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#1
09-23-2007, 10:49 PM
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Private Mortgages
Real estate market crashes
Mortgage companies crash I buy a house for $200,000 I sell it to someone on a 30 year mortgage at a higher interest rate then a bank would charge. If they default on the mortgage, I get the house back. Current mortgage rates are 6.446%, so I do (??) 7.446%, "Your estimated monthly payments are $1,391.04 and you will pay $300,775 in interest over the life of the loan." Problems: If they don't pay for house insurance, the place is destroyed and they default on the mortgage. If they turn the house into a meth kitchen and the government seizes it (would I get paid?). Question: How do I pay taxes on the mortgage payments they make to me? 
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#3
09-24-2007, 12:05 AM
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Re: Private Mortgages
Yeah, you write that stuff into the note. They don't keep the insurance up, you foreclose. Same with taxes.
You can also write into the sales agreement that taxes and insurance are impounded. When I did this, a title company serviced the payments for $3 a month.
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#4
09-24-2007, 09:04 AM
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Re: Private Mortgages
You can just put these (and other contingencies) into the note you write. Mandate insurance (mortgage companies do, so no reason you can't), etc.
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#6
09-24-2007, 09:34 AM
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Re: Private Mortgages
As a general comment, I feel that you could make a lot more money in real estate in other ways than carrying mortgages at 7% or whatever. 7% for a RE investment, IMO, is very very poor, and personally, it wouldn't be worth my time. 7% can be acheived in many other investment types that are a lot more passive than RE investing.
In addition, I'd say that just about the only really good reason to invest in RE at all is to utilize the high degree of leverage that is available to you in this investment type. Here's why: You invest 200,000, to buy a house, sell the house on a note at 7.25% interest for 30 years. Lets assume that the buyer pays off the loan. After thirty years you've made a 7.25% yield on $200k. Now say that you put 200k as a down payment on a $1M apartment complex: 20 units, renting at $600/month. Lets assume that your complex appreciates at a modest 4% over time and the rent never goes up in thirty years. After thirty years, you've made $4,320,000 in rents plus 3,240,000 in appreciation, PLUS you STILL own the property. I'm not too sure how to calculate your yield here, but needless to say that 7.5 million after thirty years is a lot more than the 300k you make selling the home on an installment sale. Selling on an installment sale is a viable RE investment strategy in only very very few instances. If you've got money to invest, there are far better ways to invest it in RE than traditional mortgage lending. You might try getting involved as a hard money lender instead, as HMLs make 15-20% and up on their yields. [ QUOTE ] Problems: If they don't pay for house insurance, the place is destroyed and they default on the mortgage. [/ QUOTE ] You'd write this into your mortgage so as to protect yourself against this situation. When the buyer gets insurance, they have to list you as the mortgage holder. If the insurance lapses, the insurance company will send you a letter telling you that your borrower lapsed. Then you can take appropriate action. Most lenders don't make insurance grounds for default, rather, if you don't get insurance they'll get it for you and charge you a whole lot more money. [ QUOTE ] If they turn the house into a meth kitchen and the government seizes it (would I get paid?). [/ QUOTE ] Paid by who? The person that is in jail? The government surely isn't going to pay you. If the gov't seizes it, you're stuck until it is released back to you. Of course, you still have to foreclose, and that will take 9 months or longer depending on your state. This can all be avoided, however, by proper underwriting. [ QUOTE ] Question: How do I pay taxes on the mortgage payments they make to me? [/ QUOTE ] This is an installment sale and you are taxed on the interest. You're taxed on the portion of each payment that goes toward interest. So like say that we've got a $200k loan, amortized over 30 years at 7.25%. Monthly payment would be 1364. Now, referring to the amortization schedule, you see that of the first payment, 1208 went to interest, and 156 went to principle. You're taxed on the 1208 at your normal tax rate.
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#7
09-25-2007, 05:32 PM
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Re: Private Mortgages
"Now say that you put 200k as a down payment on a $1M apartment complex: 20 units, renting at $600/month. Lets assume that your complex appreciates at a modest 4% over time and the rent never goes up in thirty years. After thirty years, you've made $4,320,000 in rents plus 3,240,000 in appreciation, PLUS you STILL own the property. I'm not too sure how to calculate your yield here, but needless to say that 7.5 million after thirty years is a lot more than the 300k you make selling the home on an installment sale. "
Commercial property does not appreciate. The value of the house is based on the income of the building. So if rents never increase (and no additional income is achieved) and expenses remain the same, price will stay the same.
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#8
09-26-2007, 09:47 AM
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Re: Private Mortgages
[ QUOTE ]
Commercial property does not appreciate. The value of the house is based on the income of the building. So if rents never increase (and no additional income is achieved) and expenses remain the same, price will stay the same. [/ QUOTE ] This statement is utterly false. Commercial property does, in fact, appreciate. Obviously commerical property is valued in different ways than is residential property. But to say that the value of commerical property is linked only the income from that property is absurd. Think, for instance, about this situation: Bob from Bob's Electric Supply is going out of business after 30 years. He owns a warehouse that you want to buy. The warehouse was owner-occupied, so there has been no income coming in as rents. Is the warehouse then valueless? Is it worth only what he paid of it 30 years ago? Of course not. Now consider this situation: You own a 50 unit apartment building that sits immediately next to the river right outside of downtown. The building is 30 years old, and when it was built it was in a mixed zoning district next to some warehouses and factories. Over the last 30 years downtown has demolished those warehouses and built condos and high rises along the river front. You go down to the zoning commission and get permission to build condos at your property, and as luck would have it, the city asks you if you'd be willing to put in several boat docks along the river front as well. Are you suggesting that the rents determine the value of the property? I think not. Rents and property values are only linked in the minds of beginners and get-rich-quick REI gurus. Thats because a properties income is only one piece of the investment puzzle. There are more ways to make money with a property than simply renting the property out. And to analyze your deals only in terms of rents will cause you to leave lots of money on the table over time. I'd also say that the more I think about it, the more I think that you've got it backward completely. Rents don't created appreciation. Appreciation creates higher rents. As property values rise new investors MUST charge higher rents in order to make any money. Landlords are always responding to market rents, not necessarily creating those rents.
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#9
09-26-2007, 10:28 AM
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Re: Private Mortgages
[ QUOTE ]
Bob from Bob's Electric Supply is going out of business after 30 years. He owns a warehouse that you want to buy. The warehouse was owner-occupied, so there has been no income coming in as rents. Is the warehouse then valueless? Is it worth only what he paid of it 30 years ago? Of course not. [/ QUOTE ] There is a thing called imputed rent, which Bob has been paying for 30 years. So this is a bad example. [ QUOTE ] I'd also say that the more I think about it, the more I think that you've got it backward completely. Rents don't created appreciation. Appreciation creates higher rents. As property values rise new investors MUST charge higher rents in order to make any money. Landlords are always responding to market rents, not necessarily creating those rents. [/ QUOTE ] This is where you completely go off the rails. New investors are landlords. If as you say yourself they are responding to, instead of creating, higher rents, they can't charge higher rents just because they overpaid for property values. You can only charge what the market will bear, or you'll end up with vacancies and lower, not higher, cash flow. You can increase rents by investing in your property and making it more attractive to the renters. Other than that, you are at mercy of the market. If your neighbors and the local government invest around your property and make the area more attractive, it means market rents will increase and your property will become more valuable. If they rezone you so you can develop your property and make it more valuable, it's because of the higher rents it will generate. So in the end it all comes down to the cash flow a property is reasonably likely to produce over time. Even when you buy raw land, it's value is based on the value it may have many years from today when it's finally developed. That value is discounted for time, and risk, but essentially it's based on the value of the income that will be produced by it as a developed property.
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#10
09-26-2007, 12:12 PM
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Re: Private Mortgages
[ QUOTE ]
[ QUOTE ] Bob from Bob's Electric Supply is going out of business after 30 years. He owns a warehouse that you want to buy. The warehouse was owner-occupied, so there has been no income coming in as rents. Is the warehouse then valueless? Is it worth only what he paid of it 30 years ago? Of course not. [/ QUOTE ] There is a thing called imputed rent, which Bob has been paying for 30 years. So this is a bad example. [/ QUOTE ] Yes, but if the buyer of the warehouse is another owner occupant, he would likely be willing to pay much more for the property than an investor who would rent the space out. While those criteria may be fundamentally the same for both - i.e., location, traffic counts, zoning, etc., the values that are determined by each may be very different. That's because the owner-occupant does not have to factor profit into his price and the landlord does. [ QUOTE ] New investors are landlords. [/ QUOTE ] Who says? Landlording is only one way to make money in real estate. [ QUOTE ] If as you say yourself they are responding to, instead of creating, higher rents, they can't charge higher rents just because they overpaid for property values. You can only charge what the market will bear, or you'll end up with vacancies and lower, not higher, cash flow. You can increase rents by investing in your property and making it more attractive to the renters. Other than that, you are at mercy of the market. [/ QUOTE ] Yes, yes, you're right. But the problem for current landlords is that we're not always sure what the market WILL bear. Can we raise rents by 3% this year? 7%? Do I have to lower the rent? We're not really sure. Oh wait, that guy is charging getting 12% more than me, time to raise the rents. 'That guy' in my experience tends to be the inexperienced guy that bought the property for too much. Most of the time its a 2-4 unit property. I dunno, maybe I just don't know what I'm doing as a landlord. [ QUOTE ] If your neighbors and the local government invest around your property and make the area more attractive, it means market rents will increase and your property will become more valuable. If they rezone you so you can develop your property and make it more valuable, it's because of the higher rents it will generate. So in the end it all comes down to the cash flow a property is reasonably likely to produce over time. Even when you buy raw land, it's value is based on the value it may have many years from today when it's finally developed. That value is discounted for time, and risk, but essentially it's based on the value of the income that will be produced by it as a developed property. [/ QUOTE ] Right, I understand that. However, sometimes the current use of a property isn't its highest and best use. And sometimes the highest and best use of a property can generate profits that are not from rents at all. Maybe it wasn't too clear from my original response, but the point I was trying to get at is that renting properties is only one way to make money in REI. Another way might be to tear down the rental property and build something else. I guess that the idea that I was responding to was the idea that CURRENT rents are the only way to value a commercial property. Maybe that's not what that poster meant, I'm not sure.
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