Building Your Real Estate Portfolio: Part 1 Getting the Home Purchased!

So you have read some of my previous blogs and you feel like you want to get started in real estate.  Well, there are a couple of ways to get started.  In my experience the way most people get started has very little to do with a “free seminar” where seating is “extremely limited”.  Most of these “seminars” I would compare to the traveling snake oil salesman of old.  What they have will cure everything and solve any problem. You can make tons of money without using any of your own and its risk free!!!! Yeah, not likely!

The real way that many start to get involved and often the easiest way to gain entry into the world of real estate is to purchase your first house. If you are looking to buy a house and you also know that you want to fix and flip or get a portfolio of rental properties, you may as well start with your personal, owner occupant house.  You see banks have no problem lending you money to buy a house you are going to live in.  It is in most circumstances the easiest loan you will ever get and you have the most options, VA, FHA, FHA 203K, conventional, or any number of “first time home buyer” type products. The one you choose is the one that best suits your plan and personal situation. Even better is that you will get a lower interest rate on an owner occupant purchase than an investment purchase and most lenders will allow between 6 and 10 owner occupant loans.

VA, FHA and most “first time home buyer” loans (which almost all run through FHA underwriting) are great products but if you are handy and want a property that needs a great deal of work, then an FHA or VA loan is likely not going to get you the property you want.  Those loan programs will not allow you to purchase a house that needs a ton of work. They will however get you in with the least amount of money down and sometimes that is what you need. You need a place to live and that is the first home investment step in what can be a life long process.  The one sort of loophole to this is to buy a house that is very dated and priced accordingly.  The FHA and VA loans don’t care that the house is dated, they do care that everything is there and that the house is livable at the time of purchase. You will want to make sure that you have a VERY knowledgeable realtor if you are thinking about going this rout. If they do not know tons about the process and about houses and maintenance you could be risking your earnest money, not to mention the cost of an inspection and an appraisal!

You will have a great deal more flexibility with an FHA 203K. FHA 203K allows  you to purchase a house that needs lots of work but the work has to be done rapidly right after the purchase and the money for the repairs are rolled right into the loan and earmarked for the repairs. This process has some pluses and some minuses.  The plus is that the home can be in pretty tough shape and you can still get it bough and fixed.  One draw back is that often you will likely need to hire a contractor to do the work and this can eat up a lot of the potential profits.  The loan itself also has quite a bit of extra work involved in the process. Lastly you will need to qualify for the entire loan amount of the purchase price and repairs. This can be restrictive if you have a high income to dept ratio, or need to max out your loan amount just to get into the market.

A conventional loan will be your best bet for purchasing a home that needs plenty of work and has lots of sweat equity. Be aware that the house still can not be in terrible condition unless you are putting TONS of money down, and even then you may find road blocks.  Lenders want you to purchase a home that they can sell if you do not make your payments. A burned out hole is hard to sell!  Again you should find a real estate pro that knows the process and can make sure that your loan will go through and reduce the risk if you loosing your earnest money.

The last and highest risk way to purchase a property is with a Hard Money Loan.  These are loans that are generally not based on the credit worthiness of the borrower but on the value of the asset. They vary a great deal from institution to institution or lender to lender.  Often times these are a group of investors or a single person that want to make a large return on their money and are willing to take bigger risks than most standard investment vehicles. Often you will need to put down a large chunk of funds up front, pay multiple points up front, carry very high interest rates and they are short term (often not longer than 6 months).  If you are buying the home to live in this is probably a bad option.

More on this subject to come!


Investing in Real Estate or the Stock Market


Real Estate Wins!


So you want to invest some money and you are not sure if it should be in the stock market or in real estate, keep reading. For this blog I am specifically talking about investing not buying the house that you want to live in. Owner occupant purchase of real estate is a vastly different endeavor then that of an investment purchase. I am writing this with the assumption that the reader already owns a home and is looking to better their financial situation with an investment

Let us start with some basics:

If you only have a small amount of money and/or you are not very good at saving it up to be a larger amount, small incremental investments in the stock market is likely your best play. For those that are not good at saving you can still create wealth and be heading in the right financial direction. If you have some money saved up and can make a down payment on real estate, you will likely be better off purchasing a house and renting it out. As for what I consider to be a reasonable amount of money you will need… well 25% of the purchase price you want to buy in is a great place to start.

You don’t need 25% of the purchase price for the purchase but it is the best way to go.  The main reasons for saying this is that it reduces your risk of loss.  If those that purchased speculative or investment real estate in the last housing boom would have put 25% down then we almost certainly would have not been caught in the situations we kept seeing and hearing about (which is another blog post in itself).  When you put 25% down you reduce the mortgage to a level that will help, making the payment from the rents received much easier. There are many points to how this helps.

Most obviously 25% less principal to make a payment on is a big deal.  Another reason 25% down is crucial is that you will automatically save yourself the cost of private mortgage insurance (PMI).  Once you put a minimum of 20% down, reaching 80% loan to value (LTV), you will not have to pay the extra expense of mortgage insurance. This can easily be a $150 per month savings. Lastly, the vast majority of lenders will not make an investment loan with less than 25% down.

For many, an even larger hurtle to overcome is for your first investment property you will need to be able to cover the mortgage expense of both houses (the one you live in and the one you wish to purchase). There are ways around this but that is a topic for another time and another blog post. Lending regulations change all the time and many lenders, especially smaller ones may have a product that can get around this but as of the time of my writing this blog, this can still be a tripping point for many.

So, let’s get to the meat of the math that shows you why real estate beats the stock market.  Depending on what source you use you will find that the stock market has increased somewhere just under 1900% since 1968.  Even if we use this large number, real estate still wins.  Here is the math.  If you were so blessed as to have $20,000 in 1968 and you placed it in the stock market you would have approximately $380,000 today.

If you were to take that $20,000 and invest it in real estate in 1968 even if it was just bought a single property, you would have an increase of just under 1100%. This is a much smaller return, and stocks pay dividends, etc. Yep, totally true! So real estate is a big looser. Nope! The way real estate wins is that you have a much larger vehicle for appreciation.

As we have seen above with that $20,000 dollars you could have purchased a property worth $80,000 (that would have been quite the home back in 1968).  Sticking with the 1100% increase, that home would be worth $880,000.  Not too shabby!  Now of course there are lots of costs that go with home ownership and those are not factored into this simple equation. Still, we are talking about better than double the value. Oh, and this is an investment property! SOMEONE ELSE HAS BEEN PAYING THE MORTGAGE ALL THIS TIME!  Also, it has been payed off since 1998 and a big cash cow for the past 17+years!  REAL ESTATE WINS!!!

So if you are not tired of the math up to now let’s take it one step farther. If you were a savvy real estate investor and this fits better into the reality for most of us, you likely would have taken that $20,000 and purchased four houses putting $5000 down on each one.  This gets you the same total appreciation, but would have done something you hear said is important for investing in stock, diversify your risk.  Sure it is all in real estate but an extended vacancy will not hurt the budget as it would with all your eggs in one basket. The last, almost unseen, benefit to this strategy is that those $20,000 houses would be worth $220,000 today, the current median home price in the US. This makes them the most likely and easiest to rent and keep rented and the most likely and easiest to sell if financial difficulties were to happen.

The last point that needs to be made is this:  Lets assume for easy math, that those four houses had an average rent of $1000 of the 18 years since they were paid off.  That is $4000 a month, 12 months per year equaling $48,000 per year, times 18 years equals an astounding $864,000!!!!  That should easily cover the cost of repairs and probably any dividends that the stocks would have paid you

So, yes, real estate wins!

Oh, and did I mention the most astounding part of all this? Banks will line up to lend you 3/4 of the money to invest in (buy) a historically appreciating asset. No one is going to give you $80,000 to put in the stock market!

If you have any questions about this topic I would love to talk with you, feel free to contact me!

*** Please note, this is just meant to be informative, all facts and figures are assumed to be true and accurate but there can be differences in all values stated depending on the source material used.

Short Sales are Worth your time and Effort!

Today’s post is just to make a small point to all of those people out there that are behind on there mortgage and are considering doing a short sale or have questions about the process.

If you or anyone you know are having trouble making their house payment, SHORT SALES ARE WORTH THE EFFORT!!! They take a bit of work, time and extra effort but it is worth it. Short sales are infinitely easier and less complicated then they have ever been. Banks have finally realized that they recover a much greater amount of money if they do a short sale than if they carry out a foreclosure.

People that successfully complete a short sale will be able to buy a home much sooner than those that have a foreclosure. They will be able to reestablish good credit much faster and with today’s current laws, will be likely to have the debt completely forgiven much easier than ever before.

Please do not “bury your head in the sand” and hope that the problem will just go away. It will, but it is not the wise way to solve the problem. A person will be back on their financial feet much faster after a short sale then a foreclosure and in the long run will be much happier.

If you have questions or concerns about short sales, please contact me. You will be so glad you did. It is nothing to be ashamed of, In fact you may come out the other side of it feeling proud of what you were able to accomplish.

P.S. I know of people that were able to buy a house in as little as six month after a successful short sale. It is not common but it is possible.