SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Buying and Financing Properties

Preparing to Buy Your First Property

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If you’re like me, you turn to the internet to answer all of your questions. Every time I’m ready for a new challenge, I begin by typing, “How to…,” in the Google search bar.

So, I’ve created a few posts that combine strategies that have helped me to prepare for the big purchase. Following these strategies can increase your savings, reduce your expenses, and move towards your goal of home ownership.

First and foremost, define your goal
Do you want to buy a single family house or a multifamily house? Will you live there? If so, how long do you intend to live there? Will this be a rental property? Do you plan on selling it in the future? Answering these questions will narrow down your search criteria.

Next, decide on your price range
I’m a huge proponent of living below your means. Reduce your expenses to live a more moderate lifestyle. My advice would be to set the top of your price range below what you can afford. Make sure your price range is based on a well thought out budget and a consistent spending record.

Get your finances in order
Pull your credit and review that information. You are allowed to request a free copy of your credit every year from each of the three reporting agencies (find that link here). Is everything correct? 1 in 4 people have a mistake on their credit report. Having open disputes on your credit report could prevent you from qualifying for an FHA loan. So, take care of this early.

Get smart
You should be able to have an intelligent conversation with your lender about your options. Don’t let others make decisions for you. This is your purchase, isn’t it?
Which product best suits you: FHA, FHA 203k, Conventional, or Homepath?
Learn the lingo: GFE, Warranty Deed, Closing Costs, Owner-occupant, Per Diem Interest, FRM and ARM

Save and Source
Stick to a savings plan that is consistent and can be tracked. It’s not enough to stick money under your mattress. You have to be able to show where the funds came from and where they went, for at least 3 months. This is to ensure you’re not opening new debt to fund your down payment or closing costs.

Find a Knowledgeable Real Estate Agent
Everyone I have worked with was based on a referral, and I must say, I have worked with some amazing professionals. If your real estate agent is knowledgeable and experienced, he/she can connect you with other knowledgeable and experienced professionals like lenders and title companies. They can advise you of real estate trends or bidding strategies. I chose an agent who was also an investor. So I gained a good bit of insight on buy and hold deals, flipping houses, and the benefits to gaining your real estate license.  You can often find such an agent at your local REIA meetings.

Have FUN
Searching for a home is a fun experience! Don’t let the research or the pressure stress you out. Don’t get emotionally attached to the property either. The best real estate purchases are made when the buyer has a clear mind and is not in a hurry. I lost out of many bids that I wished I had won, but I ended up with a great purchase that I love. I’m sure you will too.

Finding the Financing

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Exclusive for Smarter Landlording

Finding the Financing

By: Jimmy Moncrief

Since I know Smarter Landlording readers are focused on working “smarter, not harder” I wanted to write about a smarter way to get financing.

When acquiring a property the vast majority of real estate investors spend 99.9% of their time looking property.  They make a ton of offers, finally get a property under contract, then frantically scramble for financing.

Does that seem smart to you?

Of-course not.

Here is the smart way to pursue “smart financing”

Have a goal this week of making contact with at least 1 lending institution a day.

Here’s the schedule:

Monday: 2 credit unions

Tuesday: 2 small community banks

Wednesday: 2 regional banks

Thursday: 2 national banks

Friday: 2 hard money lenders

When you call ask for the person that makes commercial loans.  Commercial lenders are less restricted by consumer regulations.  They will be significantly more flexible. Before you start telling them about yourself. Simply ask them what kind of loans they are looking for.

At the end of the week, you should have a list of contacts for your next deal.

If you want to take it a step forward, go ahead and send them the information they request for a new loan so you are already pre-approved and you know what kind of loan you are qualified for.

Jimmy Moncrief is a bank underwriter and real estate investor.  He writes at: http://realestatefinancehq.com/

He has provided an exclusive report for Smarter Landlording readers: Top 6 Things You can do to Negotiate better terms from Banks: http://realestatefinancehq.com/smarterlandlording

Herding Cats

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Previously, I wrote about having your offer accepted.  In that article, I touched on some of the major items that you will need to keep up with, such as inspections and appraisals.  There are however a whole host of other things that you need to keep up with as well.  In fact getting to the closing table can sometimes be like trying to herd cats.

Real estate transactions involve several players.   Each player has their own role to play in you having a successful closing.  There is your attorney, the seller’s attorney, each attorney’s assistant, the lender, the lender’s assistant, the appraiser, the title searcher, the insurance agent, the bank inspector, the termite inspector, etc., etc.

Keeping up with all of this can be a challenge.  But, if you want to close on your deal by the date defined in your contract, it is in your best interest to make sure all of these players work together.  In other words, get used to herding cats.

Many of these players are swamped with other projects and real estate deals.  Yours can easily get lost in the shuffle.  I have not seen a real estate attorney’s office yet that was not stacked floor to ceiling with files.  So you have to protect your interest in getting the deal done.  No one else will care like you will.

What you as the smarter investor need to do is start a simple file as soon as you offer is accepted.  Yes, get an old fashioned legal sized file folder, write the address of the property on the tab, and put a copy of your signed contract in the file.  Then attach this Closing Information Sheet on the front cover.

This Closing Information Sheet is the one we use to keep up with our closings.  It lists all the players, gives dates when things like appraisals are due and provides a checklist to make sure we do not miss anything.  Feel free to download a copy of it here.  You will be thankful you did.  Because when herding cats, you need all the help you can get.

My Offer Was Accepted, Now What?

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You have gotten to know your market.  You have a pretty good idea of what a good buy and hold deal is. You just negotiated an offer.   It got accepted.  It is your first deal!  Now what?

That depends on what is in your purchase contract and how you are planning to purchase the property.  No two contracts are the same but most have several standard parts.  These can include:

  1. Buying the property “as is.”
  2. A property inspection period.
  3. A review of leases and financials.
  4. The need for some type of financing to close the deal, likely from a bank.
  5. A way out or escape clause.

So let’s go through each one.

  1. Many investors buy investment properties as is.  Buying a property “as is” means exactly that.  You are buying the property as it is where it is and the seller will not make any repairs.  It is incumbent upon you to know what you are getting into and what, if any, repairs and upgrades are needed and what they will cost.  To find all this out you need an inspection period.
  2. Just because you are buying a property “as is” does not mean you should not inspect it.  In fact you should!  During initial negotiations you may only have seen portions of the property.  Now is the time to see it all.  Your inspection should include all rental units, attics, basements, crawl spaces, roofs, etc.  Anyplace you can get into.  If you are new to this, you may want to hire a property inspector or at least take a trusted contractor with you.  During this inspection period you should be doing two things, making a list of repairs needed and looking for major damage and/or problems you were not aware of.  If you find major damage or problems, it may be time to go back to the negotiating table.  If the seller will not renegotiate, use your escape clause and back away from the deal.
  3. Get copies of all leases and at least two years of past income and expense reports.  Read these over carefully.  You will be inheriting the tenants and they come with certain rights.  You can’t just kick them out because you are the new owner, you will have to live with them for a while.  Be sure you are aware of what you are getting into.  Make sure utility payments jive with what you were told for example.  Do the tenants really pay them, or are they listed as expenses on the expense report?  Depending on what you find, you may need to renegotiate.  Again, if the seller is unwilling to do so, you may need to back away from the deal.
  4. Finally, if you are getting bank financing, there will be an appraisal.  Always, always, always go to the appraisal and meet the appraiser.  This person can make or break your deal depending on how they value the property.  Be helpful to the appraiser.  Take them some comps if you can.  Hold their measuring tape for them.  Explain to them, or better yet provide a list of the repairs and upgrades you plan to make.  Do all you can to ensure the appraisal goes well.
  5. This is pretty self explanatory.  If something goes wrong, such as unexpected and costly repairs, you need a way out as we see in 2 and 3 above.  But only use it if you absolutely have to.  If you make an offer, you should have every intention to close.

Assuming all is in order and has gone well, your next job is to secure insurance for the property.  Find a good insurance agent who understands your market and understands investment property.  Trust me, not all of them do.  You can often find one at your local REIA.

Finally, develop a checklist to make sure all of these various pieces get placed in their proper slots.  Do not just assume that the appraiser has the proper address to send the appraisal.  Do not just assume that your insurance agent has sent the proper forms to the right places.

It is your job to follow up with all of these people and make sure that everything gets to the right place in time to close.  E-mail the bank to make sure they have the appraisal scheduled and that they receive the appraisal when completed for example.  Nobody else cares about this deal as much as you do and often times you need to expend some energy to get all the pieces together.

Only then, once it all has been fitted together, then maybe, you will close on your first deal.  Congratulations!  Now the real fun begins.

The Key to the Deal is Motivation

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There are generally two types of investment properties out there on the market to buyers like me.  These are:

  1. Investment properties that are owned by other investors.
  2. Investment properties that are owned by banks.

I have bought from both of these owners over the course of my investing career.  Both present their own unique circumstances.  But no matter who the owner is, they have to be motivated.  Without motivation, there is generally no deal to be made.

Investor owned properties that are on the market are generally going to be listed with a real estate broker.  Many times the broker will list the property with an “exceptional” price.  In these circumstances, you have no idea why the owner is selling the property.  The owner may be retiring, he may be sick of dealing with tenants, he may have an illness or he may be trying to gauge the market.  He may just be trying to see if there is someone out there who will “pay his price” so to speak.

In other words you have no idea if the seller is truly motivated or not.  You can ask the broker why the owner is selling, but most likely you will just receive a vague answer.  If you want the property, all you can do is view it, run your numbers and make your offer based on those numbers.  If the seller comes back with a counter offer, you can begin to gauge the motivation.   If not, move on, he is not motivated.

The second type of seller is generally always motivated.  Banks do not want to be landlords.  They may have unrealistic prices in their heads, but they are generally motivated.  Again these properties will also be listed with a broker and what I have found is that banks often need to be educated on the true value of the asset they are holding.  Sure, the asset may be worth the price they are asking if it was fully rented, generating top of the market rents and lacking repairs of any sort.  But that is rarely the case with bank owned properties.  It can take a little time to educate the sellers and work these deals.

I like working with either type of seller, but for the deal to work for me, they always have to be motivated to sell.  If the motivation is not there, the gap between ask and bid is just too wide to bridge.  So determine the level of motivation as best you can early on.  If you find it lacking, move on to the next deal.

Presenting Yourself Financially

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One of the great things about real estate investing is that you get to leverage OPM, that is other people’s money.  Rarely do you use your own funds to purchase investment property (although if you can, that is a great way to go), rather you use the bank’s or some other investors funds to purchase your investment properties.  No matter where you are getting the funds, a smarter real estate investor learns how to present themselves financially.

Presenting yourself financially begins with you.  You have to show any investor, be it a local bank or a wealthy friend, that you are a good risk.  You need to demonstrate that if they choose to invest with you the chances of the investor loosing their money are very slim.  One of the best ways to do that is to put together a packet or “bank book” that explains who you are, what you do and how you plan to pay the money back.  Such a book makes you look professional and on top of your game.

Your bank book should first contain information on who you are.  Include resumes of yourself and any business partners.  Draft a short overview explaining how you got into the real estate business, how long you have been doing it and your goals for the future (you have thought about your goals right?).  Include any articles or blog posts you may have written that are relevant.  Perhaps you were interviewed by the local paper about your investments or about some charity work you have done, include that as well.  You want your investor to see that you are a solid and ethical person and thus worth the risk.

Next you need to include all of your financial information.  At least two years of tax returns will be required although more is better.  You should also prepare and sign a personal financial statement that outlines all of your assets and liabilities.  I also include information pages on the properties I own and manage that describe the workings of those properties, debts, expenses, cash flow, etc. in detail.  Include pictures.  If you rehab properties, show some before and after shots.  Remember a good picture is worth a thousand words.

I also like to add information about my team.  I list the names and telephone numbers of my attorneys, accountant and the various contractors I use.  I let my investor know they are free to contact anyone on my team with questions (let your team know first).  This information helps show folks that I seek competent advice when necessary and that I have a competent team to back me up.

Let me close with a tip.  In years past I would actually print out all of this material and put it together in a book form, over 100 pages!  No more.  Today it is all scanned and placed on a jump drive.  This cuts down my paper expense and helps my lender do their job because they are just going to scan everything into electronic format anyway.  Make their job easier and do it for them, they will like you for that and it may just give you an edge.

To help you get started, you can find the table of contents to my bankers book (or list of files for my jump drive) on my Smarter Resources Page.  Until next time, work smarter not harder.

Do Not Disturb (The Tenants)

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Many new real estate investors have bought at least one piece of real estate, their own home.  They have been through the real estate purchasing process at least once and this process is their frame of reference for future purchases.  The process for purchasing investment real estate is very similar.  You negotiate with the owner, agree on a price, draw up a contract, fulfill the terms of that contract and close the deal.  One key way that the process is different however revolves around existing tenants.

Investment properties like duplexes, quad-plexes, apartments and even single family homes that are on the market often have tenants in them.  Tenants make showing the property difficult.  The current owner is simply not going to invade his tenant’s privacy every time someone thinks they may want to buy the property.  You as a buyer have to realize that you will often have to make an offer on a property without seeing the entire property beforehand.  This is generally not a problem as we shall see below.

Tenants also require a certain level of discretion on the part of any prospective buyer because many times the owner has not told the tenants the property is for sale.  Often there will not even be a “for sale” sign on the property because the owner does not want the tenants to know that the property is on the market.  Why not?  People hate change.  A sale of the property means change and many tenants will simply move rather than deal with change in ownership (Yes, I know moving involves change as well but that is just the way tenants are.).

So when looking at an investment property with existing tenants, NEVER disturb the tenants in any way shape or form.  Always inform the listing broker or owner before you go on the property.  The agent or owner will most likely want to meet you at the property to show you a vacant unit (or possibly an occupied one) and prevent awkward encounters with the tenants.  You can always do a drive by for a look, but do not do much more.   If you do, you may just anger the owner enough that you will loose the deal.

As you can see, you will almost never see all parts of an investment property before you make your offer.  So how do you protect yourself?  You put a clause in your contract stating that the contract is “contingent upon the inspection and approval of the condition of all dwelling units.”  Once the seller and his agent are confident that you are a qualified buyer who can close and intends to truly buy the property, the owner will arrange for your inspection of all dwelling units and most likely let his tenants know that the property is going to be sold.  If, upon inspection they are in a condition that you anticipated then move forward and close.  If not however, it is time to return to the negotiation table.

 

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What Properties Should I Invest In?

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I have often been asked by people wanting to get into real estate investing for advice about the types of properties they should invest in.  There are so many different kinds of real estate investment types, from single family homes, to farms to industrial parks and there is nothing wholly right or wrong with investing in these various types of real estate.  Each has advantages and disadvantages.   But in my experience, residential real estate is the easiest to get into and the learning curve is the shortest.  So for the new investor, I recommend residential real estate investment properties and that is what I am going to discuss in this post.

 

There are three types of residential investment properties.  All three can be great investments.   Just be aware of the advantages and disadvantages of each type before investing.  Let’s go through each one.

 

Single Family Homes – Single family homes are properties with just one dwelling unit in them.  They can be detached homes on acre lots, town homes, even condos fall into this category.  Single family homes can be great investments.  One of the best features of single family homes is that they generally are the only properties you can sell on the retail market.  You often therefore can get a higher sales price when you sell than you would with other type of residential properties.

 

In today’s market there are many, many homes out there that are priced right and will generate positive cash flow.  In fact, right now they are the cheapest I think they are going to be for a long time.  Even thought prices have declined, rents have not.  Properties in desirable neighborhoods can bring good rents and very stable tenants.

 

New investors can also get some very favorable financing for single family investment properties right now.  Rates are currently amazingly low.  Investors with W-2 (regular job) income and a good credit score can get up to 10 investor loans with low fixed rates financed over 30 years, just like you can with an owner occupied house.  So both pricing and loan rates make this type of investment property very attractive.  (Here is a tip.  If you are married be sure to put these loans in only one spouse’s name.  That way you can get 20 loans, 10 in each spouse’s name.)

 

In many areas however, the prices of single family homes are far higher than the rental income they will produce can cover. In other words, unless you are paying in cash for an expensive home or have a large down payment, the amount you will have to finance will not create positive cash flow.  Be careful buying in pricier neighborhoods.

 

A downside to single family homes is the fact that when your tenant moves out, your house is vacant and producing no income.  You need to move quickly to get your property re-rented.  Vacancy is a cash flow killer!  For example, if your monthly cash flow is $150 per month on a home that rents for $900 per month and it remains vacant for a full month, you have just lost 6 months of cash flow profit.  Plus, when they are empty, they are more prone to theft and vandalism.

 

Duplexes, Triplexes and Four-plexes – These are the two, three and four unit properties or smaller multi-unit properties.  These also make great first time real estate investments.  The main advantage here with these multi-unit properties is that they will still produce income when one unit becomes vacant.

 

Another advantage for the newer investor, you can often get the same types of loans mentioned above with single family homes.  This is because Freddie Mac and Fannie Mae, the buyers of these loans, treat these multi-unit properties the same way they treat single family homes.

 

These smaller multi-unit buildings can still possibly be sold to owner occupants.  So the market for these properties is a little stronger than it is for others.  They can often be sold to someone like me perhaps.   When I was beginning my investing career, I wanted to generate some extra income so I bought a duplex and lived in one side while I rented out the other.

 

Apartment Buildings – Apartment buildings are properties that contain five units or more.  These types of properties can really be income producers.  However, they can also be real drains if they are mismanaged.

 

Management of these types of properties has to be strong or they can quickly get out of hand.  Tenant issues and faulty maintenance can quickly add up to a negative cash flow situation.  You might think you can hand this type of property over to a property management company.  But if you do not know how to manage your property or manage the property management company, you will end up on the short end of the stick every time.

 

Financing these properties is also much harder.  Say goodbye to 30 year loans that you can get with the above properties.  To purchase these types of investments, you will most likely need to go to a local bank and get an officer’s line of credit or commercial loan.  These loans have significantly higher rates and much shorter terms.  Often terms of 5 years or less.  In this way they are very much like commercial or industrial properties.

 

Selling these properties is also much harder than with other types of residential investment properties.  Think about it.  Who is going to buy these types of properties?  Certainly not a retail buyer, but another investor who is going to be looking at the same cash flow numbers you were when you bought the property.  In other words that investor will be looking for a deal just like you were.

 

What should you buy if you are just starting out?

 

I would suggest starting with a duplex, triplex or four-plex.  You can generally get decent, long term financing.  They will produce income with multiple units as opposed to sitting vacant.  The resale market is fairly good for these types of properties.  These three factors help reduce the risk for you first time investors.  If these types of properties are not available where you live, then go for single-family homes in stable neighborhoods for many of the same reasons.  Whatever you decide to do, do get into real estate investing today.  Make it a goal to buy one or two investment properties this year.  The combination of low prices and low rate may not be seen again for a long, long time.

5 Financial Reasons to Invest in Real Estate

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Fourplex apartments can be a great cashflow generator.


You have probably heard that real estate is a good investment.  You may even know some people who are active investors.  You may even be thinking yourself that you should get into real estate investing (you should be).  But have you ever thought about why real estate is such a good investment.  My friends and fellow investors Richard Scarbrough, Jo Garner and I briefly went over the reasons why on the radio this past Saturday.  Since we were constrained by time, I thought I would share some more detail.  Be sure and read through for a bonus at the end of this post.

 

There are financial and non-financial reasons why real estate is a good investment. I’ll go through the top 5 financial reasons today and save the non-financial reasons for a future post.

  1. Cahsflow is KING in the real estate investing world.  Cashflow is income from the property such as rent, less expenses including principal and interest payments, insurance, property taxes, 10% repair credit and 10% vacancy credit.*  For example, if monthly rental income is $1,000 and your monthly expenses total $850, that leaves a monthly cash flow of $150 or profit per month. Cashflow is King!  Are you beginning to understand the beauty of real estate?  All of your expenses are paid by your tenants.
  2. Leverage – Leverage simply means having the ability to use other people’s money (OPM).  Think about how you purchase real estate.  You purchase it with a loan or mortgage.  That is using OPM.  You can even purchase real estate with no money out of your pocket, entirely using OPM!  Even better, your first purchases will often utilize a low, fixed interest rate payable over thirty years.  What other investments allow you to do this?  What if you wanted to buy some gold coins (you should be doing that as well, but that is another post)?  Would a bank lend you the money to buy gold?  How about stocks or bonds?  The answer in general is no.  You would have to come up with 100% of the purchase price to buy any of those other investments.  Leverage is a huge advantage for real estate investors.
  3. Monthly Mortgage Paydown – Owning real estate also allows you to build wealth every month.  Every time you make your mortgage payment, some of that payment goes to interest and some goes to principal.  The portion that goes to principal is just like putting money in the bank.  Every month you owe a little bit less on the property and have little more equity on your balance sheet.  Plus, remember who is paying it down for you, your tenants!
  4. Federal Tax Savings – We all know that Uncle Sam takes a chunk with income taxes while allowing fewer and fewer deductions.  Real estate investing is one of the few methods that can actually bring your earned income down to zero!  Yes, zero so you pay little or no federal income taxes.  Now, I’m not doing anything illegal and do not suggest you do either.  However I do take every legal deduction available and there are many.  One of the best is something called depreciation, but that’s another post for another day.  Want to learn more about the tax benefits of real estate investing?  I suggest reading this (Nolo’s Every Landlord’s Tax deduction Guide) book.  (Please note that I am not a CPA or professional tax advisor.  Please consult an appropriate expert before completing any investment decision.)
  5. Appreciation and Equity – You may not think that this applies today with the recent real estate boom and bust.  But part of the art of being a real estate investor is finding the good deals, deals where equity and appreciation are still available.  They are out there.   Find one and get instant equity when you close.  Plus, we are pulling out of this recession and while real estate still has to hit bottom in some areas, it will eventually start to appreciate slowly once again.

 

There you have them, the top five financial reasons why you should invest in real estate.  And here is the bonus I promised.  With any other investment vehicle, such as stock, bonds or precious metals, you might get one, maybe two of these financial benefits.  Owning real estate gives you all five.  There is no other investment vehicle that gives you all of these benefits.

 

I’ll blog again soon about the non-financial reasons to invest in real estate.  Until then, work smarter, not harder!

 

* As a general rule of thumb, always allow for a vacancy credit and a repair credit equal to 10% of the gross monthly income.  If a property’s income is $1,000 for example, then the vacancy and repair credits would be $100 each.