If your house is like mine, your family spends a lot of time in the kitchen (you
remember the kitchen? The room where you microwave those TV dinners, pop the
popcorn and open soup cans?)
Contrary to what those up-scale style magazines say, you don't need to spend a
fortune to update the look of your kitchen (unless you won the lottery, in which case,
you are more than welcome to come update mine!). Here are a few simple and
inexpensive ways to give your kitchen some pizzazz!
1. If you have solid wood cabinets, strip the color or finish. Then apply a new stain
with a couple of drops (or squeezes!) of yellow or green oil pigment (available at your
local craft store) added. The color will have more depth and more drama!
2. Experiment with molding from your local home improvement store. Use different
types of molding to create interesting effects. Don't confine yourself to the expected -
a rectangle in the center. Try a narrow strip across the top or bottom - or for a
dramatic effect, try a diagonal strip with the handles attached at the same diagonal.
3. Try adding beadboard as a backsplash for a traditional or country kitchen. Be sure
to cover with a quality paint that can be scrubbed!
4. Want a Tuscan look? Mount terracotta or stone pavers as a backsplash! Apply
matching or contrasting mortar to customize the look.
5. For an even more inexpensive look, use vinyl floor tiles in a stone or mosaic pattern
as a backsplash. There are some wonderful vinyl tiles available today! You can create
a whole new look for under $30!
6. Try replacing your conventional doors with window shutters for a plantation look.
7. Try adding color to white cabinets by painting small frames red. Ask your children
to paint flowers or scenes on white paper. Then mount the paintings in the small
frames and attach two or three (depending on the proportions of your cabinets) to the
front of each door. Voila! Your own art
gallery! (And you can change the paintings anytime you want!
8. Glue inexpensive rectangles cut from woven grass placemats to your cabinet
doors. Frame with strips of molding to simulate grass or rattan inserts.
9. Cork squares can also be used as dramatic interest when glued to the front of
bland cabinets. And the cork is useful! You will have message boards on each
cabinet!
See? A dramatic makeover in your kitchen takes just a few inexpensive touches! Now,
if only I could get a cooking makeover that easily, my husband would be a happy man!
http://www.homesolutionssandiego.com/budgetkitchen.html
Wednesday, May 23, 2007
Tuesday, May 22, 2007
Top 7 Reasons Why FSBOs Fail To Sell Their Home On Their Own!
n the United States, less than 10% of all For Sale by Owners (FSBOs), are successful in selling their
home by themselves. That's because most people just give up because they don't
realize from the beginning the difficulty and complexity of the job ahead. But that's not the only
reason. Here are the seven most common mistakes FSBOs make when selling their home.
1. Failure to price a property at what market conditions will bear.
The number one reason that most FSBOs don't sell their homes is that they price it too high. Many
start counting the money they're saving on commissions and how much their sale will net.
If your house is priced higher than other comparable houses in your market, you will not get the
offers you need to sell!
2. Underestimating the time, energy, know how, ability and effort needed to sell a house.
One of the keys to selling your home effectively and profitably is complete accessibility. Many homes
sit on the market much longer than necessary because the owner isn't available to show
the property. Realize that a certain amount of time each day is necessary to sell your home.
3. Not being prepared to deal with an onslaught of buyers who perceive FSBOs as targets
for "low balling".
Another challenge of selling a home is screening unqualified prospects and dealing with low-ballers.
It often goes unnoticed that much time, effort and expertise is required to spot these
people quickly. Settling for a low-ball bid is usually worse than paying any type of professional fee or
commission.
4. Lack of knowledge about financing options for the buyer.
Are you prepared to answer questions about financing? One of the keys to selling is having all the
necessary information the prospective buyer needs and to offer the buyer options. Think about the
last time you purchased something of value, did you make a decision before you had all your ducks
in a row? By offering financing options, you give the homebuyer the ability to work on their terms.
You'll open up the possibility of selling your home quicker and more profitably. It's critical that you
locate and establish relationships with a network of financing experts that will help you accomplish
your goal profitably.
5. Not fully understanding the legal ramifications and all the necessary steps required in
selling a home.
Many home sales have been lost due to incomplete paperwork, lack of inspections or not meeting
your state's disclosure laws. Are you completely informed of all the steps necessary to sell real
estate? If not, you may want to consider consulting with a legal or real estate professional.
6. Lack of experience in handling the legal contracts, agreements and any disputes with
buyers before or after the offer is presented.
Are you well versed in legalese? Are you prepared to handle disputes with buyers? It is always wise
to put all negotiations and agreements in writing. Many home sales have been lost due to
misinterpretation of what was negotiated.
7. Not contacting the necessary professionals... title, inspector (home and pest), attorney,
and escrow company.
Are you familiar with top inspectors and escrow companies? Don't randomly select inspectors,
attorneys, and title reps. Like any profession, there are inadequate individuals who will slow,
delay and possibly even cost you the transaction. Be careful!
Selling a home requires an intimate understanding of the real estate market. If the property is priced
too high, it will sit and develop a reputation for being a problem property. If the
property is priced too low, you will cost yourself money. Some FSBOs discovered that they lost
money as a result of poor pricing decisions. In the final outcome, these mistakes far
outweighed the commission they would have paid.
Lawrence Allen has over 15 years experience as a marketing
professional and a successful real estate investor. His
experiences with numerous real estate, marketing and finance
professionals has enabled him to develop a marketing system
and Ebook for people trying to sell their home on their own.
The For Sale By Owner (FSBO) Hassle-Free Home Sale System has
received many praises from real estate professionals and home
owners alike: http://www.fsbosaleshelp.com
http://www.homesolutionssandiego.com/fsbo.html
home by themselves. That's because most people just give up because they don't
realize from the beginning the difficulty and complexity of the job ahead. But that's not the only
reason. Here are the seven most common mistakes FSBOs make when selling their home.
1. Failure to price a property at what market conditions will bear.
The number one reason that most FSBOs don't sell their homes is that they price it too high. Many
start counting the money they're saving on commissions and how much their sale will net.
If your house is priced higher than other comparable houses in your market, you will not get the
offers you need to sell!
2. Underestimating the time, energy, know how, ability and effort needed to sell a house.
One of the keys to selling your home effectively and profitably is complete accessibility. Many homes
sit on the market much longer than necessary because the owner isn't available to show
the property. Realize that a certain amount of time each day is necessary to sell your home.
3. Not being prepared to deal with an onslaught of buyers who perceive FSBOs as targets
for "low balling".
Another challenge of selling a home is screening unqualified prospects and dealing with low-ballers.
It often goes unnoticed that much time, effort and expertise is required to spot these
people quickly. Settling for a low-ball bid is usually worse than paying any type of professional fee or
commission.
4. Lack of knowledge about financing options for the buyer.
Are you prepared to answer questions about financing? One of the keys to selling is having all the
necessary information the prospective buyer needs and to offer the buyer options. Think about the
last time you purchased something of value, did you make a decision before you had all your ducks
in a row? By offering financing options, you give the homebuyer the ability to work on their terms.
You'll open up the possibility of selling your home quicker and more profitably. It's critical that you
locate and establish relationships with a network of financing experts that will help you accomplish
your goal profitably.
5. Not fully understanding the legal ramifications and all the necessary steps required in
selling a home.
Many home sales have been lost due to incomplete paperwork, lack of inspections or not meeting
your state's disclosure laws. Are you completely informed of all the steps necessary to sell real
estate? If not, you may want to consider consulting with a legal or real estate professional.
6. Lack of experience in handling the legal contracts, agreements and any disputes with
buyers before or after the offer is presented.
Are you well versed in legalese? Are you prepared to handle disputes with buyers? It is always wise
to put all negotiations and agreements in writing. Many home sales have been lost due to
misinterpretation of what was negotiated.
7. Not contacting the necessary professionals... title, inspector (home and pest), attorney,
and escrow company.
Are you familiar with top inspectors and escrow companies? Don't randomly select inspectors,
attorneys, and title reps. Like any profession, there are inadequate individuals who will slow,
delay and possibly even cost you the transaction. Be careful!
Selling a home requires an intimate understanding of the real estate market. If the property is priced
too high, it will sit and develop a reputation for being a problem property. If the
property is priced too low, you will cost yourself money. Some FSBOs discovered that they lost
money as a result of poor pricing decisions. In the final outcome, these mistakes far
outweighed the commission they would have paid.
Lawrence Allen has over 15 years experience as a marketing
professional and a successful real estate investor. His
experiences with numerous real estate, marketing and finance
professionals has enabled him to develop a marketing system
and Ebook for people trying to sell their home on their own.
The For Sale By Owner (FSBO) Hassle-Free Home Sale System has
received many praises from real estate professionals and home
owners alike: http://www.fsbosaleshelp.com
http://www.homesolutionssandiego.com/fsbo.html
What To Expect From Your House Appraisal
Having your house appraised can be a scary step in the moving process, especially if you don’t know what to
expect. Will your house pass muster or will they find some hidden defects and problems lurking in the
basement and attic? Should you scrub the house clean?
Don’t worry – this isn’t a test of how clean you keep your house or even if your house has problems (that will
be for the home inspector to find out). The appraiser is there to determine a fair market value for your home.
Whether you are selling the house or refinancing, this is a common part of the process and the inspector is
quite used to traipsing about peoples homes in all kinds of disarray so you need not be embarrassed if your
house is messy and it will not affect the value the appraiser puts on the property.
Determining the market value of your home is necessary so that your lender knows the home is valued at or
above the amount of money you are borrowing. An appraisal is an estimate of worth. It is an opinion but is not
entirely a subjective process. The FNMA, Federal National Mortgage Association sets up the guidelines and
assigns values to certain assets of your home to ensure a fair sale.
The value of your home will be determined by comparing it to similar area properties that have sold in the
past few months. The appraiser looks for properties that have the same number of bedrooms, baths, square
footage and amenities like a fireplace or garage in your neighborhood or town. They start by looking at your
neighborhood to find comparable sales or properties in similar neighborhoods that share similar
characteristics of lifestyles, income level of residents, surroundings, average age and home values. A valid
appraisal can be done when 3 or more properties similar to your own have been found.
Once the appraiser has these homes, there will be some adjustments made to take into consideration
features that your home has the others don’t or features they have that you don’t. These features have nothing
to do with your décor – they are based solely on house size, rooms and amenities so your hot pink kitchen
will not affect the value of your home appraisal!
The process is quite methodical and done to standard practices so you need not worry. If you are moving and
you have hired a realtor, you will find the appraisal will come in right on the button for what they have valued
your home at. Most realtors know the market quite well so you needn’t worry that your buyer won’t be able to
secure funding because of your home appraisal.
Lee Dobbins writes for http://www.moving-and-more.com where you can learn more about moving and
selling your house.
http://www.homesolutionssandiego.com/houseappraisal.html
expect. Will your house pass muster or will they find some hidden defects and problems lurking in the
basement and attic? Should you scrub the house clean?
Don’t worry – this isn’t a test of how clean you keep your house or even if your house has problems (that will
be for the home inspector to find out). The appraiser is there to determine a fair market value for your home.
Whether you are selling the house or refinancing, this is a common part of the process and the inspector is
quite used to traipsing about peoples homes in all kinds of disarray so you need not be embarrassed if your
house is messy and it will not affect the value the appraiser puts on the property.
Determining the market value of your home is necessary so that your lender knows the home is valued at or
above the amount of money you are borrowing. An appraisal is an estimate of worth. It is an opinion but is not
entirely a subjective process. The FNMA, Federal National Mortgage Association sets up the guidelines and
assigns values to certain assets of your home to ensure a fair sale.
The value of your home will be determined by comparing it to similar area properties that have sold in the
past few months. The appraiser looks for properties that have the same number of bedrooms, baths, square
footage and amenities like a fireplace or garage in your neighborhood or town. They start by looking at your
neighborhood to find comparable sales or properties in similar neighborhoods that share similar
characteristics of lifestyles, income level of residents, surroundings, average age and home values. A valid
appraisal can be done when 3 or more properties similar to your own have been found.
Once the appraiser has these homes, there will be some adjustments made to take into consideration
features that your home has the others don’t or features they have that you don’t. These features have nothing
to do with your décor – they are based solely on house size, rooms and amenities so your hot pink kitchen
will not affect the value of your home appraisal!
The process is quite methodical and done to standard practices so you need not worry. If you are moving and
you have hired a realtor, you will find the appraisal will come in right on the button for what they have valued
your home at. Most realtors know the market quite well so you needn’t worry that your buyer won’t be able to
secure funding because of your home appraisal.
Lee Dobbins writes for http://www.moving-and-more.com where you can learn more about moving and
selling your house.
http://www.homesolutionssandiego.com/houseappraisal.html
You Have 15 Seconds to Sell Your Home!
Selling your home? Here are some tips to help you sell yours for more than your
next door neighbor's, and faster! Most buyers will know within 15 SECONDS after
crossing the threshold if they want your home. But first, you need to attract them
inside!
11 home staging steps to take to sell your home for top dollar:
1. Start at the street. The buyer's first glimpse of your home must entice them
inside. Design Psychology goes further than mere curb appeal. Here are some
easy additions you can make to help your home outshine the competition:
Add a couple of BIG plants, either in hanging baskets or pots, to the porch, which
will lead buyers' eyes to the entrance.
The first color our eyes process is yellow, so place yellow flowers near the front
door.
Plant white flowering annuals, since they look clean and show up better at
night--when many home shoppers look.
2. Get rid of brown or dead leaves and bare spots in the yard. Add mulch to cover
bare dirt near the house. Bright flowers hold the eye and "fill" empty areas, but you
don't need to add plants to every space. Just make sure that everything looks neat.
3. Paint your front door a happy color. Yellow-gold (amber), red (blue-based),
sage, apple, or forest green, depending on the other colors of your home, will
attract the eye and create happy feelings. Buyers won't notice the color
psychology you take advantage of, but they'll love the result.
4. Once buyers step inside the front door, they usually make their minds up within
15 SECONDS, so first impressions are vitally important. Focus your attention on
the first wall buyers will see, and then hang a mirror on that wall large enough to
reflect the buyer's image. It will psychologically reinforce the buyer's presence in
the home when they see themselves in the mirror, causing them to imagine living in
your home.
5. Go beyond just clearing clutter, and remove furnishings that don't add to the
setting. Also clear bathroom and kitchen countertops. Under-furnished homes let
the buyer's imagination fill rooms with their own belongings. Once they visualize
their favorite chair in a particular spot, you have a sale.
6. Pack away your personal photographs, trophies, diplomas, and small
accessories and stack them neatly in the garage or a separate storage space.
That will also protect you from having strangers view your personal life.
7. If your home looks too bare, replace your personal treasures with house plants
or cuttings from the garden. Be creative; you don't need to spend money.
- Use tree branches and fresh flowers to bring nature indoors.
- Fill vases and glass jars with fresh cuttings and set them
in baskets.
- Add green house plants in winter, spring, and fall.
- During hot selling seasons, use green, silver and gray foliage to help keep your
home visually cool.
8. Lighting affects your buyers' emotions and is a crucial design element for
happiness, so turn on the lights when showing your home. Day-like light bulbs
enhance happiness. Amber and pink light bulbs warm, while blue light cools.
9. Air the house out. You get used to odors, but buyers shouldn't smell anything
other than natural pleasing scents like wood burning in the fireplace or fresh lemon
in the summer. Cut up a grapefruit and run sections through the garbage disposal.
It's both refreshing and clean smelling.
10. Buyers like temperatures around 70 degrees in the winter and 67 degrees in
the summer, so turn up the thermostat in the winter and turn it down in the summer.
11. Park your car out of the way and encourage buyers to park in a space where
their car won't block the view from the inside.
Remember, you've only got 15 seconds to sell your home, but by using Design
Psychology techniques, you can convert lookers into buyers and get top dollar for
your home.
http://www.homesolutionssandiego.com/stagingtips.html
next door neighbor's, and faster! Most buyers will know within 15 SECONDS after
crossing the threshold if they want your home. But first, you need to attract them
inside!
11 home staging steps to take to sell your home for top dollar:
1. Start at the street. The buyer's first glimpse of your home must entice them
inside. Design Psychology goes further than mere curb appeal. Here are some
easy additions you can make to help your home outshine the competition:
Add a couple of BIG plants, either in hanging baskets or pots, to the porch, which
will lead buyers' eyes to the entrance.
The first color our eyes process is yellow, so place yellow flowers near the front
door.
Plant white flowering annuals, since they look clean and show up better at
night--when many home shoppers look.
2. Get rid of brown or dead leaves and bare spots in the yard. Add mulch to cover
bare dirt near the house. Bright flowers hold the eye and "fill" empty areas, but you
don't need to add plants to every space. Just make sure that everything looks neat.
3. Paint your front door a happy color. Yellow-gold (amber), red (blue-based),
sage, apple, or forest green, depending on the other colors of your home, will
attract the eye and create happy feelings. Buyers won't notice the color
psychology you take advantage of, but they'll love the result.
4. Once buyers step inside the front door, they usually make their minds up within
15 SECONDS, so first impressions are vitally important. Focus your attention on
the first wall buyers will see, and then hang a mirror on that wall large enough to
reflect the buyer's image. It will psychologically reinforce the buyer's presence in
the home when they see themselves in the mirror, causing them to imagine living in
your home.
5. Go beyond just clearing clutter, and remove furnishings that don't add to the
setting. Also clear bathroom and kitchen countertops. Under-furnished homes let
the buyer's imagination fill rooms with their own belongings. Once they visualize
their favorite chair in a particular spot, you have a sale.
6. Pack away your personal photographs, trophies, diplomas, and small
accessories and stack them neatly in the garage or a separate storage space.
That will also protect you from having strangers view your personal life.
7. If your home looks too bare, replace your personal treasures with house plants
or cuttings from the garden. Be creative; you don't need to spend money.
- Use tree branches and fresh flowers to bring nature indoors.
- Fill vases and glass jars with fresh cuttings and set them
in baskets.
- Add green house plants in winter, spring, and fall.
- During hot selling seasons, use green, silver and gray foliage to help keep your
home visually cool.
8. Lighting affects your buyers' emotions and is a crucial design element for
happiness, so turn on the lights when showing your home. Day-like light bulbs
enhance happiness. Amber and pink light bulbs warm, while blue light cools.
9. Air the house out. You get used to odors, but buyers shouldn't smell anything
other than natural pleasing scents like wood burning in the fireplace or fresh lemon
in the summer. Cut up a grapefruit and run sections through the garbage disposal.
It's both refreshing and clean smelling.
10. Buyers like temperatures around 70 degrees in the winter and 67 degrees in
the summer, so turn up the thermostat in the winter and turn it down in the summer.
11. Park your car out of the way and encourage buyers to park in a space where
their car won't block the view from the inside.
Remember, you've only got 15 seconds to sell your home, but by using Design
Psychology techniques, you can convert lookers into buyers and get top dollar for
your home.
http://www.homesolutionssandiego.com/stagingtips.html
Monday, May 21, 2007
Buying Your First Investment Property
"Begin With The End In Mind"
I first heard the phrase "Begin with the end in mind" in a Steven Covey book called "The 7
Habits of Highly Effective People". This expression makes a lot of sense because the fact is,
you can't get where you're going, unless you know where you want to go.
Most new investors understand that real estate is an investment vehicle that makes sense.
We all know that many fortunes have been built with real estate. But when you are first
getting started, all the available information can be very confusing. I often receive emails
asking "what strategies should I use?" or "Where should I look to find deals?"
One reason these issues are so difficult to understand and sort out when you are new to the
investing game is that the answer to the question can be different for every individual.
Seminars tend to package information in a "one-size-fits-all" crash course. But this inevitably
leaves unanswered questions for each individual user. Simply put, each person has their own
individual situation with regard to credit, income, employment, assets, etc. All of these factors
can affect your investing choices and objectives.
Compounding this confusion is the sheer number of strategies. Should I own rental property?
Should I fix up and resell? How about Options? Or, how about buying tax leins? There are so
many choices, how is one to know what to do when just starting out?
I can remember floundering around myself. I spent thousands of dollars on different courses,
trying to put all the pieces together and gain enough understanding to know what I should do
first.
It seemed that no one wanted to tell me anything useful unless I paid them first. I soon found
that no matter how much money I spent, there were many unanswered questions. I felt frozen
by fear, because I simply did not understand what to do first. As a result, it was several years
before I actually felt comfortable enough to get directly involved in buying a property.
Today, after having seen and participated in many deals, I know that step one is decide what
you want real estate investing to do for you. In short, where do you want to go?
Like any trip, you start out by deciding where you want to go. Once the destination has been
chosen, you figure out the best way to get there.
Many of the most successful and wealthy investors I know, built their fortunes with rental
property. Some of them own 40 or more rental houses. Some of them own commercial
properties like gas stations, storage facilities, or office buildings. They each had the same
destination, that of cash flow from rental income, but two drastically different ways of getting
there.
Frankly, most of the really successful investors are very patient men and women who build
their portfolios slowly over a number of years. They are cautious and prudent, buying only
when they know the deal is a good one.
Today, many people are lured into investing because they have heard the stories about how
you can buy property with no money down, and take out enough cash at closing to pay off all
your debts. This is possible, but creating one debt to pay another does have it's risks.
Let's say that your ultimate objective is to achieve $5,000 per month passive income from
rental property. Now, think of that objective as if it were a city on a road map.
Most cities have a number of different roads you can take to get downtown.. It is the same
way with your investing. Different people will arrive at the same destination, each one using a
slightly different route to get there.
Once you decide where you want to go, your route to your destination will be determined by
your financing options. .
If you have great credit, income for which you receive a W-2 statement, and lots of cash for a
down payment, your financing options will allow you to take virtually any road you wish. The
fact is, good credit and cash will get you where you want to go a lot faster. But it's not the only
way.
If you are credit challenged, self-employed, or lack cash for down payments, your ultimate
destination can be the same, but you will need a different route to get there.
Your financing options determine the route you have to take to get to your destination. In
essence, the answer to getting started is find out what kind of financing you can get, and then
find deals that work with your available financing options.
If you can't get any kind of financing at all, you can still buy deals where the seller will agree
to finance the deal, or some scenario where financing is provided without you having to
qualify.
If you have decent credit but no cash, there are investor loans with low down payments, that
may make it easier for you to get in with little cash.
If you have great credit and cash - hop on the expressway. Look for any good deal, since you
can get a loan at excellent rates, in addition to taking advantage of any good seller financing
deals that come your way. You have the most options for getting to your destination.
No matter where you start from, you can still wind up at the same destination, and achieve the
same objective.
Step One: Decide where you want to go. Then, get with a good lender to find out which roads
you will be able to take. Even if you have to start out on the "no cash, no credit" back roads,
remember that sooner or later, if you keep driving, you will find an access ramp to the
expressway.
http://www.homesolutionssandiego.com/firstinvestment.html
I first heard the phrase "Begin with the end in mind" in a Steven Covey book called "The 7
Habits of Highly Effective People". This expression makes a lot of sense because the fact is,
you can't get where you're going, unless you know where you want to go.
Most new investors understand that real estate is an investment vehicle that makes sense.
We all know that many fortunes have been built with real estate. But when you are first
getting started, all the available information can be very confusing. I often receive emails
asking "what strategies should I use?" or "Where should I look to find deals?"
One reason these issues are so difficult to understand and sort out when you are new to the
investing game is that the answer to the question can be different for every individual.
Seminars tend to package information in a "one-size-fits-all" crash course. But this inevitably
leaves unanswered questions for each individual user. Simply put, each person has their own
individual situation with regard to credit, income, employment, assets, etc. All of these factors
can affect your investing choices and objectives.
Compounding this confusion is the sheer number of strategies. Should I own rental property?
Should I fix up and resell? How about Options? Or, how about buying tax leins? There are so
many choices, how is one to know what to do when just starting out?
I can remember floundering around myself. I spent thousands of dollars on different courses,
trying to put all the pieces together and gain enough understanding to know what I should do
first.
It seemed that no one wanted to tell me anything useful unless I paid them first. I soon found
that no matter how much money I spent, there were many unanswered questions. I felt frozen
by fear, because I simply did not understand what to do first. As a result, it was several years
before I actually felt comfortable enough to get directly involved in buying a property.
Today, after having seen and participated in many deals, I know that step one is decide what
you want real estate investing to do for you. In short, where do you want to go?
Like any trip, you start out by deciding where you want to go. Once the destination has been
chosen, you figure out the best way to get there.
Many of the most successful and wealthy investors I know, built their fortunes with rental
property. Some of them own 40 or more rental houses. Some of them own commercial
properties like gas stations, storage facilities, or office buildings. They each had the same
destination, that of cash flow from rental income, but two drastically different ways of getting
there.
Frankly, most of the really successful investors are very patient men and women who build
their portfolios slowly over a number of years. They are cautious and prudent, buying only
when they know the deal is a good one.
Today, many people are lured into investing because they have heard the stories about how
you can buy property with no money down, and take out enough cash at closing to pay off all
your debts. This is possible, but creating one debt to pay another does have it's risks.
Let's say that your ultimate objective is to achieve $5,000 per month passive income from
rental property. Now, think of that objective as if it were a city on a road map.
Most cities have a number of different roads you can take to get downtown.. It is the same
way with your investing. Different people will arrive at the same destination, each one using a
slightly different route to get there.
Once you decide where you want to go, your route to your destination will be determined by
your financing options. .
If you have great credit, income for which you receive a W-2 statement, and lots of cash for a
down payment, your financing options will allow you to take virtually any road you wish. The
fact is, good credit and cash will get you where you want to go a lot faster. But it's not the only
way.
If you are credit challenged, self-employed, or lack cash for down payments, your ultimate
destination can be the same, but you will need a different route to get there.
Your financing options determine the route you have to take to get to your destination. In
essence, the answer to getting started is find out what kind of financing you can get, and then
find deals that work with your available financing options.
If you can't get any kind of financing at all, you can still buy deals where the seller will agree
to finance the deal, or some scenario where financing is provided without you having to
qualify.
If you have decent credit but no cash, there are investor loans with low down payments, that
may make it easier for you to get in with little cash.
If you have great credit and cash - hop on the expressway. Look for any good deal, since you
can get a loan at excellent rates, in addition to taking advantage of any good seller financing
deals that come your way. You have the most options for getting to your destination.
No matter where you start from, you can still wind up at the same destination, and achieve the
same objective.
Step One: Decide where you want to go. Then, get with a good lender to find out which roads
you will be able to take. Even if you have to start out on the "no cash, no credit" back roads,
remember that sooner or later, if you keep driving, you will find an access ramp to the
expressway.
http://www.homesolutionssandiego.com/firstinvestment.html
Saturday, May 19, 2007
Understanding the Mortgage Loan Market
The mortgage business is a complicated and ever-changing industry. It is important that you understand how the mortgage market works and how the lenders make their profit. In doing so, you will gain an appreciation of loan programs and why certain loans are offered by certain lenders.
INSTITUTIONAL LENDERS
The first broad category of distinction is institutional versus private. Institutional lenders include commercial banks, savings and loans, credit unions, mortgage banking companies, pension funds, and insurance companies. These lenders generally make loans based on the income and credit of the borrower, and they generally follow standard lending guidelines. Private lenders are individuals or small companies that do not have insured depositors and are generally not regulated by the federal government.
PRIMARY VERSUS SECONDARY MARKET
First, these markets should not be confused with first and second mortgages. Primary mortgage lenders deal directly with the public. They “originate” loans, that is, they lend money directly to the borrower. Often referred to as the “retail” side of the business, lenders make a profit from loan processing fees, not the interest paid on the loan.
Primary mortgage lenders generally lend money to consumers, then sell the mortgage notes (in large packages, not one at a time) to investors on the secondary mortgage market to replenish their cash reserves.
The largest buyers on the secondary market are the Federal National Mortgage Association (FNMA or “Fannie Mae”), the Government National Mortgage Association (GNMA or “Ginnie Mae”) and the Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”). Private financial institutions such as banks, life insurance companies, private investors, and thrift associations also buy notes.
MORTGAGE BROKERS VERSUS MORTGAGE BANKERS
Many consumers assume that “mortgage companies” are banks that lend their own money. In fact, a company that you deal with may be either a mortgage banker or a mortgage broker.
A mortgage banker is a direct lender; it lends you its own money, although it often sells the loan to the secondary market. Mortgage bankers (also known as “direct lenders”) sometimes retain servicing rights as well.
A mortgage broker is a middleman; he does the loan shopping and analysis for the borrower and puts the lender and borrower together. Many of the lenders through which the broker finds loans do not deal directly with the public (hence the expression, “wholesale lender”).
CONVENTIONAL VS. NON-CONVENTIONAL
“Conventional” financing, by definition, is not insured or guaranteed by the federal government. Conventional loans are generally broken into two categories: “conforming” and “non-conforming.” A conforming loan is one that conforms or adheres to strict Fannie Mae/Freddie Mac loan underwriting guidelines.
Conforming loans are a low risk to the lender, so they offer the lowest interest rates. Conforming loans also have the strictest underwriting guidelines.
Conforming loans have three basic requirements:
1. Borrower Must Have a Minimum of Debt: Lenders look at the ratio of your monthly debt to income. Your regular monthly expenses (including mortgage payments, property taxes, insurance) should total no more than 25 to 28% of gross monthly income (called “front end ratio”). Furthermore, your monthly expenses, plus other long-term debt payments (e.g., student loan, automobile, alimony, child support) should total no more than 36% of your gross monthly income (called “back end ratio”). These ratios can sometimes be increased if the borrower has excellent credit or puts more money down.
2. Good Credit Rating: You must be current on payments. Lenders will also require a certain minimum credit score called a “FICO” (http://www.myfico.com).
3. Funds to Close: You must have the requisite down payment (generally 20% of the purchase price, although lenders often bend this rule), proof of where it came from, and a few months of cash reserves in the bank.
NON-CONFORMING LOANS
Non-conforming loans have no set guidelines and vary widely from lender to lender. In fact, lenders often change their own non-conforming guidelines from month to month.
Non-conforming loans are also known as “sub-prime” loans, because the target customer (borrower) has credit and/or income verification that is less-than-perfect. The sub-prime loans are often rated according to the creditworthiness of the borrower – “A,” “B”, “C” and “D.”
The sub-prime loan business has grown enormously over the past ten years, particularly in the refinance business and with investor loans. Every lender has its own criteria for sub-prime loans, so it is impossible to list every loan program available on the market. Suffice it to say, the guidelines for sub-prime loans are much more lax than they are for conforming loans.
Excerpt from William Bronchick's highly acclaimed book,
"Financing Secrets of a Millionaire Real Estate Investor"
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 700 transactions. He has trained countless people all over the Country to become financially successful.
William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996. He is admitted to practice law before the bars of New York and Colorado.
You may contact Mr. Bronchick for consultation by phone, fax, e-mail or correspondence at:
Bronchick & Associates, P.C.
2821 S. Parker Rd. Suite 405
Aurora, Colorado 80014
Tel 303-398-7032
Fax 303-671-0516
www.legalwiz.com
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=226&typeid=1&winpop=0&nav=1
INSTITUTIONAL LENDERS
The first broad category of distinction is institutional versus private. Institutional lenders include commercial banks, savings and loans, credit unions, mortgage banking companies, pension funds, and insurance companies. These lenders generally make loans based on the income and credit of the borrower, and they generally follow standard lending guidelines. Private lenders are individuals or small companies that do not have insured depositors and are generally not regulated by the federal government.
PRIMARY VERSUS SECONDARY MARKET
First, these markets should not be confused with first and second mortgages. Primary mortgage lenders deal directly with the public. They “originate” loans, that is, they lend money directly to the borrower. Often referred to as the “retail” side of the business, lenders make a profit from loan processing fees, not the interest paid on the loan.
Primary mortgage lenders generally lend money to consumers, then sell the mortgage notes (in large packages, not one at a time) to investors on the secondary mortgage market to replenish their cash reserves.
The largest buyers on the secondary market are the Federal National Mortgage Association (FNMA or “Fannie Mae”), the Government National Mortgage Association (GNMA or “Ginnie Mae”) and the Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”). Private financial institutions such as banks, life insurance companies, private investors, and thrift associations also buy notes.
MORTGAGE BROKERS VERSUS MORTGAGE BANKERS
Many consumers assume that “mortgage companies” are banks that lend their own money. In fact, a company that you deal with may be either a mortgage banker or a mortgage broker.
A mortgage banker is a direct lender; it lends you its own money, although it often sells the loan to the secondary market. Mortgage bankers (also known as “direct lenders”) sometimes retain servicing rights as well.
A mortgage broker is a middleman; he does the loan shopping and analysis for the borrower and puts the lender and borrower together. Many of the lenders through which the broker finds loans do not deal directly with the public (hence the expression, “wholesale lender”).
CONVENTIONAL VS. NON-CONVENTIONAL
“Conventional” financing, by definition, is not insured or guaranteed by the federal government. Conventional loans are generally broken into two categories: “conforming” and “non-conforming.” A conforming loan is one that conforms or adheres to strict Fannie Mae/Freddie Mac loan underwriting guidelines.
Conforming loans are a low risk to the lender, so they offer the lowest interest rates. Conforming loans also have the strictest underwriting guidelines.
Conforming loans have three basic requirements:
1. Borrower Must Have a Minimum of Debt: Lenders look at the ratio of your monthly debt to income. Your regular monthly expenses (including mortgage payments, property taxes, insurance) should total no more than 25 to 28% of gross monthly income (called “front end ratio”). Furthermore, your monthly expenses, plus other long-term debt payments (e.g., student loan, automobile, alimony, child support) should total no more than 36% of your gross monthly income (called “back end ratio”). These ratios can sometimes be increased if the borrower has excellent credit or puts more money down.
2. Good Credit Rating: You must be current on payments. Lenders will also require a certain minimum credit score called a “FICO” (http://www.myfico.com).
3. Funds to Close: You must have the requisite down payment (generally 20% of the purchase price, although lenders often bend this rule), proof of where it came from, and a few months of cash reserves in the bank.
NON-CONFORMING LOANS
Non-conforming loans have no set guidelines and vary widely from lender to lender. In fact, lenders often change their own non-conforming guidelines from month to month.
Non-conforming loans are also known as “sub-prime” loans, because the target customer (borrower) has credit and/or income verification that is less-than-perfect. The sub-prime loans are often rated according to the creditworthiness of the borrower – “A,” “B”, “C” and “D.”
The sub-prime loan business has grown enormously over the past ten years, particularly in the refinance business and with investor loans. Every lender has its own criteria for sub-prime loans, so it is impossible to list every loan program available on the market. Suffice it to say, the guidelines for sub-prime loans are much more lax than they are for conforming loans.
Excerpt from William Bronchick's highly acclaimed book,
"Financing Secrets of a Millionaire Real Estate Investor"
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 700 transactions. He has trained countless people all over the Country to become financially successful.
William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996. He is admitted to practice law before the bars of New York and Colorado.
You may contact Mr. Bronchick for consultation by phone, fax, e-mail or correspondence at:
Bronchick & Associates, P.C.
2821 S. Parker Rd. Suite 405
Aurora, Colorado 80014
Tel 303-398-7032
Fax 303-671-0516
www.legalwiz.com
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=226&typeid=1&winpop=0&nav=1
A Single's Game of Real Estate
This discussion leans toward answering questions asked most often by our youthful men and women in there early twenties. They often begin to ask themselves the question, "Should I consider buying a home, condo/town-home or some other type of real estate that I can call my own?" Due to the fact that housing has up to this point always been provided for or lived in on a rented basis we tend to find that our newest contributing members of society find themselves at a loss for the most beneficial and advantageous way to enter this next phase of self-sufficiency.
Due to the fact that most of us grow up in either a rented apartment or our parent's single family home, it stands to reason that most people, when beginning to ask themselves the question of purchasing their own dwelling, will come to the conclusion that a condo or small house is probably the way to go. That's a result of conditioning and it's a hard mindset to break! After taking the time to talk to or personally guide a respectable number of people in their twenties, I have come to find that firm, direct and accurate information can really adjust the reality of how real estate can be acquired and used to their best advantage starting with property that sets the tone for a much more profitable and rewarding future.
Everyone understands the concept of paying rent, so to begin with a great opening question to our real estate student is, "How would you like to collect that rent as opposed to pay it!" Naturally this question gets their attention and we can begin to open the door of enlightenment. I like to use the duplex example to illustrate the two homes under one roof concept. Some people are unfamiliar with what exactly a duplex is and how it works, so I simply state that quite often you find duplexes composed of one building that has two bedrooms and one bath on each side, all under one roof, some larger, some smaller.
These are as easy to finance as a single family home and in many cases allow you to qualify for a larger loan amount which leads to using leverage and more of other people's money to get ahead faster in life. Using an example lets say you find a duplex for $150,000 (California is higher), your loans interest rate is 6% that would cost $899.33 a month to pay principle and interest back on a 30 year loan. They would have to insure it, so we use an average of $5 per $1000 of home value to average insurance costs. So $5.00 x $150.00 = $750.00 a year for insurance. We divide that by 12 months to get a figure of $62.50 a month for insurance. We also have annual taxes that are based on what the home is worth multiplied by a millage, or mill rate. Let's use a tax rate of $11.00 per $1,000 of the homes assessed value: $11.00 x 150 = $1,650.00 a year. Now divide that by 12 months to get a monthly tax of $137.50 and by adding principle, interest, taxes and insurance (P.I.T.I), we get a total monthly mortgage payment of $1099.33.
Now when you rent one side out for (in many cases, approximately $750.00 a month) you are left to pay only $349.33 out of your own pocket every month. When I get this point firmly affixed to the gray matter of their brain, it becomes clear that this amount is much lower than the amount of rent they are now paying to live under someone else's roof and rules. Now the questions start coming in the following order. Well? How do I buy something like this? The answer most often begins with, "By getting pre-qualified for a loan," and I go on to say you will need to gather and bring the following things to the bank loan officer to get started:
1. Copies of three years of tax returns for first time buyers + schedules and W2 forms
2. Copies of most recent pay stubs within the last 30 days
3. Copies of your most recent three months of bank statements
4. A list of all creditors with name, address and account numbers
With these initial documents the lender can begin to process your application for a loan. They will determine your assets and liabilities (net worth) as well as verify where you live now, your credit history and a host of other information that begins to validate your existence and ability to borrow money now and in the future.
Once they've had a chance to review and verify your information they can pre-approve you for a certain loan amount. Once your approved you can begin your search for a home of your own, typically as a first time home buyer you will find that there are programs that let you put as little as 3-5% percent down in order to buy a home that satisfies the lender's guidelines according to its value and conformity. Now on a $150,000 loan the down payment can be anywhere from $4500.00 - $7500.00.
There are ways to lower these costs and a great place to start is by attending a first time home buyer's class. These classes introduce you to the basics and give you further information on programs that are currently available that may offer you the opportunity to buy with nothing down! So with that said, the next step is to get to a free class and get familiar with the process. Often I recommend going to the class before going to see a lender so you don't appear so green and unprepared upon your initial introduction.
Since I usually find these poor souls wondering and wandering in the land of the lost, the next frown I see come over them is the realization that they just don't have the money required to start. So the question comes up as to where to get it. I usually ask about savings, whether parents or grandparents can help, if they can sell valuable possessions or take second jobs, get grants, gifts, use trust funds, personal loans or co-signers, or a combination of these alternatives with a complimentary loan program usually gets the ball rolling. Options and hard money lenders usually come later as alternative funding and acquisition sources, so I won't confuse any one with those now.
The bottom line is this: If someone wants something bad enough there is always a way! The nice thing about duplexes is that the lender will take into account the fact that 75% of the rental income from the other side of the property can be used to offset your qualifying ratios, so in this case they can use 75% of the rentals $750.00 income to reduce the amount you must earn to qualify for what appears to be an unaffordable loan. Seventy-five percent of $750.00 equals $562.50. Now subtracting that amount from the original mortgage payment of $1099.33 leaves you with a payment of $536.83 which the bank says you must be able to repay every month out of your own pocket. You can do this!
Can you begin to see how with a little information, effort and belief you can actually own something and pay less than what you are currently paying in rent?
Let's continue on with the way things begin to unfold once you begin the journey. Starting with the day you close the deal and become the new owner you will see that you now have just created a passive income stream that gives you an extra $750.00 a month without you having to punch a clock or trade a certain amount of hours to earn the money. Your new asset works for you day in and day out constantly generating income for you while you go and do other things. This is leveraging your time and money in a very beneficial way!
You also will notice that at the closing of your purchase that the old owners who sold you this property had to prorate or give you a share of the rents due and any security deposits that the tenants had given to them. Now add to that the likelihood that your first house payment won't come due until about a month and a half after you move in and you find yourself with, low and behold, extra money, probably for the first time in quite a while!
Let's calculate it using simple math. Assuming you close on the 15th of the month, you will have 45 days before your first payment comes due, you will be credited with 15 days of rent, you will receive all security deposits of the tenant and you will receive another month's rent on the first of the month from your tenant and you yourself will have no rent or house payment of your own to make for another whole month. What does all that add up to? Let's break it down:
1. Fifteen days of rent equal to $375.00
2. A half month's rent as a security deposit equal to $375.00
3. A full month's rent in another 15 days equal to $750.00
4. No payment to the bank for another 30 days and you're not paying rent to anyone any longer, so you keep whatever you normally would have had to give to someone else as rent that month (let's say that was $500.00).
5. Another payment to you for $750.00 from your tenant as well as you having to make your first mortgage payment of $1099.33 on the 1st of the month which comes 45 days later.
Side note: If you decided to rent your second bedroom to a roommate, they would pay $500.00 a month and half your utilities as well, thus your basically living and owning this property for free. Say goodbye to all those student loans as you divert all these freed up funds to pay off loans instead of a landlord!
Adding these up, we get $375.00 + $375.00 + $750.00 + $750.00 + 500.00 not paid to your old landlord. That equals $2,750.00 that you will now have as a result of your first month and a half of ownership. Now subtract your mortgage payment of $1099.33 and you are left with a reserve fund of $1,650.67 in your account. Take your parents out to a steak dinner and celebrate - you've earned it!
Let's review: You decided to buy your own home, you made the choice early to offset expenses by looking at a multiple income property, you went to the homebuyer's class, you went to see a lender and got pre-approved for a loan, you saved or arranged to have the necessary amount required to buy and you hunted, searched and analyzed more than a few properties in order to find a good one that would satisfy your criteria.
Your next phase is to begin to realize that you are now responsible for the welfare of another family or person due to your willingness to become a landlord. Your tenants pay rent and expect you to take care of their housing needs. If you chose a good property by carefully looking at plumbing, heating & A/C, electrical, foundation, structure, roof, location and price, then you should be well positioned to be able to successfully manage these duties. Often, you as the new owner will begin to make improvements to the property such as painting, installing new carpet and doing some inexpensive landscaping and repairs. These are the things that add value to your property and keep your tenants happy while at the same time not breaking the bank!
With $1,650.67 in your bank account, you're not exactly Donald Trump just yet, but you're getting there! Smart landlords establish 6 month reserve accounts and/or contingency funds, which protect them in times of vacancies or when expensive unforeseen repair bills pop up in addition to regular planned-for maintenance items. What I'm saying is don't spend your reserves frivolously. In my case, a steak dinner is a tradition but the major portion of your funds should only be used to build, protect and enhance your asset's ability to produce and sustain income generation.
By taking on responsibility in the housing market at such a young age, you will have some added benefits and opportunities coming to you. Let's look at what starts happening: the first thing is you have overcome fear and lack of understanding by acquiring your first property. In addition, you have begun to offset expenses while saving more money, you are establishing excellent credit while building assets, and you're gaining tax advantages while getting management, home buying and repair education at an early age. These are outstanding life skills that you can employ for the rest of your life and the longer the period of time that you have to use them, the further the compounding effects will help you to go.
This type of initial home-buying strategy can and does lead to further opportunities to grow and achieve further benefits besides those already mentioned. Individuals who learn to accept responsibility early will by nature grow more mature throughout the process and in effect create for themselves a higher status in the minds of others by being looked upon as a current homeowner and landlord. Once established, you will become known for what you can do. If you were single when you undertook these challenges, then you will appear and become more self-sufficient to the opposite sex.
What do I mean by that? What I'm saying is when you meet someone who may become your spouse in the future, they will recognize your ability to provide for their safety and protection and they won't question or complain about your fooling around with wild ideas of becoming educated in real estate now. They will accept that this is something you do and will respect your ability to manage this part of your life.
As time passes on and you find this love of your life and the eventual marriage proposal ensues, the time will come when you're going to want to separate business from pleasure. As a young couple the time will come when you may want to start a family or at least separate yourself from your tenants while moving up to a nicer single family home that suits your changing needs more appropriately. Perfect, because now is the time to consider renting out both sides of the duplex while you begin to investigate your new single family home.
How does this phase work? Hold on, I'm getting there! Okay, let's assume its two years later and you have been living in and improving your duplex all along. Now taking into account that you bought a decent property in a good neighborhood and inflation and appreciation has been adding value in addition to your improvements, your $150,000 duplex should command a new appraised value of $175,000. Let me explain how the value grows: 3% annual inflation multiplied by $150,000 equals $4500.00 the first year. Let's also say that appreciation due to demand also adds 5%, so 5% x $150,000 equals $7500.00. Now $150,000 + $7500 + $4500 = $162,000, which represents the new value for year one. The second year we do the same math on $162,000 and we get $12,960 for year two. Adding that to $162,000 equals $174,960. Okay, I was off by $40.00. Don't forget any improvements and that you may have bought it at a discount because the old owners where motivated and you might find its worth even more.
Now over those two years you have also been paying that old mortgage of $1099.33 each month and the principle amount that you owe on your loan has been reduced by an additional $3,965.96, leaving you with a loan balance of $146,034.04. The difference between the new appraised value of $175,000 and the current amount of $146,034.04 which you owe equals $28,965.96. This number represents the equity, or value, that you currently own in the home. Knowing this, it is entirely possible to apply for and receive a home equity line of credit up to the full value of the new appraisal! If you haven't gone overboard on buying cars, boats and running up other revolving debt while at the same time your significant other or spouse-to-be has a job and good credit with manageable debt, than the bank is going to approve this line of owner-occupied credit.
Now what you have done is set up a line of credit which can be used to buy a $145,000 single family home with a 20% down payment. This allows you to avoid paying private mortgage insurance (PMI), thereby creating a very affordable new mortgage on your new family residence.
NOTE: Do not confuse homeowner's insurance with private mortgage insurance. PMI protects the lender while homeowner's insurance protects you. When you put down 20% of value on a home's purchase in the form of a down payment, you are in effect protecting the lender from yourself because if they foreclosed on you for non-payment, they could sell the home fast for less than full value and still be paid in full.
Don't pay for private mortgage insurance if you can avoid it!
Let's not forget that as the value of your duplex has risen the rents should also be increasing along the same lines. Now instead of $750.00, you should reasonably expect to get $800.00 per month, per side, which now delivers $1600.00 a month to your bank account. Unfortunately you still have to pay for 28 more years on the original loan amount, so you will make that good old $1099.33 payment as usual. That leaves you with $500.67 left over to pay that new equity line back with. Your new $29,000 equity line which you used as a down payment on your new home costs you $336.71 @ 7% for 10 years. Now $500.36 minus $336.71 leaves you with $163.96 left over to maintain a nice little reserve account for vacancies and maintenance/repairs. This is a good example of how to transition to a secure lifestyle while using your existing asset base to buy more.
Review:
1. Break the mold and look at multiple income property to start.
2. Go to a first time home buyer class to get ready.
3. Go to a lender prepared to qualify for an affordable loan amount.
4. Focus your effort on learning how real estate works.
5. Realize the sooner you start, the better off you will be.
6. Offset expenses by renting to others.
7. Manage tenants, deposits and property responsibly.
8. Plan for the future using assets and equity lines to start.
9. Keep reading and learning how to do new things with real estate.
10. Find mentors and use knowledgeable people to help you along the way.
I hope this little plan of entering into homeownership has given you some ideas in your quest for independence. Wishing you all the best! Your investment pal, Dan
Dan Auito is a dual-licensed real estate agent and appraisal assistant. Founder of a non-profit drug prevention corporation, a real estate consulting group and is the author of “Magic Bullets Real Estate.” This 300-page power-packed book (due out in early July 2004 comes with a website that further supports its readers.
Dan may be reached at magicbullets@alaska.com or by visiting www.magicbullets.com
Call 1 907 481-6300 or write
1619 Three Sisters Way
Kodiak AK 99615
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=229&typeid=1&winpop=0&nav=1
Due to the fact that most of us grow up in either a rented apartment or our parent's single family home, it stands to reason that most people, when beginning to ask themselves the question of purchasing their own dwelling, will come to the conclusion that a condo or small house is probably the way to go. That's a result of conditioning and it's a hard mindset to break! After taking the time to talk to or personally guide a respectable number of people in their twenties, I have come to find that firm, direct and accurate information can really adjust the reality of how real estate can be acquired and used to their best advantage starting with property that sets the tone for a much more profitable and rewarding future.
Everyone understands the concept of paying rent, so to begin with a great opening question to our real estate student is, "How would you like to collect that rent as opposed to pay it!" Naturally this question gets their attention and we can begin to open the door of enlightenment. I like to use the duplex example to illustrate the two homes under one roof concept. Some people are unfamiliar with what exactly a duplex is and how it works, so I simply state that quite often you find duplexes composed of one building that has two bedrooms and one bath on each side, all under one roof, some larger, some smaller.
These are as easy to finance as a single family home and in many cases allow you to qualify for a larger loan amount which leads to using leverage and more of other people's money to get ahead faster in life. Using an example lets say you find a duplex for $150,000 (California is higher), your loans interest rate is 6% that would cost $899.33 a month to pay principle and interest back on a 30 year loan. They would have to insure it, so we use an average of $5 per $1000 of home value to average insurance costs. So $5.00 x $150.00 = $750.00 a year for insurance. We divide that by 12 months to get a figure of $62.50 a month for insurance. We also have annual taxes that are based on what the home is worth multiplied by a millage, or mill rate. Let's use a tax rate of $11.00 per $1,000 of the homes assessed value: $11.00 x 150 = $1,650.00 a year. Now divide that by 12 months to get a monthly tax of $137.50 and by adding principle, interest, taxes and insurance (P.I.T.I), we get a total monthly mortgage payment of $1099.33.
Now when you rent one side out for (in many cases, approximately $750.00 a month) you are left to pay only $349.33 out of your own pocket every month. When I get this point firmly affixed to the gray matter of their brain, it becomes clear that this amount is much lower than the amount of rent they are now paying to live under someone else's roof and rules. Now the questions start coming in the following order. Well? How do I buy something like this? The answer most often begins with, "By getting pre-qualified for a loan," and I go on to say you will need to gather and bring the following things to the bank loan officer to get started:
1. Copies of three years of tax returns for first time buyers + schedules and W2 forms
2. Copies of most recent pay stubs within the last 30 days
3. Copies of your most recent three months of bank statements
4. A list of all creditors with name, address and account numbers
With these initial documents the lender can begin to process your application for a loan. They will determine your assets and liabilities (net worth) as well as verify where you live now, your credit history and a host of other information that begins to validate your existence and ability to borrow money now and in the future.
Once they've had a chance to review and verify your information they can pre-approve you for a certain loan amount. Once your approved you can begin your search for a home of your own, typically as a first time home buyer you will find that there are programs that let you put as little as 3-5% percent down in order to buy a home that satisfies the lender's guidelines according to its value and conformity. Now on a $150,000 loan the down payment can be anywhere from $4500.00 - $7500.00.
There are ways to lower these costs and a great place to start is by attending a first time home buyer's class. These classes introduce you to the basics and give you further information on programs that are currently available that may offer you the opportunity to buy with nothing down! So with that said, the next step is to get to a free class and get familiar with the process. Often I recommend going to the class before going to see a lender so you don't appear so green and unprepared upon your initial introduction.
Since I usually find these poor souls wondering and wandering in the land of the lost, the next frown I see come over them is the realization that they just don't have the money required to start. So the question comes up as to where to get it. I usually ask about savings, whether parents or grandparents can help, if they can sell valuable possessions or take second jobs, get grants, gifts, use trust funds, personal loans or co-signers, or a combination of these alternatives with a complimentary loan program usually gets the ball rolling. Options and hard money lenders usually come later as alternative funding and acquisition sources, so I won't confuse any one with those now.
The bottom line is this: If someone wants something bad enough there is always a way! The nice thing about duplexes is that the lender will take into account the fact that 75% of the rental income from the other side of the property can be used to offset your qualifying ratios, so in this case they can use 75% of the rentals $750.00 income to reduce the amount you must earn to qualify for what appears to be an unaffordable loan. Seventy-five percent of $750.00 equals $562.50. Now subtracting that amount from the original mortgage payment of $1099.33 leaves you with a payment of $536.83 which the bank says you must be able to repay every month out of your own pocket. You can do this!
Can you begin to see how with a little information, effort and belief you can actually own something and pay less than what you are currently paying in rent?
Let's continue on with the way things begin to unfold once you begin the journey. Starting with the day you close the deal and become the new owner you will see that you now have just created a passive income stream that gives you an extra $750.00 a month without you having to punch a clock or trade a certain amount of hours to earn the money. Your new asset works for you day in and day out constantly generating income for you while you go and do other things. This is leveraging your time and money in a very beneficial way!
You also will notice that at the closing of your purchase that the old owners who sold you this property had to prorate or give you a share of the rents due and any security deposits that the tenants had given to them. Now add to that the likelihood that your first house payment won't come due until about a month and a half after you move in and you find yourself with, low and behold, extra money, probably for the first time in quite a while!
Let's calculate it using simple math. Assuming you close on the 15th of the month, you will have 45 days before your first payment comes due, you will be credited with 15 days of rent, you will receive all security deposits of the tenant and you will receive another month's rent on the first of the month from your tenant and you yourself will have no rent or house payment of your own to make for another whole month. What does all that add up to? Let's break it down:
1. Fifteen days of rent equal to $375.00
2. A half month's rent as a security deposit equal to $375.00
3. A full month's rent in another 15 days equal to $750.00
4. No payment to the bank for another 30 days and you're not paying rent to anyone any longer, so you keep whatever you normally would have had to give to someone else as rent that month (let's say that was $500.00).
5. Another payment to you for $750.00 from your tenant as well as you having to make your first mortgage payment of $1099.33 on the 1st of the month which comes 45 days later.
Side note: If you decided to rent your second bedroom to a roommate, they would pay $500.00 a month and half your utilities as well, thus your basically living and owning this property for free. Say goodbye to all those student loans as you divert all these freed up funds to pay off loans instead of a landlord!
Adding these up, we get $375.00 + $375.00 + $750.00 + $750.00 + 500.00 not paid to your old landlord. That equals $2,750.00 that you will now have as a result of your first month and a half of ownership. Now subtract your mortgage payment of $1099.33 and you are left with a reserve fund of $1,650.67 in your account. Take your parents out to a steak dinner and celebrate - you've earned it!
Let's review: You decided to buy your own home, you made the choice early to offset expenses by looking at a multiple income property, you went to the homebuyer's class, you went to see a lender and got pre-approved for a loan, you saved or arranged to have the necessary amount required to buy and you hunted, searched and analyzed more than a few properties in order to find a good one that would satisfy your criteria.
Your next phase is to begin to realize that you are now responsible for the welfare of another family or person due to your willingness to become a landlord. Your tenants pay rent and expect you to take care of their housing needs. If you chose a good property by carefully looking at plumbing, heating & A/C, electrical, foundation, structure, roof, location and price, then you should be well positioned to be able to successfully manage these duties. Often, you as the new owner will begin to make improvements to the property such as painting, installing new carpet and doing some inexpensive landscaping and repairs. These are the things that add value to your property and keep your tenants happy while at the same time not breaking the bank!
With $1,650.67 in your bank account, you're not exactly Donald Trump just yet, but you're getting there! Smart landlords establish 6 month reserve accounts and/or contingency funds, which protect them in times of vacancies or when expensive unforeseen repair bills pop up in addition to regular planned-for maintenance items. What I'm saying is don't spend your reserves frivolously. In my case, a steak dinner is a tradition but the major portion of your funds should only be used to build, protect and enhance your asset's ability to produce and sustain income generation.
By taking on responsibility in the housing market at such a young age, you will have some added benefits and opportunities coming to you. Let's look at what starts happening: the first thing is you have overcome fear and lack of understanding by acquiring your first property. In addition, you have begun to offset expenses while saving more money, you are establishing excellent credit while building assets, and you're gaining tax advantages while getting management, home buying and repair education at an early age. These are outstanding life skills that you can employ for the rest of your life and the longer the period of time that you have to use them, the further the compounding effects will help you to go.
This type of initial home-buying strategy can and does lead to further opportunities to grow and achieve further benefits besides those already mentioned. Individuals who learn to accept responsibility early will by nature grow more mature throughout the process and in effect create for themselves a higher status in the minds of others by being looked upon as a current homeowner and landlord. Once established, you will become known for what you can do. If you were single when you undertook these challenges, then you will appear and become more self-sufficient to the opposite sex.
What do I mean by that? What I'm saying is when you meet someone who may become your spouse in the future, they will recognize your ability to provide for their safety and protection and they won't question or complain about your fooling around with wild ideas of becoming educated in real estate now. They will accept that this is something you do and will respect your ability to manage this part of your life.
As time passes on and you find this love of your life and the eventual marriage proposal ensues, the time will come when you're going to want to separate business from pleasure. As a young couple the time will come when you may want to start a family or at least separate yourself from your tenants while moving up to a nicer single family home that suits your changing needs more appropriately. Perfect, because now is the time to consider renting out both sides of the duplex while you begin to investigate your new single family home.
How does this phase work? Hold on, I'm getting there! Okay, let's assume its two years later and you have been living in and improving your duplex all along. Now taking into account that you bought a decent property in a good neighborhood and inflation and appreciation has been adding value in addition to your improvements, your $150,000 duplex should command a new appraised value of $175,000. Let me explain how the value grows: 3% annual inflation multiplied by $150,000 equals $4500.00 the first year. Let's also say that appreciation due to demand also adds 5%, so 5% x $150,000 equals $7500.00. Now $150,000 + $7500 + $4500 = $162,000, which represents the new value for year one. The second year we do the same math on $162,000 and we get $12,960 for year two. Adding that to $162,000 equals $174,960. Okay, I was off by $40.00. Don't forget any improvements and that you may have bought it at a discount because the old owners where motivated and you might find its worth even more.
Now over those two years you have also been paying that old mortgage of $1099.33 each month and the principle amount that you owe on your loan has been reduced by an additional $3,965.96, leaving you with a loan balance of $146,034.04. The difference between the new appraised value of $175,000 and the current amount of $146,034.04 which you owe equals $28,965.96. This number represents the equity, or value, that you currently own in the home. Knowing this, it is entirely possible to apply for and receive a home equity line of credit up to the full value of the new appraisal! If you haven't gone overboard on buying cars, boats and running up other revolving debt while at the same time your significant other or spouse-to-be has a job and good credit with manageable debt, than the bank is going to approve this line of owner-occupied credit.
Now what you have done is set up a line of credit which can be used to buy a $145,000 single family home with a 20% down payment. This allows you to avoid paying private mortgage insurance (PMI), thereby creating a very affordable new mortgage on your new family residence.
NOTE: Do not confuse homeowner's insurance with private mortgage insurance. PMI protects the lender while homeowner's insurance protects you. When you put down 20% of value on a home's purchase in the form of a down payment, you are in effect protecting the lender from yourself because if they foreclosed on you for non-payment, they could sell the home fast for less than full value and still be paid in full.
Don't pay for private mortgage insurance if you can avoid it!
Let's not forget that as the value of your duplex has risen the rents should also be increasing along the same lines. Now instead of $750.00, you should reasonably expect to get $800.00 per month, per side, which now delivers $1600.00 a month to your bank account. Unfortunately you still have to pay for 28 more years on the original loan amount, so you will make that good old $1099.33 payment as usual. That leaves you with $500.67 left over to pay that new equity line back with. Your new $29,000 equity line which you used as a down payment on your new home costs you $336.71 @ 7% for 10 years. Now $500.36 minus $336.71 leaves you with $163.96 left over to maintain a nice little reserve account for vacancies and maintenance/repairs. This is a good example of how to transition to a secure lifestyle while using your existing asset base to buy more.
Review:
1. Break the mold and look at multiple income property to start.
2. Go to a first time home buyer class to get ready.
3. Go to a lender prepared to qualify for an affordable loan amount.
4. Focus your effort on learning how real estate works.
5. Realize the sooner you start, the better off you will be.
6. Offset expenses by renting to others.
7. Manage tenants, deposits and property responsibly.
8. Plan for the future using assets and equity lines to start.
9. Keep reading and learning how to do new things with real estate.
10. Find mentors and use knowledgeable people to help you along the way.
I hope this little plan of entering into homeownership has given you some ideas in your quest for independence. Wishing you all the best! Your investment pal, Dan
Dan Auito is a dual-licensed real estate agent and appraisal assistant. Founder of a non-profit drug prevention corporation, a real estate consulting group and is the author of “Magic Bullets Real Estate.” This 300-page power-packed book (due out in early July 2004 comes with a website that further supports its readers.
Dan may be reached at magicbullets@alaska.com or by visiting www.magicbullets.com
Call 1 907 481-6300 or write
1619 Three Sisters Way
Kodiak AK 99615
http://www.totalrealestatesolutions.com/articles/disp.cfm?aid=229&typeid=1&winpop=0&nav=1
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