Month: January 2016

How to Create Cash Flow On Your Rental Properties…

Normally, most people will use a 30 year fixed loan. That might be OK if you intend to hold on to the property for that long. Most properties will be sold within five (5) years or maybe exchanged through a 1031 exchange. Even if you hold it for 30 years, the first five to seven (5-7) years you made nothing. The bank on the other hand, made money since those first few years most of your payment went towards interest only and maybe reducing your principal balance by approximately $1000.00 a year. Not a good return for having the bank use your money is it?

Be advised, this article is not intended in any way to provide financial advice or to suggest that this product is right for you. An accurate assessment of your risk tolerance is always advised on any investment. Please consult your mortgage or financial adviser.

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calculator-385506_1920All of you have experienced the need or flexibility for multiple exit strategies. After all, that is the first consideration you should make when evaluating an investment property. However, the strategy might manifest itself sometimes when you end up renting the property-Or maybe that was your exit strategy to begin with.

In addition to your exit strategy, you have to determine your acquisition strategy. Are you using OPM such as Sub2, Lease Option or are you using HML with the hope to flip the property short term. The reality is that unless you structured the deal right you might not have any positive cash flow. You might just break even-once you take into account PITI and MVM (Management, Vacancy Rate, and Maintenance). Well, what happens when OPM is not available and you have to hold the property even if for mid-term (2-5 years)? You have to find your own financing!

Normally, most people will use a 30 year fixed loan. That might be OK if you intend to hold on to the property for that long. Most properties will be sold within five (5) years or maybe exchanged through a 1031 exchange. Even if you hold it for 30 years, the first five to seven (5-7) years you made nothing. The bank on the other hand, made money since those first few years most of your payment went towards interest only and maybe reducing your principal balance by approximately $1000.00 a year. Not a good return for having the bank use your money is it?

I.e. $100,000.00 30-yr. Fixed @ 8% rate.

Pmt No.

Beginning Balance

Total Payment

Principal 

    Interest

Ending Balance

Cumulative Interest

1

 $      100,000.00

 $          733.76

 $           67.10

 $         666.67

 $    99,932.90

 $        666.67

2

99,932.90

733.76

67.55

666.22

99,865.36

1,332.89

3

99,865.36

733.76

68.00

665.77

99,797.36

1,998.66

4

99,797.36

733.76

68.45

665.32

99,728.91

2,663.97

5

99,728.91

733.76

68.91

664.86

99,660.01

3,328.83

6

99,660.01

733.76

69.36

664.40

99,590.64

3,993.23

7

99,590.64

733.76

69.83

663.94

99,520.82

4,657.17

8

99,520.82

733.76

70.29

663.47

99,450.52

5,320.64

9

99,450.52

733.76

70.76

663.00

99,379.76

5,983.64

10

99,379.76

733.76

71.23

662.53

99,308.53

6,646.18

11

99,308.53

733.76

71.71

662.06

99,236.82

7,308.23

12

99,236.82

733.76

72.19

661.58

99,164.64

7,969.81

As you can see in the example above your average, payment towards principle is only .09% with a reduction of principle of $835.36 for the first year. On the other hand, the bank received total revenue of $7,969.81 Consequently, you have to do justice to yourself and structure a fair deal for you, which will still allow the bank to make its money.

How can you accomplish this? It is simple…find the right financing for you. By that I mean, reassess you goals and if it is a short to mid-term holding or even if it is a longer than five (5) year term look for the right loan that will allow you to pay more towards principle. Thus, accelerating you mortgage, this in turn will create cash flow in addition to reducing your principle and creating additional equity when you sell the property.

A good product to do this with is a 2/1, 3/1, 5/1 or even 10/1 Option ARM depending on your holding period. It is important to make sure that if you have prepayment penalties it will not prevent you from getting out of the property should you need to do so. Option ARM loans might go by different names depending on the financial institution. Some call it Pick a Payment loan or Option Payment loan, etc.

The neat feature of this product is that you can choose your payment whether, interest only, 30 fixed-fully amortized or a minimum payment that will be lower than the interest only option. The interest rate you’ll pay on this product will be lower, in average about 2.5% lower, than the regular 30-year fixed rate.

You might be thinking-how could you favor these products, if these are the type of products that got us in a mortgage industry chaos? The truth is that it was not the product what caused it but companies that were not ethical and did not educate their customers as to the pros and cons. Reality is that if one does not know how to swim one should stay on shallow waters, or swim at your own risk! As consumers, particularly as investors, we should be responsible for our professional growth and know what we are getting into.

Remember, there is risk with everything you do-that’s why it is important for you to do your homework and make an assessment if the financing product you choose works for you. The Pay Option ARM is a hybrid adjustable mortgage. It is normally fixed for the first 2, 3, or 5 years and then it becomes variable. Meaning, the fluctuation of the future interest rate will depend on the performance of a normally attached index, such as LIBOR, COFI, MAT, CMT, etc.

To illustrate this approach, the interest rate, and payment of an Option ARM vs. 30-Year fixed loan is as follows:

Fully Indexed Rate:

5.390%

Minimum Payment (1.00% Start Rate):

$321.46

Deferred Interest  

$127.71

Minimum Payment (2.00% Start Rate):

$369.82

 

(Only Applicable when LTV > 80% and/or Non-Owner Occupied loans)

Deferred Interest

$79.35

Interest Only Payment:

$449.17

Fully Amortized Payment:

$560.91

$100,000.00 30-yr. Fixed @ 8% rate

PmtNo.

Beginning Balance

Total Payment

Principal

Interest

Ending Balance

Cumulative Interest

1

 $      100,000.00

 $          733.76

$           67.10

 $         666.67

 $    99,932.90

 $        666.67

As you noticed the difference in the Option ARM fully amortized payment and the regular 30yr. Fixed is…

$172.85 ($733.76- $560.91 = $172.85) The $172.85 x 12 = $2074.20

The difference between the interests paid on the 30-yr. fixed vs. the Pay Option interest only payment is…

$ 217.50 ($666.67 – $449.17 = $217.50) $217.50 x 12 = $2610.00

Can you imagine $2610.00 in cash flow?–especially if it is additional cash. Can you see the benefit?

$2610.00$2610.00$2610.00
X 2 yearsX 3 yearsX 5 years
$5220.00$7830.00$13050.00

The additional cash can be used as either additional working capital or a way to build up equity. Remember, financing and interest rates are just variables, that to a degree, you can control to your benefit. This is the beauty of thinking outside the box and the uses of the creative intuition investors have.

“An Obstacle is something you see when you take your eyes off the goal

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 7 Basic Steps to Quick Cash!

Quick CashThere are two definitions for flipping in the Real Estate investment industry, Retail flipping and Wholesale flipping. Retail flipping can be defined as buying a property wholesale, rehabbing it if necessary, and re-selling it on the retail market for profit.

Wholesale flipping can be defined as acquiring an interest in a wholesale property and then quickly selling that interest for profit (usually to another investor). This article concerns the second definition, wholesale flipping. If you have little cash and little access to credit lines, the quickest way to break into the Real Estate investing industry and produce quick cash is to learn to how to flip houses with no money to other investors. Wholesaling properties for quick cash is something that anyone can do, even the beginning investor. Following is a description of the seven basic steps involved in flipping a houses.

However, if you are not an investor or do not intend to be an investor, it does not mean that you can’t learn from what investors know to acquire properties. Remember, knowledge is power and will give you the power to acquire properties and profit even if it is a one- time purchase. You might get your first property with the intend to just own it and live in it but I will guarantee you that once you know how to do it you will do it again.

  Step 1: Faming & Assessing the Property Before Makin the Offer…

Farming is the term used in the real estate industry to say KNOW YOUR AREA, know the market trend, know where properties are for sale. This is an important process for it allows you to be in the KNOW! Once you know what is for sale and where, you will know how to make an assessment on the property. The farming has to be done by the individual but the assessment could be done buy the team of people you have put in place to make the process simpler. Even if you like to be involved in all steps of the process it is a good idea to work with people that have access to resources you need such as, mortgage bankers, realtors, contractors, etc.

Step 2: Making the Offer and Signing the Contract…

Whether you go after foreclosure properties, FSBO  properties (for sale by owner), or properties listed in the MLS; you will never, I repeat, never be able to flip a property unless you first make an offer on it, and second, lock it up with a contract. When you make your offer, you always need to keep your exit strategy in mind. Since your exit strategy is to flip the property to a rehab investor, your offer should be based on an accurate estimate of the retail value of the property after repairs less the amount of repairs, the holding costs for the rehabber, the rehabber’s closing costs to both buy and sell, a profit margin for the rehabber, and lastly a profit margin for you, the wholesaler. The maximum that most rehabbers will pay for good properties is 70% of Market Value minus the repairs and other expenses named above. A simpler formula is 65% of market value less repairs (as 5% usually covers the other expenses). Your wholesale profit will usually fall between $1,000 and $7,500. Never get too greedy unless you have the ability to close the deal yourself. Once your offer is accepted, you need to meet with the seller to sign the contract. On properties listed in the MLS, your offer will be initially made with a signed contract and agreed changes to that offer will be initialed.

Steps to Quick Cash

Step 3: Start Title Work Once the contract is signed…

Get the contract to the Title Company so that they can immediately start title work on the property. They will order a title search and schedule a closing date. There are a couple of reasons to start the title work ASAP. First, you want to make sure the title work is completed before the closing date as well as wanting enough time to cure any title problems that might arise. Second, you want to be able to close right away should your buyer have the ability to do so.

Step 4: Begin Marketing to Find a Buyer…

There are several avenues for marketing your properties. However, your main method should be to call the people on your “Buyers List.” A “Buyers List” is a list of real buyers that you have compiled by qualifying them as to their ability to close for cash quickly. You should also qualify these buyers as to the specific areas that they buy in, the type of properties that they buy, the price  range of properties that they buy, and what percentage of Market Value that they pay for properties. The better that you become at compiling your “Buyers List,” the easier it becomes to wholesale properties. Therefore, setting up their “Buyers List” becomes the first step for most successful “newbie” flippers. Another avenue is to market your property to investors is by running ads in the investor section of newspapers as well on investor-oriented web sites like AIREO.com, thecreativeinvestor.com, dfwrein.com, etc.

Step 5: Come to an Agreement With a Prospective Buyer…

At some point, someone will show an interest in buying your property. Whether you have one interested buyer or many buyers at the same time will depend on how good deal is. The more buyers that you have, the less flexible you have to be in reaching a final sales price. You must learn to qualify you buyers correctly for two reasons. First, you want to continually add good qualified buyers to your “Buyers List.” Second, you can’t afford to let someone, who cannot close, tie your property up keeping you from selling it to a real buyer prior to the closing date. Remember you are under contract to close with your seller even if your buyer doesn’t close with you. Make sure the prospective buyer has cash or an available line of credit to close with. Make the buyer provide proof of funds if necessary.Quick Cash

Step 6: Sign a Contract and Collect a Deposit…

After verifying your buyer’s source of funds, meet with them and sign a contract. You should require the buyer to put up a $1,000 Earnest Money Deposit with the signed contract. I’ve found that this $1,000 deposit separates the men from the boys. Anyone who does not have the ability to put up a $1,000 Earnest Money Deposit is not a real cash buyer. You can also use a one-page “Assignment of Contract” form to sell you interest in the deal to another investor. This assignment form allows another investor to take your place in completing the transaction. I recommend only using an assignment of contract with investors that you know well. It is much less binding on your buyer to show up for closing and you may get left holding the bag. The assignment does, however, lower the closing costs because there is only one closing instead of two.

Step 7: Submit Documents to Title Co. & Schedule the Closing…

Take the executed sale documents to the Title Company and Schedule a closing date. Now here’s the best part. Go to closing and collect your check! Flipping properties is a great way to make money from Real Estate. It is also the easiest way for a “newbie” to make money while learning the Real Estate business. However, it is true that you can’t steal in slow motion. The very best deals go very fast. The quicker an investor learns the basics of evaluating properties and correctly estimating repairs, the better his chance of finding, as well as recognizing, the very best deals. Money is made in Real Estate when you buy it. Therefore, it behooves the new investor to do  whatever it takes to master these tasks as quickly as possible. The very success of his Real Estate investing career is dependent upon it.

Visit Here for getting more information related to How to Profit from Rehabbing Houses.

Related Article :- Cash Flow Calculator, What Do You Need To Buy A House, Avoid Foreclosure Options,  Cash Flow AnalysisHow To Flip Houses With No Money, What Do You Need To Buy A HouseHomes For Sale InHomes Rent To OwnReal Estate Valuation SoftwareRent To Own By OwnerRent to own homes free listingsSteps To Selling A HouseReal Estate Analysis

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How to Minimize The Risk of a Lien

4Do you think rehabbers are the only ones at risk of getting a Mechanics Lien filed on their properties…think twice! To a degree or another, as long as you are a real estate investor you are at risk. Unless you never require anybody to do any work on a property and you do not own real estate you are not safe.

There is a lot of talk about the importance of asset protection, should I incorporate, should I use a Land Trust when acquiring properties, which business entity is better? Further, the appropriate type of insurance and the appropriate amount of coverage is crucial to mitigate or minimize loss. The truth is that you must do your homework on all the asset protection aspects that relate to your business…

Even though all the aforementioned issues are important, in the litigious business environment we evolve, it is crucial to pay special attention to the written documents we live by. I cannot stress the importance of having your attorney or a season fellow investor look over your documents when starting as a real estate investor. The legal documents you draft, whether to close on a deal and specially if having a contractor or any handy man for that matter do work on your properties, are part of your protection or shield against a possible enforceable lien.

For a matter of simplicity I will only cover some of the key clauses or crucial waivers you should include on your contract when dealing with contractors. Nonetheless, before you even hire a contractor read the property code of your respective state to familiarize yourself with your rights as a consumer. Further, make sure the contractor is insured and bonded. When I hire a new contractor these are some of the things I pay close attention to:

Check…

  • References to make sure the contractor is reliable and does good work.
  • Your local BBB office to make sure there are no complaints.
  • Your state Residential Construction Commission if any for complaints.

Make sure your…

  • Contract has a start date, due date and a default date if unforeseeable delays occur.
  • Your contract has a retainage clause.
  • Contract has a penalty clause with a penalty fee for every day the contractor is late.
  • Contract has a liability waiver in the event the contractor leaves tools and materials on site and they get stolen.
  • Contract includes a lien waiver in the event the contractor does not comply with the contract and you do not pay the contractor for work not performed or not performed to specifications and satisfaction.
  • Your procedure includes a punch list and a job walk before remitting payment.
  • Last but not least make sure your have the contractor sign a Worker’s Comp. waiver if they do not have Worker’s Comp. insurance.

If you follow these steps you will not go wrong and will minimize your liability exposure. Most important after the work is done to specification and your satisfaction make the contractor sign a Mechanics Lien Release, where it specifies that the contractor has been paid in full and that he/she waives any rights to file lien on your property.

Motivation determines what you do… Attitude determines how well you do it. (Unknown author)
An obstacle is something you see when you take your eyes off the goal (Unknown author)

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Builders Risk Insurance

Builder’s Risk insurance is a property policy designed to provide coverage for property while under construction. It covers the contractor’s interest in materials at the job site before they are installed, materials in transit intended for the job and the value of the property being constructed until it is completed and accepted by the owner.

Disclosure: This information is provided for general purposes only, and it is not intended to be an advice nor the norm. For accurate information suited to your situation, you must contact an insurance agent or a property and casualty risk manager.

construction3I hope the following information will help you. It will provide generalities of coverages provided by a Builders Risk policy. Please keep in mind that policies will very depending on the state and the carrier for each carrier has specific proprietary products.

In general, Builders Risk covers property and it is particularly designed for construction projects, unlike policies for vacant homes or homeowner policies. Further, unlike other home policies, it does not provide liability coverage, unless a specially designed product by XYZ carrier.

Liability coverage is separate. It can be part of a package policy, an endorsement, or a stand-alone policy. In any event, if you are in this business you should have some form of liability coverage, whether through a business or personal policy. Always, check with your contractor if they have insurance and what type of insurance.

I always have my contractors sign waivers regarding Worker’s Compensation and materials (I am not responsible for their loses) Moreover, check with your agent what the underwriting guidelines are for the specific carrier. There are some carriers that do not insure the property if undergoing major structural changes, especially foundation work. Builders Risk Insurance covers or protects against loss to buildings or structures in the course of construction, including materials incidental to construction.

Builders Risk insurance is a property policy designed to provide coverage for property while under construction. It covers the contractor’s interest in materials at the job site before they are installed, materials in transit intended for the job and the value of the property being constructed until it is completed and accepted by the owner. The policy may be written to cover the whole structure for new construction or rehabilitation projects. It can also be used to cover specific projects such as a new room addition, a deck, or a remodeled kitchen.

  • The policy is flexible enough to be used either for a one-building project or on an ongoing reporting basis for a project, which includes multiple buildings (check with your agent).
  • The policy includes coverage for soft costs, such as additional property taxes, and interest costs, which result from a loss.

The following coverages might be included at no additional cost or they might be endorsements depending on the insurance carrier:

  • The loss of business income
  • The cost of replacing lawns, trees, shrubs and plants
  • The cost of replacing specifications, plans and blueprints
  • The cost of removing debris of covered property after a loss
  • The loss of property in transit to the construction site
  • The loss of property at a temporary storage site

Within the limits of insurance stated in the policy, coverage includes any increase for loss resulting from any law or building ordinance-regulating repair or construction.

  • The policy covers theft of building materials at the job site.
  • Damage to glass is covered – including damage caused by vandalism.
  • Losses will be paid based on what it would cost to repair or replace the damaged property with property of like kind, quality, and use.
  • Coverage does not cease until the property is sold or accepted as complete by the purchaser, or the policy expires, whichever occurs first. Coverage ceases immediately if the policy is canceled.
  • Coverage for the contents of model homes can be added to the policy for an additional premium.

I hope this helps!

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