For most of us, financing goes hand in hand with real estate investing. Of course, there are cash buyers, but often they don’t mind refinancing a property to withdraw their cash to start another project. So, where do you learn your financing options? I suggest having 3 trusted sources. A commercial banker that is familiar with real estate investing, a mortgage broker with experience of CLOSING loans RECENTLY on non owner occupied properties, and watching a trusted site like http://www.mortgagenewsdaily.com/ to get current rate and market information. » Read more: Step one: Financing….where do I start?
Understand what season you are in
November 11th, 2009 by Dan Shafron No comments »I and many other investors, consider these times to be the best time to buy property. In agriculture, this would be the planting season. Now is the time you prepare your fields, plant seeds, and nurture their growth with anticipation of an excellent harvest in the spring. Just like you do not see farmers harvesting their corn in February in the Midwest, it would be unwise to try to get top dollar for a property that you purchase now.
Very similar with real estate investing. Now is the time to plant excellent deals into your portfolio and nurture them for big profit later. In this market of difficult credit, low appraisals, scarce retail buyers, it is the time to pick up great deals, and not focus on trying to get top dollar for your property. Now, I still suggest buying properties that put money in your pocket with monthly cash flow and have equity, but I intend to wait until the market turns around before turning that equity into cash. Many previous successful investors bought properties in times like this, and focused on selling books and their properties when times were booming. I plan to follow that success path and build a solid portfolio and not try to harvest my investments right after they are planted.
Dan Shafron
Learnrei.com
Talk the talk, then walk the walk… financing 101
November 9th, 2009 by Dan Shafron No comments »If you are new to RE investing you may be confused with many of the acronyms out there. There is no way to fit them all into a blog post, so for this round, I will focus on financing.
If you want any chance of financing your deals, or negotiating with a seller or sellers agent, you need to know the lingo. Not only do you need to know the lingo, you need to understand the meaning of these terms and how they affect your investment. By knowing the rules of the game, you can apply a strategy to meet your goals. OK, lets start out easy….
Interest Rate for investment property
This is the rate of interst that the bank charges you for borrowing their money. This rate can vary depending on many factors, such as borrowers credit, loan term (or length of loan), type of property, etc… You can find many different interest rates out there for investment property, so you need to shop carefully. When dealing with property that is not your primary residence (non-owner occupied), you need to be careful and read the fine print on the loan you are applying for. Make sure that the loan officer has history of ACTUALLY closing on a similar type property within the last few months. Do not take their word for it, or accept that they did a deal like this a year ago! A great rate that never makes it to the closing table gets you nowhere.
ARV – (After Repaired Value)
This is a very important and highly misunderstood term in real estate investment. All of the properties that I buy are distressed and need repairs to make them “homes”again. When evaluating a deal, I analyze what the property will be worth after I make repairs to it. I do this by searching the MLS for comparable sales of SIMILAR properties that were sold in good to excellent retail condition. If I determine there is enough potential in the deal, I will offer to buy it. My lenders will usually require an Certified Appraisal to back up my comparable sale analysis and get a independant third party opinion. Since the property is not currently in retail condition, I will submit my list of intended repairs and the Appraiser will take that into account when determining value or ARV
LTV – Loan to Value
Loan to Value is simply the loan amount divided by the current or after repaired value of the house. In these times and for non-owner occupied properties, 70% LTV is about the highest a lender will loan. There are exceptions, but this is a good rule to start from. Many banks will not loan based on the after repaired value of the property, but there are a few out there that will. It is important to note that value is usually determined by an appraisal, especially when a bank is involved.
DSR – Debt Service Ratio
Debt service ratio is basically your cash flow number. You divide your income from the property (usually the rental income), with all of the expenses assoicated with that property. Expenses are usually mortgage payments, real estate taxes, real estate insurance, maintenance budget, association dues, any utilities due by the owner. Banks want to make sure that your investment will provide you with positive income and therefore suggest a ratio of 1.15 to 1.25 as the threshold to lending.
I am not a banker, but I have been to the closing table many many times. Let me know your thoughts and thanks for reading. Of course, you can also send suggestions for other topics for me to write about.
Dan Shafron
How would you like an easy 5% raise?
November 4th, 2009 by Dan Shafron 1 comment »How would you like an easy 5% raise?
When I worked in the corporate world, a 5% raise was pretty good. An employee usually had to be working on the right projects and putting in a very solid effort to earn this. In this economy, many are just glad to have a job, let alone worried about getting a raise. This morning I had a realization! I have been providing investors with properties that cash flow between $300 and $400 per month in positive cash flow. I just realized that for someone making a good income, this equates out to roughly a 5% raise.
Since I am a numbers guy, check out this recent deal that one of my investors did:
Step 1. Purchase a distressed home: $49,000
Step 2. Rehab the home: $10,000
Now the property is comparable to properties selling for $110,000 in the local area, so we use this as our After Repaired Value (ARV).
Step 3. Borrow $59,000 @ 6.75% APR amortized over 25 years with a payment of $671 including Principal, Interest, Taxes ($3000/year) and Insurance (PITI)
Step 4. Rent the property for $1000 per month, which is the going rate for a property in good condition and of this size.
That comes out to over $300 per month in positive cash flow $1000 – $671 = $329 to be exact.
Now if you make $75,000 per year, a 5% raise would be about $3750 annually, where just this one property, that you have $0 of your own money invested into, and a little bit of time, will pay you over $3600 per year.
Here is the best part! You can repeat this multiple times to keep adding to this number! Since you have $0 of your money invested, it is easy to repeat this process. And of course, there usually some decent tax deductions to go along with this and make the net number even higher.
Going back to positive affirmations, if you focus on keeping your job, that is probably as much as you will get, where if you focus on increasing your income and free time, the sky is the limit. Next time your boss says he is unable to give you a raise, go out and get your own.
Regards,
Dan
Can Investors go green, other than greenbacks…
November 2nd, 2009 by Dan Shafron No comments »Can Investors go green, other than greenbacks…
Can investors go green? Can investors include green features in their properties either for sale or as a rental?
I SAY YES! Of course, with everything there are limits, but here is just one great example where going green saves you money, provides your tenant a better home, and provides better resale for the future.
I am talking about High Efficiency furnaces. These little gems cost only slightly more than the minimum allowable 80% efficiency units, and use significantly less natural gas. By installing one of these (especially during your initial rehab), you can advertise this to your prospective tenant, that their bills will be lower in this house versus another. Many tenants do not seek out this type of information, so it will be up to you to advertise it.
Now here is the best part: On many older homes with older furnaces, the existing flu pipe is a brick chimney without a liner. When installing a new HVAC system (forced air furnace) that is going to use that chimney, it is mandatory to install a sleeve liner down that chimney (at least in the Chicago area, I assume other areas as well). The cost of the sleeve and the labor to install it, is about the same or more than the extra cost of the high efficiency furnace that will not require venting through the roof.
So for me the choice is simple, when doing a furnace replacement, I put in a HE unit. The cost is about the same, and the benefits are there for the investor AND the tenant (AND of course, the earth…). Classic win-win situation.
Dan
