SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Finances

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.

How to Reduce Your Expenses

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How often do you hear, “I’m broke,” from people who have reasonable jobs, wear good clothes, and drive amazing cars? It drives me crazy. When having one of these discussions, I learned that the complainer and his 4-person family ate out 5 nights a week!

When you save for deliberate purchases, you’re happier about where your money is going. Learning how to save and how to reduce your expenses are two fundamental skills that lead to financial security and freedom. Here are a few things that helped me drastically reduce my budget.

1. Make a Budget
Question everything on your budget. How can you reduce your utility consumption? Do you really need a home phone and a cell phone? When saving to buy a house, I whittled every expense down as far as possible. I haven’t had cable in years because I’m happy watching television off of the internet. Internet wasn’t an expense I was willing to relinquish. You can find endless lists online if you’re short on ideas. Here are a few other ways I reduced my expenses.

  • Plan out your breakfasts, lunches, and dinners for each day until the next pay day. Then, make a grocery list with only the ingredients you need.
  • Abandon name brands and shop at discount grocers like Aldi for higher savings.
  • Turn off all lights when you leave a room, and use natural sunlight to your benefit.
  • Pay your bills with gift cards that you purchase a Kroger. Kroger awards 2x extra fuel points when you buy gift cards. It’s inconvenient, but you could save a dollar per gallon of gas!

2. Pay Your Bills on Time
If you haven’t been doing this, you’re not ready to buy a house. Build a lifestyle of responsible spending before jumping into large purchases like real estate. Not only will this help your credit, it will save you hundreds of dollars in late fees and charges—which could be deposited into savings!

3. Look at Your Debt
Look closely at the kind of debt that you have. Are you just making minimum payments? If so, paying down on debt could save you more money in the future. It will also free up your Credit Debt Ratio, which will help you qualify for a house.

Question your interest rates too. I spent almost an hour on the phone with my credit card company being transferred around until I had successfully gotten a lower interest rate. If someone tells you no, respond with, “OK, I understand that you may not be able to say yes. Can you transfer me to someone who can?” It doesn’t hurt to ask.

4. Negotiate Everything
I just learned this one recently, and now I can’t stop. You would be surprised how much you can haggle. It doesn’t hurt to try. In the last 6 months, I’ve successfully negotiated the cost of CD’s at the store, car repairs at the dealership, oil changes at Jiffy Lube, and service costs at Verizon Wireless. It doesn’t hurt to ask.

What expense reducing strategies have the biggest impact on your budget?

How to Save Money for Future Investing

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Training yourself to build a consistent savings will eliminate so much stress and uncertainty in life. You will be adequately prepared to deal with unpredictable expenses and you will be positioned to make serious real estate investments in your future.

So, why do we make excuses?

I’ve copied down a few of the tactics and tricks that helped me develop consistent savings. Savings coupled with reducing your expenses are the keys to financial flexibility.  I’ll discuss reducing expenses next time.

1. Increase the Inconvenience
Using the same bank for your checking and savings accounts is too convenient! It makes it too easy to borrow from your savings. That’s why I tell everyone to open their savings account at a different institution than their checking account. To INCREASE the inconvenience, I opened my savings account at a credit union whose hours of operation mirrored my own office hours. What are the chances of you leaving work just to borrow a few dollars from your savings? I don’t think so. You don’t need to buy those shoes anyway.

2. Payroll Deduction
If you have the option, have your savings come directly out of your paycheck and into your savings account. If you don’t ever see it, you won’t ever miss it. This worked so well for me that I continued to increase my payroll deduction every time I got a pay increase.

3. Know Where Your Money Goes
This may sound like a no-brainer, but seriously, know where you spend your money. Make a budget of necessary spending as well as monthly luxuries. After analyzing my spending, I realized I was eating out way too much. If you earn $10 an hour, and those shoes cost $70, think about it. Are those shoes worth a full day’s work?

4. Spend it all on Pay Day
Pay all of your bills the day you get paid. If you aren’t afforded the option of payroll deduction for your savings, then pay into your savings like it’s a bill. After all of your bills are paid, portion out what is needed for groceries, gas and reasonable “rewards” for budgeting responsibly. If there is a larger than expected balance remaining, then put most of it in your savings. If you wait to pay your bills, you will nickel and dime your savings away before you ever see it.

There will be surprises; there will be set backs. Don’t get discouraged. Everyone is different, and you should develop your own savings strategies based on how well you know yourself. For instance, I never allowed myself a “reward” for responsible spending. I saved it all. If I had just experienced a sizable set back to my savings though, I would find justification for treating myself. Yes, it made an even bigger dent to my pot of savings, but it kept me on track.

Which is more important?

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.

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.