The Magic of Income Property Math



How Income Math Is Magic

Owning income property is the key to magic money. Don’t believe me?

Think of it this way. Let’s take a small income property, say a fourplex. A quick way to figure the value of a fourplex or a duplex or triplex is to take the NOI [net operating income] and multiply by 10 or 12, the going rate here in Southern California.

So for example, a fourplex has four equal units and each is rented for $1000. Monthly income is $4000 and yearly income is therefore $48,000. The owner pays water and garbage collection for a total of $300 per month or $3600 per year. The taxes and insurance amount to $5000 per year and repairs about $2000. Subtracting these expenses from the income of $48,000 gives us the net operating income of $37,400. Multiply that by 10 and the value of the property is $370,400.

Rents have been going up all over the country and especially here in Los Angeles, so it’s time to raise the rent to current market rates.  Each unit will now rent for $1100. Yearly income becomes $52,800 and, assuming expenses stay the same, the NOI  $42,200. Multiply that by 10 and the value of the property is now $420,200. Magic. Pure magic.

For every extra dollar in increased rent, the value of the property goes up $10. This is truly magic math. Almost all the gains are passive. This kind of math is much more favorable than paycheck math, small business math or stock investing math.

More Magic

In the above example, the owners have not only increased the value of their property, but are also receiving a monthly income of $3500. If the property also has a mortgage, not included in the NOI, the tenants are paying that mortgage, not the owner. 

Many owners of income property fail to keep their rents at market rates. Now you can see why this is potentially catastrophic in the event that they wish to sell the property, take cash out of the property or refinance. Unless the rents are kept at market, the value of the property does not increase.

Reverse Mortgage Fraud Revealed

senior citizen

What Is A Reverse Mortgage?

Many senior homeowners with equity in their residences have elected to take out reverse mortgages. These mortgages allow the homeowners to borrow a substantial portion of  their equity  and at the same time to continue living in the home while making no payments to the lender. The homeowner does continue paying taxes, insurance and other home-related fees. The purpose is to help seniors continue living in their homes.

So far, so good, but these mortgages do come with a few qualifications just like any mortgage. First, the homeowner must be 62 or older and have substantial equity in the home or own it free and clear. Second, the homeowner must continue living in the home. If the homeowner moves or sells the home, the reverse mortgage must be paid off.


Reverse Mortgage Fraud

It’s important to emphasize that the homeowner must continue to live in the home. In fact, that is the whole purpose of reverse mortgages and why lenders under guidelines from HUD and FHA are willing to offer them. Every year recipients of reverse mortgages must sign a Certificate of Occupancy attesting that they continue to reside in the property.

But, recently, a routine trial audit sent shock waves  through the HUD Inspector General’s Office for HUD’s Reverse Mortgage Program [HECM]. The audit found that in the small sample of 159 recipients an astounding 86% of borrowers could not meet the residency requirements.

According to audit’s findings, the ruse was discovered because these homeowners  were also receiving rental assistance under a federal voucher program FOR A DIFFERENT ADDRESS AT THE SAME TIME.

Further, of the 136 violators, 46 borrowers outright certified the property as their principal residence. In other words, they lied and filed a false statement to HUD. Initially, 80 borrowers refused to provide occupancy certifications and were later found NOT to be residing in the home. Of the 159, only 10 admitted they were not residing in their homes.

As a result of this audit, chagrined HUD officials with begin conducting residency re-certifications of all homes secured by reverse mortgages.

Penalties For Reverse Mortgage Fraud

For homeowners who have violated the residency requirements of HECM guidelines, the lender may require:

1)  Immediate payment in full of the loans all outstanding principal balance and accrued interest.

2)  Back payments going back to the onset of the fraud.

3)  Failure to comply can lead to criminal penalties for the homeowner and any co-conspirators

It may seem hard to imagine hordes of senior citizens conspiring to defraud banks and the government departments which guarantee the loans, but that is exactly what has occurred.

So far the process has remained in the realm of civil litigation, but if the fraud is as widespread as the initial test group suggests,  look for HUD to begin to proceed with high profile criminal prosecutions as a way of cleaning up this mess.

Foreign Buyers in California


foreign money

International Buyers of US Residential Real Estate

Every year since 2007 the National Association of Realtors [NAR] has released a survey of foreign buyers of U.S. residential real estate. This year’s survey covers March 2013 to March 2014. Foreign buyers are defined as either those non-residents or those who have immigrated within the last two years. 
For this period nationwide, the total sales volume to international clients was $92.2 billion, a 35% increase from the previous period’s level of $68.2 billion. The dollar level of international sales was roughly 7% of the total U.S. homes sales of $ 1.2 trillion for the same period . Compared to the previous year, sales to foreigners increased both in numbers of transactions and in average price. 

Where Do International Buyers Come From?

Foreign buyers come from all over the world, but the top countries of origin are Canada, China, Mexico, India, and the UK which together represent 54% of all sales to foreigners. Canadians bought the most in terms of number of sales, but Chinese bought more in terms of dollar volume. As Chinese tend to purchase in a few pricey states, California, Washington and New York, so their average home price is higher than most.  Canadians purchased in lower-priced states of Arizona and Florida.

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Foreign Buyers In California

By far the greatest number of foreign buyers in California come from China which includes PRC, Taiwan and Hong Kong. California and Washington are destination states partly because of the proximity to Asia.

foreigners in ca r e

 AR’s newly released 2014 International Home Buyers Survey,showed despite a slowing in the California housing market in 2014, international home-buying activity continued its momentum. A large percentage were from China and their purchases remained very cash-strong. 

Since obtaining mortgage financing is difficult for non-residents, though not impossible by any means, 66% of international buyers paid all cash , down slightly from 69% in 2013.  Those who purchased homes below $500,000 had the greatest tendency to pay all cash (66%), compared to those who purchased homes costing $500,000 to $1 million (57%). 

Overseas buyers tend to be more affluent than the average California buyer. Most have already established homes in their own countries and are seeking resort/rental properties abroad. Some are looking for a more secure place to put their money and the US, and especially California, figure high on the list of desirable locations.Many overseas buyers find the stability of their home countries questionable and seek to protect their assets abroad and specifically in the US. This is particularly true of affluent mainland Chinese as the home economy is now constricting. 

Since non-resident visas are for no more than six months, many international buyers plan to rent their properties for at least half the year. Rentability and profitability are important considerations for such buyers. 

Overseas buyers purchased more expensive homes at a median price of $490,000, compared to 2014’s single-family median home price of $447,000. Those who purchased homes below $500,000 had the highest percentage of investment purchases (40%), compared to those who purchased homes between $500,000 and $1 million (17% for investment) or those who purchased homes over $1 million (34% for investment reasons).

Nearly half of overseas buyers purchased a home in the suburbs. The percentage who purchased in a city center or urban area declined from38% in 2013 to 33% in 2014, while purchases in small towns/rural areas increased from 9% to 10% over the same period. About 67% of international buyers  bought single-family detached homes, and 23% purchased a condominium or townhomes.

IBs in 2014 intend to keep their property for a median of 7 years, compared to 5 years in 2013.

The percentage of first-time IBs in the U.S. declined from 59% in 2013 to 54% in 2014. 75% of overseas buyers said they purchased in the U.S., primarily to be closer to family/friends, for investment and tax reasons, or because of a child attending college in the U.S.