The biggest hurdle WAS getting tenants

Investing in real estate is NOT for the weak. There are so many challenges with being a real estate investor. The biggest challenge is usually buying your first property. The biggest hurdle according to most of my friends and clients who have investment properties is getting qualified tenants. You should have no problems getting them rented according to these two stories from the Rocky Mountain News:

Demand for affordable rental housing in the state is being driven by record foreclosures and rising market-rate rents.

Read the full story: Affordable rental vacancies tighten

Statewide vacancies in affordable housing fell during the second quarter, dropping to 4.7 percent, from first quarter in the first quarter, according to a new state report.

Read the full story: Affordable apartment vacancies fall below 5 percent

Weekend Highlights

As the real estate market slows down, you should expect fewer and fewer articles in the newspapers especially during the final quarter (October, November, December). However, this part weekend, there were numerous devoted to real estate:

Should You Invest In Foreclosures?

Not all foreclosed properties are available at discount.

Do your research and do your home work when looking at foreclosures. Know the are you are buying in, find out what is a reasonable price for a similar home. Look at the property and bring some one else with you to be an objective observer. Write out lists of possible repairs, if you see anything suspicious have a specialist do an inspection.

Even though there has been a high amount of foreclosures in the nation, they have been touted as “easy money” by real estate investors trying to sell seminars more than real estate. Regardless of where the hype came from the demand is still perhaps more than the supply. For this reason banks have been able to sell their homes more and more at “market value.” For instance, Freddie Mac through Home Steps will actually renovate the homes themselves in order to make them available for full market value. Their goal is to sell them to “end users,” or people who plan on buying them as primary residences. In fact, HUD will only sell their homes to end users first, and then open the auction up to investors. Because of this, HUD auctions are flooded with investors, getting a bid in only after end users get a shot at them.

In most of the country’s “hot” real estate markets, competition for foreclosures and stagnation of pricing has made the spreads on foreclosure rehabs and flips significantly lower than before, thereby increasing the risks associated with buying foreclosures. Consider targeting a market which may be slightly off the beaten path where demand is increasing as part of your strategy, to help you diversify the risks of buying foreclosures in hot markets.

Doing your “due diligence” is key. It’s important to have a prelim title report done on the subject property(either by you or a 3rd party) to make sure there are no clouds on title.

The key to investing in foreclosures is to start early. Contact you local title company and have lists of NOD’s emailed to you. This will give you a starter list of homes that are facing foreclosure. If you have issues getting the list then contact a Real Estate professional you trust. They can get one for you.

Typically, competition for foreclosures is very high. Be sure to act quickly if you see a good opportunity.

There are high risks and hard work involved with buying foreclosure homes. A foreclosure property buyer needs to spend a great deal of time to find homes that are in foreclosure and to go through public records to make sure that the foreclosed properties do not have unexpected liens, such as tax liens, which could drive up the purchase price. Beginners should consider buying bank owned properties, which are often free from the usual risks associated with foreclosure homes.

Without a doubt to be successful in investing in foreclosures the investor must get to the homeowner early. Many serious foreclosure investors drive through otherwise well kept neighborhoods looking for homes in an unkempt condition. This can often (but of course not always) be a clue that the property is close to going into foreclosure.

You can use a simple formula to make sure that you have some cash flow or make money if buying a rehab project. You can take your after repaired value times 70% less repairs. (ARV x .70)-R = maximum offer. Obviously you can sway a bit from this depending on the area but this rule of thumb is used by professional real estate investors across the nation. You may want to contact contractors in your area to gain an understanding of what repairs costs. This formula takes into consideration your holding cost until you find a renter or buyer.

Should I become a real estate investor?

Editors Note: Due to the mortgage and credit crunch, 100% investment property loans are no longer be available. If you’re in need of a mortgage broker in Denver, CO contact us to discuss your mortgage options.

If you are thinking about purchasing real estate for investment purposes, you need to keep these things in mind.

Investing in real estate requires a long term perspective on the liquidity of the investment, as long term returns are historically very strong, but short term markets are volatile as they are with all types of investments. Because deals are fundamentally land backed, the real estate investor can rest assured that financial services entities are ready and willing to step in and finance and insure the property, which results in much lower startup costs and very low downside risk by comparison to other traditional investments.

There are four possible financial benefits to investing in real estate:

  • appreciation
  • positive cash flow
  • tax savings
  • amortization of the mortgage

If you plan on taking negative cash flow, you should be sure that you will make it up in the other 3. Most investors today expect to get most of their return from appreciation by speculating on certain “hot” markets. Consequently, they are willing to accept little or no cash flow or more commonly, negative cash flow.

And another nice benefit of the option ARM loans are they have usually have 3 - 4 different payment options (hence the name pay option ARM). They have a minimum payment, interest only and 2 different amortization payments to choose from each month. The minimum payment can be utilized for vacancies on rental properties.

Interest rates on investment properties are higher versus those of a primary residence because they present a higher risk. A borrower is more likely to worry about his own mortgage first if he gets into a financial jam.

It is possible to qualify for 100% investor loans to get you started in the real estate investment career. The rates are quite high, but if you choose the correct property you will be well on your way to success as an investor.

Real estate investing has always been a great investment vehicle when used correctly. Some of the best neighborhoods to buy rentals in are the blue collar neighborhoods. The ratio of mortgage payment to rental income seem to be best in these types of neighborhood. You may also want to consider keeping a small amount of money equal to 3 months of mortgage payments in an account readily available for vacancies when someone moves out. The faster you get your property rented the more money you get to keep.

A Pay Option ARM is a great mortgage for the property investor. It allows flexibility in your payments to offset possible costs associated with rental units, such as vacancy and repairs. It also can maximize the cash flow from a rental property.

Always remember to figure money in for emergency repairs and routine upkeep. If you cannot afford to maintain your property then you will eventually lose money. The pay option ARMS now available are great for payment flexibility if any major repairs should arise.

Over the long term, real estate has traditionally out performed many other investment vehicles such as stocks and bonds. However, as in stocks there is a significant difference in risk factor between long term investing and short term quick for profit flipping.

Second Homes and Vacation Homes Investing

Editors Note: Due to the mortgage and credit crunch, loans for second homes and vacation homes are available but qualifying has become more difficult. If you’re in need of one of these mortgages in Denver contact us to discuss your mortgage options.

2005 was one of the hottest years on record for people buying second homes with over 21% of all purchases being second homes. Driving this trend is the availability of capital for baby boomers from harvesting the swelling equity from primary residences as home values soared over the last few years. Some areas like Destin, Florida averaged over 25% appreciation in 2005 alone. Hot areas are, as suspected, homes near the beach, like the Destin area, mountains and other recreation areas. According to the National Association of Realtors, for markets where over 10% of the homes are seasonal, there was a 59% increase in value from 2001 to 2004.Also helping in the growth is the publicity given to the real estate investment industry with infomercials like Carlton Sheets focusing on the low down payments required. In some cases 5% or less is all that is required to get you interest rates that rival those for primary residences. Lastly the popularity of low payment loans like the interest only and cash flow option arm have joined the low down payment programs so that the homes are cheaper to get into and cheaper to hold, at least on the short term. Also helping in the growth is the publicity given to the real estate investment industry with infomercials like Carlton Sheets focusing on the low down payments required. In some cases 5% or less is all that is required to get you an interest rates that rival those for primary residences. Lastly the popularity of low payment loans like the interest only and cash flow option arm have joined the low down payment programs so that the homes are cheaper to get into and cheaper to hold, at least on the short term.

To be considered a 2nd home you are not allowed to own more than two second/vacation properties. Any more than two second/vacation properties and you may have to consider it an investment property.

Often the lender will lend a lower LTV on a second home vs. a primary residence.

You may be asking yourself why real estate is such a good investment. Let’s look and see why it is such a good investment. You average home’s appreciation rate is around 5% per year. The numbers look like this: Year 1 - 100,000 home value when you buy Year 2 - 105,000Year 3 - 110,250Year 4 - 115,762Year 5 = 121,550As you can see it doesn’t take long to build up some equity in your house. If you bought a 200K home then those numbers would be double. This example is not even taking in into account that you are paying down the principle balance on your loan. If you have your home on an interest only or pay option loan then you are probably cash flowing each and every month too.

Option ARMs are excellent tools for investors seeking rental income, particularly on seasonal properties. You have the option to keep your payments low when the property is empty, and manage your cash flow while the property is booked or rented.

Keep in mind that if it is a second home or investment property, there may be loan to value restrictions.

Some of the factors that lenders look at when qualifying a home as a “second home” are:1. Distance from primary residence2. Location3. Is the home being used for “personal” use

The first step for obtaining a second home is to speak with your mortgage broker and discuss financing options and determine the amount of money you can affords to spend. Be sure to remember the added maintenance costs of a second home, a lot of routine work needs to be done to maintain it and keep it in enjoyable condition. This may be work that you may not be able to do yourself do to distance or time limitations.

If the property that you are buying is for the purpose of a legitimate vacation or second home, many lenders offer loan terms that are comparable to those offered on a primary residence. To qualify, the lender will need to be comfortable that the property is being used as a second home, not as investment (rental) property.

Lenders offer more favorable terms on second homes than investment properties. Underwriters will want to know for sure if the home is being used as a second home or as an investment property. Most people purchase second homes in resort areas for vacation purposes or near relatives and family members.

Lending banks post more stringent underwriting requirements for second homes and vacation homes, because if the homeowner should suffer a financial crisis, he would almost always first default on the vacation home and try to save the primary residence. In addition to ensuring that the homeowner is able to afford payments for both the primary and the second home, most banks also require higher down payment for the second residence.

Rental Property

Many people dabble into real estate investing, or at some time or another think about purchasing rental properties. There are many things that need to be considered when looking to buy rental properties.

One thing you should know is that qualifying for investment property financing is usually a little tougher than qualifying for the property that you plan to live in.

Another thing is that you will also want to develop a business plan for an investment purchase to make sure that you do not get in trouble financially. You need to budget any profit you make from that property for repairs and routine maintenance. Many a real estate investors fail due to lack of planning.

Rent vs. Own

Most people after deciding to leave the security of the nest start off renting. Our incomes are limited, we have little or no money saved, and little or no credit. Buying a home right out of the gate is usually not a realistic option, so renting, for a couple of years makes sense.

Lets say you move into an apartment and a year later you want to move, you now have to come up with enough money out of pocket for closing costs and down payment. If you had purchased a home instead of renting and after say a year you wanted to upgrade to a bigger or better home than you will be able to sell and use the equity of the home for the down payment on the new home and cover closing costs as well.

When sending your son or daughter off to college, consider buying an apartment instead of renting one or paying exorbitant dormitory / residence hall fees. The appreciation over a four year period has helped pay for more than a few our clients’ tuition bills.

With no money down financing and seller assists of closing costs it is often possible for someone to buy a home for less cash out of pocket than would be required to rent a similar property. A renter must usually come up with first and last months rent along with cleaning and security deposits which could total thousands of dollars. This shatters the myth that you must have a large amount of cash saved in order to buy a home.

OK, now a couple of years have passed. Ask yourself these questions, in the last two years have I:1. Had the same job?2. Paid my rent on time? 3. Established any credit?4. Received a pay increase?5. Put any money into savings? If you can answer yes to at least the first three questions, ask yourself this! “Why am I paying my Landlords Mortgage”?

Real estate is still the best investment anyone can make. Many people who rent seem to think they cannot afford to own. Years ago that statement may have been true, but in today’s market with low interest rates and numerous 1st time homebuyer programs, in many cases the statement should be - can you afford NOT to own. Your rent money is just a liability, you get nothing in return for your investment. The principal portion of your mortgage payment is investing in something that will gain value, and becomes an asset. The interest portion of your mortgage payment is tax deductible! The property taxes you pay are tax deductible! And in the first year of homeownership any points you paid are tax deductible! Think again about how much you are paying for rent each month and then contact me to find out if now is the right time for you to become a homeowner!

If you are concerned about the added expense and time required to maintain a home, there are many options available that will minimize this risk. Many communities have townhomes that are maintained by Homeowners Associations. Your only responsibilities are for the inside of your property. There are many advantages to this type of arrangement:

-You can pick out and own your own appliances.-You can paint and decorate how you wish.-You decide what floor coverings are used - Carpet, Hardwood, Ceramic tile.-You are not responsible for cutting grass, roofing, landscaping.-In many instances you have your own garage for parking.-No more annual rent increases.-Some communities have community pools and parks that are shared by the residents.-You can choose to have control over what is offered in your community by becoming a member of the Homeowners Association board of directors. Typically you will pay a small assessment fee on a monthly basis to the homeowners association for the services they provide, and it is not unusual for the assessment combined with your mortgage payment to be less than what you currently pay for rent.

Renting versus owning is a personal preference and is a great housing solution for certain people in certain situations. However, most financial advisors agree that renting is not a wise solution to ones housing option for the long term.

One of the best advantages of owning a home is the tax deduction on the interest. This alone could save you thousands come tax time.

Why would you throw away thousands and thousands of dollars every year on apartment rent or renting a house when you could own a home for the same amount of money? When you pay rent you’re building equity for your landlord. If you pay $750 a month, that’s $9,000 a year that’s just wasted. You’re never going to see that money again.

A borrower who decides to buy as opposed to rent is going to be better off in the long run. I have explained to many of my clients that the increase of property values is a great reason to buy because instead of throwing your money away on rent for which you have nothing at the end of the year if you purchase the property value increase will put you ahead of the game when they get ready to refinance possibly for cash out or sell the home outright.

Property flipping

One of the growing trends in real estate investing is to buy a property for a lower then market value price and re sell it quickly. This is known by most investors as property flipping. Flipping is not a sure fire way to make money and has its own positives and negatives that need to be understood before you try to do this on your own.

Loans for Investment Properties

Editors Note: Due to the mortgage and credit crunch, investment property loans may be harder to obtain. If you’re in need of a Denver, Colorado Mortgage contact us to discuss your mortgage options.

Acquiring investment properties has become much more simplified in regards to the financing options available. Today’s mortgage programs can allow you up to 100% financing of your investment property. There are several different loan options available that are set up to maximize your cash flow.

Loans for investment properties are generally much more risky than owner occupied homes. To offset this risk the lender may require a higher down payment and a slightly higher interest rate. Also, if the investment property will be income producing then the lender will restrict how much of this income can be used towards loan qualification. Ask your preferred mortgage professional about the implications of buying an investment property with a mortgage.

Investment loans are so flexible they are allowing many investors to get into the game. It is a good idea to speak to your Mortgage Broker to see how we can get you an investment loan also!

The flexibility of a pay option ARM is also a useful tool to investment property owners. Several of my borrowers us this loan not to increase cash flow, but to maximize the use of the rental income. While the property is rented they make the highest payment they can with just the rent, when the property is vacant between renters they utilize the minimum payment so there out of pocket expense is minimized. Investment property owners can also utilize the minimum payments if repairs are needed, etc. The minimum payment can off set the out of pocket expense of repairs and maintenance

Although it may seem like easy money, making money in real estate investing is a skill that takes research and experience to acquire. It requires a good plan and an understanding of the processes involved to either rehab a home or renting to tenants. Make sure you do your research and understand what you are undertaking. The last thing you want to do is put yourself into a situation where the property you buy costs you money every month.

In the world of real estate investing, a property that generates monthly cash inflow is always considered a sound investment. To create a positive cash flow situation, investors often prefer “interest only” mortgage products, which requires the homeowner to make monthly payments on only the interest accrued for the prior month. Because “interest only” payments are always lower than fully amortized payments, investors have a better chance of creating a monthly cash inflow.

If you are purchasing a home that is in a state of disrepair, you may want to look at a renovation or rehabilitation loan. Lenders will loan on investment properties up to 90% of the after repaired value. Monies are given out on a draw schedule similar to a construction loan. Investors find these types of loans favorable due to not having to pay for repairs and remodeling out of pocket.

A Pay Option ARM and an interest only loan are great choices for mortgages on your investment properties. These will allow you to have the lowest payments possible to help you utilize your cash flow to its fullest potential. There are many more loan programs now for investment properties than there were a while back. You will generally pay a somewhat higher rate on an investment property than you would on an owner occupied property due to the higher risk involved to the lender.

Investing Your Equity

Most people leave money they could use for investing sitting in their house in the form of equity. That’s right, you can refinance your house and place your cash in a growth fund. Did you know that you can actually gain wealth faster by doing this even if you are only receiving the same return on your money as you are paying in interest on your mortgage due to tax write-offs on mortgages?

If you invested in and only make 1/2 more than you are paying, you will have accumulated enough in your side account to pay your home off years early. Or continue to contribute for thirty years and you will have hundreds of thousands more the pay off of your home. Of course everyone’s scenario will be different. Consult your financial pro.

When investing with your home’s equity you are in a sense becoming a bank. Think about what it is that a bank does. It borrows money at one rate and invests it at another, hopefully higher rate. Keep in mind that banks are operated by highly trained and skilled investment managers and risk evaluators. It would be advised that you have a solid plan and work in conjunction with skilled investment professionals before becoming “a bank” with the equity in your home.

Historically, investing in real estate has had the highest rate of return on average. Many homeowners have discovered that they can build wealth much faster by cashing out the equity in their current residences and purchasing investment properties. Lets assume an investment of 20% on a property (20% down payment), and that the property increases in value at an average rate of 4% annually, that translates into a 20% annual rate of return for the amount invested. With property value increases in the double digits as we have seen in recent years, it is not uncommon to see annual rate of return on investments above 50%.As with any other investment strategies, there are risks associated with cashing out home equity. However, one can minimize some of the risks. By making certain that he can afford the new, increased mortgage payments without depending on the income from the investment, the homeowner would not be in a financial tight spot regardless how his investment performs in the short term.

Equity in a home does not make you money by just sitting there. In fact, if the value of your property decreases, your equity is lost. By cashing out the equity and placing those funds in an investment with a higher return than the interest you are paying, you will make money from your equity.

Always contact an accountant to make sure a scenario works in your best interest.

Lenders sell money. That’s their business. They provide money to people who need capital. They charge interest, but you don’t have to make the assumption that interest is your foe. Many major corporate, financial and even church institutions use debt management to accomplish their goals, even though they may have plenty of assets earmarked to cover their liabilities For these institutions, debt is a wise and prudent money-management tool. It’s easy to see if a bank can borrow money from the Federal Reserve at 4 or 5 percent then turn around and lend that money at 8 percent, the can make a handsome profit, especially on large sums. By separating the equity from your home, you can accomplish the same thing.

There are programs that allow you to transfer your equity into other investments without paying any taxes.

Other sites: Loan Officer | AFTER BANKRUPTCY APPLYING FOR CREDIT | Delinquency | Fixed-rate mortgage | Credit FAQ | What not to do after you apply for a Mortgage | Due-on-Sale-Clause | What not to do after you apply for a Mortgage| Pay Option Arm Calculator