Summary: For several reasons like favorable skilled demographics, a liberal Govt. policy, IT and retail boom, the global perception towards Indian economy is changing fast. This positive change has helped the Indian reality sector to boom.
Construction and development segment is one of the fastest growing sectors of the Indian economy. This segment is augmenting investors. Even the real estate prices are augmenting fast, especially in metros and upcoming cities like Bhubaneswar, Kochi, Pune and Nasik. This rapidly growing market is maturing day by day as large numbers of people are taking part in it.
Flying high on the wings of this booming sector, property in India has become a dream for every prospective investor looking forward to dig profits. All are eyeing Indian construction and development sector for a wide variety of reasons:
* India is a growing economy with a continuous rise of 8 percent for last three years. This growth has increased purchasing power of Indians and created demand for reality sector.
* India is producing 2 million new graduates on an annual basis. This necessitates a demand for 100 million square feet of office and industrial space.
* The global perception towards Indian is changing fast. Presence of a large number of Fortune 500 and other major MNCs has created a feel good atmosphere in the Indian economy. This positive change will attract more companies to initiate their operational bases in India and will create more demand for corporate space.
* For investment purpose, India is a safe destination. According to a recent survey, 70 percent of foreign investors in India are making profits and another 12 percent are breaking even. This statistics is powerful enough to attract more and more FDI in Indian reality sector.
* The relaxed FDI rules implemented by Govt. of India last year has invited more foreign investors. After the decision of 100% FDI in this sector, real estate in India is seemingly the most lucrative ground at present. The revised policies are very much investor friendly and have allowed foreigners to own property. Now government of India dropped the minimum size for housing estates built with foreign capital to 25 acres (10 hectares) from 100 acres (40 hectares).
• Apart from IT, ITES and Business Process Outsourcing (BPO) India has shown its immense expertise in sectors like chemicals, apparels, pharmaceuticals and jewelery. In these sectors India can match the best in the world. These positive attributes of India is definitely going to attract more foreign investors in the reality sector in near future.
Sunday, August 31, 2008
Determine the profit on your Real Estate sale
Most people look to compromise in their area to come up with the listing price for their property. This is logical, but you also have to hub on the bottom line.
How Much Would You Make on The Sale of Your Property?
It happens more frequently than you might imagine. A homeowner decides to sell and goes about figuring the top price to sell. They might set a price off of the cuff or does study to ascertain the best price that will result in a sale within a specific time period. What many do not take into account, nevertheless, is the ultimate amount would get from the property. This could lead to brutal surprises when the eventual amount is much less than expected a concept known as seller’s remorse.
In realism, the decision to sell your property must only be made after determining what you could objectively get out of it. Most people, however, lean to eyeball this amount. If you have a lot of justice in the property, it in fact is not an issue. If you don’t, you better start calculating or you can be in for a bad shock.
The first place to start is the predictable price you would sell for minus the outstanding balance on your mortgage. This gives you a rough estimate of your equity, but must not be relied upon as the final cash out figure. Instead, you have to sit down and start calculating the other costs such as:
* Mortgage pre-payment penalties,
* Property taxes for the part of the related year in which you are selling.
* Any costs connected with repairs to the property to get it in shape to sell.
* Attorney’s fees if a lawyer is necessary to be part of the process in your state.
Incidental costs connected with the sale as agreed to in the purchase agreement with the buyer. Items could include title insurance premiums, recording fees, examination fees, warranty insurance, escrow fees and so on.
One area people totally forget to factor in is, ironically, the main expense. If you use a real estate agent, you are going to pay an important commission. A typical 6 percent commission on the sale of a $300,000 home is $18,000. More and more sellers are bypassing this by selling their properties without agents, which makes brains given the money involved. Regardless, you require ascertaining how you would sell the home and the relevant cost of doing so as part of your overall calculation. Making the choice to sell is an emotional one. It should, however, also comprise a hard, cold look at the financials involved and whether doing so makes sense.
How Much Would You Make on The Sale of Your Property?
It happens more frequently than you might imagine. A homeowner decides to sell and goes about figuring the top price to sell. They might set a price off of the cuff or does study to ascertain the best price that will result in a sale within a specific time period. What many do not take into account, nevertheless, is the ultimate amount would get from the property. This could lead to brutal surprises when the eventual amount is much less than expected a concept known as seller’s remorse.
In realism, the decision to sell your property must only be made after determining what you could objectively get out of it. Most people, however, lean to eyeball this amount. If you have a lot of justice in the property, it in fact is not an issue. If you don’t, you better start calculating or you can be in for a bad shock.
The first place to start is the predictable price you would sell for minus the outstanding balance on your mortgage. This gives you a rough estimate of your equity, but must not be relied upon as the final cash out figure. Instead, you have to sit down and start calculating the other costs such as:
* Mortgage pre-payment penalties,
* Property taxes for the part of the related year in which you are selling.
* Any costs connected with repairs to the property to get it in shape to sell.
* Attorney’s fees if a lawyer is necessary to be part of the process in your state.
Incidental costs connected with the sale as agreed to in the purchase agreement with the buyer. Items could include title insurance premiums, recording fees, examination fees, warranty insurance, escrow fees and so on.
One area people totally forget to factor in is, ironically, the main expense. If you use a real estate agent, you are going to pay an important commission. A typical 6 percent commission on the sale of a $300,000 home is $18,000. More and more sellers are bypassing this by selling their properties without agents, which makes brains given the money involved. Regardless, you require ascertaining how you would sell the home and the relevant cost of doing so as part of your overall calculation. Making the choice to sell is an emotional one. It should, however, also comprise a hard, cold look at the financials involved and whether doing so makes sense.
Thursday, August 28, 2008
Home Loan Process - What Are The Organizations Involved
In order to get a home loan, people and organizations such as inspectors, real estate agents, credit agencies, title search people and others need to sign off on the project. Who they are is usually dictated by the home loan people but having them all lined up and ready to sign off is up to you.
Who is involved?
The people and groups involved in getting the home loan issued include: you, the lender, the real estate agents (for you as well as the seller), the inspector, the title company, your creditors, your employer and your spouses' employer and credit history if the purchase is to be a joint purchase.
The home loan lender
This group can be a bank or other financial organization. Generally, they are the ones that require all the paperwork to let the home loan proceed. Unfortunately, they are the ones that require the information and are not necessarily the ones who pull it together. The documentation for the home loan is largely your responsibility although the home loan lender will likely verify the financial details before the loan proceeds. Generally, having as much documentation pull together before hand is a wise idea.
The real estate agents
The real estate agent can be a good guide for getting you through the maze of home loan paper work. They have been through the process before and have a fairly good idea what to expect. They are not responsible for pulling information together but can be a good resource for finding and using reputable people during the process. Title search and inspection companies might be a good example of resources they can help locate.
Inspectors
The inspection process is a requirement for most home loans. Generally, this process is a good idea in any event. It is always good to know beforehand if repairs or upgrades are going to be likely in the future. However, if the inspector finds that the home has significant issues the home loan may not be able to proceed. Unfortunately, in this instance, the search for a new home will need to go on. Fortunately, most of the home loan paperwork has been completed so this event is more of a disappointment than a home loan disqualifier.
Title Search Company
This company's work can be the scariest work in the entire process. One might think that the process has been done before so there should be little issue. Unfortunately, this can sometimes not be the case. The home loan company wants to know that the property is free and clear of encumbrances. If it is not free and clear there cannot be a sale. Generally, the scary part is that when something is found it comes out of nowhere. Where title searches are concerned Murphy's Law applies; if something bad can happen, it will happen.
Credit Help for Real Estate Financing: Five Categories of Your Credit Score
1. Payment History -- 35%
The number of accounts paid as agreed and a good payment history give you a higher score.
Negative points lower credit scores because of 30 days, 60 days, and 90 days late on any debt. The dollar amount of these delinquencies also impacts credit scores. Severity of delinquency, how long past due, and number of delinquencies are nasty remarks on some credit reports. The older these derogatory items are, the less impact they have on credit scores. You do not want any present delinquent accounts when applying for a real estate loan.
Never, ever pay a mortgage payment more than 30 days late. Lenders do not like to see any delinquencies on real estate loans.
Adverse public records, such as bankruptcy, judgments, suits, liens, and wage attachments negatively dominate credit history. Any of these items cleared up helps improve a credit score, unless the item is aged. The older the derogatory entry, the less the impact. Any activity on a particular item makes the item update and therefore, remain on the report for another seven years. So, if a derogatory item is more than four or five years old, don’t bother with it.
Collection items unfavorably shape credit payment history. The more age a collection account has, the less its consequence. Most mortgage companies require that collection accounts be cleared before lending. If this is your problem, see “Help with Collections” later in section six.
2. Proportional Amounts Owed -- 30%
The amount owed on a credit line compared to the available credit is termed the proportional amount owed. With a credit card limit of $5,000, the score will be higher if less than $2,500 is owed. Even better is to owe less than 1/3rd of the available credit or less than $1501. To have the highest proportional amounts owed scoring factor, owing less than ten percent of the available balance gives you the best possible rating. On the other hand, owing over $4,500 on an account with a limit of $5,000 lowers your score significantly, especially if you have too many credit cards and other loans with high balances compared to available balances.
Tip: Call your creditor and ask them to raise your available credit as long as you don’t use this credit. This raises your proportional amount owed scoring factor.
To raise your credit score dramatically and quickly, pay down as much as possible on each credit line instead of paying off one credit card at a time. If a credit card is totally paid off, it does not compute in the proportional amount owed; therefore your rating does not benefit from paying balances in full. On the contrary, paying balances in full takes the account out of the equation and you don’t get higher points for the low proportional amount owed.
3. Length of Credit History -- 15%
Any account over twelve months with a good payment history helps a credit score if the balance is not too high compared to the available credit. Six months is the minimum length of time to establish credit. The time since accounts opened and the time since account activity are factored into the length of credit history.
4. New Credit -- 10%
Whenever you apply for a new credit line, your score receives a negative hit. The more inquiries you generate, the lower your score. Obtaining new credit lowers your credit score. We only apply for credit when applying for mortgages. Every time we get a new mortgage, our credit scores go down.
Never finance a new car or get a new line of credit when you are getting ready to finance property. Wait until after closing to apply for further financing. Be aware that after your new loan shows up on your credit report, your financing abilities shrink. If you need credit funds for any reason, including renovation costs for your new house, apply for this after closing your property purchase.
5. Types of Credit Used -- 10%
The different types of loans taken out by consumers affect credit scores. Credit assessors view mortgage accounts more favorably than consumer finance accounts. Too many installment loans, auto loans, and department store credit cards affect credit negatively. To improve your credit score, pay off installment loans and consumer finance company accounts after you have lowered your proportional amounts owed. Then pay off your department store retail accounts. Keep balances as low as possible on home equity lines of credit because they often count as consumer finance accounts instead of mortgages. Achieve higher credit scores by having only mortgage accounts and a couple of major credit cards with low balances.
Note: In addition to credit scores, lenders consider length of time at residence and employment as well as income and education.
Do You Need a Credit Score of 700?
Don’t believe it! We have so many loans; our scores are in the mid 600s, but we buy and sell property all the time. Even with a perfect payment history, we can’t get our scores up because we have so many real estate loans with high balances remaining. We often need to get “B” loans instead of “A” loans, which means we pay higher tax-deductible interest, points, and fees.
Sunday, August 24, 2008
The 5 Most Common Mistakes Homeowners Make When Shopping For a Mortgage
Chances are your home is your most valuable asset. You don't want to make a mistake that may cost you thousands of dollars or potentially put your family's home at risk. Close Your Own Loan.com has compiled five of the most common mistakes homeowners make while shopping for a new home loan.
1) Keep it private
Identity theft is the fastest growing crime in the United States. Many Loan Officers, or criminals posing as Loan Officers, will request your personal information including your social security number and date of birth up front. Do not give it to them. Any reputable company will be able to give you a rate and payment quote up front before you give them your personal information. By keeping your personal information secure you will accomplish two things:
a) You will keep your credit score high by avoiding unnecessary credit inquiries.
b) You will keep identity thieves far away from your personal information.
2) Use YOUR judgment
A recent survey of homeowners in foreclosure with adjustable rate mortgages revealed that 85% of them stated they would not have taken the adjustable rate mortgage had they not been talked into it by a Loan Officer. Often a Loan Officer will try to talk you into an exotic adjustable rate mortgage simply because it pays a higher commission. Do not let their greed determine your next home loan. Explore all of your different loan options yourself in an environment free from sales pressure.
3) Ring, ring, ring...
Have you ever made the mistake of applying on one of these "get multiple quotes from different lenders" websites? I bet you were surprised when they sold your information to dozens of different mortgage brokers who then bombarded you with phone calls for weeks trying to talk you into refinancing with them. Is that what you really want when you go online looking at home loan options? If you wanted to talk to someone on the phone, wouldn't you have called them instead of going online? Don't fall prey to these information brokers.
4) Up front fees
Some mortgage companies will ask you to pay a credit report fee, application fee, or rate lock in fee up front. Any reputable mortgage company will only charge closing costs once the loan has closed.
5) The guessing game
Interest rates fluctuate daily. Many homeowners will see their new rate and payment and decide to wait hoping that interest rates will drop. While you might get lucky and guess correctly, can you really afford to gamble with your family's home? If the new home loan payment offers substantial savings over your current total payment situation, don't be afraid to lock in your rate and savings. Trying to time the market to save an extra .125% in interest is simply not worth the gamble if rates go higher.
We hope you will find this information helpful in avoiding the pitfalls that those before you have fallen victim to. Please feel free to explore our Interest Rate Guide to learn more ways to lower your rate, improve your credit score and Close Your Own Loan.
Friday, August 22, 2008
Questions to Ask Potential Real Estate Agents
If you're buying a house, chances are you'll be employing the aid of a real estate agent to guide you through the process. The important thing to remember is that you are technically their boss. They should be working for you, whether you're buying or selling a home. That's why it's so necessary to interview several real estate agents before settling on one. Here are some helpful questions to narrow down the candidate field.
1. How many years have you been working in real estate?
Although some agents may be newly licensed, they may have been working on other areas of real estate that will be helpful to you. Any previous experience working with home buying and selling will make an agent a valuable asset. Many times realty is a second or third career. If your realtor was a mortgage lender before switching to the housing world, they might be even more helpful than someone who has been in the business since the word go.
2. How many homes do you sell yearly?
Numbers count, but be aware that small numbers aren't always bad. An agent may only sell a handful of properties each year, but if they're worth millions, that's all they needed to. That's why it's important to ask not only how many they sell, but the price range that the homes fall into. If you're buying a house, this will help you gauge which houses the agent has access to and is more experienced with selling. If you want to sell your home, this will be a good indicator of whether or not the realtor is going to successfully market your property.
3. What is your area of expertise?
If you want to buy a condo, don't hire a realtor who sells mansions. If you want to buy a family home, don't hire anyone who specializes in two-person town houses. Finding niche agents will open more doors during your house hunt or sale. Buyers will be shown more properties matching their requirements, while seller's homes have a better chance of being marketed more effectively.
4. How many other clients are you currently working with?
Translation: How much time can you devote to my needs? Some realtors won't turn down a client, even if their plate is already overflowing. Ask for the numbers. If the phone is ringing off the hook during your meeting and papers are flying, you may want to look elsewhere for an agent who can devote a good chunk of time to you. Explain to them your typical schedule and what times you'd you would be available to view houses or have meetings. If they can't be flexible, move on.
5. Do you have a list or client references?
Nothing says more about the professionalism and worth work ethic of a realtor than their ability to provide you with a list of client references. Just producing a list on the spot is a good sign that the agent is prepared and wants your business. If there is none available immediately, or the agent sputters out some excuses, take it as a sign to head elsewhere.
The Real Estate Agent Income Crisis - There is a Way Out
Many real estate agents are suffering financially. Possibly this is you. It is unfortunate but houses are selling much below their value and are staying on the market for months. There are more sellers than buyers and there is no relief to be seen in the very near future.
People are struggling; struggling to pay bills to pay debts. The real estate industry is a tough market to be in right now. Possibly you have been wanting to find a way to get you through.
One of the best solutions is to start a home business. There are many tax advantages and you have the benefit of writing off many of your household expenses at tax time. It is also flexible. Something you can do while still being a real estate agent. Maybe something to tide you over until the economic situation improves or maybe something that permanently creates an income for you. The key is to find the right business. One that is recession proof.
We have chosen to build a recession proof business and are helping others to do the same. When searching for any home business there are some critical evaluating tools you need.
Want to Work from Home? Have you considered These Crucial Evaluating Tools?
So you have decided that you would like to work from home. Maybe you want to stay home with your children, maybe you want money for that extra special something or maybe you want to create financial freedom. Maybe you just need to pay your bills and pay off debt. So you know your reasons why. This is a great start but now what?
It is easy to want to jump into the first thing that comes along. Something may sound good on the surface, so you should jump right in, right? Wrong.
There are several key factors that anyone and everyone should consider when deciding on what business would be right for them. Ensuring you have thoroughly researched the opportunity can save you a lot of money, a lot of time, and more importantly, a lot of heartache. I have heard too many stories of people going broke trying to find the right one. I even know someone who has tried 23 opportunities before finding the right one. Can you imagine?
The first key in researching a business is knowing what features you should be looking for in a company. You will definitely need to know the following:
- Is there an established track record?
You want the company to be at least seven years old - successful home-based business companies experience a surge of growth in their first 3-5 years, but most cannot support the increased capital and organizational needs this growth demands to continue their success. Be wary the person who says "this is a ground floor opportunity" or you need to "catch the wave".
- Is the company financially sound?
You should be able to get access to this information. Another great way to know if a company is legit, is trustworthy and has integrity is if they will let you see their previous years' income statistics. If they're not willing to share what their business people make, do you really think they're doing that well. And I don't just mean the top earners, find out what the "little guy" is making.
- Do they have a strong management team and company credentials?
Beware! There are some companies out there who are "touting" scientists behind their products that have received their degree by mail order over the internet. Do your research! What is the history of the management? What awards have they received? What does the Better Business Bureau have to say about them?
- Does this company have unique, consumable products that are guaranteed?
There are companies that have only one product. How many of that one product do you think you have to sell to make any money? If this is a luxury item, you most likely won't get repeat sales from the same person which creates much more work for you. If it's a hobby, you are looking at the same thing. The product should be something that a person goes through and needs again fairly soon, preferably monthly. These products should also have a 100% guarantee.
- Does this company require that you keep inventory or 'front end load'?
This is a very fast way to the poor house. I know lots of folks who have garages full of products. You may think it will be easy to 'unload' it but it's not. Make sure the company does not require you to have stock or inventory.
- Is there a low personal production requirement?
Essentially, this means how much of their product do you need to order to stay in business? If they are asking you to order more than you would use, then you guessed it? Straight to the poor house for you.
- Is there a high customer re-order rate?
Some companies have a re-order rate of only 5%. Does this tell you how hard you will have to work to win customers and keep them? Again, if the company won't give you this information then they have something to hide!
- Is there low initial investment?
You should be able to get started in any business for $500 or less. In addition, any investment should be guaranteed. Any more than that and the risk sky rockets.
- Is there low attrition?
If more than 10% of the people are leaving every month, what does that tell you?
- Is there breakaways?
No breakaways!!! What that means is that you work really hard and then when you reach a desired level, they have the rest of your team "break away" from you and you start all over. Does that sound like what you are looking for? Know the compensation plan. You should be able to earn an income from each person you offer your product or service to. No breakaways, no balancing sides.
- Does the company have any risk?
Risk is a 4 letter word. It has its place but not in your business. This is your life. There should be no risk. You should only be using products you would use anyway, and there should be a full guarantee on everything. If this is the case, there is no risk!
Alright, so now that you know what is important to look for in the company, what product concept makes the most sense, you ask?
REPEAT Consumables (necessity items) and I can't stress this enough. This is a 200 billion dollar industry. People must already want or need to buy the products. It is much easier to interest people in something that is better or less expensive than their current brand than it is to get them to buy something new that they hadn't considered before. The concept of "switching stores" works best because people spend "no new money", they just switch brands. Durable goods won't generate residual income because people won't buy each month.
The products should always be competitively priced (have a low cost per use). No matter how well people like something, they won't stay customers forever if the product costs more than the store bought equivalent. Since commissions depend on customer purchases, the longer they stay, the more RELIABLE your income. The products must also be unique and exclusive to the company. It is of benefit if there are patented products that have been scientifically developed. The re-order rate should be above 90% and it has to make sense to just be a customer, continuing to buy the products without being a business builder.
Lastly there are a few more things that you may want to consider. Does the company manufacture its own products? Does the business offer a system that you can duplicate for success? Does the organization provide you with free training and support? Do you have to leave your home to build the business? Do you need experience in sales or business to be successful? Can you make enough to replace your income? What are the tax advantages to owning a home-based business?
I know this seems like a lot of work, but the end result will make for a happier, wealthier you. Good luck in your search!
Focus Your Way to Real Estate Wealth
Last night, as our dog Bram was drooling over Dave eating crackers and cheese, my Mom said:
If we all could focus on making money like dogs focus on food we would all be millionaires by the time we turned five.
Ok, five years old is a stretch but my Mom is definitely onto something. When you make something your focus, even just for an hour, how much do you accomplish? In this day and age of blackberries and iPhones, very few people focus on any one thing for long. So, think of the power of actually giving your biggest goal one hour of 100% attention every day. What if you focused an hour a day on building real estate wealth?
This means that you would spend one complete hour every single day with the sole goal of building your real estate wealth. What would you do with that hour if you are just starting out? Here are some ideas:
- Before you do anything - figure out what your goals are! How can you focus your way to real estate wealth if you haven't defined what that wealth is, or how you want to achieve it?
- Read a book about real estate investing. There are some great books out there that will help you learn the basics. If you are Canadian, I highly recommend you read Making Money in Real Estate by Douglas Grey.
- Research property values in your target area (and if you don't have a target area, then you should be researching potential areas looking for places where there is going to be some positive changes to the economy or the housing market).
- Research real estate agents and property managers for your target area, and start making calls to find people that you would be comfortable working with.
- Speak to a mortgage broker to get a handle on your financial situation, and what you can qualify for in an investment.
- Visit open houses in your target area.
- Start researching rental rates in your target area by reading newspapers, checking craigslist and other rental websites.
Here are some of my favourite blog posts along the lines of this subject. Search for them in google and read them for inspiration and motivation!
- Tim Ferriss - one of my favourite blogs - specifically read 4 Hour Work Week Blog: 9 Habits to Stop Now: Once you read this I am pretty sure you will find several ways to get an hour out of your day. For me, it's checking my email MUCH less!
- Rock Your Day - Lots of posts on getting up really early to rock your day. Always great content in this blog. Read: Rock Your Day: Catch Yourself Making Excuses and then do Something About it.
- Early to Rise - Daily newsletter which I have been reading for over four years now. Early to Rise is FULL of great ideas for making money, being healthy and maximizing your potential in whatever you want to do. Read: Early to Rise: 3 Steps to Success.
Anyway - it's now time for me to focus my way to Real Estate Wealth. Or, is it time to take Bram for a walk? I think Bram is telling me it is walk time... well I will focus after I walk the dog...
The Real Estate Market Crash of 2008 - How Did We Get Here?
Before the real estate market crash of 2008, there were the prophets. They spoke of a real estate balloon that was bound to burst and take down the real estate market as well as the economy. Even with all of this prophesying, many were taken by surprise when the once lucrative real estate market began to crumble.
So, what caused the collapse? The main culprit was the subprime lending market. When this market crashed, a large amount of companies faced foreclosure. Even the companies that did not foreclose suffered losses that amounted to billions of dollars.
You may have already heard news reports about the subprime market crash. If you are like most, however, you may not know what the crash meant to individual property owners. You may even have questions regarding how we got in this situation to begin with.
Over the past few years, subprime mortgages were the biggest trend in real estate lending. Buyers who were unable to qualify for conventional mortgages could obtain financing via a subprime mortgage. People who obtained these loans often had to pay high interest rates.
Lenders obtained the money to pay for these mortgages from a variety of sources. Many companies secured loans at low interest rates and then loaned that money out to buyers at a higher rate. Some of the money was borrowed from central banks.
While the housing market remained relatively stable, the ill consequences of these loans could not be seen clearly. In fact, the market was experiencing a surge in value that was unprecedented. This surge resulted in an unrealistic expectation of the future real estate market which in turn caused lenders to put even more money into funding mortgages that new homeowners could ill afford.
In 2005 and 2006, the last real boom was occurring in the real estate market. During this time, it was extremely easy to get a loan. Lenders thought that they would be able to make money from buyers even if they did not pay for the mortgage through the high interest rates they were charging and the ever-increasing value of real estate. But when interest rates started to rise, people stopped buying homes. Additionally, homeowners started failing to make payments due to the interest rate spike.
It became harder and harder for lenders to obtain funds to invest into mortgages. Buyers, now unable to qualify for a loan easily, began to stop looking for a home to purchase. Investors became wary, and underwriters started increasing the requirements to qualify for a loan. People who had adjustable rate mortgages sought desperately to decrease their skyrocketing monthly payments. But they could not qualify for a new, fixed loan under the strict guidelines. This only caused the number of foreclosures to rise dramatically resulting in the real estate market crash of 2008
House Swapping Trend in Real Estate
Now is the best time to acquire homes as the house prices are still practically less. However, the prevailing financial and credit crunch is limiting the cash reserves and liquidity. Thus, many homebuyers would need to first dispose or sell their existing homes so that they can have the money to buy the homes they like. The problem is, it is logically harder to sell homes these days.
Homebuyers are raving about a revolutionary and innovative concept in home selling and buying. To ease the troubles, why not resort to house swapping? With the advent of new and non-traditional media and communications, swapping is becoming a popular trading scheme. It has been in use for trading just any product or item bought and sold across the market. You can easily trade your 3G mobile phone with an iPod. Somewhere in the market, there surely is an individual who wants to trade his or her iPod for a 3G phone. You should meet.
That is also the basic framework in home swapping. Your home can be traded or swapped with the home of another homeowner. To get into the process, you should first determine your likes and preferences. What do you like in a house? Where do you want to own a residential unit? What design and theme do you prefer? If you have set your preferences and requirements, it is time you search around for houses that match your standards.
In the process, you should also assess your home. How aesthetic and appealing is it? What is the prevailing design and where is it located? You should post these data into the market so that prospective seekers can be reached. There are many online and conventional firms operating to facilitate house swapping. These companies are aiming to match you and your dream house and then find someone who wants your home. In the end, you will have to surrender ownership of your home to be able to secure and get ownership of another one, probably your preferred and dream type.
Craigslists are good online materials that can facilitate house swapping. You can also post your ads in the classifieds or in other sources. There are trading firms that seek homeowners like you so better open your eyes and senses when they roam around. Viral marketing can also be effective as well as peer recommendations and feedbacks.
House swapping transactions are basically most recommended for young growing families, empty nesters and vacation home owners who want to swap vacation assets. Homeowners who are relocating are also the most common house swappers. Some owners who just itch to get and own a new house are also much delighted and satisfied with house swapping transactions facilitated in the market.
As for the quality of homes swapped, there is no need to fret. Traders and mediators make it a standard to inspect homes for swapping. You can as well inspect the home you are eyeing very carefully and thoroughly before the swapping transaction is started and closed.
Sunday, August 17, 2008
Choosing Commercial Real Estate As an Investment Alternative
Real estate investing is considered to be a safe investment over time. This is one reason why many do this as a full time profession. One can also invest in real estate and not be involved full time. Most people think of real estate investments as homes or condos or multi-family properties. Commercial real estate is another excellent choice when it comes to investing in real estate.
Commercial real estate investments typically allow the owner to continue their day to day unrelated business while their hired professionals upkeep and maintain their commercial property investment. Although most people think of commercial real estate as office buildings, retail stores, or industrial facilities, there are a lot more property types in the commercial real estate.
Some examples include properties such as health care centers, retail structures and warehouse. One of the most desired and financed commercial property is called residential. More specifically, apartment buildings (real property that consists of more than four residential units) are considered commercial real estate.
Most people consider commercial real estate difficult to enter due to financing and larger down payments than residential property. Although this is true to an extent, there are many commercial financing programs that will offer up to 90% financing and some even up to 97% financing for small commercial properties up to $1 million dollars. Of course, commercial mortgage loans go significantly higher to $500,000 and more.
Commercial real estate investing can be significantly profitable due to increasing rents, inflation and material costs. An investor must be able to analyze an opportunity more thoroughly in commercial real estate versus residential real estate. Some initial analyzes involve the rent rolls, pro-forma statements, and operating income. These numbers are crucial to the lenders to determine the amount of financing you will receive. Once you know the amount you will receive from the lender you can easily determine if the investment is worthwhile. You could take up commercial real estate for either reselling after appreciation or leasing out to residential tenants or retail tenants.
If you research and learn there will be substantial commercial growth in the area (due to tax breaks or gentrification), it may be wise to evaluate the potential for appreciation in commercial real estate and then seek out a good investment. If you find that a multifamily or office property, for example, is available but too expensive for you to buy alone, you may want look at joining or creating a small investor group and acquire it together. In another example, you might find it lucrative to purchase a commercial property that you can change to a warehouse which you can then rent to small businesses. As you have learned here, there are many creative ways to achieve success in commercial real estate investing.
Commercial Mortgage Refinance - 6 Issues That Can Kill Your Deal
There are several potential issues that can delay or "kill" your commercial mortgage refinance. Some of which will just tack on a few days or weeks to the process while others will completely eliminate the lenders interest in funding your loan. A prime example of this is value and environmental issues.
1. Title Problems. A forgotten lien on title can have a major impact on closing. Perhaps the dollar amount of the lien is substantial and cannot be rolled into the loan amount. Or the borrower may challenge the lien and will have to get it removed/resolved before the lender will fund the transaction.
2. Value. When the borrower and lender negotiate a loan term sheet, one of the most important components is the loan to value ratio. For example, on a refinance virtually all banks will not go beyond 80% loan to value. In other words, if your property is worth $1,000,000, your potential loan cannot exceed $800,000. If after your appraisal has been complete and the value comes out at say $900,000, you have a problem and a dead loan.
Besides the obvious frustration due to the canceled loan, there can be much disagreement with exactly how the value was determined. Appraisal reports are not perfect and have a subjective component to them. Deciding which comparable recent sales to use and how exactly to add/remove value from these comps is up to the discretion of the appraisal company.
3. Sudden Change in Business. Lenders sometimes call this "Adverse Change". Basically what it means is that there has been some type of borrower change from the time of initial loan approval to the closing. With some commercial mortgage refinances taking as long as 90 - 120 days to complete, much can go wrong in that time.
For example, we had a transaction where the borrower had to purchase a small fleet of trucks for his business. The truck loan was personally guaranteed and was reported on his personal credit report. The additional debt dragged his score to the minimum acceptable levels for the funding bank. In addition, the cash flow was tight to begin with and this additional debt also affected the numbers. It created some tense moments for all involved, but was resolved.
4. Environmental Issues. The liability for the lender having to take back a property with environmental issues is huge. No one wants to be stuck with the bill and cumbersome process to clean up a property. Not to mention the possibility of being sued by neighboring owners. It is not unheard of for these costs to exceed the value of the real estate itself.
In regards to a commercial refinances, most environmental issues are not on the scale of Chernobyl. What typically happens is that the results of the Phase One come in with concerns and a recommendation for a Phase 2 report, which typically requires borings and soil samples. The cost on the Phase One is around $1,800 while a Phase 2 is much more expensive. It is not unheard of for that report to be approximately $10,000.
The borrower will have to pay for this report upfront and in cash. He could be reimbursed this cost at closing, but will have to get there - if the results of the Phase 2 shows more issues the borrower could be in a very bad position and may have dead loan and be out the $10,000.
5. A Disaster. It goes without saying that if there is some type of damage to the subject property or perhaps a death to one of the partners, that this will have a substantial delay in the least, to the refinance.
6. Insurance. The subject property has to be insured. To some this may seem painfully obvious but we have seen many refinances get delayed because of this. This problem is especially relevant on refinancing out of private mortgages and or seller financing. Many private lenders don't confirm that proper insurance is in place or simply do not care. Also, on cash out refinances the borrower may have to increase the insured amount as the loan increases which can create issues in and of itself.
Commercial Property Value - How to Determine
In residential real estate, the listing price is determined by the seller. Comparables "comps" are analyzed for a myriad of variables including price per square foot, bedroom count, bathroom count, number of garages features (pool, central vacuum, etc), location (cul-de-sac, corner, busy street), views & more.
Adjustments are then made to the subject property to render it equal with those comps. For instance if the subject property has one fewer bedrooms and 500 fewer square feet of living space, it's price will be reduced by the value of the extra bedroom and the reduced square footage.
In commercial real estate, pricing is determined by the income the property produces. Although physical features (pool, laundry facility, etc) and location (busy street, etc) are factors, they are considered only to the extent that they enable the property to command higher rent or decrease its operating expenses in order to increase the property's cash flows or Net Operating Income (NOI). Secondarily location is considered to the extent of the potential appreciation of the land. In commercial real estate, it is these cash flows and the amount an investor is willing to pay for these cash flows that will determine the price of the property.
Put simply, if the annual cash flows from a particular property are $100,000 and an investor is willing to pay $2,000,000 for those cash flows, then the property is worth $2,000,000 to that investor. If another investor is only willing to pay $1,000,000 for those cash flows, then the property is worth $1,000,000 to that investor.
Investors will consider numerous properties in a given area to determine the standard of how much is typically paid for particular cash flows in that area. The "going rate" in area can be considered its cap rate. An exact definition and explanation of cap rate will be detailed in a subsequent article. This article will address the concept of cap rate.
In this example, the first investor only required a 5% return on investment or yield and therefore could pay as much as $2,000,000 for $100,000 in annual cash flows to obtain his/her 5% desired return. The second investor required a 10% yield and was therefore only willing to pay $1,000,000 for the same $100,000 of cash flows. Different investors require different yields which affect the price ultimately paid for the property.
This one year yield could also be described as cap rate. In commercial lingo it would be said that the second investor requires a "10 cap" and that the first investor only required a "5 cap." This is an oversimplified explanation to demonstrate the concept. The "one year yield" distinction is made as cap rate only accounts for one year yield, usually the following year from when the investor purchases the property. To determine the combined yields of multiple year returns, different measures are used and will be detailed in a subsequent article.
Commercial investors will determine their risk adjusted requirements for their investments and will base those decisions on opportunity costs. Opportunity costs are the costs associated with not investing into something else. For instance, if an investor could alternatively invest in a stock, bond, T-bill CD, or other instrument and yield 15%, why would he/she buy a property which only yields 5%? In order to attract investors the property owner would have to lower the price (increase the cap rate) to give investors a higher yield.
Notice the inverse relationship here. As prices are lowered, the yield to the investor or cap rate to the investor goes up as related to the cash flows. Conversely, as property prices are increased, the yield to the investor or cap rate on those same cash flows goes down. Cap rate only takes into account the first year of cash flows and does not account for the second year, third year, etc.
Notice I have not even mentioned appreciation. The value of commercial real estate is primarily considered based on its cash flows while investing in residential real estate is for anticipated appreciation.
In residential, there is only one way to make money. The market must go up so the investor can sell for more than the original purchase price. In commercial real estate investors are purchasing cash flows. In our example, if the second investor paid all cash, at a 10,cap which values the property at $1,000,000, that investor would be paid back 100% of the initial investment after 10 years and as of the 11th year, the investor would have $100,000 of annual cash flow from that single property. Because there is no mortgage called debt service in commercial real estate, this would be the cash flow before tax to the investor. In other words, other than income tax, this is the spendable cash to the investor on an annual basis.
Hopefully the property will have appreciated as well and the market will be favorable. But in the very worst case if no appreciation occurred whatsoever, the investor would still enjoy the $100,000 of annual cash flows. The beauty of commercial real estate is in the ability to plan. If you buy a residential property, you must sit and wait for the market to appreciate. The problem is that you never know when this appreciation will occur or how much. You can't plan. And, you're at the mercy of the market. In commercial real estate, as long as rents don't decrease substantially and vacancies don't increase, you know ahead of time how much money you will make regardless of market appreciation.
Now consider this. Let's say that the second investor decided not to pay cash and instead leveraged the property with a 10% down payment or $100,000 to purchase the $1,000,000 property. Let's also consider that the remaining $900,000 was financed at 7% for 25 years which is the typical term length in commercial financing. With a fully amortizing loan the annual payments would be $63,000. In commercial real estate, paying debt owed to the lender is called debt service. In residential, it's called paying the mortgage. From the $100,000 cash flows (NOI) from the property the debt is paid leaving $37,000 of cash flows before tax. For simplicity sake, I will not account for tax effects on income or yields.
In this example, in Year 1, the investor has earned $37,000 for a $100,000 cash outlay or a 37% cash on cash return and will do so for 25 years until the debt is paid off assuming no changes to the income. Subsequently, the investor will enjoy the entire $100,000 of annual cash flows as there will be no debt service. To calculate the combined cash flows from multiple years the investor would look at a measurement called Internal Rate of Return (IRR). For the scope of this article I will not address IRR. But remember, Cap Rate is for a single year's return and cannot account for multiple years with different cash flows each year.
Notice again, I haven't even spoken about appreciation which may or may not occur. But even if no appreciation occurs to our example property, this is still an incredible investment! Now obviously during a 25 year period these cash flows will change as rents will likely be increased and capital improvements will likely be needed (new roof, etc). But again, I'm keeping it simple for example purposes.
To summarize: In residential real estate there is only one way to make money. The strategy is to carry the property and hope that the market goes up and that the property appreciates so that the investor can sell for a higher price than was paid. Positive cash flows are typically non-existent and if present, negligible relative to the anticipated appreciation the residential investment will bring.
In commercial real estate properties are purchased for their positive cash flows AND potential appreciation. It is because of these cash flows that commercial real estate is less risky.
It is for this reason that commercial real estate is more stable and can weather the market storms that residential investments cannot and it is for this reason that the super wealthy own residential to live or vacation but invest in commercial real estate to create their massive wealth.
Wednesday, August 13, 2008
Who Wants to Understand Real Estate Contracts?
Mention the word contract and images of expensive lawyers comes to mind. In real estate transactions, this is largely not the case anymore.
Owning a home is the American Dream. While the last few years have been more than a bit rocky for homeowners, the basic idea is still true. It can well be argued that homeownership is the central pillar to the middle class in this country. Given this fact, the legalities surround real estate transactions are surprisingly simple.
In most states, real estate transactions have been reduced to forms. There is a form for making an offer. There is a form for making a counter offer or accepting. Once you have a deal agreed upon, there is a form contract you can use. All of these forms can be purchased at your local office supply store.
Using real estate contract forms makes some people nervous. Rightly so! This is probably one of the biggest financial transactions you'll be entering to in your life. Are you really willing to trust doing it with a pre-printed form? Surprisingly, the use of these forms is generally the right move in most states. The forms are time tested and meet all legal requirements for the state. That being said, it is important to understand some basic legal issues surrounding contracts.
The biggest issue that arises in real estate transactions is the oral promise. A person should honor their handshake or promise, right? Well, maybe in a perfect world. We don't live in such a place. This means you need to get everything in writing. If you do not include all aspects of an agreement in the written contract, they are unenforceable. Oral promises are not enforceable in court, so don't rely on them.
Let's assume you get involved in a real estate transaction and realize you are in over your head. You don't really understand the contract process. What should you do? Go hire a real estate lawyer. Yes, they will cost you some money, but it is money well spend. Spending even a few grand on a lawyer to get advice on what the contract says, should say and so on is far better than committing to hundreds of thousands of dollars of debt under bad terms!
Millions of homes are sold each and every year. Don't let a fear of contracts stop you from getting involved. If you don't understand the process, talk to a lawyer. In most cases, however, forms will do the job for you without any problems.
Probate Real Estate - Is a Legal Background Necessary?
I know many of you haven't gotten started yet in Probate Real Estate because you are afraid you will run into legal hassles. Well, guess what? When it comes to legal stuff, I'm not the sharpest knife in the drawer either.
However, I'm still extremely successful in Probate Real Estate.
How can that be, you ask? Here's the secret. Buying Probate Real Estate is not a legal process even though the Probate is conducted through the judicial system. Probate Real Estate as I describe in my book, is nothing more than a method of prospecting for folks who might be interested in selling their house at a discount. That's it!
Let me explain it to you this way.
If I thought folks who owned blue houses would give me a discount, I would have figured out a method to contact folks who own blue houses. I have discovered that is not the case. Blue house owners are not a good place to prospect for good deals. Green ones aren't either! What about yellow houses? Nope - wrong again.
How about Probate houses? Now we are talking!
People who have inherited homes ARE more likely to sell these houses at a discount because they don't want them. Why? They have just inherited the house, and most people don't need another house! What they DO need is more long green (cash money), and the sooner the better, thank you very much!
Consequently, I have devised a system to get a hold of them and see if we can put something together. "I'll buy your house quickly if you'll give me a little discount." Simple enough?
So once I find a willing seller, and I'm the willing buyer, we've got a deal. Now it's just like buying the house next door. Even the blue house next door! You and the seller agree on the price, you write a Sales Agreement and the two of you close on the property. Just be sure to use a title company or an attorney, whichever is appropriate in your state, for the closing. They will keep you out of hot water.
Pretty simple, huh?
That's why you don't need any legal knowledge, or legal training. There are no "special" forms or "special" contracts. As a matter of fact, let me give you a little free tip here.
When you go to write your Sales Agreement, if you want to keep in compliance with your local State and County regulations, go down to the For Sale By Owner office in your area and pick up their "forms" packet. It'll cost you around $25. In it you will find a copy of the Sales Agreement that is used in your area. It should also have a short instruction sheet on how to properly fill it out. That's the one to use. Just use their instructions to fill out your Sales Agreements and you'll be good to go. That will also keep the real estate police from knocking at your door!
So now in the two minutes it took you to read this article, you have learned all the legal stuff you need to know about buying Probate Properties.
However, I'm still extremely successful in Probate Real Estate.
How can that be, you ask? Here's the secret. Buying Probate Real Estate is not a legal process even though the Probate is conducted through the judicial system. Probate Real Estate as I describe in my book, is nothing more than a method of prospecting for folks who might be interested in selling their house at a discount. That's it!
Let me explain it to you this way.
If I thought folks who owned blue houses would give me a discount, I would have figured out a method to contact folks who own blue houses. I have discovered that is not the case. Blue house owners are not a good place to prospect for good deals. Green ones aren't either! What about yellow houses? Nope - wrong again.
How about Probate houses? Now we are talking!
People who have inherited homes ARE more likely to sell these houses at a discount because they don't want them. Why? They have just inherited the house, and most people don't need another house! What they DO need is more long green (cash money), and the sooner the better, thank you very much!
Consequently, I have devised a system to get a hold of them and see if we can put something together. "I'll buy your house quickly if you'll give me a little discount." Simple enough?
So once I find a willing seller, and I'm the willing buyer, we've got a deal. Now it's just like buying the house next door. Even the blue house next door! You and the seller agree on the price, you write a Sales Agreement and the two of you close on the property. Just be sure to use a title company or an attorney, whichever is appropriate in your state, for the closing. They will keep you out of hot water.
Pretty simple, huh?
That's why you don't need any legal knowledge, or legal training. There are no "special" forms or "special" contracts. As a matter of fact, let me give you a little free tip here.
When you go to write your Sales Agreement, if you want to keep in compliance with your local State and County regulations, go down to the For Sale By Owner office in your area and pick up their "forms" packet. It'll cost you around $25. In it you will find a copy of the Sales Agreement that is used in your area. It should also have a short instruction sheet on how to properly fill it out. That's the one to use. Just use their instructions to fill out your Sales Agreements and you'll be good to go. That will also keep the real estate police from knocking at your door!
So now in the two minutes it took you to read this article, you have learned all the legal stuff you need to know about buying Probate Properties.
Ask These 5 Questions When Choosing a RESPA Real Estate Attorney
"What the heck is RESPA?"
Many attorneys try to handle real estate matters in addition to their regular practice. Very few lawyers are aware of the complexities of the Real Estate Settlement and Procedures Act (RESPA) enforced by the Department of Housing and Urban Development (HUD.)
RESPA statutes are consumer protection laws that impact virtually all single family to four family homes. RESPA compliance issues and the remedies available to borrowers who have been victimized by unscrupulous mortgage lenders, title companies and other real estate settlement providers are a real challenge. Even for full-time real estate attorneys, RESPA is a very complex statute. You must be careful and ask questions of the attorney you choose in order to make sure you get the proper legal protection that the RESPA statute i is designed to accomplish. Consumers and Businesses alike are protected when RESPA is in compliance.
Question #1
"What RESPA experience do you have?"
No doubt about it. Start with the big one. Real estate laws and regulations are complicated enough without adding RESPA to the equation. Have they prepared marketing agreements that comply? Have they attended RESPA specific training courses and seminars? Have they kept abreast of the most recent HUD guidelines and court cases nationally regarding RESPA? How many RESPA cases and clients have they handled? What types of RESPA cases did they handle? Were the issues similar to yours? What were their results? Don't be shy!
Question # 2
"What type of reputation does the attorney have?"
This is a tough one to figure out - so do your homework! Is the attorney primarily a transaction attorney or a litigator skilled in courtroom procedures if necessary? Your attorney must have the communication skills necessary to work with the other attorney as well as you. The other attorney, if more knowledgeable on RESPA can run over you and your lawyer. Remember that many cases are won or lost on the attorney's knowledge and high ethical standards. Check the local Bar association for background. Get references and check them out thoroughly.
Question # 3
"What type of resources does the attorney have?"
No attorney can do everything well. Make sure that your attorney has the resources available to work your case efficiently. Does the attorney have a well established network of experts and fellow attorneys who can network with to add value and expertise to your problem? Some attorneys try to do it all and act as a one man band. Your attorney's ego should not be larger than your case. A good attorney quickly involves others with higher degrees of expertise in areas where it is needed to represent you properly. The experts they use are a reflection of your new attorney.
Question # 4
"What about communications and follow up?"
The hallmark of a good attorney is the degree of communication he has with his clients. If you have to ask "What's going on with my case?" then you have a problem. You don't want to have these types of issues after choosing an attorney. Be blunt and ask how often you will be contacted and updated. How will you be contacted? Will the attorney just send you a form letter or use personal communication and contact? How do you prefer to be contacted? E-mail, phone calls, letters? Ask for it. "Are you too busy to handle me? Are you going to push me to a lower level staffer or junior attorney?" Clear communication and updates can ensure success and results.
Question # 5
"How do they charge?"
Some attorneys charge a flat fee, some charge a contingency based upon results and some charge hourly rates. The type of problem or case generally dictates the type of charge. There is an old saying, "Speed, Efficiency and Price - pick TWO!" The cheapest attorney may not be the best and the most expensive attorney may not be the best either! Make sure that you are not penny wise and dollar foolish. You are choosing an attorney for results. Make sure that your attorney has the financial incentive to work your case efficiently and successfully.
Thinking Forward Regarding Your Commercial Real Estate Loan
Regardless of what we often have in our business it is always wise to search for what you think will be a big help in your investment. So with that being said let us try to focus on real estate investing. Well there are many types of real estate investing and one of them is Commercial real estate. Well, from that alone we can figure out what types of investment we vaguely want to happen. First there are these known things to consider in its market alone, it is not just a simple thing to know but rather a different one. Securing Miami commercial real estate loan at favorable terms requires some careful work on your part. If you've consulted a good mortgage loan calculator, and figured out what you can swing, there's still the whole application process to take on, first. Applying for small business loans should be done with a careful and well-researched approach. Miami commercial real estate demands high numbers at times and is often noted as another type of situation in the market.
Applying for Miami commercial real estate loans, well it is always figured out that its own market can be treated as a good investment prime at times, so there are several factors in which we should be able to know when we try to apply for a Miami commercial real estate loan. When you want to apply for a Miami real estate loan, you have two choices. You can go to the office of a lender and fill out a questionnaire about your finances. Or, you can visit an Internet-based broker and fill out an online form, which will gain you results far more quickly. The more things you try to embark the market with some strategies that you think would help you a lot, the more times, you'll have a chance on having a good market value. Be aware that in Miami commercial real estate the value of it can also be measured with the knowledge of the term.
Sometimes there are these pointers that we should consider especially in the market which shows nice potential in Miami real estate. You should always know how to cooperate when asking a loan and one of its terms is filling out these application forms doesn't have to be a trial. You should, of course, strive to convey your financial information as accurately as possible. However, an online form is relatively simple to complete. You have to b honest and accurate on the things that you will pit in these forms because often times than nothing you'll be able to at least be updated on those kinds of things. Let us be sure that thinking forward the things that you will put in the forms will reflect to you as well.
You should know that when you apply for Miami commercial real estate loans, expect to be asked the following questions. They will want to know all of the details regarding your business finances. You will be asked about your current mortgage payments, including your balance, terms, and so on. You should also be prepared to answer questions about the purpose of your new loan, the amount, etc. The given value for the market can be either good or bad, so you have to at least know the newest update to it. Because if you are aiming to get value on you Miami commercial real estate loan you should always know better.
Real Estate Loans
If you are looking to get started in real estate or business, it's quite possible that you will need a loan to get started. If you have bad credit, you might consider giving up before you've even gotten started. Well, I have good news for you. There are some things you can do to get that first loan while you work on improving your own credit rating for future projects.
One of the things you can do is to get a partner with good credit to join you in your real estate or business venture. This is called an "equity kicker" and is very popular in business. By doing this you use your partner's credit as your own for the project you're involved in. What does your partner get in return? In return for supplying the needed credit, you will give your partner a portion of ownership of the business. Depending on the size of your project and how strongly you need your partner's credit rating to get the needed loan, a reasonable percentage to offer will be in the range of 3% to 5%.
Understand that in most deals, you will be the working partner and your "good credit" partner will be the silent partner. He or she will supply the needed credit and nothing more to the deal. As an added incentive you can also offer your partner a small portion of the profit from the real estate or business project. Again, the amount should be in the range of 3% or 5%, depending on the profitability of your project.
While this is a great way to get started, it's important that you work on improving your own credit rating for future projects. Your goal should be to eventually be able to acquire real estate or business loans on your own without having to use a partner's credit.
The way you build your own credit rating is by paying your bills on time, getting a "secured" credit card and using it actively while paying it off fully each month of the year. By owning an asset such as a building or business, you immediately improve your FICO credit score. By paying off your credit cards each month, your score rises. All of these things will work together to get you a higher future credit rating.
For your real estate or business venture, form a company that will put you on the payroll. This will give you a source of income, a W-2 and an employment history. These things will raise your credit rating because you will have a traceable history. This is something that lenders love to cite when approving the loan that you've applied for at their company.
What other things can you do to improve your credit rating? Try joining respected real estate or business organizations. Not only will being a member contribute to your credibility, making you more credit worthy, but it will provide you with more knowledge about your business and help you to make important contacts within the industry. Remember, any dues you pay are provable and tax deductible.
So, don't give up your dreams of getting started in real estate or business just because you currently don't have the best credit. Try using a partner's credit to get started and then follow the steps above to improve your credit rating. Eventually you will be able to get business or real estate loans using your own good credit.
Sunday, August 10, 2008
6 REASONS for Investing in Florida Real Estate Investment Property NOW
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I invite you to take the next few minutes to learn the truth about the real estate market, how it compares to other methods of building assets and why it is such a lucrative form of investing. Many potential investors will say, 'I need to get into the Florida Investment Property market', especially taking into account current stock market fluctuations and the HOT market for investment properties, but simply don't know the facts about Orlando property investing and how to use sale and leaseback method of property management.
When is the last time your financial advisor or stockbroker tried to convince you that moving a portion of your assets into the Florida Investment Property market might be a good idea? Never Right? The 'why' is simple. They don't earn commissions when you buy Florida Investment Property. It is also likely that you have probably never had an 'apples to apples' comparison of stocks versus Florida Investment Property quite like the one you will see here.
Reason 1:
Leverage: Banks will not typically loan money to buy stocks. Banks will however, compete fiercely to loan money to buy Florida Investment Property. Your first question should be, 'why is that'? It has to do with risk management, which we will discuss later. The fact that banks want to loan you money to buy Florida Investment Property creates a situation which we will call LEVERAGE.
Let's assume that you have $10,000 to put into some type of investment. If you choose to buy $10,000 worth of stocks, you will own exactly $10,000 worth of stocks. Pretty straight-forward. However, suppose you choose to invest that $10,000 into Florida Investment Property using a 90% mortgage (which in many cases can go up to 95-100% mortgages in today's market), you will own $100,000 worth of Florida Investment Property. If both of your investments were to appreciate by 10%, your actual gain with your stocks would be $1000 where your actual gain with Florida Investment Property would be $10,000. That equates to an actual 10% return on investment vs. a 100% return on investment. That's what we call leverage.
Leverage: Florida Real Estate vs. Stocks
The traditional argument against Florida Investment Property Investing (mainly from Stock Brokers) has always been 'I can get an average of 10% from stocks with little effort so why would I invest in Orlando Investment Property that only appreciates 6-7% per year'? This point-of-view is not taking leverage into account.
If you take the above statement to be true and compare the REAL numbers, the stock investment gained 10% of the initial $10,000 value (or $1000) and the Orlando Investment Property investment gained 6% of the initial $100,000 value (or $6000). That is still an actual return of 10% versus 60%. It is not hard to see which investment provides a greater immediate return on investment. Additionally. these numbers do not take into account any income from your property during the course of the year, or the substantial tax advantages to owning property, which we will discuss later.
Reason 2:
Value: As we mentioned previously, if you invest $10,000 into purchasing stocks, you own $10,000 worth of stocks (a fairly obvious point). If you invest $10,000 into purchasing Orlando Investment Property using the leverage of a 90% mortgage, you own $100,000 worth of Orlando Investment Property right? Well, only if you paid retail for your property. Any savvy investor will tell you that there are excellent deals to be had in Orlando Investment Property, you just have to find them.
What if you purchased a $100,000 property that happened to be worth $110,000 the day you bought it? Does it happen? The answer is yes, all the time. If you have your eyes open and are willing to 'go through the numbers' to find good deals, they are all around you. You may be asking yourself, why would anybody sell a $110,000 property for $100,000?
Value: Making money when you buy.
The reasons are endless as to why a quick sale is desired, but just to name a few: job relocation, divorce, an estate is being settled or maybe a current appraisal on the property simply wasn't done prior to selling. By 'finding this deal' you have accomplished two things.
You have added $10,000 to your asset column in the form of equity.
You have created additional LEVERAGE for yourself as the value of your property increases (a 6-10% gain on $110,000 is better than a 6-10% gain on $100,000!) Remember, you make money in Orlando Investment Property when you buy, not when you sell.
Reason 3:
Control: Let's take our assumption one step further. When you buy your $10,000 worth of stocks, what can you do to increase its value? If we follow the previous assumption, you have invested $10,000 using a 90% mortgage to purchase a $100,000 property that has an actual value of $110,000 because you 'found a good deal'. So what can you do to further increase the value of your new $110,000 property?
It is amazing what a cleanup, a little landscaping and a paint job can do to increase the value of a property. Only a few hundred dollars well spent can result in huge value gains in Orlando Investment Property. Your $110,000 property with a little effort could easily be worth $115,000, $120,000 or more virtually overnight! Do you have to do any of this work yourself? Absolutely not! If you like to do that sort of thing then have at it, but if not, simply hire it done and accept a little lower net gain.
Reason 4:
Superior Tax Position: The tax code in the United States is geared to reward Investors who make housing and other property available to the population. When you invest in stocks, you are taxed at some of the highest rates in the tax code. When you invest in Orlando Investment Property, you put yourself in one of the best tax positions in the business world. Remember the wealthy that hold substantial portions of their assets in Orlando Investment Property? Tax advantages are one of the main reasons this is true.
Continuing with the above example, let's say that you have completed your 'deal' with the $10,000 invested with a 90% mortgage to purchase the $100,000 property that appraised for $110,000 (because you 'found a good deal'), which you improved to say, $115,000 by spending another $1000 on cleanup etc. Assume that one year passes and the Orlando Investment Property market grew by 6%, your property would now be worth $122,000. So far, so good right? If you are like most people, you may want to spend some of your hard earned money.
Let's do the numbers. You have a mortgage at current rates that started at $90,000 and after a year worth of payments (the majority of which are tax deductible) you still owe approximately $89,000. However, your property is now worth approximately $122,000. If you were to refinance at 90% once again, you would take out a new mortgage of approximately $110,000. This will leave you with approximately $21,000 in cash in your pocket. Now, the BIG question; do you have to pay tax on that money? Absolutely Not! You have not sold the property or realized a 'capital gain'. You have simply borrowed money from yourself. You are able to do what you wish with that money, free from any tax whatsoever. Obviously, a good strategy might be to purchase two more properties just like your first deal!
Also, we have not taken into account the fact that ALL of your interest payments on this property are tax deductible. In addition, you are also able to depreciate the property itself and all of its contents for additional tax advantages if you choose to do so.
Let's be fair and compare the Orlando Investment Property tax position with the stock scenario. Assume that the $10,000 initial stock investment grew by 10% in the first year, creating a gain of $1000 and you wish to access it. If you draw it out, you will pay from 20-28% (or higher) in capital gains tax in order to have access to this money. This reduces your net gain to $800 (actual 8%) or less, depending on your tax situation. Compare that to Orlando Investment Property and you are beginning to get the picture.
Reason 5:
Limit Your Exposure To Risk
Risk Management: Do you remember at the top when we said that banks would compete fiercely to loan you money on Orlando Investment Property? The answer to the 'why' is very simple. Low Risk. Banks incur little if any risk when loaning money on Orlando Investment Property due to the steady, solid growth rate of the property market, as well as the fact that if you default on your payments they will simply sell the property to somebody else. This is in direct contrast to the volatile stock market, which can vary daily with sharp increases and decreases in value. Furthermore, banks realize that a property isn't going anywhere, whereas many investors know all too well about .com and other types of companies that were there yesterday and gone today.
This is all not to say that Orlando Investment Property markets don't go down from time to time, however the dips are much less dramatic than that which can take place in the stock market, proven out by the banks' willingness to loan money on property.
Reason 6:
Protecting your peace of mind.
Finally, Now that we understand the value of leverage and risk management we realize that a 6% Orlando Investment Property gain 'beats the pants off' a 10% stock gain in actual return on investment by a wide margin (approximately 50%, not taking into account several factors that can increase this number such as tax advantages, income on property etc.) Owning good, solid Orlando Investment Property allows you to sleep at night, or go on an extended vacation without worrying about your asset column. This is directly opposed to holding a substantial percentage of your assets in stocks.
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Understanding Your Rental Property
Adding real estate to your portfolio can be a smart thing to do. Many do this by converting their first home into a rental when they can afford to acquire another principal residence. As I have discussed before, every portfolio should have 20% invested in the alpha rim (see “Do What the Hell I Tell You-Guide to Portfolio Building”). The alpha rim is the part of a portfolio that is not invested in stock market products. Therefore, it is not subject to market fluctuations and provides some risk protection to a given portfolio. When adding any new investment to our portfolio, we should take time to learn the basics so that we can make informed decisions over time. Adding real estate to a portfolio definitely requires an understanding of the fundamentals.
Let’s begin by taking our first town home. It was purchased right after we were married with the intent that we would one day live in a larger home. Because we were so good at saving, we did not need to sell the first home to get into the new place. We have made contributions to retirement plans and have savings on the outside of the retirement plans. The decision has been made to keep this town house and convert it to a rental property in order to begin investing in the alpha rim. It becomes necessary at this point to understand how a rental property works from its beginning, during its operation, and when a decision is made at the ending its existence in the portfolio.
Putting the Property in Service
If the property is being converted from personal use, as it is in this situation, we must take the lower of cost or market value in placing this property into service as a rental. If we purchased the home originally for $200,000 and its fair market value is $300,000 when we are ready to make the conversion, we will use the $200,000 original cost as our basis. If the fair market value was $150,000 at the conversion date, then this would become the basis for the rental property. Placing a property in service in this case means establishing how much will be available for depreciation and how much will be allocated to land. Let’s assume that $200,000 is our basis. We will need to allocate this basis to determine what can be depreciated and what must be land (not depreciated). I like to use the property bill assessment as it normally breaks down the property into what is building and what is land. After reviewing the property assessment, it is determined that 80% of the property’s value is building with the remaining 20% representing land value. This means that we will depreciate $160,000 over a 27.5 year life, or $5,818 per year. If we were to purchase this rental property as opposed to converting, our basis would be calculated based on cost plus settlement charges. Remember, each year that we take depreciation, we are reducing our tax basis in the property. This is important to know as we consider disposition of the property.
Operations of the Rental Property
As one might imagine, everything that relates to the property becomes a tax deduction. Mortgage interest, real estate taxes, repairs and maintenance, insurance, property management fees, and the like become ordinary and necessary expenses for the rental property. It should be noted here that the ideal situation is to have the rents charged to tenants equal not only debt service on the mortgage, but some built-in factor for repairs and upkeep. This of course, will be subject to fair market value rents in the neighborhood, but the goal should be to cover these expenses. In the event that the property operates at a loss, this loss will be able to offset other income on a tax return to the extent that adjusted gross income is $100,000 or less and the loss itself is not greater than $25,000. If adjusted gross income is $150,000 or more, the $25,000 loss limitation is reduced to zero which would make suspended any losses realized. Suspended losses are then carried forward to offset passive income in future years or to be recognized upon termination of the property. When starting a rental property, it is important to know the rules of the game as one might not get the tax benefits expected. If your adjusted gross income exceeds $150,000, you will not currently get any tax benefit from losses unless you have passive income from other sources. If you have a series of suspended loss carry-overs, you might consider adding a passive income generator to your portfolio (see my article, “The Most Complete Real Estate Article on the Internet”).
Disposition of the Rental Property
Now we are considering the disposition of our rental property. At the time, it is believed that we can get $400,000 for our investment. Do we have exposure to income taxes due to the gain of this property? Of course we do, don’t be silly. Let’s first calculate what our gain will be. We know our selling price, so we need to calculate our adjusted in the property. If the property has been depreciated for 10 years, our accumulated depreciation will be $58,180 ($5,818x10 years). This would bring a depreciable basis of $160,000 down to $101,820. We will add $40,000 to this for un-depreciated land basis bringing the adjusted basis up to $141,820. The gain exposure for this property is then calculated to be $258,180. This gain is section 1231 gain which will likely mean that it is long-term capital gain. However, this gain will have two tiers of tax. Because of the depreciation taken in prior years, the accumulated depreciation of $58,180 will have a 25% tax rate application. The balance of the gain, $200,000, will be taxed at the long-term capital gains rate of $15%. There is the potential to do a 1031 (like-kind) exchange on this property which would allow for the postponement of the gain providing that a property of greater or equal value is acquired. There is also the potential for netting the capital gain of this transaction with capital losses that might be in the portfolio. Does it make sense to sell outright or do a 1031 exchange? It depends on the facts and circumstances of this particular portfolio. If the alpha rim is well above the 20% mark, and with long-term capital gains at just 15%, it might make sense to just recognize the gain and pay the taxes (see my article on netting capital gains and losses). If we need to buy another property to maintain 20% in the alpha rim, the 1031 exchange could be the right solution. See what I mean when I say one must understand the fundamentals of owning real estate? My way is better.
1031 Deferred Exchange - Real Estate Investment Property Qualifications And Rules
A 1031 exchange is a strategy used to defer or eliminate the payment of capital gains taxes arising from selling a real estate property used for investment or for "productive use" in a business or trade. It is named as such because "1031" is the IRS code section 1031. "Exchange" refers to the core of the strategy in which one investment property is sold (relinquished) and a new investment property is purchased (acquired) and intended to replace the sold property.
*Review of Capital Gains*
A capital gain is known as the profit from selling an investment. It is the difference between the cost basis of purchasing the investment and the amount for which it was sold.
Capital Gain Tax Deferral Through a 1031 Exchange
A 1031 Exchange would enable the investor to avoid paying tax on the capital gains realized from the sale of an investment or business property. A third party intermediary, an entity not related to either party, would retain the capital gains (profit) from the sale until a replacement investment property is found and purchased by the investor.
The capital gains realized from the sale of the investment property will be applied to the purchase of the newly acquired property, thus avoiding the payment of capital gains taxes. Very specific requirements must be met and only certain properties qualify for a 1031 exchange.
Determining If Your Property Qualifies For a 1031 Exchange
The detailed process of a 1031 is somewhat complex and it's always advised to seek out a tax professionals' guidance throughout this process. Any errors will disqualify the investment property exchange and the investor would be required to pay the capital gains tax.
Summary of 1031 Property Qualifications
Certain qualifications of the existing property and the replacement property in question must be met. These qualifications include:
1. Type of Property
2. Intended Use of Property
3. Like-Kind Property
4. Specific Requirements
Type of Property
Two types of Real Estate Properties qualify: Business Properties and Investment Properties that are owned for the purpose generating income. This may be revenue from a business or income generated from the investment itself (ex. Rental income).
*Key Point: Personal Property Does not Qualify
For example, rental properties or a Plumbing business would generally qualify for a 1031 exchange.
This is a very specific requirement and excludes any personal property. While most homeowners consider their home an investment, its primary purpose is a place of residence, not to generate investment income.
Summary of Properties Excluded
1. Inventory
2. Dealer Inventory (Flipping is excluded)
3. Personal Property held for sale
4. stocks, bonds and notes
5. Interests in Partnerships
6. Vacation homes
7. Certificates of Trust
Intended Purpose
The intention of current property and the replacement property must be for a business or investment purposes.
* This may sound obvious, but there are some situations where intent will come into play. For instance, an investor wants to buy a rental home in Florida as part of a 1031 exchange. The investor currently owns apartment rentals and is looking to sell and replace them with the vacation home.
Intended purpose will determine if this situation qualifies for a 1031. For instance, the vacation home will qualify if the intent is to collect monthly rent from tenants. However, if the investor intends to reside in the vacation home, even if only in the winter, it does not qualify for a 1031 exchange.
*Key Point: Personal Property AND Vacation Homes are Excluded from a 1031 Exchange.
Like-Kind
The properties to be exchanged must be of "Like-Kind". According to the IRS, the investment properties must be of similar character and nature. However, the grade and quality of the new property does not have to be similar.
For instance, an investor may have own a landscaping business and wants to sell it in exchange for a residential home that he or she wants to fix up and sell for a profit. Would this qualify for a 1031 exchange? The answer is No.
Purchasing homes with the intent of flipping' them does not qualify for 1031 exchanges because they are considered "Inventory". Inventory is not eligible for a 1031 exchange.
However, a shopping center can be exchanged for an apartment complex, or raw land intended for business can be exchanged for a department store.
Summary of Specific Requirements and Safe Harbor Provisions
1. Both Properties are held for investment or use in a trade or business.
2. A Replacement property must be identified within 45 days of the sale of the relinquished property.
3. Replacement property must be purchased within 180 days of the sale of the relinquished property.
4. A qualified intermediary must be designated to hold the proceeds of from the sale of the relinquished property until the closing date of the replacement property.
5. To remain tax free, capital gains received from the original sale must be utilized for the purchase of the replacement property.
In closing, the 1031 Exchange is an excellent strategy to protect business profits, yet it's a complicated endeavor that requires the assistance of professional guidance and planning.
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