Monday, September 27, 2010

Rental Inventory - Facts and Myths

Myth – it is absolutely impossible to get a rental.
Fact – rental inventory is really tight right now, but a smart renter with a good broker will take advantage of any opportunity and can find an apartment with relative ease.

Myth – unit availability is on a decline, fewer and fewer units are available.
Fact- while it may feel like inventory is declining; the figures given in the recent rental market report released by The Real Estate Group NY indicate an upward trend of rental unit availability. In fact, availability is up 1.7% for doorman units and up 3.6% for non-doorman units all across NYC.

Myth – inventory statistics are hard facts that the renter should live by.
Fact – inventory statistics are almost always estimates. As any broker will tell you, there is no one central rental tracking system in New York City. Even though you can now get more information than ever from online sources, rental inventories are still in their dark ages. Until New York City landlords agree to a central rental tracking system, inventories will always be incomplete.

Myth – landlords often over-report their inventories. All inventories in New York are over-reported.
Fact – Most inventories are very under-reported. A large portion of mom-and-pop rental agencies have units that aren’t even tracked in the first place. Manhattan is a large city with an incredibly large number of landlords, and the units of the smaller landlords are very rarely fully represented. Furthermore, bigger landlords often do not fully represent their inventories in fear that a large availability will lower prices across the board. It is in their interest to show less of their supply to up the demand and to keep prices high. If people think there are few available units, they will be more likely to pay more for those units.

Myth – when searching for a property, it makes sense to go online, look up a large number of listings and send them to your broker. It makes even more sense to attempt to handle the negotiations alone once you find the right property.
Fact – you employed a broker for a reason. Odds are, most the listings you will find on Streeteasy, Craigslist or similar web sites are already rented out or are simply not available. An experienced broker will filter through those situations and only provide you with real possibilities. You are not an experienced broker, and will likely not be able to decipher the realities from old or fake listings. Sending him listings may give him an idea of your preferred criteria, but typically these listing are misleading and this simply slows the process down. Your broke has access to all of the current listings in the city and if he finds something good it is important to make time so someone else doesn’t beat you to the punch.

Myth – as a potential tenant I am looking on line and seeing some listings before my broker sends them to me. It doesn’t seem like he is looking out for my best interest. I have a better selection on line and am able to gain access just as quickly as a broker.
Fact – each landlord has their own marketing plan. Some landlords will send their listings to the brokerage community instantly and others will hold them for a few weeks put them up on their own websites (sometimes these web sites re scrapped or getting direct feeds) before they share the listing with the brokerage community. The number of landlords that do this is small but they each have their own approach to pricing, incentives, internet marketing and working with the brokerage community. Brokers have access to almost all of the listings and receive them in a very timely manner. If you are seeking something specific and/or want to have an edge over other renters seek a good broker to represent you.

Thursday, September 16, 2010

Hedge your Multi-Family Bets

When I first started investing in real estate one of my mentors took the time to explain the value of purchasing multi-family investments rather than single family homes. As a result, most of my property investments are multi-family. If you think about it for a moment, it makes more sense than purchasing a single-family dwelling for investment purposes. The idea is to hedge your investment and to keep the cash flow in your business positive. Even though I have been lucky and experienced a rather low rate of vacancies over the years, when I do have an empty unit, the other unit(s) in the building creates a buffer and protects me from taking a complete loss on the property for that period.

By choosing multi-family properties as an investment you gain in other ways too. It is always good to have another set of eyes to watch over your property and tenants like to report to you what is going on especially if it is negatively affecting them. One time, I had a young couple and two children living on a top floor unit and just above them was the attic. They decided to try and save a little money and temporarily had their mother living up in the space. It took a noise complaint from the other tenant in the building to bring this to my attention. There are so many issues here that could be very negative for all, but my main concern is for the safety of those living in the house. In the attic there is only one ingress and egress (only one way to escape – the stairwell), so in the event there is a fire they would be unable to escape and there is no fire alarm in the attic to warn the habitant in the event of a fire. Having another set of eyes looking over your property is a huge advantage and can help to reduce your liability.

It helps to maintain a good relationship with your tenants. If you show an interest in their well-being and take good care of the property, for the most part, in turn they will take good care of it too. When consulting with other landlords and managing agents in the past, I have heard and witnessed the mis-handling of tenant’s complaints. I have also seen poor communication skills from landlords when tenants are late with rent. Both of these occasions are opportunities to be firm yet fair. What I have found is it is always helpful is to talk positively, be courteous and communicate via e-mail stating your position. This way you always have a record of the communication and you can write in a manner that is without emotion. Being emotional in your response will usually backfire. The last thing you want to do I create a vindictive and hostile atmosphere.

You can typically gauge what is happening with the tenant and with your assessment outline your actions and then follow through. This is true whether you are handling a simple repair or a more complex matter of a potential eviction. Also, take a few moments to understand their situation and determine their intent. By listening to their situation you will benefit greatly and it doesn’t hurt to be genuinely concerned, just as long as it doesn’t cost you money. Believe it or not, niceties including please and thank you go a long way and so does hope you had a good weekend or take care. If you create a good relationship and choose multi-family investments you definitely improve your position and reduce your liability.

Thursday, September 9, 2010

Credit Inquiries – Do they affect your FICO Score?
It has been a while since I last addressed the subject of Inquiries. It seems there are always endless questions and confusion surrounding this topic. What is an Inquiry? An Inquiry is when a consumer's credit is reviewed by a lender, creditor, or by the consumer personally. Inquiries remain on the credit report for two years. Some types of inquiries will hurt credit scores, while others won't affect them at all. This seems to be where the most confusion comes into play.

When a third party pulls credit with the consumer's authorization this inquiry will negatively affect the credit score. This type of inquiry is called a "hard pull". On the other hand, if a creditor pulls credit without authorization (for example, to consider a consumer for a promotional 2% credit card offer), it is considered a "soft pull." A soft pull is an inquiry that does not negatively impact the credit score. But suppose the consumer applies for the promotional 2% credit card? The creditor will then undertake a more in-depth review, this time with authorization. This will be considered a hard pull, reducing the score.

To understand inquiries we must look at scores as well. We will take the FICO Score as an example. The FICO Score is used by mortgage lenders when deciding a consumer's risk level. Based on the risk level, lenders decide what interest rate is appropriate for a loan -- or if a loan will be approved at all. When lenders pull FICO Scores it is considered a hard inquiry and will hurt the credit score. But FICO also sells scores directly to the general public online at Ordering your score and credit report directly from this site will not affect your score. In fact, even if a consumer pulled his credit and scores 80 times in one day at, all 80 pulls would be considered "soft" and would not affect the score. Consumers can also obtain their credit directly at other online sites, such as,,, etc. without hurting their FICO score.

This is how FICO defines the effects of inquiries:

"The impact from applying for credit will vary from person to person based on their unique credit histories. In general, credit inquiries have a small impact on one's FICO score. For most people, one additional credit inquiry will take less than five points off their FICO score. For perspective, the full range for FICO scores is 300-850. Inquiries can have a greater impact if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk. Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports. While inquiries often can play a part in assessing risk, they play a minor part. Much more important factors for your score are how timely you pay your bills and your overall debt burden as indicated on your credit report." **

Fico speaks about the five points as if they were insignificant. But five points at a 740 or 720 FICO score can make a big difference in interest rates, which could equate to a considerable amount of interest over the life of the mortgage depending on the size and life of a loan. It is essential to think about timing when you manage your credit. Timing is everything. If a consumer is planning on applying for a mortgage within one - two years, every action that could affect their credit score should be weighed by the impact it will have on that loan. Since a home is one of the largest purchases a consumer will make in their lifetime, and the mortgage will be one of their largest monthly payments, it only makes sense to try to get the best interest rate and make the lowest monthly payment possible. With this in mind we must understand how different inquiries happening at various times change a consumer's scores.

When lenders pull credit scores through their pulling service (a third party between the bank and the credit reporting agencies - Experian, Trans Union, and Equifax) they are given merged reports that come in a format of the bank's choosing. What most people and bankers may not realize is that each bank chooses what "window" they will use to decide the effect of inquiries. The window is defined as the time period the consumer has been allotted to shop for a mortgage loan, car loan or lease, or student loan, without each inquiry reducing their credit score. During this window they can have 10, 20, or even 60 inquiries and it will only affect the score as if it was one inquiry (or hard pull). This applies only to the three loan types mentioned above, and each group is considered separately in batches of inquiries.

For example: Brian was shopping for the best rate on a mortgage. He went to Bank of America on August 1st , Wells Fargo on August 3rd, HSBC on August 12th, and M&T on August 16th. All of these banks had a 14 day window that they allowed for inquiries to be viewed as one in batches. The three inquiries within the 14 day period only reduced Brian's score by 4-5 points but the inquiry that occurred on the 16th day, which was past the 14 day window, decreased his score another 4-5 points. Brian's score was a 725 when he began and by the time he decided he wanted to get the loan 2 months later, after having his credit pulled yet again, his score was down to a 710. Brian could not get the type of loan he originally wanted because of the lowered score. He wound up paying more for the loan but he was lucky because he could have been turned down completely.

Most banks used to have 30 day windows but when the economy changed they became more restrictive on lending money. Reducing the window reflects the banks' more conservative posture.

Now getting back to Brian: If we take the same situation as the above but we have Brian shopping for a car at the same time it would look like this: Brian went to a Toyota dealer, a Lexus dealer, and an Acura dealer looking for a car loan on August 5th, 10th, and 14th. This would only have reduced his score another 4-5 points since it was done within the14 day window. But if he also increased his spending limit at Macy's on August 9th that would reduce his score another 5 points. Now we are talking about a 700 score. This is a major change in score and could make a huge difference in his loan rate.

To be clear, then: Each grouping (or batch) of inquiries for a car, student loan, or mortgage is considered as one single inquiry per group, as long as they are performed within the allotted window. Any other hard pulls during the window, such as for an increase in spending limits or to open new credit, are never viewed in batches and always reduce the score individually.

Once empowered with an understanding of how inquiries can decrease their scores, and the art of timing when shopping for loans, consumers have the power to make a big difference in their financial lives.