you can offset income and realize tax savings much sooner. At present, the depreciation for residential properties should be uniformly distributed within 27 and a half years, and no more than 39 years for commercial investment properties.

Interest. Interest is usually the most sizable deductible expense of a landlord. This includes interest on credit cards for expenses used in operations of your rental property, and mortgage interest payments on loans you used to fund the property acquisition or renovation. Mortgage loan interest can be deducted to cancel out an equivalent amount of income. This deduction is similar to the interest deduction for a home mortgage.

Maintenance Expenses. The cost of repairs to rental real estate are totally tax deductible as long as the repairs are really needed, standard, and reasonably priced. You can reduce your tax payable if you incur expenses in fixing gutters or floors, repainting, replacing rotten wood housing the water heater, replacing broken windows, fixing leaks and toilets, and many others. This deduction is especially beneficial for owners of old properties that need substantial fixing since the cost of doing these can be hefty. This is a privilege real estate investors can enjoy but mere homeowners cannot, so take advantage of this. However, this does not cover renovations that extend the life or boost the value of the property.

Insurance Premiums. Insurance premiums that cover rental property investments can be exempt from tax. In contrast, insurance premiums for homes are not tax deductible.

Local Travel. As a landlord, you can deduct the expenses you incur when traveling anywhere for your rental property operations, such as when you drive your SUV, van or pickup to your single-family rental property to handle a complaint of a tenant. You can also include here your hotel bills, airfare, meals, and other related expenses if you travel overnight while conducting business such as looking for more properties to add to your rental property protfoflio. Some investors take advantage of these tax breaks by incorporating other plans, such as taking a side trip vacation, with the said business trip. However, be careful and properly document your travel expenses if you plan on doing this since the IRS will examine overnight travels closely. You do not want to attract unnecessary attention of our friends from the bureau.

As a rental property investor, there are more items that you can deduct from your taxable income. However, we limit our discussion to these items to give way to a brief discussion of what could possibly forfeit your prerogative to tax savings.

Be Careful, You Can Forfeit Your Investment Property Tax Deductions

Be careful with the people you take in as tenants. You can possibly lose nearly all your tax deductions if you rent your property to a friend or family member.  There are also strict guidelines to follow when using funds from your self-directed IRA to purchase investment property. Finally make sure to keep a good record of how much time you spend on your real estate business.  If you can qualify as a Real Estate Professional per IRS guidelines this will allow you to deduct 100% of your paper losses against your income.  To qualify as a real estate professional per the IRS you must spend more than 75o hrs materially participating in your real estate business and must spend more than half your professional working hours materially involved in the your real estate business.

It pays for a landlord to know what is covered in investment property tax deductions since this could bring in substantial tax savings that can significantly impact returns.

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Section 8 Image by ryarwood via Flickr

Many posts ago, we discussed the merits of taking in Section 8 tenants. Many landlords a lured to rent out their properties to these tenants because HUD’s Section 8 has made things easier for them in terms of minimizing late rental payments; property protection; minimizing turn-over; and shortening vacancy periods. If you want to your rental property business to be virtually stress-free, then follow these steps:

Prepping The Rental Property For Section 8 Tenants

Getting the rental property ready for inspection by interested Section 8 tenants would obviously be the first thing to do. Stage the home to make it more appealing and do not forget about curb appeal to lure them inside. When renovating properties for these type of tenants, go for durability over grandeur. Remember that there is a mandatory Section 8 inspection, so forget about doing superficial cover-ups, but instead fix what needs to be fixed to ensure that your property passes the minimum criteria.

Informing The Local Housing Authority That Your Property Is Available For Section 8 Tenants

Let them know that you are making your rental units available for the program. Get in touch with the Board in your local Housing Authority, whichever state your property is located to ensure of its appearance on the local list. Listing the property online through Go Section 8 is not an assurance that your rental unit will be listed locally, so make sure to reach the Board.

Accomplishing The Landlord Packet

To pass as a Section 8 landlord, you have to furnish information substantiating your right to rent out the property, document showing that the property has insurance, and others. Make sure that you submit all the requirements to avoid rental payments from being withheld from you. You can also take this chance to check on the particular landlord information that you cannot find on the Go Section 8 site.

Making A Property Profile

Request for a copy of the list provided by the Section 8 program to potential tenants, and look for properties located within two miles of your property. To come up with a profile of your property, compare your property with these in terms of location, price, square footage, and upgrades.

Marketing Your Rental Unit(s) To Lure Section 8 Tenants

One of the reasons why some landlords are catering to this niche is because there is a great demand for properties that can take in Section 8 tenants. This means that marketing your property would be easy. The Section 8 program listing, where your property must be listed, goes directly to your target market, tenants who are eligible for the program. Marketing to private tenants is not this simple.

Vetting Your Potential Section 8 Tenants

The screening process for this type of tenants is similar to screening other kinds of tenants, so do the process before drafting the lease contract. Although Section 8 authorities would already screen the candidates for particular felonies, you must also do your own research especially for possible recent misdemeanors, or other issues that may later have a huge impact on your rental property.

Checking Out Property Management

Property management could tug at your revenues, but it could also ease off stress due to problem tenants, property maintenance, and compliance issues. Although the rules of the Section 8 program could help to make tenants think twice about vandalism, and delayed payments, causing you less problems. If you think your cash flow can accommodate property management fees, then ask other property investors to recommend property managers to you and hand over the reins of running your property to one of them.

With the demand for this type of property  still high, the provisions of Section 8 protecting your property from delayed payments and vandalism by tenants, and your property manager running the show for you, you can lean back and put your feet up as you wait for Section 8 checks to arrive month after month.

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Assignment of Contract Image by thinkpanama via Flickr

Contract Assignment

A great way for a fledgling real estate investor to kick-start a career in this business is by flipping contracts. When you assign a contract, it means that you grant another party to your rights and prerogatives in a written agreement in exchange for consideration. In legal parlance, “consideration” is anything that has value, including money, goods, services and promises. In this post, let’s use the term to denote “money”.

The Real Estate Contract

As you already know, a transaction in real estate involves two primary parties: the seller who has a property to sell for a specific amount and the buyer who is willing to buy the property for a certain amount. The two will hash out prices until they reach a certain agreed amount. Once they strike this bargain, the agreement materializes into a Purchase Contract. Please bear in mind that in real estate transactions, a contract has to be written down so that it becomes legally binding.

As an example which we will be using throughout the post, let’s assume that in a contract, You as Mr. Buyer, agrees to pay $ 40,000 for the property of Mr. Seller. You do your math mentally and could see that if the property is rehabbed, it can sell for $80,000.

The Assignment of Contract

With a contract in his possession, the buyer can discharge each of his obligations listed in the contract so that in due course this execution of duties can bring the contract to a close and the buyer can get hold of the title to the property. The buyer also has the option to trade in his rights to another party who can take over as though the latter had inked the original contract. In legal terms, the third party is known as the “assignee”, while the one who assigned the contract is known as the “assignor”.

The assignor and the assignee would ink a new document known as the “assignment of contract” so that the former can pass on the position in the contract to the latter. Once this has been signed, the assignee has to pay the assignor an assignment fee and the latter in turn has to furnish the former with the original purchase contract and the assignment of contract so that closing can proceed. In practice, the assignee will hand over the assignment fee first to an escrow agent and the assignor can get the amount during closing. However, if the assignor and the assignee already have a good business relationship, this may not be necessary.

With the Purchase Contract signed by you and Mr. Seller, you, as a real estate investor flipping contracts, would start looking for someone interested to pay you $3,500 assignment fee in exchange for your rights and privileges in the contract. Once you find this person, you and the new buyer sign the Assignment of Contract, wherein you are the assignor while the new buyer becomes the assignee. The new buyer then pays you $3,500 while you hand him the Purchase Contract and the Assignment of Contract and hand it to the escrow agent. The closing proceeds with the buyer paying the seller $40,000 who gives him the title. Basically, the new buyer would purchase the property with an after repair value of $ 80,000 for $43,500.

Assignability of Contracts

As long as it is not specified that a contract is not assignable, you can assign any contract to another party.  Most if not all banks selling their real estate owned (REO) and bank owned properties will restrict the assignability of contracts.  Some real estate investors say they have figured out how to work around this and make money wholesaling REO’s.  Personally, I have tried many of the creative real state investing methods out there and have wasted a lot of time.  There is great money that can be made by applying the basics of real estate investing.

When you understand how the process works, assigning a contract is relatively a cinch to pull off, making it a fantastic entry strategy for real estate newbies to earn in this business.

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Landlord Tips on Rental Applications and Lease Agreements

Prevention is better than cure. The cliche surely applies to renting out properties, and legal documents such as Rental Applications, Lease Agreements and lease clause inserts are your prophylaxis to the headaches that many landlords suffer from when they have not taken the trouble of getting vaccinated. Some experienced landlords and lawyers handling landlord versus tenant cases prescribe some landlord tips for the beginning landlords who are most often still legally blind and additional landlord tips for those who have been in the business for a time.

Landlord Tips on What Legal Documents to Prepare

For a smooth-sailing contract-signing with the tenant, require him to bring the necessary documents including a copy of his social security card, driver’s license, and the amount due in cash, certified funds or money order. The main legal documents you have to prepare to be signed by the tenant are the Rental Application and Lease Agreement.

A Tenant’s Notice of Intention to Vacate attached to the Lease Agreement and a Property Condition Report are also recommended. The former will prepare you when the time comes to look for a new tenant while the latter will help you “look after” the property to ensure that tenants properly maintain it. This may or may not include a Security Settlement Statement that computes for the deductions based on the damages done upon moving out. Take the time to read out the lease with the tenant highlighting the significant parts to ensure that there is a meeting of minds. If the meeting ends in disagreement, go ahead and tear up the Lease Agreement and move on to the next prospect.

Check data in the rental application is a must before turning over the keys to the tenant. Always remember to ask for past and current landlord references and validate these by asking the landlords to validate the address of the previous place they were renting. But sometimes a simple call to the “landlord” may not be enough. Some landlords tell the candidate upfront that they are going to inspect the place which the candidate tenant is vacating. If he argues about this, then they do not take him in. If he comes from out of town or his place is out of the way, then they require him to double the deposit. The same goes with candidates who lived with relatives or friends. If after six months, things appear to be peachy, the tenant gets refunded for the additional deposit. If you plan to copy this strategy, ask for advice from your lawyer if these inspections are considered legal in your region.

Furnish the tenant with a copy of the Rental Application which he signed. This is for your protection as it includes statements that authorizes you to retain the deposit should the tenant breaches his commitment to rent.

Landlord Tips on What Legal Documents and Document Changes To Avoid

To avoid a possible headache, do not allow the prospect to delete clauses or make changes to vital parts of the lease. Some tenants may have their own versions of the Lease Agreement, it would be best for you to stick to your own. Obviously, his version will include tenant protection wordings. Now whose welfare are you trying to protect?

To avoid the headaches of managing a property and dealing with problem tenants, it will serve you well if you ink a Lease Agreement with all bases covered. Most landlords know this that is why they share experiences and exchange landlord tips for their protection.

What is Foreclosure Defense?

Foreclosure defense is a legal strategy in which a homeowner retains the services of an attorney to complete a forensic loan audit of all the documents associated with the mortgage. The attorney is looking for fraud and predatory lending violations than can then be used to aggressively counter sue the bank for damages and in return force the bank to negotiate with the homeowner or investor.  This process can typically take 12-24 months depending on the severity of the findings.  Remarkably, on average over 80% of all residential loans since 2003 contain such violations.  During the housing boom, banks could not push new mortgages through their system fast enough to satisfy the appetite for profits by Wall Street.

In the midst of this frantic churning of mortgages, many T’s were left uncrossed and many I’s were left undotted.  There is a long list of items than an experienced foreclosure defense attorney will pursue in order to delay the foreclosure process or in some cases even completely rewrite the actual terms of the note.  Just a the few of those items include: chain of title issues, backdating of documents when deadlines were missed, loss of original paperwork including the note, good faith estimate (GFE) numbers not adding up, unauthorized individuals signing paperwork, strict pooling and servicing agreement (PSA) guidelines not being followed, and on and on.

In the worst-case scenario, the attorney is able to delay the foreclosure 1-2 years while the homeowner or investor does not make a single mortgage payment during that time. This allows an individual the time needed to get back on their feet and regroup prior to the foreclosure occurring.  In the best scenario, the attorney is able to delay the foreclosure process 1-2 years and settle with the lender for a reduction in principle, lower interest rate and in many cases a brand new loan. There are even cases where the bank has not been able to produce the original note and the case goes into extended limbo or even the note is forgiven since the is no legal proof that the owner owes that money.

Is Foreclosure Defense Ethical?

Everything being performed here in legal, but is it ethical?  First of all, banks don’t make decisions based on emotions; the words in the contract are all their attorneys stand by.  In the majority of cases, investors and homeowners did not take out mortgages in order to defraud an institution.  Most individuals approached their banks looking for a forbearance, a loan modification, or a short sale once they realized the trouble they were in.  The problem is that the majority of the requests were denied or ignored according to the statistics.  Foreclosure defense is a viable and effective way to force the banks to actually take notice of your case and work with you.

Foreclosure Defense Costs

According to Adam Ackerman, one of the managing partners at www.foreclosuredefense.com, the initial forensic audit of the mortgage documents costs approximately $750 per property.  Then after that, there is a monthly $750 retainer fee that is charged per property.  So given these costs, this option isn’t for everyone.  If your a homeowner or investor with a monthly mortgage in this range to start with, it may be better to just save all your money and ride out the process until the property is sold at auction.  But for the many homeowners out there with much larger mortgages, in many cases a $750 monthly retainer would be more than a 50% reduction in the monthly payment while the attorneys fight on your behalf.

Applications for Real Estate Investors

During the interview, Ackerman detailed several examples of how real estate investors struggling with under performing rental properties asked the banks for help in the form of a loan modification or a short sale and were turned down or ignored.  Now these investors are using foreclosure defense techniques to force the banks to negotiate with them.

Banks are not set-up to deal with aggressive countersuits when they foreclosure on someone.  Foreclosure attorneys working for the banks earn a flat fee based on the minimum work required to process a foreclosure.  So when requests for detailed information, proof of documentation and countersuits start coming in, most of the time the banks don’t want to deal with this kind of headache and magically become receptive to the investor’s request for a loan modification or a short sale.

In one case, an investor with a two multi-unit buildings purchased during the boom was struggling to pay his mortgage due to the reduced rents from his struggling tenants.  The bank refused to work with him and in turn he hired a foreclosure defense attorney to represent him.  Even after paying $1500 per month (2 properties) for the defense, this investor is still taking home $3500 per month in rents. Even if the foreclosure defense fails, after two years of delaying the foreclosure process, the investor will have collected $84000 in rents.

Short Sale Investors

Foreclosure defense can also be a good tool for those real estate investors working with homeowners to either buy or flip their property after the banks approves a short sale.  Deals with large profit margins may be well worth saving using foreclosure defense techniques in order to buy the added leverage needed to help the bank change its mind.

Special thanks goes to Adam Ackerman at www.foreclosuredefense.com for contributing to the information in this article.  Their network of attorneys work with investors and homeowners across the country in all 50 states.  Please feel free to contact them for more information and a free consult.

Flippers and Rehabbers Caught in the Crash

Many real estate investors, flippers, and rehabbers were caught with their pants down when the real estate market crashed in mid 2007.  Rehabbing and flipping foreclosures was the craze at the time, as depicted on the many popular TV shows such as Flip This House and Property Ladder.  As long as the money was flowing loosely from the banks to the investors and homeowners, flipping a rehabbed home was relatively easy.  Almost anyone could arrange 100% financing for their end-buyers back then.

Bankruptcy & Real Estate Investors

But when the money dried up and banks stopped lending almost over night, many investors were left holding fully rehabbed homes with no buyers to be found.  Many of the flippers at that time had no intention of ever being a landlord and therefore were determined to sell their property rather than rent it out.  The problem is that the real estate markets only got worse.  For several different reasons, the REO’s being flipped for quick cash were not good rental property candidates.  They were either too expensive or in too rough of a neighborhood to find quality tenants to occupy them.

Bankruptcy – What Does it Accomplish for the Real Estate Investor?

Many investors spent their entire savings and even their retirement savings (ouch) in an effort to keep their under performing rentals afloat when selling them didn’t work.  Stuck with maxed out credit cards and uncooperative lenders, many investor have filed for bankruptcy to get out of this mess.

Bankruptcy Accomplishes the Following for a Real Estate Investor:

1. It eliminates the right of the lender to collect a deficiency judgment from the investor when the property sells for less than its loan amount.
2. It relieves the investor from the obligation to repay the note on the property.
3. It eliminates the need to pay the real estate taxes, since the bank cannot come after the investor anymore.  The bank will be stuck paying the taxes for you, in order to avoid the property being sold at a tax sale.

Bankruptcy Does Not Accomplish the Following for a Real estate Investor.

1. Bankruptcy itself does not relinquish ownership of the property. The real estate investor still legally owns the investment property after a bankruptcy is filed.  The bank has to legally foreclosure on the investor in order to take back the property.  This means the investor could keep collecting any rents received until the property is sold at auction assuming the bank does not assume the rents as they are entitled to.
2. Bankruptcy does not eliminate the landlord’s liability for what happens at the property.  Since ownership still belongs to the investor, the investor can still be sued by a tenant, the city, or issued violations that will have to be dealt with.
3. Bankruptcy does not eliminate the landlord’s responsibility to the tenant as dictated by a lease or local tenant-landlord laws.

Your Real Estate Investing Career is Not Over

Remember, bankruptcy stays on your credit report for 7 – 10 years so make sure its your only way out.  But if that’s your last resort, don’t be pressured into doing anything that’s not required of you.  Being eligible to file for bankruptcy usually means you’re in pretty bad shape financially, so understand the law and do what’s necessary to get yourself back on your feet as fast as possible and investing once again.

Bankruptcy does not mean your real estate investing career is over.  There are still many options out there for the creative investors.  Private lenders, hard money, transactional funding, and owner financing can all be used to continue investing in real estate even with bad credit.

Over the past year, I have talked with several investors down on their luck because of the real estate market crash.  Everyone seems to have the same story, “I didn’t see this coming”.  More accurately put, I would say that most of us had our blinders on and tried to enjoy this gravy train as long as we could.  So what does an investor do to get through this downturn?

Banks are Approving Loan Modifications for Investors

Banks are approving loan modifications for investors

Bank of America (Countrywide), Harris Bank, and local community banks are some of the banks that we have first hand experience with in successfully modifying the loans on rental properties.  Surprisingly, contrary to all the news you here about how difficult this process is, all the loan modifications we have done have been fairly easy!

Here are some of our key points and experiences dealing with the loan modification process:

1. On one property involving a local community bank, we were turned down for a loan modification even though we put together a perfect application showing that this property would be behind on payments any month now.  The property was struggling but the bank wasn’t since the loan was still current.  So we fell behind on the loan for two months and reapplied.  Guess what?  The loan mod was completed in 4 weeks with the monthly payment being reduced by 30%.
2. In the case of Bank of America, the entire application process was done over the phone including the hardship letter.  Now this process was long and drawn out, 9 months in total.  6 months of the process were a trial period to make sure we could make the new payments.  This loan modification reduced the monthly mortgage payment by 43%.
3. In the hardship letter, it’s important to explain how and why the situation occurred and what is being done to correct it.  Explaining that the tenants are behind on payments and are being evicted or put on repayment plans has worked in every case.
4. You will have to prove that you will be able to make the new payments on the loan.  This is either has to proved on paper or during a trial period before the loan is officially modified.
5. In all of our dealings, late charges and fees immediately stopped once the application for the loan modification started.  In most cases the late fees were waived upon approval of the loan mod.
6. We never received any principle reductions.  All modified loan terms centered on lowered interest rates and changing option arms and variable rate balloons to 30 year fixed loans.
7. The banks never inspected any the houses.  One bank did a drive by to make sure the property wasn’t boarded up.
8. There were no fees involved to complete any of the loan modifications.
9. Attorneys and special loan modification companies are not needed to successfully complete a loan modification.
10. Keep a log of all phone calls and what was discussed.  Always ask when you should expect to hear back from the bank and follow-up immediately once that date hits.  Make sure to get any new terms or trail period payments in writing.
11. One investor dealing with American Home Mortgage found them very difficult to deal with and ultimately decided to let the property go into foreclosure. The interesting thing to note here is that the foreclosure proceedings are now approaching 14 months!
12. On a slightly different note, I actually got my primary residence home equity line of credit modified from an interest only variable rate loan to a 30 year fixed rate loan at 4.875% WITHOUT ever being late on any payments.  This loan is with Fifth Third Bank.  I have to say that the hardship statement that they took over the phone was pretty much a joke.  I just said I had several poorly performing rental properties in my investment portfolio; no proof needed.  I think in this case it helped that I was a very good customer.

For those Severely Behind on Payments

First of all, this downturn will not be over in 2010.  If you’re struggling with keeping up with payments on unrented rehabs or poorly performing rentals, then stop dreaming that this will be over anytime soon.  The key is to evaluate your situation objectively by eliminating all emotion from the evaluation.  That means that the best option for some of you that are severely behind on payments will be to file for bankruptcy and let the banks foreclose on your bad investments.  It happens; get on with your life.  It may take 5 to 7 years before you recover enough equity to make selling is an option again.  Also, please do not start using your retirement funds to stay afloat because you think it’s the morally right thing to do.  It’s a business decision, period.

You will have plenty of time to relax when you own several free and clear investment properties.

In the years leading up to the real estate debacle which began in May of 2007, many real estate gurus were touting that even if a property barely breaks even on a monthly cash flow basis, it’s still a good deal because of skyrocketing home values.  The option arm mortgages were also marketed on this same premise, that home values will never go down.  That game is over.  The easy money loan programs are gone and interest rates will most likely rise in the future.  This will keep prices in check and property values will appreciate very slowly over the next 5-7 years.  This makes cash flow king once again; speculation is dead. Fortunately for rehabbers and investors alike, positive cash flow has never been easier to obtain given the amount of cheap foreclosures hitting the market daily.

With that said, here is what you can do with that extra cash flow.

This graph illustrates the effect of increasing the monthly mortgage payment on reducing the length of the mortgage payoff term.  This example is based on an investor buying, fixing, renting, and refinancing a property for an end loan value of $80,000 at 7% interest with a 30 year term.

Payoff Acceleration (years) vs. Additional Monthly Payments ($)

For a Loan Value of $80,000 @ 7% Interest on a 30-Year Term

Payoff your Loan in Half the Time

Just by paying an extra $100 per month, the loan payoff is accelerated by over ten years!  An extra $200 per month cuts the payoff time to less than half of the original term.  Notice that the acceleration of the loan payoff reduces sharply as the amount of the monthly payment increases above $200 per month in this example.  So in this case, if your monthly cash flow was $300 per month, it would make more sense to only contribute an additional $150 -$200 per month to the mortgage and put the remainder into a maintenance/repair account.  The acceleration of the payoff on similarly structured loans diminishes quickly after a certain point (additional funds) on ALL mortgages.

So instead of spending your extra $200 per month on fast food and other items you don’t need, apply that positive cash flow to your rental property mortgage and own that house free and clear in half the time.  Use the Quick Cash Flow Calculator to determine how fast you can pay off your rental property if you were to apply all of it’s positive cash flow to the mortgage.   Buy, fix, and rent out several properties like this and retire from your wonderful 9 to 5 job in half the time.