Fast Fact Notes Chapter 9

Chapter 9 – Real Estate
“Home sweet home” - Make real money with real estate

The real money is in real estate. Where else can bricks and mortar make you big bucks?

Buying a property means that you can enjoy all the perks of home ownership by having a roof over your head, while investing in an asset that can actually appreciate in value. And the better you look after your home, the better it will look after you.

Welcome to the Real Estate biz!

What are the benefits?
For starters, you need never worry about your rent increasing again, or about being asked to move out. You are the one in control, so you call the shots. You’re the boss.

Furthermore, real estate is one of the smartest investments out there. With the high demand for homes, it’s no wonder that real estate is credited with creating seven out of every ten millionaires!

• Leverage – You have the enviable ability to control a property of greater value than the cash you invested.
• Equity growth - It’s like a savings account built into home ownership.
• Tax benefits
• Appreciation – This is a real estate term for the increase in value of land and buildings.
• Higher return on investment – Due to the leverage you have with real estate investing and the fact your investment appreciates on the total value of the property, your ROI is much higher than other forms of investing. If you purchased $10,000 worth of stocks and you get a 15% return, you earned $1,500 for the year.  With real estate, that $10,000 investment would control a $100,000 property. With the same 15% appreciation rate you would have earned $15,000 the first year, which is equal to a ROI of 150%.
• Cash flow

Money Pros strive to learn as much as they can about real estate investments. They realize this investment vehicle offers benefits that will help them reach their financial dreams faster.

 

Kinds of Real Estate Investments
Single-family homes are separate structures that either have open spaces on all four sides or are separated from other structures by dividing walls that extend from ground to roof. 

Multi family residential properties come in several different styles.  Multi-family properties make for good rental units.  In addition, many people that buy multi-family properties live in one of the units and rent the other units out. 

Duplexes have two attached units
Triplexes have three attached units
Four-plexes have four attached units

Condominiums are buildings where the living areas of the property are owned by individuals. The common parts of the property, such as the grounds and pool, are owned jointly by the unit owners.

Lofts are a type of condominium that are typically located in downtown areas of a city.  They typically have very high ceilings, exposed pipes and contemporary furnishings.

Town homes attach to one or more other structures. They differ from condominiums because you own the land as well as the living area. 

Never bust the budget
As with all major purchases, you should really crunch some serious numbers before taking that leap and buying a property. Sure, a house appreciating in value can make you rich, but what about being “house poor?” That means being broke from the expenses of owning a house – usually the result of bad budget planning (or no planning at all!).

Before purchasing, you want to have enough money for at least a 10% down payment. Plus, ensure that you have six months of your bill money stocked away in your emergency fund. With a budget, you can see what you can honestly afford.

For a home you intend to live in, here is a snapshot of the expenses involved with real estate ownership:

• Mortgage payment – Like auto payments, you make a down payment and then make payments toward the remaining balance. www.freeby30.com has a calculator that will allow you to calculate mortgage payments based on house prices.
• Property Taxes –They are typically between 1% and 3% of the purchase price.
• Insurance - This would protect the homeowner against such perils as fire, wind, and earthquake damage.
• Association dues – Related to condominium, town home or planned unit developments, this could be a monthly or annual fee.
• Maintenance - This expense will be directly affected by the age and condition of the property, so you might need to estimate these costs.

Moreover, when you buy or sell a home there are fees associated with that process:

• For the Buyer – Loan closing costs: 2.5% of the loan amount
• For the Seller – Closing costs: around 7% to 8% of selling price; Sellers pay for a full service real estate agent commission, which is negotiable, but accounts for 5% to 6% in most areas

Careful and considerate planning of your budget will be key to your success in real estate.

Money Pros factor in all the costs of home ownership, and purchase homes within their budget.

 

Getting Real in Real Estate - Climbing the Property Ladder

Let’s look at your real estate goals and see how buying a home fits in with your overall financial plan. Ask yourself: What am I trying to achieve in buying a home or a rental property?

Needs are things necessary for basic living – for a single person buying their first place, the needs may be pretty simple, such as up-to-date plumbing and safe electrical.

Wants are things we can live without, but it would be nice if they fit into our budget – skylight in the bedroom, Jacuzzi tub, etc. Write a list of needs and wants before you start your search.

Where should I buy?
Think realistically, and look at the location in relation to your distance from work, and distance from friends and family. What is your lifestyle? Does it fit with the home’s area? For instance, do you want to be nearer schools and parks, or nearer to bars and restaurants?

Real estate agents
For your first purchase, use a larger, full service real estate agent company like Century 21, ReMax, or Coldwell Banker. Try to find agents that specialize in the areas and homes you’re interested in buying or selling by picking up local papers and fliers.

Above all, find an agent you feel comfortable with, and ask a lot of questions. For example, you could ask:

• How many years have you been practicing real estate in the area?
• How many years have you been helping people buy/sell homes in this price range?
• What have you personally listed or sold in this specific area?
• Does your brokerage provide any extra services that will help in a purchase/sale?

Ask about the current market conditions. Everyone has different opinions; and remember, whether you buy or sell, the real estate agent will be making a commission, so do your home work.

• Buyers ask – What’s your plan to help me find a house? and
• Have you ever had any disciplinary action?
• Sellers - How do you plan to market the property? and
• What improvements would you recommend to sell the home quickly to receive top dollar?

Choosing the right real estate agent will make a big difference when buying your property.

What next?! Look, Like, Lock
Look
Real estate agents will help you search through the properties, and they can send you emails of home listings as they come available, and even drive you to view the properties you’re interested in.

Like
Take good notes at each property – what do you like, what don’t you like – make sure to view many properties before settling on “the one”!

Lock
Once you find a home that you like - okay, that you love – then the real estate agent will help you to form an offer.

Whenever you make an offer, the real estate agent and you should build in several ways for you to exit the contract without losing your deposit. These are often called “weasel clauses,” but they will keep you in the best negotiation position throughout the contract.

How do you determine if the market tells you it’s a good time to buy? Usually, markets where the value of homes is increasing (values are appreciating) share certain common characteristics. These outperforming markets usually have:

• Population growth – people moving into the area.
• Employment growth – jobs attract people and stimulate economic growth
• Value increase - Homes are starting to increase in value
• Short sell times - On average, it takes six months from the time you list a house, it sells, and a new buyer moves in; in a good area, the time it takes to sell a home is shorter.
• Parts of the country that are nice to live in
• Affordable – the average person can still afford to buy in the area.

Areas that might not be so good to buy in may have these opposing characteristics:

• Population decreasing – people moving out of an area
• Employment decreasing – fewer jobs, fewer people
• Value decrease - Home values are falling
• Longer time on the market - Fewer buyers
• Rents are decreasing

The steps to an offer:
1. First, make your offer subject to receiving an acceptable professional inspection report. Asking for seven to fourteen days to have the report completed and reviewed is typically acceptable.

Always, always, always have a detailed inspection of the property done. An inspection will alert you to any major repairs that may be necessary.

2. Once you receive this report back, begin round two of the negotiations. Get an approximate cost on the items that need repair. Then request the seller pay for a portion of these items.

3. Once your final offer is accepted, forward your information to the loan company you have chosen.

4. Closing – The closing of the property occurs when all parties have met the demands of the contract. You will sign your loan documents and those will be forwarded to an escrow company. An escrow company typically gathers all the necessary pieces of what the contract requires. Once everything is complete, you receive the keys to your new house!

Money Pros follow the basic steps in purchasing a home, thereby insuring the property is in good condition and worth at least as much as they are buying it for.

 

The Lowdown on Loans
Getting the right loan makes a huge difference in the profitability of the property. With hundreds of loans to choose from, knowing what loan products are best for you is essential.

Here are some questions you should answer prior to searching for a loan that’s right for you:

• How long do you plan to keep the property?
• What are your real estate market predictions over that time?
• What payments can you afford?
• What is your risk tolerance?
• If it’s a rental property, what kind of cash flow are you looking to achieve?
• Are you trying to pay down the principle balance?
• How does this property fit into your overall financial plans?

Know your loans – types of loans
Today’s lending market offers loans to fit your unique needs. Which one is right for you?

Fixed rates – payments stay the same for the length of the loan
Adjustable rate – payments change on a scheduled basis

For your first property purchase, choose a 30-year fixed-rate loan.

Getting you in the door - qualifying for a home loan
Lenders look at four areas when determining if you’re eligible to qualify for a home loan:

• Credit – As discussed throughout this course, credit is the first thing a potential lender will look at when qualifying you.
• Equity – On a home purchase, equity is equal to the amount of money you put down on a property. If you put 10% down, you have 10% equity. The more you put down, the easier it is to qualify for a loan.
• Assets - Lenders want to see on average at least three months of mortgage payments in an account. Have at least six months of payments set aside, in addition to the down payment, before you invest in real estate.
• Debt to income ratio - This shows the lenders you have the ability to afford monthly loan payments.

Next you need to find a qualified loan officer. Interview at least four loan officers before settling. The best place to start is through past experience or referrals from friends; then expand your search through the Internet.

Here are some key interview questions for potential loan officers:

• What is your experience and how long have you been working for this company? (A broker with at least five years of experience is suggested.)
• Do you have any past complaints with the DRE (Department of Real Estate)?
• How often do you handle purchase loan transactions?

Get quotes
Now that you have found three or four loan officers you feel comfortable with, complete the short application with them over the phone. They will guide you through it. The loan officer will then qualify you and prepare products to present to you.

Money pros know what it takes to qualify for a home loan. They plan in advance to make sure they have good credit, money saved, good income, and low debt.

 

How much will it cost?

After they give you a proposal over the phone and you decide on a product, ask the loan officer to fax you the Good Faith Estimate (GFE).

Compile all the different quotes, review them, and compare the programs. Pay careful attention to the fees on the Good Faith Estimate and compare the total cost of the loan.

Although you are just looking at the overall cost, it is important you know what the typical fees are for: Title insurance, Escrow fees, Doc prep fees, Appraisal, Credit report, Flood certificate , Mailing, Notary, Processing, Underwriting, Origination points, Discount points, and Administration fee.

Non-cost items you will see on the GFE (Good Faith Estimate) are:

Impound account
Interim interest

Do not use these numbers in your comparison

Comparing fees
Add up all the total fees, compare them as a whole. Do not compare individual fees since you are just concerned with the bottom line. Which lender offers you the best combination of rates and fees? Which loan officer offers the best program?

Are you paying too much?? Find out how your loan broker is compensated! Your broker is paid a percentage of the total loan amount. This amount ranges from 1.5% to 5%.  See how much your loan broker is making. Lenders typically generate fees in three ways:-

• Yield Spread Premiums (YSP) – This should be disclosed on the Good Faith Estimate. If it is not, ask them to provide the GFE showing it.
• Points - These are fees charged by the lender. Points can be used to get a lower rate and/or added commission. I always suggest to first-time buyers not to pay points to get a lower rate.
• Other fees - These fees come disguised in many different ways. Often they are called “administration fees” or “broker fees.”

If the loan broker you felt the most comfortable with has the best rate and terms, move forward with that loan. If not, share with that person the other quotes and ask if they can match the program to earn your business. It never hurts to build up their ego by saying, “You are the most knowledgeable of all the loan officers I spoke with. I would like to work with you if you can match the terms of your competitors.”

Next, the loan officer will ask you to gather some basic information, which may include:

• Pay stubs
• Tax returns and/or W-2 forms
• Two months of recent asset statements (bank, 401k, stock, CD, etc.)
• Homeowners insurance
• Miscellaneous information (divorce decree/credit letters of explanation, etc.)

A home of your own!
Are you ready for the responsibilities that come with home ownership?

Make sure your bills are paid on time by setting up an automatic bill pay, as discussed in Chapter X.

Pay your property taxes - penalties for paying property taxes late are high, so make sure to pay in a timely fashion!

Make sure your insurance is always paid, too. Insurance typically protects against natural disasters, although each policy is different. So read and understand yours. If you forget to pay your insurance and your home burns down, you’re in some trouble.

Money Pros understand the costs and process of getting a home loan. They receive the best terms and lower payments because they have a basic idea on how to evaluate a loan.

 

Renting to Others - Why Own Rental Properties
So, you decide to own instead of rent. Better still, you decide to own and rent to others! Owning rental properties is an excellent way to increase your net worth. The key benefits of owning rental properties are similar to the benefits of owning the home you live in, with one addition - cash flow.

Rental property real estate - things to bear in mind
Vacancy - A vacancy rate is the percentage of time the unit(s) are vacant (not rented). Most areas typically have a vacancy rate of 5% to 10%, which means the unit(s) are vacant 5% to 10% of the time. Knowing this will allow you to budget for the 5% to 10% of the time you are not collecting rent. Just call local property management companies to get an idea of the vacancy rate for the area you’re interested in.

Property Management fees - Property managers are professionals that supervise rental properties. Their duties include collecting rent from tenants, filling vacant units, coordinating repairs, and forwarding you monthly income statements. Typically, fees are 8% to 10% of the amount of the monthly rent collected. Pay all outgoing expenses that would be reported to credit reporting agencies, even if the management company offers to.

Money Pros see that they can build long-term wealth and cash flow by owning rental properties. They study, create a plan, and purchase rental properties.