So you want to be a Real Estate Investor but have no idea where to start. If you are really serious about getting into Investment property I would advise to start with your budget and how much money you have get started with. The money side of Real Estate investing is the single biggest issue I see people get in trouble with. That said you should also figure out if you are going to fix and flip property or if you are going to acquire long term a rental property. These are two very different strategies and should be understood before jumping into either. The third option is commercial property and the fix and flip market doesn’t really exist for these types of investments as commercial property does not have the demand like housing does, commercial property has traditionally been used to generate income. These are the basic Investments people start with when looking to invest in Real Estate. Not to say there aren’t other options our there but Residential Fix and Flip, Residential income property and commercial income property are the most common Real Estate Investments people want to start with.
Let’s take a look at what a budget should be for investing in Real Estate. To start you should be prepared to be able to make a down payment of at least 20%-30% and if you are fixing and flipping you should also have the money in reserve to pay for the improvements you wish to make. There are some loans that we can arrange for you called After Repair Value Loans (or ARV loans) that will lend you a percentage of the project based on the appraised value of the home after it has gone through your renovation. Generally, these loans will be 65%-75% of the fixed-up value of the property. But if you can put down the required down payment and have the repair money you will see the best gains and not have the worries of overruns and problems that will pop up during a fix and flip project. Some advice I would give for a fix and flip, as I have personally done several, would be to “do the numbers” before even entering into contract to purchase. The numbers are some basic calculations of costs, and as you do more of these the better you become at estimating the costs of repair. Before entering into a purchase contract on any potential fix and flip you should know what the costs to repair will be as well as what you could sell it for once the repairs are done. For example if you are looking at a house that is listed for $200,000 in “as is condition” in a market where is could sell for $300,000 fixed up you need to have an accurate idea of how much it will cost to fix up. In this example if it was going to cost $50,000 to bring the property up to the top of the market you could stand to make $50,000 in profit. Figuring it will take about 3 months of repair before you could put it back on the market. If this is an acceptable profit for your time and energy then it would be a good investment for you. If the costs look like it will be more like $80,000 to fix you have to ask yourself if this is enough for your time and money taking into consideration what you might find when you start demolition. Knowing your costs is the single most important part of the fix and flip investment as it doesn’t make sense if the costs to repair plus the purchase price is greater than what you can sell it for in the end. Also know your market place, if the values are rising due to lack of inventory your project might be worth more when you finish the rehab, but if your market is stagnant or slowing with increasing inventory you need to consider that the project might be worth less when the rehab is done.
If you are buying a property for rental income it is important to note that you should have a realistic income goal you wish to “Net” after all the monthly costs of your rental property. You should also know the tax rules both state and federal with regards to rental property and what the landlord’s responsibilities are. If this is your first attempt at a rental property you may want to explore the cost of having a property manager. A property manager will handle all things to do with the tenant, so you don’t have to, but with that comes with a cost that you must figure in as well. You should be prepared to put an initial down payment of at least 20%-30% down more if you wish to have more return on your money. Again, there are 2 objectives to holding rental property and you should identify what your objectives are. First, are you purchasing a renal for monthly income or are you purchasing and holding hoping for gains on your investment or both? Both plans require you to “run the numbers” to make sure you actually get what you set out to. If you are looking for income after paying a mortgage on your home, you have to ask “how much do you need to make”. For example: You buy a $400,000 single family house put down 30% and have a $280,000 mortgage with a mortgage payment of $1,503 at 5% and your annual taxes for the property are $5,000 a year then divide that by 12 and your monthly taxes are $416, and your insurance is $1,200 annually your monthly insurance is $100. Your base monthly cost before repair contingencies would be $1,716. If the rents you can get on the property are not greater than that you will have negative rent every month which means you will not be making money but paying money. This might be OK if you think the $400,000 property will gain in value over the years at a rate that is acceptable for you. If that is not acceptable then you would have to put more money on the initial down payment to lower the mortgage amount thus lowering the monthly payment to a level where you are receiving the income you want. This example doesn’t take into consideration a work contingency fund for any unexpected problems that may arise with having renters in your property like clogged plumbing, landscaping, broken appliances, etc.. Again this all boils down to your budget if you can afford to pay cash for the property you should look at the return on your investment. That is done by taking your initial investment and dividing the income after expenses into the initial investment. In our example above if you bought a $400,000 house for cash and the rents you could get is $1,800 a month your taxes and insurance are $516 a month and maintenance will average $200 a month you would have a monthly cost $716 a month subtract that from your income and you have a net income of $1,084 times 12 is $13,008 annually then divide that by your initial investment of $400,000 and you get 3.3% return on investment not taking into consideration any increases in value of your property. If that is acceptable return for you then it would be a good investment, if not then do the numbers on another investment where you are getting the return you desire.
If you are considering commercial property as an investment be prepared to be in a much higher sales price environment than residential Real Estate. Commercial Real Estate is generally not a vehicle that the first time Real Estate Investor should be in unless they really understand the market they are in and the rules of owning commercial Real Estate and have the assets to maintain commercial property. A commercial Investor must be prepared for vacancies in their property unless they are an owner operator of the building, in other words you run your business from the commercial property. It is prudent to own the building you run your business from if it is possible as you can pay yourself rents from your company, which is a conversation for your tax professional as well. There is a lot more to owning commercial property that I can get into in this blog but if you are interested before my commercial real estate blog comes out just give us call and we can help you.
There are many ways to invest in Real Estate these are just a few examples. If you wanted nothing to do with the actual day to day operations of owning Real Estate and you have money to invest you might want to look at being an investor in a private Real Estate Note where you lend your money to someone who needs it that can’t qualify under traditional financing. This is where we at MAE Capital Real Estate and Loan would find someone in need of Private money for a project they have, and we would lend your money to them and every month you would get a check for the interest on your investment. This type of investing is a lot like investing in a Certificate of Deposit but with a high yield. You would have to be prepared to have your money tied up for a period of time of 1 to 5 years. With this type of investment, you will know what your yield will be every month with no expenses to worry about. There are other investments in Real Estate such as Real Estate Investment Trusts, Joint Ventures etc. where you are investing but don’t have the management responsibilities. If you are interest in getting started in investing here at MAE Capital Real Estate and Loan we can advise you in both the Real Estate side and the loan side of the transaction, one call all your answers. We can be reached at 916-672-6130 our website at www.maecapital.com.
This election was shocking to just about every American after being spoon fed from the media that the results were a foregone conclusion. Newsweek had to recall its welcome Madame President issue as they went to press with a certainty of the winner. The stock market had to make adjustments and now entire households are adjusting the new norm. The social issues that this election has brought about has forced changes and probably changes in the way we get our news and who we trust to deliver it. All that aside we now have to ask what will Donald Trump do with Real Estate and what were his campaign promises with regards to change. Myself, being the Real Estate and Lending industry for the last 32 years and seeing more changes to the industry over the last 8 years then the last 32 combined. I have to say with this new administration there will be an abundances of new changes. Mr. Trump spoke of repealing then soften to fixing the Dodd Frank regulations imposed on consumers in 2010. The Dodd Frank Act basically made mandatory waiting periods for consumers when they apply for a loan, put caps on interest rates that could be charged on primary residences, and put such restrictions on lenders that if they were to make a mistake they could be fined millions of dollars. The Act made loan officers take a test or tests depending on the State to become licensed before being able to originate Qualified Mortgage Loans. The Act made it so lenders had to disclose fees a minimum of 3 times during a transaction on a person’s primary residence. The Act made it law that the a person’s debt to income ratio could not exceed 43% of their income. The act limited the amount of money a Mortgage Broker could make, and It basically took away the ability of a person that has less than perfect credit to obtain a loan on a primary residence. The act has become so restrictive that real growth in the real estate field has only come from the lack of housing and new construction and the demand for existing housing has pushed up real estate values.
There is a lot here to forecast the future with and I am optimistic as Mr. Trump been in the Real Estate game all his life and has seen firsthand what has happened to the Real Estate Industry with the new laws. With that said and his promises to re-visit the new laws and make changes should be beneficial to consumers. Here is what I see as some logical changes our new President can accomplish with a controlling House and Senate. Mr. Trump will have to start with the mutli-Trillion-dollar Agency created to oversee and fine lenders, the CFPB or the Consumer Finance Protection Bureau. The CFPB has been tasked with interpreting the laws the way they chose fit, without due process of law. All the while imposing regulations above and beyond the law that they can also enforce as they see fit. This Agency is supposed to help consumers from big bad lenders. In fact, they do the opposite by scaring lenders to the point of not lending to those that should be able to attain financing. I would argue that the whole Agency is discriminatory by nature. I can say this by the fact that current lending laws and regulations enacted by the very agency designed to help consumers have severely hindered consumers in the limitation of credit to certain groups of people. I know this as I have been in this industry for over 30 years and before this Agency’s existence and before the whole mortgage debacle there was common sense in the lending industry and with the new laws this common sense has gone away. It would appear that only those that have had generations of ability to attain credit in the U.S. would have had more experience and education with regards to attaining credit. It was not until 1968 that the civil rights act became law that allowed all races, religions, sexes, obtain credit under an equal set of credit standards. Until then the ability to obtain credit was pretty mush only white men. After the Civil Rights Act all of a sudden all groups were allowed the same opportunity. However, without education of how credit works people did not know how to handle credit so when it was offered to them they could not handle it, simply because they were never educated on how the system works. So only a generation later we are still faced with entire groups of people that their parents were not afforded the same opportunities as them so they could not have taught their children how to handle credit. Before all of the laws designed to protect these very people from lenders we had a system that could take this into consideration and give people a chance with credit. In today’s world those groups of people are discriminated against more than ever by the very laws designed to protect them. So our new President has to address this issue, and the only way I see to do this is to give the lenders back the power to make decisions based on merit not on law.
The next thing Mr. Trump will have to do, is to allow those institutions to fail that make bad credit decisions and get rid of the too big to fail attitude. Mr. Trump should employ people that are in the business of Real estate and Finance to assist in the fixes and changes. Mr. Trump should tone down the powers of the CFPB to give lenders a chance to lend to more people. This will be a daunting task as the CFPB should be overhauled from top to bottom, which by the way, would be a long time coming. We also should remember that in the history of government there has never been agency shut down, they have been re-assigned or re-named so don’t expect the CFPB to go away. Not to mention the jobs that agency employs, however, if it were me I would get those people back to private industry now that they have been armed with compliance techniques. Other changes that should be made to the CFPB are giving the loan officers back the ability to negotiate interest rates and the ability to give to their clients a portion of their pay if they need to make a deal work. This is a simple economic fact that consumers have a choice where they can get their mortgages and generally will gravitate to the lowest interest rates and lowest fees. Currently a Loan Officer has a compensation plan with their employer and this cannot change even if the Loan Officer wished to contribute a portion his or her commission to make the deal work. A prime example would be if a Loan Officer’s compensation is set at 1.2% for all loans the close they cannot lower their commission to those who wish a high loan amount. That 1.2% commission might be good for Loans up to $500,000 but after that they should be able to lower their commission and thus lower the costs to the consumers. This kind of common sense needs to come back to lending. Mortgage Broker Compensation should not be limited to 3% on Qualified mortgages. The argument for this change is not so Mortgage Brokers can make more money but so they can make more on the smaller loan amounts to entice them do them, and be able adjust to a smaller commission on the larger loan amounts as the work is the same for small loan as it is for a large loan amount. These are just some common-sense adjustments that need to be made. I would keep the Loan Officer Licensing as that keeps the riff raff out the business.
These are some common-sense changes that I feel are necessary to insure a healthy Real estate industry. Mr. Trump soon to be President Trump will have a big agenda when he gets sworn into office in January. The media has put so much attention on his immigration policies and changes he wants to make to Obamacare that are missing some of the positive changes that he will be making in the housing industry. He can take advantage of the fact the media has not paid attention to anything other than the left wing high profile agenda items, that he can make these changes without too much negative media attention. It not only my hopes and prayers that changes are made it is echoing throughout the entire Real Estate industry. So let’s make America Great Again and American Real Estate has been a pillar in the economy for as long as America has had an economy so let’s get working again without the fear of the Government.
In California, as with the rest of the Nation, the Real Estate markets are red hot. What exactly does that mean, you ask? Well, simply put, there are more home buyers out looking to buy homes then we have seen in years. There are multiple reason for this, but the biggest driving factor is the low interest rate environment. Low interest rates are also causing a refinance boom for home owners to lower their monthly payments. There are some limiting factors that are inhibiting otherwise qualified home buyers from getting in the market while rates are low. Specific limitations are the Dodd/Frank rules that have choked down the qualifying criteria for a home loan. However, while the rules are far stricter for owner-occupied homes the demand is still there and we are now starting to see builders building homes again.
Low interest rates allow for people to qualify for more of a house with the income they have. These lower interest rates are also causing the prices of homes to go up from the demand to buy affordable housing. It is interesting to watch this market as the homes in the “sweet spot”(this is where the housing affordability is in relation to the local incomes, in the Greater Sacramento area this “sweet spot” has risen to homes between $300,000 and $450,000 in value) are being pushed higher in value, while the upper end homes are not in as much demand. This is usually caused by first-time buyers entering the marketplace in the “sweet spot”. We are seeing the pent up demand start to work its way into the first time buyer markets as most of the first time home buyers grew up through the recession and the great Real Estate crash of the beginning of the century. These home buyers are feeling more comfortable with their income and do not want to repeat what their parents had happen to them. As these home buyers get later into their 20’s and into their early thirties they are entering the Real Estate Market older than the generation before them. This is causing more demand as these first time buyers are mixing in with the move up buyers and the people that lost their homes in 2008-2011 that are now re-entering the market. Coupled with lower the lower interest rates you have a market ripe to expand.
Sellers of homes are having a tough time pricing their homes and their Agents are helping but still it is a challenge. If you are looking at selling your home, and the house down the street with the same floor plan just sold 2 months ago for a lower price but there is nothing else for sale in the neighborhood, that same home may sell for 5-10% more today. The problem with that is that an appraiser will have trouble appraising the house, as the comparable sales will be older and homes selling outside the neighborhood are selling for more, proportionately. So how do you price your home? One of my tricks would be to price the house up about 5-10% than what the market is for the neighborhood and accept offers at the higher price to see what kind of demand your home is bringing. The higher demand will result in full price offers knowing that the house will not appraise. At this point 2 things can happen; one, the seller can sell it for the appraised value by lowering their price, already knowing the that house was priced higher than market to begin with, and or option number two; the buyer can bring the difference in cash to the table to make the deal work. Option number two, with the buyer bringing in more cash, probably will not work if the house is under contract with a FHA or VA loan. As FHA and VA buyers, most of the time, do not have much cash to work with as they are generally first time buyers using their savings to buy the house. A seller should take into consideration the type of financing they will accept on their home prior to putting it on the market.
All potential home buyers in this marker should be approved for their financing prior to even starting to look. This should be a given, but there are Agents out there so excited to have a potential home buyer to work with they miss this valuable step. If a buyer makes an offer on a home that becomes accepted and Both Agents (the one representing the buyer and the one representing the seller) don’t get this approval first the escrow could potentially fall out later in the transaction due to the lack of loan approval and everyone has wasted their time. Believe it or not I have seen this more lately as we also do loans for those folks that don’t otherwise qualify for traditional financing and they call us in desperation to get a loan after they have been declined for traditional financing. Sometimes we can help but most of the time we should have talked to them before they made the offer. With these cases the buyer has wasted everyone’s time and if the seller is in a hurry to sell because they may have bought another house, that deal may also fall through. All potential home buyers have to look at the big picture, not only for themselves, but for all the folks involved in a Real estate transaction. I know that is unrealistic, but if this article can help one transaction I have done my job by writing this.
All the new regulations with the Dodd/Frank act and the CFPB (Consumer Finance Protection Bureau) making lenders qualify all potential home buyers of primary residences on their verified income, has reduced demand a bit as it has disqualified the self-employed segment of the home buying population as well as others that should be able to buy homes. It also has made it significantly harder to obtain financing for a primary residence as the laws and regulations has made lenders so self-conscious about approving loans that lenders are fearing the fines that the Government can levy on them that they have tightened their standards making it harder to obtain a traditional loan. These laws have played a roll in keeping the demand under control, but I worry for the future when the markets cool off and the supply exceeds the demand. Housing supply in excess of demand will cause Real Estate prices to plummet quicker than ever before.
Summer housing is red hot now and should stay healthy for near future as Rates should stay low. The Federal Reserve will probably not raise rates in the near future as the underlying economy is not as good as the numbers being produced from the Government indicate. We are also in an election year, one that is probably the most important one of last 50 years, and that will also keep short-term rates low as the current powers want to keep the same political agenda going for the next 4 years. The long-term implications of the Real Estate markets will hinge greatly on the next administration America elects. One candidate that is a Real Estate mogul and is second generation Real Estate wealth who knows the value the Real Estate markets play in the American economy, and another candidate that is a career politician that has not done one good act during the time she has been in public offices. Not to name names, but if you are interested in Real Estate and how it drives the American Economy you know what you should do with your vote. Capitalism is what has made America great and the more we move towards Socialism the closer we get to our demise as a nation. History proves this to be true with Russia, Greece, Spain, Portugal and a dozen other European countries that have failed in that experiment. Britain’s have seen this first hand as they were one of the countries supporting the failed counties in the European Economic Union, that is why they voted to leave and start to help themselves again. I digress, Real Estate is the best wealth vehicle America has, so I am a little partial to the industry as I have given the last 32 years of my life to this industry. I wish everyone GOOD LUCK and happy hunting out there. as always if we can help you with your Real Estate or Mortgage needs we would love to talk with you. (916) 672-6130 www.maecapital.com.