Defining and Working with Proof of Funds (POF) and Verification of Deposit (VOD)

When investing in real estate the time will come when you are submitting offers on properties and the seller will expect you to provide a proof of funds or a verification of deposit as confirmation that you have the cash on hand for the deal.

In this article we are going to look at what defines a proof of funds and a verification of deposit as well as their use and purpose.

Both the proof of funds and the verification of deposit are used in the case of cash offers. They are presented with your written offer to a seller to show you have the money in the bank to make this deal happen as smoothly and as quickly as possible. These typically come from a hard money or private money lender. Here is the definition and descriptive use of both:

  • Proof of Funds Letter – This is typically a free and simple letter from a lender/funder stating that you, as a buyer, have the amount of cash needed to purchase the property. The funds are in an account within the institution described in the letter. This letter has both the contact information and details of both the buyer and the location of the funds provided by the lender/funder.
  • Verification of Deposit – This is an actual bank statement from a lender/funder that has your name on it showing the details of your account with the funds needed to complete the purchase. The only stipulation is that the bank account number is blackened out for information security purposes. Most of these lenders/funders will charge a fee for a verification of deposit.

In some cases, property sellers and their agents might express concern about a proof of funds letter based on its appearance and format. The issue they may have with this letter is that it is coming from a lending institution, giving the appearance of a finance deal, rather than a cash deal.

In lieu of this concern, make it clear that this is where you keep your funds for real estate investing activities. Explain that you have more control over accessing your funds and you have potential tax benefits by not keeping your funds in a personal bank account.

Ultimately, make use of these two fund verification methods so your seller can feel confident moving forward with your cash offer.

Cash Flow in an Up and Down Economy

Cash flow: for some it is the thing they can never figure out; for others it flows like well water.

How do you set up cash flow? How do you keep cash flow coming in? What properties can bring in cash flow?  Cash flow can be set up through single-family homes, multiple unit properties and commercial properties. The focus for this article is on commercial property storage units.

Storage unit facilities come in varying sizes and layouts, from a small, single row of units to a multi-acre facility that has indoor and outdoor storage capabilities.

Storage units are able to survive in high and low economic times because of people’s need to acquire “stuff.”  In good times, people need a place to store the extra stuff they have. In lean times, downsizing happens so people store the stuff they cannot part with.  As a storage facility owner this is all great news, along with the fact that I will not need to unclog any toilets or worry about the eviction process.  If someone does not pay for their storage unit, the unit will be locked and the unit owner will typically be given a 30 to 45 day notice. After that the unit will be put up for auction.  At the auction, the unit will be opened and people can look, but not go in the unit itself. The unit goes to the highest bidder. Typically the unit needs to be emptied by the end of the business day.

Now, when evaluating cash flow from existing storage units, there are multiple considerations to make:

-What is the current occupancy rate? How do the prices compare to close by competition?

-What is the mix of size of units in the area? How many units are available in competing facilities?

-What type of storage is being offered: outside, RV, inside, climate controlled, small vehicle?

-Are there mixed-use facilities in the area: car wash attached, mobile home or RV park adjacent, vehicle rental facility or moving supply store?

-How long has the facility been in operation?

-How close are the nearest competitors?

This is a short list of things to check on a cash flowing commercial property, specifically a storage facility. As with any type of commercial property in a city, we want to make sure the city is still happy to have the facility operating within city limits. Talk to the planning and zoning commission to find out what the city’s 5-year plan is and how they see your facility playing into it.

I have seen facilities that went back and forth with the city for five years on what was needed and how the facility should look before the building was approved —it took four phases. But because planning was completed before the second phase of development, the facility was fully rented during phase one.  Understanding what your objective with your property is for the next five years will help you plan ahead and help your cash flow, even in a down market.

How to Recognize and Avoid 8 Real Estate Financing Mistakes

Real estate investing may seem like it’s either easy or hard, and both may be correct. The secret oftentimes is dependent upon how the investor manages his or her Real Estate financing.  Nothing can be more discouraging than to structure a great real estate investment and then have everything come apart because of financial pressures that could have been avoided.

Possibly the problem occurs because of how the investor structured the purchase and financing, or maybe it’s because of outside personal financial pressures. Regardless of the cause, the problem is real and should be avoided.

Avoiding the financial problem in the first place is by far the best course of action, but unfortunately, that doesn’t always take place.  Recognizing the problem or mistake is only the diagnosis, but now you must take corrective action.  It’ going to be a process that can take both time and effort.  Once you recognize the mistakes, you can take action to avoid these problems altogether.

Mistake #1 – Not Obtaining Accurate and Complete Information on Past, Present and Future Expenses

You can’t expect to achieve success in real estate investing if you do not have accurate records of past expenses involving the property.  This includes all expenses related to the property itself including utilities, taxes, and especially repairs.  If the appliances pertaining to the property have been repaired in the past, you want to know when the repair occurred and what the actual expenses were.

It’s entirely possible that you will need to repair or replace the same items again.  You also want to know if there is any warranty on the work performed.  Failure to get this information forces you to become responsible for additional unexpected repairs.

One of the primary reasons for having a complete inspection report on the property prior to closing is so that you can understand and project upcoming expenses.  You must be prepared financially for repairs and maintenance to the property.  When you aren’t financially prepared for large upcoming expenses, you put yourself in jeopardy of losing the property.

If you are purchasing a rental property, you want to have a complete history of not only the revenue received but of all expenses associated with the property.  In essence, you are purchasing the new rental business.

Mistake #2 – Accepting Poor Owner Financing

Owner financing involves the seller financing the sale of the property to a buyer and can allow the buyer to achieve financing without normal banking approval.  With a traditional mortgage, you borrow money from a bank to pay for the property.

Then, you make payments back to the bank to pay off the loan. With owner financing, you make arrangements to pay the owner in installments, typically of principal and interest, until you’ve paid off the purchase price of the property.

Owner financing can be a valid and profitable way to purchase real estate, but you must ensure that you are not going to assume unwanted problems.  If at all possible, you should attempt to certify that the property is free and clear of Mortgages.

If this is not the case, you could be in jeopardy if the owner doesn’t make payments on the underlying mortgage.  You can solve this if you escrow a portion of your payment to go for payment to the underlying mortgage.

If the owner has legal or financial issues, the property is still in potential legal jeopardy and could be foreclosed on.  If the property is free and clear, you can get a title policy and have the owner actually take a first mortgage against the property and act just like a bank.  In this way, the property is transferred by title to you and is no longer in the name of the seller.

If you elect to pursue owner financing, make sure that you are protected in the case of the seller not paying any underlying mortgage.

Mistake #3 – Taking a Hard Money Loan with Unreasonable Terms

Hard money loans are loans made almost entirely based on the value of the property without regard to the creditworthiness of the borrower.  These loans are normally bridge or short-term loans and come with higher payments and interest rates than traditional loans.

The lenders are generally private individuals or entities and they are relying primarily on the value of the property if it were to be sold to pay the loan. These hard money loans have a lower loan to value ration than traditional loans and they generally have a loan period of one to three years.

Most of these loans are used when the property is going to be fixed up and resold.  Because the interest rate and payments are higher, along with a short-term payment period, you may be subject to an increased risk of foreclosure if your real estate business doesn’t go as planned.

If you elect to pursue a hard money loan, make sure that you are getting a loan with terms that are reasonable for your real estate business.  Don’t be caught unaware when the loan or payments come due and you don’t have means to make the payments.

Mistake #4 – Assuming Existing Loan with Underlying Problems

Not all real estate loans are the same, and when you assume a loan obtained by a previous borrower, in your case the seller, you will be subject to the terms of that loan.  Maybe the existing loan has restrictions or payments that don’t meet with your real estate business plan.

Take for example a loan with a balloon payment due in a short period of time.  An unexpected balloon payment could destroy your real estate investment.  If you were not projecting the large balloon payment, it could literally put your real estate investment into foreclosure.

Many real estate investors enter into adjustable rate mortgages that have increased interest rates.  As the interest rate goes up, your profits are going to go down.  Don’t be caught unaware of the potential increase in payment, nor on the potential for a requirement that the loan is paid off entirely in a short period of time.  This could occur in a matter of a few short years or even months.

Mistake #5 – Ignoring Potential Legal Problems

As a real estate investor, you should be cognizant of all potential legal problems involved with your real estate endeavor.  This includes not only your personal actions but the actions of other people who may be involved with your property.  Take for example an owner who is being sued personally from past tenants or even individuals who worked on the property.  If the previous owner had work done on the property and did not pay the person doing the work, there is a potential for a special kind of lien to be levied against the property.

These liens are called mechanic liens and are best described as a security interest in the title property for the benefit of those who have supplied labor or materials that improve the property.

Your seller may be facing legal problems of a personal nature, and if the seller is unsuccessful in such circumstances, the property could be subject to potential liens.  Make sure that you acquire the property in such a way that you get a title policy on the property that ensures that all seller legal issues are resolved.

There are also potential legal problems between yourself as a landlord and the tenants in any rental property.  It is highly recommended that you secure an umbrella insurance policy to protect yourself against such occurrences.

Mistake #6 – Not Vetting Existing Tenants

A major financial mistake that plagues real estate investors who acquire rental properties is having non-paying tenants.  There is no guaranteed that you can always secure great tenants, but you can do several things to improve your tenant payments.  When you purchase a property, ask for all rental records for each tenant.  If you have one or more existing tenants who have shown that they don’t always pay their rent on time, you need to make sure you correct this situation.

Perhaps you can get them to agree to use an auto payment program in return for not raising the rent.  Whatever incentive you come up with, you need to do all in your power to increase your success in collecting rent.

SEE ARTICLE: (Link to article written by Gary Cochran “Follow a 7 Step No-Fail Checklist When Purchasing Your 1st Rental Property”)

When you become a landlord, you are automatically assuming the role of rent collector.  It is critical that you establish strict payment policies with both old and new tenants.  If you have already identified a potential problem through existing financial records, try to replace bad tenants with good new ones.  If it’s not possible to do this, it might be best for you to pass on this specific rental property.

Mistake #7 – Purchasing Property with Excessive Leverage

When you purchase property with borrowed money, you are using leverage to potentially increase your return on the real estate purchase.  If you purchase a property with a one hundred percent (100%) leverage, you are borrowing the full purchase price of the property.  When you have excessively high leverage in real estate, you put yourself at risk of potentially losing the property through foreclosure if things don’t work out exactly as planned.  If you are in such a situation and expenses become larger and rents don’t come in as planned, you could be in danger of not having enough money to meet mortgage payments.

Most traditional lenders have found that if the borrower has at least a 20% down payment, they are in a much better position to have the borrower make payments.  It has been proven that excess leverage in real estate leads to much greater risk.

Mistake #8 – Excessive Personal Debt

Most financial mistakes can be overcome if the borrower or real estate entrepreneur has sufficient capital to meet future expenses.  If you are a new, or even experienced, real estate investor and you have a very high debt load, you are already in a position of risk.  The higher your personal debt, the higher your risk.  When you have excessive debt, you automatically are in the position of having to pay out more and more of your income.

In many cases you may feel it necessary to draw too much on the income coming from your real estate investments.  This puts those investments at risk.  It is recommended that you reduce your personal debt as much as possible when entering into real estate.

Financial mistakes in real estate investing are far too common.  Sadly, most of these problems can be avoided if we take the time and make the effort to follow proven solutions.

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Home Down Payment

Home Down Payment

It’s every American’s dream to have a house they can call their own. And before that dream materializes, they’ll have to accomplish a number of things and have enough money for their home. Usually, the first thing that comes to mind when we think of buying a home is the down payment. A home down payment is the amount of money paid upfront to purchase a home. It is combined with the monthly charges added when applying for a home loan.

When preparing for a down payment, you’ll have to consider multiple things like the type of home you wish to have, the type of loan you want to apply for, the term of the loan, and so on. You’ll need to consider all of this before you truly start factoring your down payment cost. There are tools available to help you determine your expected down payment cost and how to save for it.

When you are able to save a large amount for the down payment, you’ll be more comfortable in your payment cycle for many months. For instance, if you can pay 20% of the home’s selling price as the down payment, you won’t have to pay for the private mortgage insurance (PMI). Also, a bigger amount of down payment results in smaller monthly mortgage payments. It also helps you qualify for a loan with a much lower interest rate. Having a larger down payment can make you an ideal buyer, making your offer more attractive compared to other potential buyers. Although a 20% down payment is enough for you to avail these benefits, you still have the option of paying an even bigger amount for your initial payment. It depends on how financially prepared you are and how bad you want to get the house yourself. The more beautiful and ideal the house is, the more buyers there are that you have to compete with, and a higher down payment offer can definitely do the trick.

Negotiating Earnest Money Deposits

Negotiating Earnest Money Deposits

An earnest money deposit is always a bit of a challenge for real estate investors.  Real estate agents and some sellers tend to ask for really large earnest money deposits, but paying large earnest money deposits can be a huge challenge for real estate investors, especially since they make multiple offers in order to make deals happen.  If you were to make 10 offers this week on properties and each one required $2,000 in earnest money, what would that do to your ability to be an active investor?  Let’s examine the truth about earnest money in terms of the law and provide a practical approach on how to make your offers include earnest money that is reasonable and practical.

As far as we are aware, the laws across the United States require that there be “consideration” in making an offer to purchase real estate.  Consideration refers to the offering of something of value from the buyer to the seller for them to consider the purchase offer.  In years past that may have been a chicken or a new harness. Today it is most commonly money.  The law does not usually specify how much money qualifies as consideration, nor when that consideration needs to be paid.

There are ample cases in most states indicating that $1 represents “good and valuable consideration” for the purchase of real estate. So to offer a relatively low consideration is a right that exists in all states, and the money does not have to be paid upon acceptance of offer to open escrow on the property.  Escrow is a collection of money and/or documents held by a third party in connection with a real estate closing.  Escrow can be opened with only a purchase agreement going into the escrow at the beginning.

I have found that in making offers, the person who makes the offer has an advantage, so we ought to use that advantage to make an earnest money proposal that works for us.  Here is an example of what we would suggest for an earnest money proposal: “The earnest money deposit shall be $300 due and payable at closing.”  It has been amazing to me how frequently this proposal has been accepted just because it is in writing and included with a bona fide offer to purchase.

Not all sellers will accept an earnest money proposal like the one above.  For example, on foreclosed properties, the lender who owns the property, or the government agency who owns the property, often has set regulations that they will not bend.  Institutional sellers have a right to set these regulations if they choose.  Since most private sellers are a little more flexible, the above proposal is more likely to be acceptable to them.  After all, earnest money deposits go into a safe or a bank account and cannot be accessed or spent until after closing.  There are no shopping sprees at Costco available to the seller.

If the seller resists your earnest money proposal, they will probably counter with a request for more money due sooner than closing.  Let’s say they ask for $2,000 and want it to be due within two days after they sign the agreement.  You can respond with the following:

  • Well, I’m reasonable and negotiable, and it sounds like you are opening some negotiation.
  • You have requested two modifications to my proposal—A) The amount of the earnest money deposit; and B) When the earnest money deposit will be made.
  • In the spirit of negotiation, I’m willing to allow you to select either one of the two modifications, and I will take the other one. So if you want $2,000, I get to select when it will be paid, and I choose payable at closing. Or if you want the money within two days, I get to select the amount, and I choose $300.
  • If you are unwilling to negotiate, then I will need to terminate my offer. Keep in mind that there are a lot of opportunities for me. I can make 20 offers today if I want to, but you need to sell just this one specific property, and I am a bona fide buyer making a bona fide offer.

Obviously, I’m not able to have this discussion in every situation, but I have made certain that my real estate agents understand and support my approach, and we use this “two choices” approach frequently, and we’ve shared it with many other investors who have also implemented it successfully.

You may have to make a few extra offers along the way, and you always have the right to agree to pay a larger amount if that works for you.  We want to assist in every way we can to create greater success for you as a real estate investor.  And remember that real estate deals are made, not found.

 

How to Overcome Personal Fear in Today’s Financial Climate

How to Overcome Personal Fear in Today’s Financial Climate

It’s difficult to not worry in today’s up and down financial times.  Newspapers, television, and social media outlets continually reveal the negative results of decisions made by entrepreneurs.  Unfortunately, the rush of bad news is only compounded when your friends, neighbors, and long-term associates join in and talk about their personal failures.  If you’re like most people, you might soon question your personal investment decisions, and before you realize it, you develop what I call “personal fearopia.”

In this “fearopia,” you start to question decisions you made without any basis for concern.  In today’s world of real estate investing, this is especially true.     When “personal fearopia” rears its ugly head, the decision-making process can quickly be impaired.  The first thing that happens is that you begin to question past decisions.  You worry that you made a mistake and start to financially retreat.  But beware: when you’re moving backward, there is no chance for you to progress.  Here at Response, we hear many financial success stories, and without exception, the individuals who have been financially rewarded have done so when they followed a simple well thought-out plan for overcoming fear of failure.

Entrepreneurs experience failure, but they should remember that they’re not alone.  Bill Gates and Steve Jobs both experienced setbacks and failures on their road to success.  What makes them different is that they treated these failures as temporary roadblocks on their path to ultimate success.  As the Director of Real Estate Education at Response, I believe it is critical for each new real estate entrepreneur to realize two important points.  First, failure is temporary and not fatal, and second, there is a proven method for overcoming fear in the tumultuous financial climate of today.

With the right attitude, failure is temporary.  In an earlier article, I explained why I believe that Michael Jordan is much more than a tremendous athlete and member of the Basketball Hall of Fame.  He has impacted countless individuals in their quest for success, both on and off the basketball court.  When asked about failure, Michael Jordan used his own quest for success on the court to emphasize that failure is temporary and nothing to be feared.  He said, “I’ve missed more than 9,000 shots in my career.  I’ve lost almost 300 games.  Twenty-six times, I’ve been trusted to take the game winning shot and missed.  I’ve failed over and over and over again in my life.  And that is why I succeed.”

I would like to suggest a simple five-step method for overcoming your fears as you begin your career in real estate investing.

Step #1 – Confront your fears head on.  Don’t ignore fear.  Instead act as if you have already succeeded.  Ignore the media and social media outlets who barrage you with negative examples of why you can’t succeed.

Step #2 – Develop a personal real estate plan.  Start by getting as much education as possible about your preferred real estate strategies.  Remember that Resource provides  training, tools, and resources.  Now use your education to develop a plan that includes goals and objectives along with timetables.  You will never succeed unless you are willing to challenge yourself to meet timetables that match your objectives.  This plan should be written out and then reviewed on a regular basis.

Step #3 – Eliminate negativity.  This new plan is a personal roadmap that can help you reach your financial objectives, but if you don’t eliminate negativity in your thoughts, actions, and associations, the plan can fall apart. Instead of thinking about negative “What if” questions, turn your thoughts to the positive and start dwelling on the “When this (positive event) happens.”  You will be surprised at how this new positive attitude will increase your ability to turn your plan into reality.

Step #4 – Take action.  You must put your plan into action.  Own your plan. These are your goals and objectives.  It can help to cut large goals into small, easier goals.  Prioritize your time and turn those small goals into completed tasks.  Take action and you will be actively conquering fear.

Step #5 – Build confidence by refining your plan.  As you take action and experience small successes in your real estate career, your confidence level increases.  When this happens, consider refining your plan to include larger yet still achievable objectives.  Every time you do this, your ability to overcome fear will increase.

It’s good to accept that fear could play a large role in your financial life. But you are in control. Your thoughts control your actions and vice versa. So eliminate that fear by taking steady, manageable action and you will soon find success in your real estate investing.

The Effect Rising Interest Rates have on the Real Estate Market

The Effect Rising Interest Rates have on the Real Estate Market

Interest rates are on an upward trend over the two years. As they continue to rise, let’s look at the affect they will have on the housing market.

The biggest effect is going to be, as interest rates go up consumers buying power goes down. Here is an example of how this would look. Let’s say a consumer can qualify for a home payment of $1000 per month.  They do a down payment of 10%, and they get a 4% interest rate. That would qualify them for a property valued at $232,500. This was the case a little over 1 year ago. In today’s market with everything being equal, but their interest rate closer today’s market rate at 5% would allow them to buy a property valued up to $207,000. With the rising interest rate, they have lost $25,500 in buying power. This along with the higher home prices in today’s market, make in hard for the end retail buyer to buy homes. This can also start putting some down pressure on the market which will cause property price to slow or even start going down.

Another thing that will be affected by rising interest rates is ARMs (adjustable rate mortgage), because it is directly correlated to the current interest rates. As interest rates go down ARM interest rates will go down, but as interest rates go up ARM interest rates will go up as well. ARMS will have an introductory period where interest rates will not change. When the introductory period ends the interest will start following current market rates. If they are not refinanced into a fixed rate, their interest rates will continue to rise with the market. As the interest rates goes up their mortgage payments will go up. This may cause some homes to be become unaffordable to the home owner, which will result in more foreclosures taking place.

Interest rate are still at a historically low rate, but they have been rising over the last couple of years. As they continue to rise, there will be more downward pressure on housing prices. Interest rates are an important element to pay attention to in the real estate market.

 

Real Estate Investor Secrets

Real Estate Investor Secrets

It’s true that the vast majority of individuals who initially make the decision to invest in real estate soon fail.  In fact, real estate professionals have found that 95% of the people who start the process to invest in real estate never even make an offer to purchase a property.  Why does this occur?  It all boils down to one simple word – Discouragement.  On the other hand, there are a substantial number of people who decide to invest in real estate, using one or more investment strategies, and they prosper and succeed.  What’s different between these two groups of people?  The second group has learned to control and even eliminate discouragement from their mindset, while the first group hasn’t.

Let’s look at several things that successful real estate entrepreneurs have done that changed the way that they invest in real estate.  We like to call them the 7 secrets that can eliminate that dreaded discouragement for beginning real estate investors.  As you learn to incorporate these secrets into your investment strategy, you will soon recognize the benefit of eliminating discouragement from your mindset.

Secret #1 – Understand your Personal Investment Strategy

Each of us are different and we all have separate talents and strengths.  Some of us are great with numbers, while others are fantastic in developing personal relationships.  Regardless of the differences we have and the talents we share, it’s possible for all of us to succeed in real estate investing, but we need to be aware of our personal strengths and weaknesses.  The goal is to match a separate real estate investment strategy to your personal strengths.  For example, if you have a talent and skill of doing construction work, you might want to consider looking into finding fixer upper properties and flipping them for a profit.  If you are great with numbers and love working with people, you might best look into finding a rental property as your first purchase.

There are basically three major real estate investment strategies that include: rental properties, fixer upper and flip properties, and buy and hold properties.  Within these three major categories, there are multiple individual strategies.  As you begin your real estate investment adventure, you need to select your individual strategy and then begin to do the research on how that strategy works.  It is critical that you understand what to do and how to do it before you do anything.  If you decide to go into rental properties as your main strategy, take the time to learn all you can about the advantages and disadvantages of owning rental property.

Once you have a basic and sound understanding of how a selected real estate strategy works, you need to develop your own approach to the strategy.  We like to call this approach – your niche.  It’s what is going to make you special and help you make a profit from your real estate adventure.

Secret #2 – Create a Roadmap that Will Guide You to Success

Every new real estate investor should start by developing or framing a basic business plan based on the real estate strategy they have studied and chosen to follow.  This business plan is really a roadmap you can follow that will help you overcome obstacles and move towards success.

  • Set Specific Goals.  In essence, this roadmap will contain a list of short-term, mid-term, and long-term goals, all of which will guide you along the path of success. If your chosen strategy was rental properties, specific goals might include items such as; looking as specific properties in your target area, researching rental rates within the target area, identifying funding opportunities that match your credit rating; making the offer, etc.  This list of goals should be written out and be extremely specific in nature.
  • Each goal should have a timeline or timetable attached to it.  You must have a way to measure if you have succeeded reaching the goal. These timelines are not meant to be a constraint on your ability, but rather a way to motivate you to take action.
  • Create Rewards for Completing Your Goals.  Each goal is a step toward your ultimate success as a real estate investor.  Goals are nothing more than dreams if no action is taken, and if you reward yourself for completing the goal, action will usually take place.  For example, one of your goals might be to identify three specific rental properties in the target area.  Once this goal is reached, you might reward yourself with a special night out with your spouse or significant other.  The object is to create rewards that you will remember and enjoy as you reach and complete these initial goals.  If the reward you choose has meaning for you, you will work harder to complete the goal.
  • Establish Danger Points that should be avoided. Your roadmap should list things that can derail your success in real estate.  As you study and develop your personal investment strategy, you should understand all the risks involved and then work to eliminate them.  Some of these dangers signs might be:
    • Don’t over leverage your property.  It’s true that when you use borrowed money or capital to purchase a property, you can magnify your return, but, it’s also true that increased leverage or borrowing can also magnify your risk.  When you decide to purchase a property, you need to be aware of how you are going to repay the borrowed capital.  Every investor needs to control the leverage and not let the leverage control you.
    • Don’t fall in love with the property.  When you become emotionally involved with the property, you begin to make emotional decisions instead of fact based and financially sound decisions.  If you start to believe that you must have a specific property, regardless of the price or terms, you are setting yourself up for both failure and discouragement.  Wise investors always look at the numbers and base their decisions on those numbers.
    • Don’t over rehab when buying properties.  This is especially true for fixer upper properties.  You want to make to make the property as rentable or saleable as you can.  When you over rehab a property, you are spending your profis before you ever get them.

Secret #3 – Continue Your Education

Educating yourself should be a life-long pursuit, and it is extremely important for the aspiring real estate entrepreneur who wants to achieve success.  There is, however, another side benefit of continuing your education about real estate.  Discouragement often appears when things don’t go as planned.  By continuing your studies about real estate investing you will plan better and avoid those pains of anxiety and discouragement.  And when you are already discouraged because things haven’t gone as anticipated, continued education in the following ways will get you back on the path to success.

  • Educate Yourself Through Personal Study. This study can take place in a myriad of ways.  You might start by reading and listening to books written by other successful real estate experts.  Pay special attention to their stories of how they reacted when obstacles appeared unexpectantly.  In addition to discovering that you are not alone in these pangs of discouragement, you will learn specific steps to overcome the obstacles or setbacks that might be causing your discouragement.
    Your personal study should not be relegated to simply reading books.  You should also search out other successful investors and spend time talking to them about their experiences.  These discussions should always be centered first on identifying the problems they may have met, and second, on evaluating specific ways they solved the problems.  Don’t pass on the opportunity of learning about their successes in real estate.A third way to continue your personal education is to meet and greet the experts in the field of real estate.  Leverage their expertise by learning what they do and how they do it.  You may want to meet with well-known appraisers, bankers, and even surveyors.  All of these experts can give you information that will help you identify problems along with the best solutions.  The time you use meeting and interacting with real estate professionals will also teach you multiple languages.  Soon you will know how a plumber, appraiser, banker, title company officer etc. speaks.
  • Find a Mentor. Mentors may be paid professionals or they may just be other real estate professionals who have experienced great success.  When you are just beginning your career in real estate investing, take the time to meet other like-minded individuals in real estate.  When meeting these people, learn to ask questions that are based on specific examples.  You will find that when you ask knowledgeable questions, you will get real world examples of success.  You might find a mentor by becoming an unpaid intern for them.  Offer to do some of their research for them, naturally following their instruction.  As your relationship with a mentor grows, your education will also increase.
    If you have the financial capability to pay for professional mentoring, it can be worth the money you spend.  If you elect to pay for professional help and mentoring, make sure you establish the credibility of the selected mentor.  If you are paying for this valuable service, the mentor should be able to provide references and examples of how they have helped other people like yourself.
  • Attend Training Events.  If you belong to a local real estate investment organization, they will normally have access to local training.  Make sure you attend and take good notes.  These are also places where you might establish relationships with potential mentors.  There are also well qualified national organizations who can provide extremely competent instruction in the specific steps involved in different real estate investment strategies.  Many successful real estate entrepreneurs have found that the money they spent on their education was returned many times over in their personal success.
    There are also credible webinars offered online that can increase your knowledge about real estate.  When selecting a webinar, take the time to assess the qualifications and credibility of the person providing the webinar.  The more you learn, the better you will feel, and the better you feel, the quicker your discouragement will disappear.

Secret #4 – Buy Right

Every smart investor should always make money on the purchase.  This means that they are buying at market or below market.  Naturally, if you can purchase a property below market value, you have built in equity right from the start.  The question becomes, “How do you buy right?”  It starts by using the following simple steps:

  • Know Your Target Market.  If you are buying locally, spend time looking at what other properties have sold for.  It doesn’t matter what people are asking, what really matters is what people are getting for the property.  The saying “Location, location, location” is all important.  Make sure you are comparing apples to apples and not apples to oranges.  Pay attention to where the different properties are located in the area and then compare sales among true like properties.  Once you have established realistic values in a geographic area, then you are ready to start identifying prospective properties.
  • Look for Motivated Sellers. When you are ready to purchase a property, it will pay big dividends to know why the seller is selling the home.  Once you identify a well-motivated seller, you can make an offer that builds in equity for you at time of purchase and likewise get the property sold immediately for the seller.  It’s a win-win deal.
  • Learn to Negotiate. Negotiation techniques can be learned and the time you spend understanding how to negotiate will pay big dividends.  There are training courses and seminars that will help you learn how to do this.
  • Create an Exit Strategy. Many first-time buyers think the exit strategy just means how they can sell the property when they are ready to liquidate the property.  Yes, this exit strategy should be considered when purchasing the property.  You don’t want to buy a property that is a dog and will always be a dog.  You want a property that can be put in a position to be sold with good curb appeal.  Forgetting this fact, is the reason why some investors are discouraged when they are left with a property that is in the wrong location and can’t be sold regardless of the price.
    The second type of exit strategy that must be considered is an exit strategy that allows you to exit the purchase.  If you make an offer on a property and soon find out that it wasn’t what you thought it was when you made the offer, you need to make sure that your offer allows you to walk away.  The “subject to” clauses are an important part of the purchase agreement.  Discouragement can come when you are locked into a bad purchase.

Secret #5 – Follow the Roadmap

Discouragement and anxiety usually appear when the investor has gotten off course in their real estate experience.  These individuals have usually failed to meet short-term or intermediate goals.  Perhaps the individual is discouraged because they haven’t found a great under market property in their local area.  Maybe they are depressed because they haven’t secured financing.  There are numerous reasons why discouragement appears, and in almost all cases it can be traced back to not following a plan and taking action.

  • Match your Roadmap to your Market.  It’s important for you to immerse yourself in the real estate market on a local basis.  Unless you are aware of those things that influence the market, you will be in peril of making decisions that are unwise and possibly fatal.You need to know what things are driving the job market, which schools are best, and where the people are moving to.  Sometimes when you first draft your business plan or roadmap you may not be totally aware of changes that are taking place.  When you become aware of these changes, make subsequent changes to your goals and timetables.  Your discouragement may sometimes be a factor of what is happening around your property and not the property purchase itself.
  • Keep a Real Estate Journal. The best way to keep yourself on track and following your personal roadmap is to record what is happening and what steps you have taken.  It is a good idea to write your specific goals in your journal along with the timeline for accomplishing those goals.  When you meet an objective, write it down in your journal.  You will find that by recording both the positive and the negative things that take place in your real estate adventure, you will have a guide book to help you on subsequent purchases.
    Be honest with yourself when recording both the good and the bad things that take place.  Accuracy in your journal is important.  It has been found that this recording of events reaps rewards.

Secret #6 – Upgrade your Mindset

Your mind is a powerful tool and it can change how you act and how you perceive what is going on in your real estate business.  If you want to eliminate discouragement from your existence, you need to remove those obstacles that influence those negative feelings, but you must also change the way you think.

  • Eliminate Negativity in your Life. It has been proven over the years that we act as we think.  This is true in all aspects of our life and is especially true in the real estate business.  Start by doing simple things such as removing negative words from your vocabulary.  Surround yourself with positive reminders of what you want to accomplish.  If you have decided to fix up a property and flip it, then get a rendering done of what the property will look like when finished, and then put this rendering or picture in plain view.Instead of saying “If this doesn’t work, I don’t know what I’ll do,” replace it with “When I finish this property purchase, I’ll be able to create a regular passive income with that rental money.”  Start looking at what you want to do instead of looking at negative outcomes.
  • Surround Yourself with Like-Minded People. There is nothing that creates more discouragement than “naysayers”.  You don’t want to be around people who will tell you what is wrong with your ideas.  These type people never take action on their own behalf and deep down are envious of your efforts in improving your life.
  • Read Books on Positive Thinking. Books by well-known authors about positive thinking will influence how you think.  And when you start thinking different, your life will be different.
  • Consider Getting Professional Real Estate Help. If you are discouraged because you think you are alone, then maybe you just need to enlist the help of good professional rental management or the help of a good accounting firm.

Secret #7 – Take Immediate Action

It’s no secret that action creates habits and when a habit is fully adopted, the task in question becomes easier.  If you are discouraged, make the decision to do something that requires real action on your part.  If you are still waiting to make your first offer, then go out and make an offer that you don’t even expect to get accepted.  The important point is to make the offer.  And you may be surprised to find yourself in control of a great property at below market value.

One action may not be enough to get rid of the feelings of discouragement.  If you are still feeling discouraged after accomplishing just one of your short-term goals, go ahead and fulfill the action for another goal on your roadmap.  As long as you are acting, you are progressing.  Success in real estate investing is a process and action is also a process.  Make it the same process.

There is nothing that discourages discouragement more than simply taking action.  You have a roadmap to success in your business plan.  If you are discouraged, take the specific action steps you have recorded on your roadmap.  When you act, you really do change things.

 

Defining Hard Money vs. Conventional

Defining Hard Money vs. Conventional

When doing deals in real estate investing, the time could come when you need to borrow funds to buy, fix and sell a property for a profit or to buy and hold it as a rental. In either situation you can either borrowing the funds from a traditional lending institution, such as a bank or mortgage company, or from private and/or hard money lenders.

In this article I am going to break down the pros and cons associated with each, along with the details of each lending situation.

  • Traditional/Conventional Lenders – These are typically banks and mortgage brokers who require an approval process that can be very involved and sometimes extensive. It involves pulling a credit report for your current credit score, a thorough screening of your current and past financial status, and an evaluation of your total net worth and the cash value of your assets. You need to provide a number of supporting financial documents to show the lender that you are not only qualified but also highly capable to pay back the loan as well as the 10% or larger down payment. This screening process can most often take several weeks to accomplish. Despite these lending standards, an investor might choose this type of loan because of its much lower interest rate (typically below 6-7%) with much longer terms, such as 20-30 year loans.
  • Private and Hard Money Lenders – These are the lenders that real estate investors take advantage of the most. Private money lenders are typically individuals that loan their own money from their own accounts and assets. They usually charge a higher interest rate and points in accordance with what they believe is their risk in the deal. Hard money lenders are more often a group of investors that have pooled their resources to be part of a bigger group. One of the biggest reasons a real estate investor would consider borrowing from either of these two types of lenders is because of the simpler lending requirements. In the case of the conventional lenders, they first look at the financial status of the borrower more than the property. In the case of the private/hard money lenders, they look at the numbers in the deal as well as its profitability. These lenders can provide funds in less than 30 days on a regular basis and in some cases less than 14 days. This alone is one of the reasons this type of lending is so attractive to investors who buy, fix and sell properties. Despite the much higher rates (such as 8% and higher), the terms are usually much shorter and in most cases less than 12 months. Under these considerations investors that are rehabbing properties find this acceptable as they are usually on a much shorter time frame, around 90 days to 6 months, from close to close.

It is always to your advantage to look at all options when it comes to borrowing funds for deals. Always look at your budget and the direction you want to go before deciding which lender better fits your needs.

Funding – Part 2

Funding – Part 2

Let’s visit a few ways you can find funds to complete a real estate deal.  What about those retirement accounts that aren’t performing as well as you would like?  Sometimes the stock market is up, but by the time you get done celebrating it is down again.

As you advance in years you may start to seriously think about whether you are going to have enough saved to live a comfortable life when you retire.  You can self-direct the money in your IRA, 401(k), or even RRSP (Registered Retirement Savings Plan in Canada), and use these funds to invest in real estate.

Note that it is extremely important for you to consult an experienced administration company that understands the laws and tax implications of self-directed accounts.   Some sites you may want to research are:

www.checkbookira.com

www.accuplan.net

www.mountainwestira.com

www.equitytrust.org

www.newdirectionira.com

The economy will continue to have its ups and downs, as will traditional savings, but people always need a place to live.  Rents stay the same or even increase when home prices drop.  Isn’t that interesting?  So once you have a self-directed account collecting rent, you are pretty darn secure.  That feels a lot better than being at the mercy of what the next election results may do to your savings.

Banks have tightened up their lending, but it is still possible to get traditional mortgages on investment properties.  If your personal financial situation is good, you have the option of mortgaging your investment homes.  Most banks follow the guidelines set by Freddie Mac and Fannie Mae, those big government agencies in the sky.  Therefore, the number of traditional mortgages you can hold is limited.

A good mortgage broker is your best guide.  You can likely find a knowledgeable broker at your local REI Club.  The cost of getting the loan and paying it for a few months can be greatly outweighed by the profit made in reselling the renovated home.

You can also get a mortgage on a property you intend to hold as a rental.  Just be sure you are getting more each month than the payment and other holding costs.

There are literally tens of thousands of banks and credits unions in the U.S. The smaller financial institutions (those with one to five or so branches) have more options for investors.  These local banks have portfolio loans that are kept in a house, meaning they make their own loan decisions over muffins and tea.

They are not bound to follow the guidelines set by Fannie Mae and Freddie Mac.  Go in and talk to these nice people. See what the possibilities may be.

Lack of funds should not be a roadblock.  Think in and out of the box and you will discover sources of funds you may not have previously considered.

Funding – Part 1

Funding – Part 1

For many investors, funding is a bit of an enigma.  Let’s clear the air with a couple solutions.

Let’s begin with no money.  You may even have lousy credit.  Or maybe you have money and good credit but you don’t want to use it or risk losing it.  Begin with wholesaling.

When you wholesale a real estate transaction, you essentially act as a matchmaker.  You find other investors who buy properties for cash.  You talk to these fellows and see what they buy, where they buy, and how much they pay.  Next, you essentially go shopping for them.  Who doesn’t like shopping?

Once you know what your cash buyers want, you find highly motivated sellers with matching properties.  These sellers might have their house listed on the MLS, in which case you will work with a real estate agent.  These sellers might have them advertised as For Sale by Owner (FSBO), in which case you work with them directly.  Or these sellers might not be waving any kind of flag saying “I want to sell my house” until you dig them up with your creative marketing.  You make a lot of offers, which costs nothing.

Once you have a property under contract (the owner has agreed to your price and you have a purchase agreement signed), you essentially sell the deal to your cash buyer for a fee.  You can wholesale, wholesale, wholesale to make money, money, money.

 Or you do have cash…

Now you’ve wholesaled some houses and you have cash or maybe you are starting out with cash.  Cash is king as the saying goes. You can make cash offers, get better deals, and then fix and-flip or hold properties for cash flow for yourself.

You may have sources of cash you have never considered.  One potential source of funds is a Home Equity Line of Credit (HELOC).  Do you own your home?  Is it worth more in today’s market than the balance of your mortgage?  If the answer is yes, then very possibly you could get a HELOC.  This can be a very effective way to use your money to grow more money.  If you took out a HELOC and were paying perhaps 4% interest and you used these funds to purchase, renovate, and resell a house to make a 10-20% profit, you are ahead of the game.  Or maybe you use the funds to purchase a home as a rental and get a 10-15% return on your money.  Again, you are ahead.

In fact, you have created what in the financial world is called “arbitrage,” a profit based on the spread of two purchase prices, or in this case two rates of interest. Just toss that word around at your next REI Club meeting and you’ll immediately sound like a savvy investor

There is a myriad of ways to fund real estate transactions.  These are just a couple.  Make your money work for you! Don’t let lack of funding be a roadblock in your investing endeavors.

How To Calculate Fixed-Rate Mortgage Payments

How to Calculate Fixed-Rate Mortgage Payments

When financing a property a common question that investors have is: how to calculate fixed-rate mortgage payments? It is important for any buyer to fully understand how various rates in the agreement are computed. This allows him or her to recognize the right payment plan that fits his or her financial situation and to make better financial decisions. To calculate a mortgage payment, you’ll need to know the following:

Principal amount, interest rate, loan term, market value, mortgage insurance, property taxes, your monthly income, and other relevant fees.

Principal, or loan amount, is the home’s purchase price less your down payment.

Interest rate, usually charged as an annual percentage, is what the creditor charges you for the loan.

Loan Term is the number of years you’ll agree to pay the loan in full.

Property Taxes should also be put into consideration to avoid any issues with the government and unnecessary fees.

Monthly Income is important as mortgage payments will affect your after-expense, after-tax take home net income.

Other Fees may include additional taxes or business liability fees if you’re operating as an LLC or otherwise.

While you can always use an online mortgage calculator or check the Web for available mortgage payment tables covering different interest rates and loan terms, it is also important that you know how to do this manually, especially if you’re in the real estate business. Fixed-rate mortgages have the same payment and interest rate for the life of the loan, regardless of any affecting economic factors. Thus, you will only be needing a few numbers to compute your monthly payment.

To calculate, use this formula: P = L[c (1 + c)n] / [(1+c)n – 1].

Looks confusing? Not so much.

P = Monthly Payment

C = Monthly Interest Rate, which can be computed by dividing your annual interest rate by 12 monthly payments.

N = the total number of months in the term.

L = is the total amount you borrowed from the lender, or the home value.

Knowing this equation and understanding the intuition behind the math will help you better budget and calculate fixed-rate mortgage payments.

 

Why PMI is Not so Bad

Why PMI is Not so Bad

PMI is Private Mortgage Insurance. Most people that apply for a loan will plan on paying PMI. PMI is required for anyone that is getting a loan on a property and does not have a 20% down payment. PMI is not a set amount. It varies depending on the borrower’s credit score and the amount of money they are putting down on the property. The rates range from .03%-1.5% of the original loan amount, and the payments are divided up over the 12 loan payments made throughout the year.

PMI benefits the borrower by helping them get in to a property without having to have a large down payment. This is a big advantage in today’s market, as trying to save for a 20% down payment while the prices of homes continue to increase at a rapid pace could have you chasing prices for awhile. Some PMI companies may even offer job loss insurance coverage, which is something that is not publicized.

There are several options available to get rid of PMI as well. The first option is to refinance your loan. If you have 20% equity in your property, you can get rid of the PMI payment. Another way is to just pay for a new appraisal. An appraisal will cost between $400- $600 out of pocket but can save you on a PMI payment every month. The 20% rule still holds true with this option. If your home has 20% equity in it, you can have your lender cancel your PMI. Another way to get rid of PMI is to improve or add on to your property to where it gives you 20% equity. To cancel your PMI, it must be done in writing, and you may have to prove you do not have any other liens on the property (for example a HELOC). You will also have to be current on your payments and have a good payment history.

PMI serves a big purpose in real estate by helping people without a lot of money get into homes. Talk to your lender about what benefits you have with your PMI. With an understanding of what PMI is and the purpose it serves, you will see that PMI is not so bad.

The Items Needed in a Business Proposal for Financing

The Items Needed in a Business Proposal for Financing

To begin, there are 5 questions that all potential investors want answered before they will do a deal. Your entire presentation should center around answering these questions.

  1. How much money do you need?
  2. How much money will I make if I do this?
  3. When will I get my money?
  4. What are the risks involved?
  5. What if something goes wrong? Or more clearly, how do I protect myself if you screw this up?

The secret is to answer these questions quickly and not dwell on anything longer than necessary. For example, the longer you harp on how much money they will make, the less they may believe you. Hence, less is more! It’s not just what you say, but how you say it.

The best way to say anything is to show it as opposed to saying it. Let’s look at to following scientific study for proof:

Lenders are 100 times more likely to remember what they see than what you say!

 

 

 

 

 

The above chart is from Tor Norretranders’ book “The User Illusion: Cutting consciousness down to size.”

The point of the above study is simple. If people are paying attention to what you are saying, you have a 33% better chance of them remembering what you are saying if you make a visual presentation. If people are not paying attention to what you are saying, your chance of them remembering is 100 times better if you are making a visual presentation.

Since we have scientific documentation on the value of visual presentations, it makes sense to present our deal visually. The official term for this kind of presentation is a proposal. This is what will increase your chance of succeeding with your buyers and lenders. Hence, you should study what content a proposal should have. You will find a list of things like this:

Funding Proposals Should Include:

  1. Executive Summary
  2. Romance the Project
  3. Logic of Property Location
  4. Comparative Market Analysis
  5. Projected Profit
  6. Exit Strategies!
  7. About Your Company
  8. Financial Summary

There are 8 items on this list. Completing this proposal could take time. However, you may only need a one-page Executive Summary. Yes, only one page and it should answer all 5 questions that we began with above. You may never need to present anything else. Let’s look at how easy this can be:

Executive Summary

  1. Make a Summary
  2. Be Short and to the Point
  3. Include All Pertinent Information
  4. Make it only one Page!

The Executive Summary is just that, a SUMMARY that is short and to the point. All the pertinent information is included without all the details. Usually just one page with the highlights only. Remember, these are questions your investors and buyers want answered:

  1. How much money do you need from me, the lender, or from me, the buyer?
  2. How much profit for me, the buyer or the lender?
  3. How long does it take me, the lender or the buyer, to get my money?
  4. What are the risks I would take lending you the money?
  5. What if something goes wrong? What they think but don’t say is, “How do I, as the lender or buyer, protect myself if you screw this up?”

Next, let’s go over an example of how a “Real Estate Deal” can be presented so it answers the 5 questions on one page and looks good doing it:

Above is an actual deal where Jake got all the money he needed from John to do a deal. Just for the record, both Jake and John were students of mine. John was a former student at the time of this deal and Jake was a current student. Let’s look at how Jake was able to get John to invest the money based on the information above. Jake’s presentation answered all 5 of the critical questions and did it colorfully, using pictures and charts. See how this is achieved on the next page below:

Question 1: How much are we talking about?… is answered just below the subject property:

ARV = $215,500

Loan = $140,000

Will Pay 4 Points

15% Interest

6 Month Note

Jake is asking to borrow $140,000.00! Hence, he answers question one on the center of the page.

Question 2: How much do I make if I give you the money?

ARV = $215,500

Loan = $140,000

Will Pay 4 Points

15% Interest

6 Month Note

Again, just below center page, Jake answers question two, “How much do I make?” Jake is offering to pay $5,600.00 in points just to borrow the money and 15% thereafter on a 6-month note.

This was an actual deal. Jake didn’t have two nickels to rub together and call a dime. The $140,000 Jake borrowed was everything Jake needed to do the deal. Jake never even made a deposit.

Question 3: How soon do I get my money? Comfort for this question is offered in the top left-hand corner of the one-page Executive Summary.

36 Day Rehab

See Gantt Chart

Here, top left-hand corner, Jake documents skill in organizing and managing a rehab. Further, he specifically shows how and when the rehab will be complete in 36 days. Add to this Jake’s conservative estimate of the ARV for his property and lenders can get a good feel for how quickly they will get their money back.

Below is a simple example of a Gantt Chart. I don’t have a copy of Jake’s. Jake got his funding approved without having to show the Gantt Chart. How he did this will be shown in a recap of question 5.

The Gantt Chart presents what needs to be done and when. Hence, the painting is done before the carpet is installed. The tile is laid before the plumber comes to install the toilet. Gantt Charts can look pretty with a lot of color and graphics.

This specific example above is used to show how you would outline one of the scariest items that could come up in a rehab: a cracked foundation. Jake didn’t have this problem, but you might. Stay calm, let your lenders and buyers know you have your game under control.

Question 4: What are the risks? This question is answered ambiently with this “One-Page Executive Summary.”

 

First. It is easy to see that the comps being shown are the same style, size and in the same neighborhood. This is comforting to buyers, investors, and money lenders because the more similar the comps, the more believable the ARV (After Repair Value).

On just one-page, serious documentation is given to assure this as a “killer deal.” The home styles are similar, the size is the same and they are in the same neighborhood. Conservatively, Jake’s ARV shows his property value at $215,000 and he only asks to borrow $140,000.00. The two comps Jake shows are similar homes that sold quickly. The first sold at $222,500.00 in 45 days. The second sold for $236,000.00 in 61 days. Lenders and buyers center their decision to lend or buy based on “Comps.” The mathematics of these comps is comforting to lenders and buyers. The graphic presentation of the properties themselves and their numbers reduces the fear of risk.

Question 5: “What if you screw this up?” This question is almost never asked at all, much less in such a bombastic manner. Yet it is often the most important question to answer because, it is often the first thing the buyer or lender worries about. You will want to answer this question. Showing that a rehab will rent at a profit if it doesn’t sell is assuring to lenders and buyers alike.

A lot of what Jake showed offered comfortable proof. But, this Rental Exit Strategy is where John decided to do the deal. This property would easily rent for more than $1,400.00 a month. The One-Percent Rule indicates renting at 1% or more of the investment is likely to be profitable. Jake is only asking to borrow $140,000. A profitable rental may be the ultimate exit strategy.

John, the lender, knows if he does the whole deal and lends the $140,000 to Jake he will be able to take a first position lien against the property. Hence, if Jake screws up the deal, John owns a cash-cow rental property. John and Jake did the deal. Thirty-Eight (38) days later, Jake had $36,000.00 cash from the deal on zero investment. John made more than that. Jake has done dozens of deals since, some of them with John.

While Jake was able to get his deal financed in one visit over the phone with John, many interested lenders will ask for more information. The same rules apply. Continue to:

  1. Romance the Project…

Tons of deals get lost because the deal-maker gets sloppy in their presentation. Make everything look neat, organized, colorful, and exciting. You will do a lot more deals and make a lot more money.

  1. Logic of Property Location…

Jake was able to prove that all his comps were in the same neighborhood. But, property location can mean a lot more. If your property is a 20-minute walk to a University, close to a military base, near a hospital, or a shopping center, renting a property can be easy.

Have things been happening to improve the value of the neighborhood, like improved public transportation, shopping centers, parks, etc? Lenders and buyers can be impressed by these things. Don’t forget to make these things a visual part of your presentation.

  1. Comparative Market Analysis…

Notice how the numbers on the comps match the numbers on the map. Remember, your initial presentation should be one page. CMA’s and other details are to be presented once you have an interested buyer or lender.

  1. Projected Profit…

Don’t just scratch your numbers out on a piece of paper. Lay things out so it looks like you know what you are doing.

  1. Exit Strategies…

One of the most powerful exit strategies for a rehab flip is being able to rent it profitably. Because Jake is borrowing $140,000 and the rent rule says you should make money at $1,400 this looks very appealing to a lender. The importance of this exit strategy can’t be overstated. But, remember that a graphic and colorful presentation will seal the deal.

  1. About Your Company

This couple, like Jake, had never done a deal. However, they present their company elegantly. Good chance no one will ask for references. However, just use people who will speak well of you. Neighbors, friends or anyone else who will testify to your skills, likability, and honesty.

  1. Financial Summary…

Your Proposal can’t be too long. But, it can be too boring! Don’t be afraid to make your points graphically.

This is how to make winning proposals. But, don’t put a lot of time into the complete proposal until someone has shown interest from your One-Page Executive Summary.

 

How to Use a No-Seasoned Refinance

How to Use a No-Seasoned Refinance

To use a no-seasoned refinance in your business, you must first understand what a no-seasoned refinance is.

 

There are two parts to a no-seasoned refinance:

  • Seasoning
  • Refinance

 

In the world of mortgages, seasoning is how long you have owned a property and paid the loan. For example: If you have owned a property for 12 months, it would be said that you have 12 months of seasoning. If you have owned a property for five months, again, it would be said that you have five months of seasoning. However, if you have less than three months of ownership, the seasoning would be called “no-seasoning.”

 

A refinance is, well, a refinance. It means that you had financing on a property and then obtained new financing to pay off the old financing. This refinancing can be done for a couple of reasons:

  • To pull out cash from a transaction, assuming you have enough equity in the property
  • Obtaining a better interest rate than you previously had

 

A great benefit of a no-seasoned refinance is that you can quickly refinance a property to pay off your old loan, potentially getting some money out and/or getting a better interest rate than you originally had. For example: You obtain a house with a hard money lender who is charging 15% interest rate. You then quickly turn around and refinance the loan, paying off the hard money lender and getting a new, better rate of 4.25%.

 

If used correctly, a no-seasoned refinance can help you buy and hold properties to rent with little to no money from your own pocket.

No-Seasoned Refinance Overview

No-Seasoned Refinance Overview

In real estate, there is a little known, but highly effective, way to create large wealth using leverage. The method is knows as No-Seasoned Refinance.

 

To understand this concept, we will need to break the information down into two parts:

  • No-Seasoned
  • Refinance

 

You should, by now, know what a refinance is. This is the process of paying off an old loan for a more favorable interest rate or paying off an old loan to get additional cash out of a transaction. Here are a couple of examples of the two types of refinances:

  • You currently own a home on which you are paying 6.5% interest rate. You recently find out that current interest rates are around 4%. You then talk to a bank and refinance, paying off the old loan with 6.5% for a new loan with an interest rate of 4%.
  • You own a home, which you owe $100,000. That home has a value of $150,000. In this home you have $50,000 in equity. You decide to put some of that equity to use and build a new deck for the home. You go to a bank and refinance, paying off the old loan of $100,000 and replacing it with a new loan for $120,000. The additional $20,000 is paid out as cash.

 

Seasoning is a common term in the mortgage and financing industry. Simply said, it is the period of time that you own a home. For example, if you own a home for 12 months and have made 12 payments, it is said that you have 12 months of seasoning. If you have owned a home for 6 months and made 6 months of payments, you will have 6 months of seasoning. However, when you have a home that you have owned for less than 2-3 months, banks commonly reference this as “no-seasoning.”

 

The idea of a no-seasoned refinance is to purchase a home using financing, such as hard money financing, or your own cash, then quickly refinance pulling the cash out and either repaying yourself, if you used your own cash, or paying off the other financing. Once the money is free, you can use the financing or your own cash to purchase another property and continue the process.

First-Time Home Buyer Programs

First-Time Home Buyer Programs

Buying your first home is no easy task. You will go through stressful steps that include paying fees and dealing with people. Purchasing your first home is a huge responsibility but also an opportunity; an opportunity to design your own space. But before we jump to the paintings and landscape of your first home, you need to go through some important steps, like finding the right real estate agent and determining your budget.

The money you borrow to buy your first home is usually considered a first mortgage loan. If the amount is a little less, it’s called a junior loan, enough to help you pay the down payment. The good news is there are many programs that can help you get ready. These programs come in a variety of forms. You just have to remember that, as a first-time home buyer, you need to be guided on what financial steps to take. This is why first-time homebuyer programs exist.

One common program is the FHA loan, where the lenders insure the mortgage. They are protected and will not take a loss if you default the loan. Some programs focus on the area you cover. If you are targeting a rural area for your first home, there are available programs that can help you, like the U.S Department of Agriculture assistance program. There are also loans specific for veterans and surviving spouses, which are usually provided by U.S Department of Veterans Affairs. Unique programs like Good Neighbour Next Door also exist. They provide housing aid for law enforcement officers, firefighters and emergency medical technicians.

You need to be prepared before finally experiencing the sweet taste of having your first home. That is the main purpose if these programs, to get you prepared. There are various organizations that can help you obtain affordable loans while also protecting the lenders against the borrowers’ defaults. There are also programs that will require you to attend a homebuyer education course if you are a first-time homebuyer. This course will help you understand the importance and responsibilities of homeownership.

Owning a home is equivalent to having the freedom to blueprint; the color of your walls, the garden, kitchen, and bedrooms, they are all in your hands. However, blueprinting will only be possible after taking the initial significant steps, which include getting approved for a mortgage, finding the real estate experts, and choosing the home that fits your financial capability. Now it is time to assess your eligibility and start evaluating the available programs that will help you get a hold of your first home.

Understanding the Amount of Your Buyer’s Profit on an Assignment Deal

Understanding the Amount of Your Buyer’s Profit on an Assignment Deal

One thing that is not stressed enough in our presentations to our buyers is how much profit is on the table for them. By understanding the buyer’s profit, we can better inform our buyers as to the amount they can expect to make. It also can strengthen our position when negotiating the wholesale fee.

When calculating an offer, understanding the type of market we are in will make us more effective. If we are in a cold market, the buyer has a stronger negotiating position. In a hot market, the seller has the advantage. We are currently in a hot market. Therefore, we need to use strategies that will strengthen our offers and help our bottom line.

Let’s run through some calculations and see what we can do to make our offer more competitive. As we run the numbers on an assignment deal, pay close attention to adjustments that can be made to strengthen our offer:

Asking Price- $179,000

ARV- $250,000

Buyer’s Profit- 20%

Rehab- $30,000

Wholesale Fee- $8,000

Now, let’s calculate what our max offer will be with this information:

$250,000- ARV

X .8- Buyers Profit 20%

$200,000- All-In Price

Less $30,000- Rehab

Less $8000- Wholesale Fee

$162,000 Max Offer

$179,000- Asking Price

 

Now, let’s calculate what our buyer can expect to make on this deal. We must first determine if we are in hot or cold market, as this will influence some of our decisions regarding the property. Our current conditions tell us that market conditions are hot. So, this is how to determine the profit our buyer will make from the above offer:

First, we must subtract the all-in price from the ARV. Next, because it is a hot market, our buyer should consider paying costs such as real estate fees, closing costs and holding costs. This would cost about 40% of the gross profit. The buyer would keep 60% of the gross profit or the net profit. Let’s look at it as a formula:

 

$250,000- ARV

Less $200,000- All-In Price

$50,000- Gross Profit

X .6- Buyers Percent of Gross

$30,000- Buyer’s Net Profit

 

This $30,000 profit would be attractive to most buyers. However, closing the gap between the asking price ($179,000) and our max offer ($162,000) may be hard to overcome. So, let’s look at the things we could adjust to present a more competitive offer:

$250,000- ARV

X .85- Buyer’s Profit 15%

$212,500- All-In Price

Less $30,000- Rehab

Less $5,000- Wholesale Fee

$177,500- Max Offer

 

As you can see, our new max offer ($177,500) is much more competitive and the gap with the asking

price ($179,000) is much easier to bridge. Let’s calculate the new buyer’s profit and see if it is a good

deal for our buyer:

 

$250,000- ARV

Less $212,500- All-In Price

$37,500- Gross Profit

X .6- Buyer’s expenses 40%

$22,500- Net profit for buyer

 

It is a smaller net profit for the buyer than the first offer. I will not try to tell you if the $22,500 is a good or bad profit because that is for each buyer to decide. With a few adjustments to our offer there is a greater chance that our second offer would be accepted. We don’t always make the money we want; however, $22,500 is better than nothing.

Best of luck in your investing. Be creative and you will complete more deals than those who do not think outside of the box.

How to Fix Your Credit Score

How to Fix Your Credit Score

Having good credit is an important part of investing in real estate. With good credit you can get financing easier and you can also get better interest rates. Now, if you have a poor credit score here are some steps you can take to improve your credit.

  • Pay all your bills on time. This is a no-brainer, but make sure all your bills are paid on time, even if it is the minimum payments.
  • Don’t open too many new accounts at once. One thing that credit agencies look at is the age of your accounts. By opening several new accounts at once, the average age of your accounts will be reduced.
  • Do not cancel any unused cards. Another aspect of credit is the amount of credit you have used compared to the amount of credit you have available. The lower the percentage used, the better. Ideally you want to keep the ratio of credit used to credit available below 30%.
  • Keep your credit balances low. This ties in with number 3 in that you should not max out your credit. Keeping your credit balances low will help keep your credit score high.
  • Have a variety of different credit types. Paying on a car loan, a credit card, and a mortgage will show you are able to juggle and maintain payments on different credit types.
  • Debts in collections needs to be paid off. If you have any accounts in collections they will need to be paid off. Until they are paid off, your credit will suffer.
  • Get a personal loan to pay off credit cards. This can be a very effective way to lower your interest rates and pay off your debt faster.

In real estate investing having good credit will increase your opportunities to invest. As mentioned, it will save you money, give you better interest rates and help you qualify for better loans. Keep these 7 tips in mind, as they are great ways to maintain and improve your credit score.

Steps to Pre-Qualify for a Mortgage Online

Steps to Pre-Qualify for a Mortgage Online

Pre-qualification is an estimate of how large of a mortgage you can afford.  It is the first step when looking for a home to buy.  It’s important because it helps you narrow down your options and focus on how much house you can really afford. It is based on your financial situation over the past two years. You will need proof of employment, tax returns from the previous two years (if your self-employed) and a credit report from all three bureaus: Experian, TransUnion and Equifax. You can think of it as a free consultation between you and the loan officer.

The lender will review your income to give you a general idea on how much you can borrow.  When you pre-qualify for a mortgage, you are only getting a rough idea of what you can borrow.

You can apply for pre-mortgage approval online by going to the mortgage loan websites.

Here is some example of questions you will need to fill out.

  • First and Last Name
  • Phone number
  • Email address
  • Zip code where you currently live
  • How soon you’ll be applying for a loan
  • Are you currently working with a real estate agent?
  • How you would like to be contacted (phone vs. email)
  • The purpose of the loan (e.g. purchase vs. refinance)
  • The amount you want to borrow
  • How you plan to use the loan (primary residence, income property, etc.)
  • The type of property you are buying (detached home, multifamily. Condo, etc.)

After providing this information, a representative will contact you regarding your request. They will give you a rough idea how much you can borrow, based on the information you’ve provided. Be prepared for some additional questions regarding your income level.

You can also get a pre-qualification letter. This will let the sellers know that you are serious and that you can qualify for a loan to buy their home.  

You can contact other mortgage lenders about your mortgage pre-approval if you want to.

Pre-qualification is not a commitment between you and the lender. The next step is loan pre-approval. Loan pre-approval is a more in-depth version of this process. The lender verifies your income, your debt level, and other aspects of your financial situation. They want to know whether you can qualify for a home loan and decide how much of a loan they are willing to lend you.

Benefits of Using Private Lenders

Benefits of Using Private Lenders

Private lenders and hard money lenders are very similar but have a key difference.  Private lenders differ from hard money lenders based on where their money comes from when they lend it to you.  Private lenders’ money will come from investments outside of real estate, whereas a hard money lenders’ money is part of a business built around real estate and real estate investing. 

Private lenders can often be new to real estate investing, which may make them a bit naïve.  However, that doesn’t mean you should avoid them.  Rather, be patient and willing to work with them, as their money might just be one of the greatest ways to obtain funding for your real estate transactions.

Here are a few reasons to use private lenders’ money for your real estate transactions:

  1. Private money is quickly accessible.  Because private money comes from investments such as CD’s, stocks, mutual funds and other similar investments, the money can be quickly converted to cash.  This accessibility can allow you great strength and speed when purchasing real estate.
  2. Private money is cash.  Cash gives us strength when making offers on real estate.  Buyers without cash have a hard time competing against those that can offer cash.
  3. Private financing is easy to obtain.  Private lenders often look at the quality of a real estate investment over you, the borrower.  If paperwork, credit checks, and income reviews are not part of what you want in your real estate investment career, private lenders will often over look all of this when the investment is good enough.

Purchasing real estate can be very rewarding and getting financing through private lenders can make the process easy, quick and additionally rewarding.

Tips for Saving for a Down Payment for a Mortgage

Tips for Saving for a Down Payment for a Mortgage

Buying a home is typically the largest single purchase a person will make in his or her lifetime. When you are preparing to make a big purchase in real estate, it is important to understand the complexities of what you can afford, what everything will cost, and how to prepare for your purchase.

Before you start looking at homes, your first step is deciding what you can afford and what you want from a home. List your basic requirements such as location, size, and other features.

Then, you will need to save for a down payment for your home.

Different mortgage programs require different amounts for a down payment. If you qualify for a FHA home loan, you can purchase a house with 3.5% down. In addition, many other mortgage programs allow a down payment as low as 5% of the purchase price of the home.

If you are financially able to put 20% down, it can be beneficial. Lenders will not require you to purchase Private Mortgage Insurance (PMI). PMI is an additional cost built into your mortgage that protects the lender in the event of a default.

Here are some tips to help you save for your down payment:

  • Pay yourself first. Make saving a priority by setting aside a certain amount each month.
  • Consider having money automatically transferred in your savings account each month. If you never see the money, you are less likely to miss it.
  • Cut back on your Spending. Choose one item to give up or cut back on and put that money in the bank. This item could be a drink, which is a small expense that tends to add up quickly.
  • If you have the option, consider working overtime and add that money to your savings.
  • Get a second job or do freelance work to earn more money.
  • Sell stuff on eBay. eBay is the ideal place to offload your unwanted household items in return for money. You can convert your clutter into cash.
  • Eliminate the luxuries. For example, put your cable television subscription on hold.  Take your lunch to work every single day. Don’t go shopping for new clothes.

Over a period of twelve months, you could easily save a few thousand dollars. 

Why Hard Money Financing is an Option for Investors

Why Hard Money Financing is an Option for Investors

Every investor must start investing somewhere.  If you are like me, you likely purchased a program, saw an infomercial, or went to a seminar and saw the great potential real estate can offer you.  You discovered that you can change your life with real estate investing. 

Investors often start with a “quick” cash method to “get money coming in.”  This quick cash method often involves starting their real estate investing business with a wholesaling technique, such as assignment of contract, double closing, or even bird dogging.  However, if you are like me, you have the goal to get into purchasing properties to rehab and then sell on the market for a significant profit.

As investors begin they may feel that investing in buy, fix and sell properties is out of reach for them.  However, it does not have to be.  Hard money financing can provide an opportunity for you or any investor to begin purchasing properties to repair and resell.

Hard money financing has a stigma that comes with it, which is that financing is extremely costly and extremely dangerous for an investing business.  Though it is true that hard money financing does carry with it a 12-18% interest rate, it is very important to understand that the financing obtained through a hard money lender is likely only going to be used for three to six months.  Hard money loans are short term loans; you want it that way.  It is also important to understand that you can, and should, deduct the costs of a hard money loan in your offer formula.  Deducting the costs in your formula helps you afford the financing and still make the profit you were hoping to make.

If you use a creative hard money lender, you can potentially get into properties with little out of your own pockets.  If you account for the additional costs of the lender you can still purchase real estate, even in the beginning, to fix and resell and, the best part, make far more money than you would likely make wholesaling properties.

Three Ways to Obtain Owner Financing

Three Ways to Obtain Owner Financing

As we look to build our real estate portfolio we need to learn what we can about the different ways to finance a property or other income-producing asset.  Understanding owner financing can help us grow our portfolio.  Understanding what to do in order to obtain owner financing can be an important tool in our quest to be a successful investor.  Let’s consider some things we can do to utilize this important tool:

  1. Perhaps you have found a property where you don’t have the cash for a down payment, but your credit would allow you to finance the rest of the house.  Talk to your seller.  She may be willing to carry a note for your down payment.  Let’s say she sells you the house for $100,000 and the bank is willing to loan 80% loan to value.   The appraisal shows the loan can be made for $80,000 from the bank.  The seller could finance the other $20,000.  The key is to not be afraid to ask.  You could amortize the loan and make the payments over time or arrange to make a balloon payment.  Always be thinking of ways to get a deal done.
  1. Though not technically owner financing, lease options are a creative way to finance a deal.  Look for an owner who is having a difficult time selling a property.  (This really works in slower markets.)  Approach the owner and ask them if they would consider a lease option.  Let’s use the following as an example: Perhaps you could offer an option of $5,000 and agree on a sale price of $100,000.  You agree to lease the property from the owner for $800 per month.  Try to negotiate the longest possible time you can get to exercise you option.  For our purposes let’s say that option is for two years.

You will then look for a buyer who will lease the house from you.  Offer your buyer the opportunity to purchase an option from you.  For example, your buyer leases the property from you for $1,100 per month and offers a $10,000 option.  Now, let’s say your buyer exercises his option after one year.  You would then exercise your $5,000 option.  You would make $5,000 on the option and another $3,600 on the rents.  Your total profit would be $8,600 for the year you were involved with the property.  We didn’t even consider what you could have made if you offered the property at a higher price than what you had optioned. 

  1. Finally, let’s look at what you could do with mobile homes with a property owner who would be willing to work with you.  Quite often in older mobile home parks there will be homes that have been abandoned.  These homes are often left with repairs and renovations needing to be done.  They are often an eyesore in the trailer park.  It is costly for the owner to do the repairs and costly to move the mobile home.  This is where we can take advantage of a situation and make money.  Ask an owner to allow you to take ownership of the mobile home with the stipulation that you will find renters or find someone to buy the mobile home from you.  Quite often you will find owners who are willing to consider and execute such an agreement.  You are now in for the cost of rehab and the owner has a decent mobile home in their park.  You will then sell or rent the mobile home.  You have just created an income or a profit.

Use your imagination and do not be afraid to talk to people and propose your ideas.  These are some effective creative financing tools that allow you to use a seller’s money.  Best of luck in your investing!

3 Ways to Make Money with a Home Equity Line of Credit

3 Ways to Make Money with a Home Equity Line of Credit

When investing in real estate most people don’t realize that their home can be a great source for funding deals.  Using a home equity line of credit or HELOC can provide the cash needed to do real estate deals. Here are 3 simple ways to use a home equity line of credit to fund deals:

  1. Flips – If you have enough cash from your HELOC you can buy a property for a fix and flip.  Another option, if you do not have enough money available to do a fix and flip, is to use the cash you have available to get a hard or private money loan.  Hard money and private money lenders are much more willing to lend you money for a flip if you have some cash available to put into the deal.  They usually like you to have 20%-30% of the purchase price of the property plus rehab costs. 
  2. Rentals – If you have enough cash you can buy rental property outright.  With interest rates as low as they currently are, the rent you collect from a rental will cover your HELOC payment and give you a good cash flow as well.  You could also use your HELOC for a down payment on a rental property.  The down payment is usually 20%-30% of the purchase price.  Keep in mind you will still have to qualify for a loan to cover the rest of the purchase price.
  3. Lease option or seller financing – These work for those who have a limited amount of money available from their HELOC.  Lease options and seller financing allow you to get into deals with a smaller amount up front and without having to qualify for a bank loan. 

Another benefit of using cash from a HELOC is that a cash offer is a much stronger offer and will give you a better chance of getting your offer accepted.  You still need to do your due diligence to make sure the deal makes sense.  Keep in mind that there will be a monthly cost to repay the HELOC so factor that in when you are running your numbers on the deal.   Interest rates are at all-time lows, which makes a HELOC some of the cheapest money you can tap into. 

Qualifying Hard Money Lenders

Qualifying Hard Money Lenders

There would be instances when a real estate property owner or investor would find himself hard pressed for cash and time to finance his investment. As opposed to going to the banks to apply for a much needed loan, some would-be borrowers go to a hard money lender. For whatever reasons real estate investors can choose to go to hard money lenders for a loan. One big attraction to these lenders is how quickly you will be able to get the loan.

Requirements for Hard Money Loans

Hard money loans are considered as mortgage loan since the lender will be using a real estate asset as the collateral for the loan. The amount of money the borrower will be able to get is primarily based on the value of the property itself and not on the credit standing of the borrower. However, it is wise to take note that hard money loans are short term loans and are usually expensive compared to bank financing. The interest rates for this type of funding varies – ranging from 10-18% with additional charges called points.  It is often that hard money lenders charge 3-8 points (points are an percentage of the loaned amount.  For example: $100,000 loan charged 3 points or 3% would be $3,000). Although the higher interest rates would seem to be scary for first time borrowers, seasoned investors are less daunted by it. They would simply reason out that the benefits of being able to get the much needed financing quickly outweighs the higher cost it entails.

Qualifying the Lender

Not all lenders are created equally.  Also, not all lenders lend the same.  Unlike traditional bank financing that have similar interest rates, similar costs and similar qualification methods hard money lenders are quite different.  Think of it this way: Lender 1 is your neighbour and Lender 2 is an unfamiliar person from a real estate investment club you attend.  They will both lend differently and will charge you different interest rates while also having different lending requirements.

Get to know the Lender

The absolute best thing you can do is to determine how the lender will do business.  A ten-minute conversation can give you great insight into how they will lend to you and what their requirements would be.

Questions to Ask

Here are a series of questions that will help you understand what the lenders will consider.  However, before you go running and calling the lenders keep in mind most lenders are not asked this many question so they may   But, these questions will also show that you know what you are doing better than most the lenders may speak with.

  • What are their points?
  • Can points be charged at the end of a loan?
  • What interest rate do they charge?
  • What is their LTV?
  • Will they lend the LTV upon the value or purchase?
  • Will they fund repairs?
  • Can you pull cash out of a loan?
  • Do they lend in residential financing?
  • Do they lend in commercial real estate?
  • Do they have a pre-payment penalty?
  • Do they offer a Proof-of-Funds?
  • Do they check credit?
  • Do they look at the property more than you?
  • Do they have an application fee?

Hard money lenders are widely used in real estate but when you use them think: “Are they good enough to work with me?”  This will help you understand the purpose of qualifying the lender and find the best funding for you and your business.

Private Money Lenders

Private Money Lenders

What is a Private Money Lender?

A private money lender is a company or individual that loans money, usually secured by a note and deed of trust or mortgage, for funding real estate deals. Private money lenders are typically considered more relationship based in comparison to hard money lenders.

Three places to Find Private Money Lenders

  1. Real estate investment clubs

Real estate investments clubs are a great way to find any part of your power team including private money lenders. Be proactive in networking with as many people as possible when you attend. The point is to let people know you’re doing deals and looking for more possibilities on raising capital. This is a great way to find out if the person you are speaking with is a private money lender. If they aren’t you may get a referral to people that are.

  1. Online searches

You can find just about anything with online searches. There are several websites out there that have lists of private money lenders or lenders that have their own website. A good place to start is www.privatemoneylendingguide.com and browse the lender directory. When contacting a private money lender, you could say “Hi, my name is John Doe and I found your information on the Private Money Lending Guide directory website. I have a deal that I’m working on that I would like to discuss with you. Do you have a few minutes?”. If they have a few minutes to speak, this is the time to start asking any and all questions about the potential loan you need (points, interest rates, terms, etc.) and how the lender operates. If they don’t have enough time, schedule an appointment with them so you’ll have the time to discuss things.

  1. Referrals

I briefly touched on this with real estate investment clubs, but don’t underestimate the power of referrals. Typically, referrals come from people you trust that have had dealings with the private money lender they are referring to you. The great thing about referrals is you can get them anywhere. Family and friends, co-workers, social media (LinkedIn, Facebook), Realtors, etc. The old adage goes “if you don’t ask, you don’t get”, so don’t be afraid to ask for what you need.

Using these methods can help you find the private money lenders you need to make your real estate business a success. Having Private money lenders lined up can also give you confidence in your deals knowing the money is there when you need it.

How to Qualify Private Lenders

How to Qualify Private Lenders

Private lenders can be a great way to start your “fix and flip” real estate business.  Typically, a private money loan is meant for short term lending purposes and then the property is either sold or refinanced.  Private money lenders base their loan on the equity of the property and not the purchasers credit or income credentials.  Private money lenders are typically a private individual or group, not an institution.  When speaking with private money lenders it’s important to qualify them to find out what you can expect from them and what they expect from you.  You’ll want to know the terms, the conditions and just how much they are going to be involved in your project.  They will also have their own qualification process of you and your property but for now we will focus on the information you will want to obtain from your private lenders.

First of all, you will want to know the terms of the loan you will be getting from your private lender.  Typically, the interest rate will be quite a bit higher than if you were to go to a conventional bank, don’t panic, as long as you run your numbers correctly and there is a profit at the end of things, this is a win-win for everyone until you can make enough profits to buy the property with your own capital.  Also, make sure you ask if there will be any points charged in this transaction.  It is very common for a private lender to ask for 2-3 points when the property is sold.  These points are equal to 2-3% of the purchase price.  This might seem like a lot but it’s all about running the correct numbers.  Keep in mind that once you prove yourself to your private money lender, they may be willing to negotiate the terms of your next “flip” because they now trust that you will be able to renovate and sell the property and they want to keep you as a customer.  The next thing you will want to know about the terms of your loan is how much the private lender is willing to lend to you.  For example, they may be willing to give you 90% of the purchase price but you will need to come up with the final 10% as well as the rehab costs.  In other instances, you might find a private money lender that is willing to give you the rehab costs for a higher interest rate and you will approach another source for the majority of the purchase price.  You will also want to discuss if and when any payments will be due during this process.  Keep in mind, because this is a private individual or group, they get to set the terms.  Some will require monthly payments and others will not require a payment until a certain number of months have passed.  It is imperative that you understand exactly what terms your private lender is giving to you, so that you can make sure you are running your numbers correctly and ensure you will make a profit.

Another thing you want to find out from your private money lender is what will happen if you go past the agreed upon number of months they are lending.  In some cases, the interest rate will go up.  Other times, payments with penalties included will begin.  In the rare occasion that the property is not sold within the allotted time you need to know what your private lender is going to require.   This is a rare situation but it’s better to have this conversation up front and know what needs to be done so that there are no surprises for either party if the situation arises. 

The last thing that you want to talk about with your private money lender is how much they plan on being involved in your project.  Some private money lenders want to have a say in the plans, the colors and the selling of the property.  They feel because their money is involved they have a right to some of the decisions.  Then there are other private money lenders that will quietly let you run the project unless they see a huge red flag and need to step in with their opinions.  Either way, you want to prepare yourself for which type of “partner” you are teaming up with so that you will not be insulted if your private money lender wants to have a say in your project.

At the end of the day, a private money lender is an excellent way to get your foot in the door as a “fix and flip” real estate investor if you don’t have the capital yourself.  Getting creative about using other people’s money to help you get started is a great option to begin this process.  There are a lot people out there with money that want to make their money grow and you want to make your new “fix and flip” real estate business grow.  By using their money to start your business, it’s a win-win for both of you.  Just make sure you communicate clearly the terms, the conditions and what expectations you have of each other so that the relationship can continue through many more projects.

How To Find Private Lenders

How To Find Private Lenders

A great way to leverage your funds in a deal is to work with some private lenders. I would define a private lender as a private individual or company that loans money, for the purpose of funding real estate transactions. The lenders will usually secure their loan to you with the note on the property or some other kind of collateral from you. They are more flexible than hard money lenders and usually less expensive.  There are several ways you can find these lenders.

  • Online Searches: Use your favorite search engine like Google, Yahoo or Bing. Do a search for “private money lender, your city and state”, this should produce a list of places you can contact and qualify to see if they would be a good lender for you.
  • Family or Friends: You would be amazed how many of your family and friends want to get into real estate investing and how much they might have to lend you. One thing to remember, always be cautious which family and friend you want to work with. Make sure they have some business savvy, also make sure they can afford to lose the money they invest into your deal, not that you are going to lose that money but if something were to happen then the loss would not ruin them or you.
  • Real Estate Investment Clubs: This is one of my favorite places to find good lenders. Attend your local real estate investment club meeting. At this meeting you will usually run into private lenders and that face-to-face meeting will help you establish a working relationship with these guys.
      • www.meetup.com on this site, get to the search button, type in “real estate investment club”, then select your city and distance you want to search. Then you will get results of club in or around your area. Click on each club individual, read about who they are and contact the organizer and get registered to go to their next meeting.
      • www.creoline.com from this site, search your area and a list of clubs will be listed out. Contact the organizer and get registered to attend their next meeting.
  • Networking Sites: The following sites will allow you to network with people and/or specific groups within these sites that will give you good leads to the lenders.

3 Reasons to Use Hard Money Lenders

3 Reasons to Use Hard Money Lenders

Hard money lenders are private people or companies that use their own money or lines of credit to finance real estate. These lenders are often familiar with real estate. They have often built lending companies as well as purchased, sold and exchanged many forms of real estate throughout their business life. Because of a hard money lenders extended knowledge their prices, interest and other costs are set. Their interest rates usually run about 10-18% with additional costs (called points) around 3-8% of the loan amount being lent to you. These large costs may deter first time and new investors from using hard money lenders for their real estate investing businesses. However, here are three large reasons you should consider using hard money financing in your own real estate investing businesses:

  1. Cash Financing

    You have likely heard “cash is king”. In no other business is this truer than in real estate.

    Think: if you were selling a house and you received two offers. One was cash and the other was traditional financing. With all other items being equal you would be more likely to accept the cash offer. Cash gives strength and power to your offers. Hard money financing is often considered as “cash” financing and gives you the same strength, power and value as actual cash.

  2. Speed

    One of the similarities and benefits of cash and hard money financing is the speed.

    If you were at a grocery store to purchase a candy bar and purchased the treat with cash it would only take you minutes to purchase the candy. Similarly, real estate purchased with cash or hard money financing can be completed very quickly. Unlike the candy bar real estate purchases have a need to clear title. However, after a cleared title real estate transactions can be completed in days. This speed can also give large strength to your offers.

  3. Easy qualifying

    Hard money lenders do not have the same lending requirements as a bank. As you may know or have experienced: banks often require down payments, good credit scores, years on a job and sizable bank statements. This is not likely the case for hard money lenders; instead, their evaluations are usually on the property and the equity you are purchasing as a part of their property review rather than on you.

    Easy qualifying allows more investors like you and I to purchase.

Reading these easy steps, you can see the value of the financing offered by hard money lenders. To add to the benefits of these types of lenders if you know their costs you can deduct the costs from your offer formulas so that there is little to no change to the profits you could make in real estate transactions. Consider using hard money lenders to finance your next real estate transactions.

Pros of Using Trust Deeds

Pros of Using Trust Deeds

Buying and holding trust deeds is a great way to offset buying and holding a property. Trust deeds are also known as real estate notes, seller financed notes, and/or mortgage notes. Notes are usually created by the seller of the property to help finance all or part of the transaction. This service the seller provides usually attracts a lot more buyers for them. The terms, conditions, down payment, interest rate, due dates, payment amount, late charges (if any), length of the loan, and anything else associated with the note will already be negotiated between the buyer and seller of the property. Therefore, you do not have to renegotiate anything. As the investor buying the deed, you need to review the entirety of the note and decide if this is something you want to buy. Deeds are a great investment opportunity for investors. The pros of using trust deeds as an investment tool are as follows:

  • Usually a higher rate of return, meaning better cash flow for you.
  • Less risky than owning the property out right or investing in stocks.
  • No management of the property is needed.
  • No need to pay mortgages, taxes or insurance.
  • You are in first lien position on the property, meaning the trust deed is secured by the property.
  • You can possibly sell your note to other investors, usually at a higher profit than at what you acquired it.

Simply put, you are acting as the bank when you own a trust deed. Your investment is secured by the property, which means if the borrower is not able to make payments to you, you have the right to foreclose on the property, as long as you are in first lien position. Investing in deeds is a great investment strategy to add to your portfolio. I would suggest only getting notes that are first lien position notes. You can find other type of notes, but for now stick to these kinds and you will be in good shape.

Refinancing Your investment Property

Refinancing Your investment Property

The major difference between refinancing your primary residence and an investment or rental property, is that in addition to the standard paperwork, a lender usually requires at least six months’ worth of mortgage payments (as liquid assets) and a higher loan-to-value ratio for mortgages on investment properties.

What could refinancing do for profitability or return on investment (ROI)?

  • If you need to get cash out of the property to purchase other investments.
  • If you want to benefit from a drop in interest rates.
  • If you plan to move out of your current location and wish to rent the property and/or the loan is due.
  • If you want to maximize your (ROI) by lowering your monthly mortgage payment and increasing your rental income.

If you have ample equity, meet borrower requirements, and will benefit from a drop in interest rate, there are just a few more things to consider before you move forward with refinancing.

  • LTV Requirements. LTV stands for loan to value ratio, which means exactly what it sounds like. The higher the percentage, the closer your loan amount is to the appraised value of your property. Of course, the higher that percentage, the less equity you have built up in your property.
  • You need to have equity in your property to refinance it – plan on at least 20%. Realizing that the more equity you have, the better position you’ll be in to qualify and reap the benefits of a new loan.
  • Additional Debt and Loan Eligibility. If you have long term goals of purchasing more rental properties, be mindful that taking on additional debt could have an effect on your eligibility for future loans.
  • Mortgage Rates: Lenders consider investment properties riskier than primary residences. Mortgage rates for investment properties usually run about 1 percentage point above owner-occupied residential mortgages.
  • NOTE: Lenders will typically not refinance a home that is currently listed for sale.

Even though it is slightly more difficult to refinance the mortgage on your investment or rental property than it is to refinance the mortgage on your primary residence, depending on your current interest rate and loan terms it may be worth the added “hassle” in the long run. Even a small decrease in interest rates or a refinance to a shorter loan term can save you thousands or more over the life of your mortgage loan. If you think it will be beneficial to refinance, reach out to a lender, compare rates available on investment or rental property refinances – then calculate the savings before you move forward with the refinancing on your investment property.

What are Trust Deeds?

What are Trust Deeds?

A trust deed is a legally binding agreement between a person and his creditors. The agreement gives the trustee the mandate to manage the assets while repaying outstanding debts that the owner of the asset owes the creditors. With trust deeds, the agreement between the asset owner and the creditor is voluntary. As a result, creditors who opt not to sign the trust agreement can seek an alternative means of recovering the debt that the person owes them. On the contrary, creditors who sign the trust deed are bound by the terms of the agreement in that they can’t seek an alternative means of recovering their debt.

Types of Trust Deeds 

There are varied types of trust deeds, and they are outlines as follows:

  1. Asset free deed 

The asset free deed is taken by individuals who don’t have any assets. The agreement of this type of deed allows the trustee to get some portion of income from the affected individual and use that money in paying creditors. Taking an asset free deed helps the individual who doesn’t own any asset to avoid bankruptcy.

  1. General Trust Deed

Also referred to us a regular deed, the general trust deed is taken by creditors under a voluntary basis. The individual should appoint trustees who are well skilled as insolvency practitioners. He then goes on to transfer all the assets that he owns to the trustee. With the use of the general trust deed, the individual is protected from undergoing the bankruptcy process.

  1. Protect Trust Deeds 

These deeds are enforced by a court of law. The asset owner seeks the aid of the court to bind the creditors to the deed. A protected deed can also be used to protect the home equity of the individual. Once the deed is discharged as per the agreement, the asset owner becomes debt free.

Self-Directing your IRA – FAQs

Self-Directing your IRA – FAQs

An IRA is merely a savings plan for the retired. The plan allows people who have not yet retired to invest a certain fraction of their retirement package without paying tax on the invested amount. This condition of an IRA is valid either prior to retirement or shortly after retirement. IRA stands for Individual Retirement Account. A Self-Directed IRA is unique because it has more investment options than any other type of IRA that is available on the financial market. Here are some important frequently asked questions related to the Self-Directed IRA.

What are some of the most notable benefits of a Self-Directed IRA? When you have an IRA, you will be entitled to tax deductions, asset planning and tax free profits. But, a Self-Directed IRA enables you to invest in various alternative assets, like real estate. The investment options in an IRA that is self-directed are more diverse than those which are associated with a standard IRA.

Is a Self-Directed IRA common? Self-Directed IRAs have been around since the early 1970s. However, they’ve received little attention because the custodian financial institutions do not usually allow alternative investment options that come with the self-directed plan.

How do self-directed investments work? There is a very slim difference between investing in a normal IRA and a self-directed one, other than the fact that you’re able to invest your retirement funds in other alternative assets if you so choose. The basic steps that are followed when investing in a normal IRA also apply to a Self-Directed IRA.

Disclaimer: The Company introduces general information and education concepts about self-directed retirement accounts (such as 401(k) and IRA accounts). Like any investment, there is risk in using retirement funds for investing in real estate assets. It is possible to lose a portion or all of an investment in real estate – including those purchased with retirement funds. Please review IRS Publication 3125 regarding the use of retirement funds for alternative investments. The document can be found at: http://www.irs.gov/pub/irs-pdf/p3125.pdf. Every individual is different, with unique circumstances. We do not offer tax, accounting, financial or legal advice. Prior to acting upon this information, you may consult your own accounting, legal and financial advisors to evaluate the risks, consequences and suitability of that transaction. The Company is not a retirement account custodian, trustee, or securities dealer.