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Financing 2015 Tips For Property Renovations

Some additional creative financing tips

While there are some obvious and creative ways to finance any property investment renovation project, consider these tried and true options as we head into this new year. Any form of financing that offers using other people’s money (OPM) to create a deferred form of payment for you as a property investor, is a great way of creating more leverage as you upgrade and improve your investment property. Adding market value with financing leverage is an excellent way of increasing your overall return on investment (ROI) for any rental property.

When first acquiring an investment property, try using an FHA loan. Most FHA loans require owner-occupancy. And this can be accomplished if you plan on purchasing a multi-family home, and plan on living in one of the units as an owner-occupying landlord. Chase Mortgage, for example, offers FHA loans as part of their mortgage portfolio. To see if you qualify for any type of mortgage, try using a home loan calculator provided by the lender. Or use one of the mortgage calculators included here, on our site, specifically for property investors.

FHA 203K loans

If you don’t plan on becoming an owner-occupied landlord, consider a Homestyle Renovation Loan, also known as the FHA 203K renovation loan. This style of mortgage can be taken out when you want to expressly bundle all the fix-up costs on a prospective investment property , and roll them into the entire mortgage on the property when you first buy it. The Homestyle Renovation Loan is offered through Fannie Mae (FNMA), and allows investors to roll their renovation expenses dire4dtly into the overall mortgage loan on the property. And you don’t need to live on site either.

The increased use of leverage using this particular mortgage product is excellent for property investing. Save your cash funds, and utilize the lenders money to finance expensive renovation costs that will invariably boost the marketability and market value of any investment property –whether you intend it as a hold ‘em rental property or a flipping opportunity. In addition, this will open up the use of your personal capital for other projects that may come up in the near future. The 203K loan can be used on any house, multi-family (under 5 units), townhome or condo renovation project. And more importantly, it can utilized no matter the existing condition of the property. Mortgages of this variety carry loan to value ratios in the fifty to seventy-five percent range, all depending on the property.

Property leverage advantages

This type of loan is great news for investors who really want to leverage properties. Instead of sinking a great deal of your available cash into renovation costs, you can now wrap a large portion of those renovation costs into the mortgage. This frees up your other capital for purchasing other investment properties. It’s also a great way of saving your untapped capital for emergencies that may crop up – emergencies that will require quick infusions of your own funds on any given investment property you acquire.This Fannie Mae Homestyle Renovation loan can be used to purchase basically any house, condo or townhome, or multifamily property. And the property can be in any condition, and loans will typically carry loan to value ratios in the 50 to 75% range, depending on the property.

Use building supply store credit

Another tip for financing investment property renovations is to use building supply store credit. Consider obtaining as large a credit line as possible when opening a Home Depot credit card, for example. Lowes is another great building supply store to open a credit line with as well. Many times these stores offer great discounts or zero percent financing for extended periods when utilizing their store based credit cards on purchases made in their stores. I have used each for whole kitchen remodels, and they are great sources of other people’s money. Besides that, you can also take advantage of kitchen and bath design services for any remodeling/renovation project. And there is no cost to use their service. Finally, these home building supply chains offer deep discounts on appliances for your renovations. And if you’re trying to outfit new kitchens on a multifamily property, and need to purchase multiple sets of appliances, these stores will offer tremendous savings for bulk buys on appliances as well.

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The Purpose of Title Insurance For Rental Property

Chain of title

The chain of title, or who actually owned a piece of real estate, is a construct from merry old England from the days of feudal lords. When real estate investing, title ensures an owner is the rightful owner of a rental property, and that there are no other claims, past or present, on it. And the purpose of title insurance is to protect anyone acquiring real estate (and if a mortgage is involved, their lender as well) from having a claim of title placed on the property. In actuality, anyone can make a claim as to ownership of a piece of property. However, title insurance companies relieve the purchaser of anyone investing in real estate from having to worry about settling any claims on it in the future. The title company, in essence says: “It’s our problem now, you go out and worry about only your investment opportunities.” Naturally, title companies run complete chain of title checks to make sure they protect themselves, prior to any closing, and insurance being taken out on a property.

The ordering of title

Title is traditionally ordered by the buyer’s attorney for his client. This occurs after a property investor has either agreed to a purchase price and terms for all cash, or if there is a mortgage involved, he has been approved and received a mortgage loan commitment from his bank. The title company then performs an intensive search of county records to determine an accurate chain of title to the property. This search is a comprehensive review of all the mortgages, deeds, easements and liens on a given property that have ever been recorded. Recorded is the key word here, because without a property sale being recorded, no one else can make a legal claim on it in the future. Without a sale being recorded, it’s as if the sale never occurred – legally, that is.

The title search

Any title company property search will be sure to include all records the local municipality has on file for the investment property. This will include any outstanding water or tax bills, special assessments, tax liens and any other item that could conceivably affect the title. Traditionally, building department records are also checked to ascertain any outstanding building permits (opened, but never closed as completed), or similar code violations. Once title is completed, a title report is prepared by the title insurance company. It is sent to all the attorneys in the property transaction for their review.

If there are any current problems (for example, an unaddressed easement that was never disclosed), the attorneys need to hash out a solution prior to a closing. Similarly, if a building code violation comes up in the title report, or, as another example, the title picks up an existing, illegally built shed (that was built without a building permit), the seller will need to obtain a building permit (or tear down the shed), prior to the closing. Once the buyer’s attorney is satisfied that all outstanding violations have been removed, and that his client, the buyer, will be able to purchase the property with no encumbrances on it, the title is deemed to be “clear.” And a closing can finally be set.

At the closing

At closing, the buyer who has purchased title insurance is given his policy. This ensures that his title rights are fully protected, subject only to any conditions set forth in the insurance policy. An example of a condition could be any kind of pre-existing easement on the property (for example, a right of way for a trail path, or utilities right of way). And the bank holding the buyer’s mortgage is also named as an insured member on the policy. The cost of the title policy is a small sum to pay amongst all other closing costs, especially given the protection it affords the buyer (and his lender).

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Buying Investment Property For No Money Down

Myth or reality?

Ah, if it were only that simple…the most often-asked question in property investing has to be: can you actually purchase investment real estate for no money down? Well, I certainly have not. Nor have I heard of any other investor I know doing so. That said, in theory, there are ways to limit your own financial exposure in any investment property acquisition. Just don’t expect to find a situation where you can buy property completely for no money down. Investors tend to get pretty scared when they see you have no proverbial skin in the game. And then they either run away, or jump ship.

OPM made simple

Using other people’s money (OPM) is a tried-and-true formula many experienced investors have honed to a fine craft. Some ways of doing so involve seeking out owner-financing for a piece of investment property that’s on the market for sale, asking for greater loan to value ratios from your lender, asking for relatives and friends for unsecured loans for any given project, and partnerships (also known as joint ventures) where your partners take on partial ownership responsibilities with you (though not necessarily project control, or even any hands-on participation in the process).

Owner-financing

This is where most investors will begin in their efforts to reduce the amount of money they actually invest in any given piece of investment real estate. Finding a “desperate” seller is a good way to locate investment property where you can have the seller take back a large amount of the financing in paper supplied by them. The mortgage may be for a short-term, but if you work out a long-term amortization schedule (say, 30 years), your cash flow will be greatly improved. Most short-term mortgages given by sellers tend to be in the 3 to 5 year range. Afterwards, you can look to convert the mortgage to a standard one with your usual bank/lender that you have a relationship with already.

Also, keep in mind that sellers don’t necessarily have to be desperate to give owner-financing. If you “give” in price a little bit off of your negotiated amount, and pay a little extra, you may find that a seller is willing to offer paper in return for the increased price. Paper they had no intention originally of giving…

Greater LTV’s

Another option to lessen your actual cash outlay is to ask your lender for a slightly greater loan-to-value ratio for any given investment property. Most times a lender’s standards for investment property may be a top LTV of 70%. But if you shop lenders, you may find you can do a little better. In addition, consider buying a property where you become an owner-occupant. So, for example, if you purchase a three-family house, you can live in one unit and rent out the other two. In this scenario, since the property is also your home, you can apply for a mortgage under owner-occupied LTV ratios – which can be much greater than 70%.

Unsecured loans from family and friends

If you’re comfortable with this arrangement, consider borrowing funds for down payments and/or repairs and renovation from your family and/or close friends. You can download any number of promissory note blank forms online, see which makes the most sense for you, then ask your family member or friend to sign with you. The note will usually be for a specified amount of time, with a set rate of interest, with both principal and interest due at the end of the term.

If you give your relative or friend several points above what they could get from a bank, both you and they will be quite happy with the arrangement. Let’s say you offer them an interest rate of 5% on their unsecured loan. They’ll be happy receiving such a high return, and you’ll be ecstatic obtaining an unsecured loan at such a low percentage. A good deal for both parties. Keep in mind that you rather obviously better not default on your payout of the principal and interest – or Thanksgivings could become pretty icky in the future. So make sure you know your relatives and friends well enough to not mess with them in any financial sense. This rather obviously involves the utmost trust on both your parts. So make sure you know yourself and your relatives or friends very well before undertaking this scenario.

Partnerships

Lastly, consider partnerships (or joint ventures) with other investors. Some may not want the headache of being responsible for al the work that’s required once you’ve purchased the property. Some don’t want to be property managers. Others don’t want to do property renovation work. So they let you handle it – in return for a share of the operating and future sale profits, since they will become part-owners with you.

Counting the ways

All these ways of financing investment property are designed to lessen your overall cash outlays in any given project. You can use one or several of these techniques to help you keep you overall exposure down. Will you be able to totally pay for an investment property with no money down? Not very likely. But you can lower your total cash cost – and in so doing, lessen your own risk, as well as substantially increase your return on investment (ROI). Obviously, the smaller your own cash amount invested in a property, the greater your leverage – and the greater your ability to reap larger ROI’s on your minimal cash investment.

photos courtesy of clearlyderby.blogSpot.com, mathforgrownups.com, moneycrashers.com, corporatedispute.com, appraiserjobs.com, debtoutof.com, infrawindow.com

Buying Owner-Occupied Commercial Property

Some recent history

A local business owner in my area asked me for some advice recently on evaluating a mixed-use commercial building he was considering purchasing. He appeared to be stuck on the concept of the absolute price he should offer, based on what a commercial building down the block had sold for within the prior year. I had to remind him that with commercial property, cash flow is king in determining market valuation.

In residential home valuation, then comparable sales are the best way to come up with a good market value for a property, as most appraisers will attest. And appraisers are who banks rely upon to give their unbiased valuations so the bank can feel secure in offering a mortgage note for any given loan to value ratio to a borrower. But with commercial real estate, appraisers most commonly use the income approach to market valuation. They’ll analyze closely all expense items, current rent roll, vacancy rates for the area, as well as an amount for maintenance, then come up with a projected income statement to best determine market value for any given commercial property.

Checking your figures

Ultimately, I simply advised this business owner that he must check all figures given him by the seller as to expenses and rent roll (just like an appraiser would). And most importantly, he should not dwell on what the guy down the block sold his building for last year. Apples and oranges, I reminded him. Just look at the cash flow – the most accurate data for a cash flow you can get. Once you have an accurate picture of the cash flow number, you can use general multipliers for your area (usually within the 8 to 12 range, based on desirability of your area) to determine a market valuation.

The owner-occupier’s advantages

In the case of this business owner, he had a leg up…not only on his competition for the building, but for a commercial loan as well. His fast food business was already a tenant of the building, which also included residential apartment units upstairs. This is an excellent scenario for lenders, who look more favorably (read: better terms and interest rates) on giving mortgages for owner-occupied commercial property. In addition, he could possibly qualify for a Small Business Administration (SBA) backed mortgage note. So his options for lending increase, and thus puts a downward pressure on the terms he will be given, helping his overall cash flow as he can obtain the best loan possible. In addition, owner occupied commercial property loans are offered more flexible terms, with longer payback periods…another major advantage over non-owner occupied commercial property.

Non-owner occupied investment property traditionally rely on standard commercial mortgages for their financing. Many do some partial, or even total owner-financing as well. Again, if the owner is willing to offer you excellent terms, then by all means he will get closer to his asking price. As long as the cash flow works out well in your favor, take the terms of the mortgage note in return for a higher absolute price.

photos courtesy of businessfinancespecialist.com, 123rf.com, melbournehomeloans.biz, whatsthepointofaventura.com, thealternativeinvestor.net

Best Investment Property Search Tips

Location x 3

Here are some quick search tips that will keep you pointed in the right direction when trying to locate your next piece of investment property. Trite but absolutely true, finding the worst property in the best neighborhood is axiomatically better than locating the best property in the worst area…regardless of the absolute price. Most beginner investors get too hung up on the bottom line price they’ll have to pay. Instead, worry about whether the cash flow will throw off enough return on your investment.

Cash or Mortgage

You should also be concerned about your ability to finance the project. While having enough cash on hand to pay the freight for the entire purchase is nice (and will always yield you the most advantageous negotiating position to obtain the best price on any piece of investment property), having the ability to finance and obtain a mortgage on a property is much more important. Leverage is the key, and you will not be using any leverage when you buy all cash. That said, keep in mind that you could employ the strategy of buying all cash in order to obtain the best deal on any given property, then finance it with a mortgage after you’ve purchased the property: in effect, the best of both worlds. Keep in mind though, that most lenders will require some form of “seasoning” (or amount of time for you to actually own the building) until they are able to give you a loan on it. Seasoning traditionally can be a year or more, depending on the lender.

Avoiding negative cash flows

Keep in mind that your pro forma cash flow will tell all you need to know about whether a potential investment property will be a good deal or not. You’ll certainly want to avoid any negative cash flow scenarios (also known as negative gearing), unless you have deep pockets, and are pretty sure you can turn the property around by raising rents substantially in a short period of time to drastically increase your cash flow…either through repairs – or through being able to replace existing tenants with below-market rents, with those that pay market rent.

Creating your pro forma income statement

Your pro forma income statement (also known as your pro forma cash flow) needs to reflect actual expenses on the potential property you’re considering making an offer on. Never take the word of the seller. Do your due diligence, and get confirmation of every figure a seller gives you. Pour over each lease. See each expense item bill for the last year or two the seller gives you. Talk to your insurance agent for accurate figures on what new insurance will cost you – and make sure you have enough of both property insurance, as well as liability insurance.

Make sure you can ascertain exact figures for the current rent roll, as well as common expense items such as taxes, fuel (whether oil, propane, or some other source), sewer and water charges, trash collection fees, electricity charges and insurance. Naturally, you’ll also need an accurate number for your projected monthly mortgage payment if you will be obtaining one.

Vacancy rate

Oh, and don’t forget to add in an amount for vacancy. While it is wishful thinking to create a pro forma cash flow based on 100 % occupancy, it’s not reality. You always need to build in some vacancy rate. The standard is 10% of the total rent roll. Depending on the area, and the ease or difficulty it may be to rent out a vacancy, the 10% figure can be tweaked up or down a couple percent. But the norm is 10%. (It’s just really hard to replace a tenant without some down time in between.) Also, don’t forget to add in the expense of .maintenance. This also is usually a small percentage of total rent roll (you can plug in any number you like – from 2 or 3 percent up to 10 percent , based on how liberal or conservative you’d like to plan for emergencies – like a burst pipe, for example…

Just make sure you don’t skip any steps, and do your homework, diligently. In this way you can best protect yourself – and identify the best investment properties on the market that are ripe for acquisition.

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A New Year’s Property Investing Tips

Time for review…

The beginning of a new year makes for a perfect time to go over your property investing strategy. There are several key elements in any good property investing plan that should be reviewed at regular intervals…so why not now? It shouldn’t take very long to do this review, so let’s get started!

Annual rent roll review

A solid property investing strategy is to review your annual rent roll to ensure you are maximizing market rents from all your units. If you don’t already have tenants under leases, consider creating set leases with small yearly bumps included in them. If you have current leases coming due this year at different intervals, make sure you have a good idea of what bump-ups you want to ask for. Market research is critical here. Go out and check your competition. See what the going rate is for similar units as the ones you have coming available, or that will be up for renewal. Never leave rent roll money on the table. Always be maximizing your cash flow in this way.

Maintenance review time

Have you deferred any needed repairs to your units and/or buildings from last year? Make sure you create a schedule for the needed repairs, lest they become even bigger problems that could cost you exponentially the longer you put off the fixes. Budget for the repairs, and include them in your pro forma cash flow expenses for this year to get a more accurate picture of exactly how much you will net from your property investing.

Debt structure review

If you have long term mortgage notes in place from a long time ago, consider refinancing while rate s are still relatively low. This could end up saving you greatly in the long run. If you paid all cash for a property recently, consider whether this would be a good time to increase your leverage by taking out a mortgage on the property now. If you’ve added improvements to it in the past year, this would also help free up your cash. Crunch your numbers first, and see if the extra debt load from the new mortgage will still allow you a positive cash flow. If so, then a new mortgage may be a great way to help free up your cash for more property investing.

Pre-tax time review

Prior to April 15^th, the beginning of the year gets you to focus early on whether you are maximizing your depreciation on your buildings. It’s also an excellent time to get in to see your accountant to go over these matters – before they are snowed under with work come tax time in April. Maybe they will have some new suggestions about how best to maximize your day to day expenses, as well as your capital expenses to help offset your cash flow income, realizing a smaller tax bite come tax time.

Insurance review time

Consider the beginning of the year as the perfect time to review your current building insurance policies. Yu should already be working with one dedicated insurance agent for all your property investing needs. Go over with him any adjustments he would recommend to make sure you are adequately covered in the event disaster strikes – or you have a negligent tenant. Also remember to review your current liability insurance policy on each of your buildings. This may the most critical insurance item to review. Make sure your insurance agent feels you are properly covered in the event of a tenant accidentally hurting themselves on your property, and suing you.

To sum up…

Utilizing this time of year as a great time to review all these key elements of any good property investor will help you substantially. You’ll end up maximizing your cash flows, as well as reducing taxes, and making sure you’re adequately covered in the case of emergencies or disasters.

photos courtesy of santabanta.com, activerain.com, acanthusandacorn.blogspot.com, omaharedcross.blogspot.com

Property Investing Financing News

The Coming Borrowing Crunch

All property investors need to be aware of a potential disaster in the next several years that could make obtaining mortgage funds increasingly difficult. Lenders may find themselves in such a downward spiral of red ink, that the current credit crunch will pale in comparison to what lies ahead. And what would the cause of this downward spiral be? None other than the simple home equity line of credit. A line of credit that I have consistently advocated here as a solid way to raise funds for increased property buying opportunities, as well as leverage, with some of the lowest interest rates and best terms available.

A recent article from Reuters (“Insight: A New Wave of U.S. mortgage trouble threatens,” by Peter Rudegeair, 11/26/13) notes the coming potential for disaster striking the U.S. banking industry: “U.S. borrowers are increasingly missing payments on home equity lines of credit they took out during the housing bubble, a trend that could deal another blow to the country’s biggest banks.” The article goes on to explain that “the loans are a problem now because an increasing number are hitting their 10-year anniversary, at which point borrowers usually must start paying down the principal on the loans as well as the interest they had been paying all along. More than $221 billion of these loans at the largest banks will hit this mark over the next four years, about 40 percent of the home equity lines of credit now outstanding.”

The chilling effect on property investors

If, as experts are predicting, default rates go up, even a small amount, on the vast majority of home equity lines as they hit their 10 year re-set years, and the monthly repayment nut goes up substantially because of the double-whammy of adding principal to the payment, as well as anticipated higher interest rates being rolled in beginning in 2015, the overall repayment amount may be unaffordable to many who took out their equity lines. Banks holding these second mortgage loans may not be able to recoup the losses in any default because the first mortgage would need to be paid of first, and the lender holding the equity second mortgage may not see a dime in any default scenario. Now, maybe the housing market will increase its robust performance of late. But I wouldn’t bet on it.

Over the next several years, as these equity line 10 year anniversaries roll out, and many are defaulted on, lenders will need to hunker down even more – and will curtail their lending – not only of equity loans, but first mortgages as well. Overall, credit will become increasingly tighter. Not overnight…but much like stepping in quicksand, slowly, and over several years credit markets will begin to tighten up even more.

Just how bad could things get?

The Reuters article also points out just how bad things could get: “What is happening with home equity lines of credit illustrates how the mortgage bubble that formed in the years before the financial crisis is still hurting banks, even seven years after it burst. By many measures the mortgage market has yet to recover: The federal government still backs nine out of every ten home loans, 4.6 million foreclosures have been completed, and borrowers with excellent credit scores are still being denied loans.

The only way banks would have to alleviate the stress on the system would be to take proactive measures. The Reuters article goes on to explain: “Banks have some options for reducing their losses. They can encourage borrowers to sign up for a workout program if they will not be able to make their payments. In some cases, they can change the terms of the lines of credit to allow borrowers to pay only interest on their loans for a longer period, or to take longer to repay principal.”

A return to cash as king

Ultimately, like in the last several years, cash investors will rule. Be aware of this as you plan your long-term acquisition strategy. The belt-tightening by lenders will come slowly, as more equity lines go into default when they hit their respective 10 year anniversary re-sets. Like a python squeezing it’s victims to death, property investors need to know that they too can be squeezed out of mortgage opportunities in the coming years.

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The One Minute Rental Property Analysis

Numbers crunching on the fly

When searching for residential real estate, you’ll need to go and visit a lot of ugly ducklings to find a white swan. The property that screams out: profitability, high positive cash flow and excellent return on investment (ROI). Therefore, it is crucial that you have a quick and dirty system in place to analyze any given piece of real estate you need to evaluate. A system that can let you know before you even move on to your next potential rental property to examine, if the current one you’ve just toured is worthy of an offer or not.

This system, ideally, should be something you can do by rote. You should be able to crunch numbers quickly. If you need to do them on paper, fine. But as you get more experienced, you’ll find you can do the calculations in your head. Ultimately, they should take no more than a minute to analyze, once you’ve asked the right questions, scanned the listing data on the property, actually seen the property, and have done the basic math. Your ultimate goal, of course, is to be able to winnow down prospective properties to the best ones available to make an offer on, in the least amount of time possible. You can always continue the process for any “winning” rental properties in more detail prior to actually making your initial (and succeeding) offers.

Gross rent roll

Here are the main items you’ll need to plug in: On the income side, you’ll need to obtain the current rent roll. If there are any vacancies, you’ll need to ascribe a market rent for them, based on the size and condition of the unit, its amenities, and the overall location of the property. It’s simple enough to come up with a base gross yearly rental amount based on this information. Make sure you consider if the current rent roll is undervalued or not, and if so, what leases the existing tenants are under. In effect, how quickly before you can bump up their rents to full market value? Naturally, you should already have a good idea of your local market rents for like size units in different locales within the area. These must be researched before getting in your car and starting your searches.

Cost structure

You’ll then need to deduct your overall yearly costs in order to come up with a good guesstimate of your annual cash flow. The main items here include property taxes, which should be provided on any listing data given to you. Be sure to check that the property is within an acceptable assessment range. If it looks like the property is currently over-assessed, you’ll want to be ready to grieve the assessment to get your taxes reduced should you actually acquire the property. If the property is under-assessed – beware! You could get socked with a new assessment if the municipality decides to reevaluate the entire town, or if you make any improvements to the building that require a building permit. In either scenario, be prepared to increase the current taxes as you crunch your numbers.

Mortgage costs

You’ll also need to add in your mortgage costs, if you are not paying all cash. Remember that non-owner occupied rental property traditionally have slightly higher mortgage interest rates than conventional home loans do, as much as 1 to 1 ½ percent higher on average. And if your credit score is below the low 700’s, the rates can go even higher. You can also expect to have a higher down payment requirement than a conventional home loan. So instead of 20 percent down for a conventional home loan, non-owner occupied rental property can start at 25 to 30 percent down in most cases. With poor credit, it can go up to 40 or 50 percent down, depending upon the lending institution and their lending standards.

Utilities

Another cost to consider are utilities. Do the units pay for their own electric bills? This is usually the case. However, there may only be one furnace in the building, and you as the landlord will be paying for heating costs for all the units in the building. Are the rents high enough to cover this type of cost? And make sure you get the current seller’s records for heating usage to ensure accuracy. In addition, check to see if there are any other miscellaneous fees that go with the building, such as association fees. You’ll also need to obtain data on the current seller’s insurance costs, and check with your own insurance company to see if they are in line, or if you’ll need to bump up that figure as well. After a while, you’ll acquire a sort of shorthand with your insurance agent, so you’ll be able to estimate rough insurance costs for a year on the spot.

Vacancy rate and maintenance

The last couple of cost items are strictly a function of your gross rent roll. They include a cost deduction for unit vacancy. Usually, if you’re being conservative, you’ll account for 2 month’s worth of vacancy per year for each unit in the building. In a hot rental market though, you can cut this down to 1 or 1 ½ months of your gross rent per unit. And if you’re going to use a managing agent, you’ll have to figure in a cost of roughly 10% of gross rents collected. However, they will take care of all your tenant selection and placement. The final expense to include in your analysis is an amount for maintenance. Certainly, you need to figure on at least 10% of each unit’s gross rent. A more conservative approach would be to use a 15% maintenance figure. This will help cover expected maintenance items like plumbing or handyman repairs. But it should also be enough to cover unexpected emergency repairs.

Perfecting the one minute analysis

Once you’ve done this analysis on paper a few dozen times, you’ll find you’ll be able to run the numbers in your head. And you’ll also find that you will become proficient in doing these calculations while you actually are walking through a prospective rental building. Pretty soon, you’ll find you can get the total numbers crunching done quite speedily. In very short order, you’ll find that you too will have perfected the one minute rental property analysis. Then, it’s on to the next potential white swan laying in wait for you to discover…

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Property Investor Alert– Beware The Latest Mortgage Rate Trend

Rates are on their way up…

Cash flows for property investors are about to take a hit in the coming months – and into the foreseeable future. As The Fed has recently indicated, their stimulus package has an expiration date, and it’s coming soon – possibly as early as this September. So kiss goodbye to the approximately $85 billion a month of stimulus The Fed has been effectuating of late, by purchasing Treasury bills and mortgage-backed securities in order to help keep interest rates low. And that’s just some of the sobering news property investors need to stay alert to in order to plan your investment strategies intelligently. Add to this the fact that 30 year mortgage interest rates have been slowing ticking upwards over the last several weeks, and you’ll soon realize the bottom was reached on the interest rate front – and it doesn’t look like it’s going to return any time soon. Many national economists are predicting overall mortgage rates to increase on a steady trajectory through the end of this year.

Rates are going up for several reasons

I have reported here in recent articles that the current housing rebound is due mainly to property investors, especially a few incredibly large hedge funds that specialize in property investment. And I have noted that consumer confidence remains not altogether strong, as the jobless rate limps along, barely creating the necessary rebound to seriously improve job confidence. This yields a static situation where people are still fearful about their employment – at least the ones that have jobs. It still remains quite difficult placing job hunters in available positions nationwide. And this ultimately continues to erode consumer confidence, and keeps many potential homebuyers on the sidelines. Thus, it’s still a great position to be a landlord to provide housing for all the fence-sitters who continue to rent, thus pushing rental prices up.

Banks are flexing their muscles

So it is property investors who continue to prop up the housing market and mortgage industry – investors comprise more than 20% of all home sales in the past year. With all this activity, and with unemployment remaining at least steady, lenders are now flexing their muscles, figuring it’s finally time to start ratcheting interest rates up. After all, they see the numbers: the average time homes are on the market nationally have dropped considerably this year – from 100 days down to 60 days on average. And nationally, home inventories have been dropping from about a six month supply down to about four and a half months. So it would be wise for any property investor who was considering making their new-buys later in the year, to heed this news – interest rates will only be considerably higher by winter. Best to lock your deals up sooner rather than later if you’re going to be financing with an investment property mortgage loan. Your cash flows will thank you.

photos courtesy of realtypin.com, kstp.com, realtybiznews.com, forbes.com

Financing Investment Property

Some basic tips

When looking to finance investment property acquisitions, here are a few of the most basic tips you’ll want to consider before you begin your property search. Figuring the best way to finance your investment will be one of the first steps you’ll need to take prior to spending a great deal of time and energy in locating a real estate investment.

Get to know your local lenders

There will be greater latitude with smaller, local banks. Each local bank will have their own set of lending guidelines. Get to know each lender’s guidelines, and their individual strengths and weaknesses. Get local real estate agents to refer you to their “preferred” lenders. These real estate pros should each give you three names. See whose name pops up the most out of all local lenders, then work directly with them.

Make sure your credit is excellent before starting your search

Always know your credit score at any point in time. Your score will have the greatest impact on your ability to secure a mortgage when financing investment property, as well as having a tremendous impact upon the interest rate you will be granted. A score of 740 should be a bare minimum. Preferably, you’ll need a score in the upper 700’s to low 800’s these days to ensure getting the best interest rates on real estate investment loans.

Be prepared to put up a large down payment

Unlike homeowner loans, banks assign greater risk to investment properties. They therefore help lower that risk by asking for larger down payments. Most lenders will require 25 to 30 percent down on most investment properties. Some lenders require 40% or more, depending on your credit score. The lower the score, the higher the down payment required.

Ask for some owner financing

Never be embarrassed to at least ask if the owner will consider SOME amount of owner participation when financing investment property – EVEN if they do not say they will on their property information listing sheet. Always ask! You never know just how desperate a seller’s situation may be, and you don’t want to pass up the opportunity to utilize other people’s money (OPM) when possible.

Think outside the box (creative financing options)

Use home equity lines of credit. It’s an extremely cost-effective use of borrowed funds – as long as you’re aware of the potential dangers. You need to set a conservative time horizon for the sale of the investment property to ensure a quick payback of borrowed home equity funds. Otherwise, you’re asking for trouble – placing your own home in jeopardy. In addition, consider short-term borrowing from credit cards – especially discounted credit card offers with zero percent or one or two percent charges on borrowed funds. Of course, shop around for the lowest surcharge cards. Most cards require some upfront surcharge – ranging from two to four percent on average. Again, know your time horizon for holding your investment property acquisition – then choose the credit card offer that best fits your needs, and offers the most leeway in payback period.

Another oft-used method of alternative financing is a shot-term loan from a relative. This can work – but be sure to absolutely create a signed promissory note to your relative/friend/”angel.” That way, everyone is on the same page, knows the repayment period, interest rate, and what will happen if you default. At the end of the repayment period, you certainly want to retain your relative/friend/”angel” as someone who continues to hold you in high esteem. Of course, you should always discuss these creative ways of financing investment property with your financial advisor prior to making any moves. It just makes good business sense to get another outside professional opinion first.

photos courtesy of kwcommercialsa.com, fhasinc.org, anchoragehomesearch.com, thelastembassy.blogspot.com, psdgraphics.com