SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Mortgage

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

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.

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.

Podcast – Landlording 101

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Check out my latest podcast where myself, Jo Garner and Holly Swogger, President of the Memphis Investors Group, discuss landlording basics such as leases, screening tenants, security deposits and more.  We also discuss how you can increase your cash flow by using some of the many mortgage options available to landlords for their rental properties.  We have never seen rates this low.  If you can refinance now is the time to do it.  Put some more cash in your pocket today! 

 

 

 

 

 

 

 

 

 

The Time Is Now To Get Into Real Estate!

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Right now there is almost a perfect storm for real estate investors.  If you are thinking of getting into real estate investing and becoming a landlord there is no better time than now.  Real estate is currently on sale and mortgage rates are at the lowest points anyone has ever seen!  Even better, rents are on the rise because more and more people can’t purchase a home and are there fore forced to rent.

If you are thinking about becoming a real estate investor, I can’t emphasize enough how good the conditions are right now.

If you have been thinking about it and you want to jump off the fence and get into real estate investing here is what I would do.

  1. Do your homework.  Learn about real estate investing.  What are the major expenses and how will you handle them.  Join a local REIA for expert local advice.  Get this book for some real expert advice.
  2. Pick a place to farm as I explain here.  You need to start out in someplace you know and someplace you can get to rather easily.  Find a place and get to know it like the back of your hand.  Learn what properties rent for and what they are selling for so when a deal comes along you can run your numbers quickly and grab it.
  3. Get your money lined up.  If you have your own funds, great!  If not, you should go and talk to a mortgage broker about setting up some investor loans.  If you have good credit and income, it can be done.
  4. Look at buying foreclosures.  Foreclosures are everywhere right now and can really be priced right because banks can’t get rid of them fast enough.  There were over 4,000 in my area just this year alone!   Plus, with a foreclosure there are many other advantages that Richard, Jo and I talked about here.
  5. Once you find a deal, jump on it!  You have done your homework, plowed your farm and have some money lined up.   These conditions will not last forever.

Trust me, in a few years you will be wishing you had bought more real estate.  Like my friend Richard says “Don’t wait to buy real estate, buy real estate and wait.”  That’s great advice!

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.