4 Habits Successful Real Estate Investors Share

Real Estate Investors

Real Estate InvestorsNot long ago, it seemed as though an entire generation had been doomed to live out their adult years paying rent. Millennials were often portrayed in the media as a generation of renters. Other outlets spoke of the housing crunch affecting millennials in rather striking terms and likened the debate around housing policies to “generational warfare.”

While rising home prices still present a formidable challenge to the cohort of young adults – especially in larger urban areas – more and more millennials have taken the jump toward homeownership in the last few years. A 2021 report by the National Association of Realtors on generational real estate trends revealed that millennials currently make up the largest group of homebuyers at 37 percent.

The allure of homeownership comes from the fact that owning a property is one of the fundamental ways of accumulating wealth. In addition to the amount of equity you accrue as you pay down your mortgage, cash flow is a key part of the equation when it comes to building up a stronger financial future. That’s where real estate investing comes into play.

The benefits of investing in real estate include passive income, stable cash flow, tax advantages, and more. If you are ready to jump on the real estate investing bandwagon and take advantage of the current low mortgage rates, make sure you have a game plan in place that will set you up for success and pave the way to financial freedom. Here are four habits successful real estate investors share:

  1. Build Credit

Before you get started in real estate, make sure your finances are in good shape. There is no easy answer as to what credit score you need for a residential or commercial investment property loan as credit requirements can differ greatly among lenders and are based on numerous factors.

As is the case with other loan types, a good credit score will help you secure lower interest rates and more favorable conditions that might require little to none of your own cash up front. Another key factor lenders will look at is debt-to-income ratio (DTI). Your DTI is all your monthly debt payments divided by your gross monthly income. With a lower DTI and the income to support it, you are able to qualify to borrow a larger amount of money.

  1. Make a Plan

Figure out what your short and long-term goals are and solidify them into a business plan. The investment model best suited for you really depends on why you are in real estate investing and for how long you plan to keep the property. Some people may be eyeing passive income, while others have a goal to invest for retirement. Setting your goals from the outset will allow you to zero in on the type of property you should invest in.

  1. Develop a Niche

When you develop and invest within your niche market, you are better able to outperform your competition and secure superior deals as you can target your audience more efficiently and identify pain points to minimize your risks. Once the investor has dominated a particular niche, they can then move on to other niches using the same in-depth approach.

Single-family or multifamily homes, retail or office buildings, industrial or commercial properties, mobile homes, land, student housing, and short-term rentals are just some types of assets you could potentially invest in.

It bears mentioning that a focus on a niche does not necessarily mean being confined to a single location. Make sure that the numbers make sense for you, whether it be investing in smaller cities where prices are lower or in large metropolitan areas.

  1. Invest Now

The current low interest rates make it the perfect time to start investing in real estate. In addition, home prices are expected to continue to rise throughout 2021 for various reasons, one being a bullish stock market.

Are you ready to invest in real estate and see the value it can provide? RLG would love to help you! Call us today to learn more!

Commonly Used Investment Lending Terms from A-Z

There are many terms commonly used in the investment lending world. When you apply for a loan with Ridge Lending Group, here are some that you may come across:

Annual Percentage Rate (APR) – This calculates the cost to the applicant for borrowing money. The APR reflects the interest rate, any points, mortgage broker fees, and other charges that the applicant pays to get the loan. As APR is an easily manipulated number, it may be difficult, if not impossible, to compare different programs and products based on the APR.

Adjustable-Rate Mortgage (ARM) – This is a type of mortgage that has a fixed rate for a set period of time and then the rate is adjusted. The fixed period can be as short as 1 month or as long as 10 years. All ARM’s are based on an adjustable index + a fixed margin = the Fully Indexed Rate

Borrower: Borrower is the primary applicant on a mortgage application.

Consumer Financial Protection Bureau (CFPB) – An agency of the United States government responsible for consumer protection in the financial sector.

Co-Borrower – The additional applicant on a joint mortgage application. A borrower may apply with a co-Applicant/co-Signer, who can be anyone; however, the application will not be considered a joint application.

Debt to Income (DTI) – This is the ratio of the borrower’s gross monthly income to their debt. Front End DTI refers to all housing related debt. Back End DTI refers to all debt, including Front End DTI. It is typically expressed with both numbers separated by a dash. Example: 30/50 (30% Front End DTI, 50% Back End DTI. Back End DTI will always be more than Front End DTI.)

Desktop Underwriter – An automated underwriting engine. DU is used for underwriting Fannie Mae, Freddie Mac, FHA, VA and USDA loans. Each loan product will have its own DU.

Federal Housing Administration (FHA) – The Federal Housing Administration is a United States government agency founded by President Franklin Delano Roosevelt, created in part by the National Housing Act of 1934. The FHA sets standards for construction and underwriting as well as insures loans made by banks and other private lenders for home building.

Federal National Mortgage Association (FNMA or Fannie Mae) – One of two GSE’s (Government Sponsored Enterprises) created by Congress to increase access to mortgages. Mortgages offered under Fannie Mae guidelines are called “conforming” mortgages since they conform to Fannie Mae guidelines.

Federal Home Loan Mortgage Corporation (FRMC or Freddie Mac) – The second of two GSE’s created by Congress to increase access to mortgages. Mortgages offered under Freddie Mac guidelines are also called “conforming” mortgages since they conform to Freddie Mac guidelines.

Home Equity Line of Credit (HELOC) – A revolving line of credit based on the equity in a property. Generally, HELOC’s are based on the prime rate. The All in One First Lien HELOC is based upon the 30-day U.S. Dollar LIBOR.

Housing and Urban Development (HUD) – HUD is responsible for national policy and programs that address America’s housing needs and enforce fair housing laws. It also oversees the Federal Housing Administration (FHA), the largest mortgage insurer in the world.

Interest Only – This is a payment type where none of the required payment goes towards principal. While the required payment will generally be lower than an amortizing payment, the amount owed does not go down since nothing is going towards principal. Like a fully amortizing mortgage, a borrower is allowed to pay extra towards principal.

London Inter Bank Offered Rate (LIBOR) – A benchmark rate that banks use to lend money to each other. It is typically a marker of the state of the economy. In a bubble, the rate will be high. In a recession, the rate will be low.

Loan To Value (LTV) – The maximum percentage of the appraised value of a property that a lender is willing to fund on. This figure will change with loan product, occupancy and property type.

Mortgage Backed Security (MBS) – These are the investment instruments that are bundled by Fannie Mae, Freddie Mac, and Ginnie Mae for sale on Wall Street.

Mortgage Loan Originator / Loan Officer – A licensed professional who receives a residential mortgage or loan application and offers or negotiates terms of a residential mortgage loan.

Non-Owner Occupied (NOO) – Refers to a rental or investment property.

Owner Occupied (OO) – This is the borrower’s principal or primary residence.

Principal-Interest-Taxes-Insurance (PITI) – This is the total housing expense on a monthly basis.  It also includes homeowner’s association fees and monthly mortgage insurance if applicable.

Private Mortgage Insurance (PMI) – This is charged on conforming mortgages that are over 80% LTV. After the loan is paid down to 80% of the properties appraised value, PMI will be canceled by the servicer.

Prepayment Penalty (PPP) – In states that allow it, this is charged by subprime lenders and the occasional conforming lender to assure the lender of making a profitable mortgage investment. A PPP can be either hard or soft. A hard PPP means that the borrower will pay a penalty for paying the mortgage off before a specific time period whether they sell or refinance. Most PPP’s are for 3 years or less. With subprime lenders, the time period will generally be the same as the fixed period of an ARM mortgage. A soft PPP means that the borrower will have to pay a penalty if they sell or refinance within the first year or refinance within the remainder of the PPP.

Prime Rate – A prime rate or prime lending rate is an interest rate used by banks, usually the interest rate at which banks lend to customers with good credit. Some variable interest rates may be expressed as a percentage above or below prime rate.

Real Estate Settlement Practices Act (1974) (RESPA) – Federal law that regulates what must be disclosed to a consumer during a loan transaction and prohibits abusive practices by lenders to consumers.

Truth In Lending Act (1968) (TILA) – Federal law that requires the manner in which banks disclose fees and costs associated with a loan transaction be standardized to enable borrowers to comparison-shop lenders.

TILA-RESPA Integrated Disclosure Rule (TRID) – Instituted by the CFPB as a combination of TILA and RESPA requirement. When TRID is triggered, the loan estimate must go out to a borrower within 3 business days of a complete mortgage application.

The United States Department of Agriculture (USDA) – The U.S. federal executive department responsible for developing and executing federal laws related to rural economic development. The USDA has two loan programs for Primary Residences, the USDA Direct and the USDA Single-Family Housing Guaranteed, which both offer 100% financing on a primary residence purchase or refinance for eligible (low-income) borrowers and eligible (rural) properties.

VA – The United States Department of Veterans Affairs. The VA has loan programs for veterans to receive 100% financing on a primary residence purchase or refinance.

Verification of Deposit (VOD) – This is a form sent to the bank/credit union/savings bank to verify the amount of funds in the account and to provide an average balance over a specified period, usually 60 days.

Verification of Employment (VOE) – This is a form that is sent to the employer to verify employment. Many times, a VOE will be done verbally by the lender just prior to closing.

W-2 – W-2s are tax forms provided by the employer to show total year’s income.

2-4 Unit – Duplex, Triplex or Quadplex. The most units RLG will lend on is 4. Anything more than 4 units will be a commercial transaction.

Investing in Real Estate for Your Financial Future

investing in real estate

Investing in real estateAccording to a recent HousingWire article, investing in real estate could be less risky than investing in the stock market. While the stock market has hit all-time highs this year, it likely belies a market that will be more volatile in the future. During 2020, home prices increased 10% to levels not seen since 2014, while inventory dropped across the country. This created a seller’s market and a successful investment environment.

Investors commonly share the following advice, “Don’t wait to buy real estate, buy real estate and wait.” Home prices are expected to continue to rise throughout 2021 for various reasons, one being a bullish stock market. When you invest in real estate, you invest in a tangible item that is not managed elsewhere. As home prices remain on an upward trajectory, real estate investment continues to be a lucrative way to financial freedom.

To learn more about the benefits of real estate investment in 2021, click here.

Are you ready to invest in real estate and see the value it can provide? RLG would love to help you! Call us today to learn more!

Investment Lending Metrics Explained: Discount Rate, NPV and IRR

Loans for real estate concept, a man and a women hand holding a money bag and a model home put together in the public park., Investment Lending, Real Estate Investment

Loans for real estate concept, a man and a women hand holding a money bag and  a model home put together in the public park., Investment Lending, Real Estate InvestmentFollowing up on our “Investment Lending Metrics Explained” series, we will be breaking down three commonly used terms in the real estate investment industry. Let’s get to it!

Discount Rate

While the discount rate can refer to either the interest rate charged to financial institutions for the loans they take from the Federal Reserve Bank or the rate used to discount future cash flows in discounted cash flow (DCF) analysis, our focus will be on the latter. DCF is a method used by real estate investors to help determine the value of an investment based on its future cash flows. The formula can be written as follows:

DCF = (Cash flow for the first year / (1+r)1)+(Cash flow for the second year / (1+r)2)+(Cash flow for N year / (1+r)N)+(Cash flow for final year / (1+r)

The “r” represents the discount rate, which is the rate used to discount the future cash flows from an investment to the present value to determine if an investment will be profitable. As the formula shows, discount rates are applied to future income streams. Many large brokerage companies conduct discount rate surveys for real estate investors.

NPV

Net Present Value is the value of all future cash flows over the entire life of an investment discounted to the present. It is used to calculate today’s value of a future stream of payments. The net present value analysis subtracts the discounted cash flows from your initial investment.

NPV = (Cash flow/1 + r) N – initial investment

IRR

IRR is the annual rate of growth an investment is expected to generate. IRR is calculated using the same concept as NPV, except it sets the NPV equal to zero. In other words, the IRR represents the discount rate that makes the NPV of future cash flows equal to zero.

0 = (Cash flow/1 + IRR) N – initial investment

Suppose, for example, you have $100,000 to invest in a property, and the rental is estimated to pull in $20,000 in cash flow each year for the 10 years you plan to hang on to the property. The IRR will be the interest earned over the full 10-year period, or 15.1%.

Are you ready to take the plunge of investing in real estate? RLG has the tools and resources at its disposal to get you on your way and not waste a moment of your time. Call us today to learn more and experience firsthand the dedicated, personalized customer service and undivided attention that RLG has to offer!

Fix and Flip: Estimating Rehab Costs and Profit

fix-and-flip loan

fix-and-flip loanSavvy investors focused on fix-and-flip properties know that estimating rehab costs is perhaps the most critical and challenging part of the deal. If your estimate to fix-and-flip the property is too high, you will likely lose the deal to another investor. If you underestimate, your potential profit will adversely be affected.

The better you assess rehab costs, the more successful you will be. Let us look at some key aspects to consider as you estimate rehab costs that will help ensure a strong ROI:

  • Know your buyer and neighborhood: Study the comparables – recently sold properties in the neighborhood similar to the property you are interested in – so you have a clear idea for how much you should be able to sell the house. If the property is in an upmarket neighborhood, potential buyers will want higher end rehabs. If it is in a med-low income neighborhood, you will need to spend less on the total project.
  • Spend time in the property and note problems: With an idea of how you want the property to look post flip, have a checklist in hand as you walk through the home. Take notes of all issues or problems with the home that you will want to address. If you need help, take your contractor with you. Taking photos and videos is also a great tip.
  • Begin your estimate: Sort your check list into categories (Exterior, Foundation, Interior, etc) and include other line items such as contractors. Either from experience, with the aid of a contractor, or by searching the web, assign costs to the items in each category so you come up with total costs for each category. Now you know your estimated rehab cost.

It is important to never lose sight of your after-repair value (ARV), the value of the home post fix. Your ARV will not only help you determine your rehab budget, but also how much you are willing to pay initially for the property. Most experts agree that to profit from the project, you should bid no more than 70% of the price for which you believe you can sell the property. But remember to factor in what it will cost you to fix up the property.

There is no doubt there is much money to be made in the fix-and-flip market. And lots of factors will determine whether or not you are successful. Contact the RLG team today to schedule some time to discuss how RLG’s vast experience in the sector can help guide you to success.

Buying A Turnkey Investment Property

house key in door, turnkey investment property

house key in door, turnkey investment propertyIt is called turnkey investment property because all you must do is unlock the door. A turnkey property is one that is fully renovated and ready to rent. There are generally no fixes or repairs to be made. Once your renter signs the contract, they can move in straight away. Let us take a look at some of the pros and cons of investing in turnkey property.

Pros of turnkey properties

  • The property requires no or minimal repairs and is ready to rent.
  • There should not be significant repair costs during the first years as the property has been recently renovated, translating to good cash flow prospect.
  • The turnkey concept provides the opportunity to easily and quickly invest in areas or states far from you.
  • Can help you diversify your real estate properties and weather economic ups and downs by buying properties in different markets.
  • For investors who are incredibly busy, turnkey properties can save you time. There is no months-long rehab. Your property is ready to generate income.

Cons of turnkey properties

  • It can be hard to find good deals that will maximize your cap rate. Someone has already rehabbed the property and seeks to capitalize on their investment.
  • Either you or a management company will have to manage the property.
  • Unlike flipping houses, you need to evaluate the long-term economic health of the local market since you are making a long-term investment.
  • Turnkey properties can come already rented. Check to ensure they have been properly vetted.
  • Many investors work with turnkey companies who handle many of the details. Make sure you trust them. A lot could go wrong.

Turnkey real estate investing is not for everyone. There are inherent risks, including working with a turnkey company. But there is also a lot to gain. If all turns out splendidly, you could be poised to make solid passive income without doing too much work.

If you are interested in turnkey investing, be sure to research thoroughly. And that begins by contacting the experts at RLG. We stand ready to help you grow your investment portfolio.

Know Your Goals: Cash Flow vs. Appreciation

Property investment and house mortgage financial concept, Hand putting money coin stack with wooden house, cash flow, appreciation

Property investment and house mortgage financial concept, Hand putting money coin stack with wooden house, cash flow, appreciationWhen looking for real estate properties, real estate investors commonly debate whether to chase cash flow or appreciation. Let us first define these terms. In real estate, cash flow is the net difference between money coming in and money going out from a rental property. Positive cash flow is what you are going for. In contrast, an appreciating property is one that is typically in a desirable area and whose value may increase over time. Both have obvious benefits, but it really comes down to what your goals are. Let us take a closer look.

Cash Flow

  • Positive cash flow provides passive income; when the market is down, you can still earn income from renters.
  • Positive cash allows you to hedge against future issues with the property.
  • You can invest the positive cash flow to further broaden investment goals.
  • You will be able to pay down your mortgage with a positive cash flow.
  • Positive cash flow is more predictable and therefore less risky than appreciation.

Appreciation

  • Allows you to build potential wealth for the future.
  • Your focus is on a larger sale payout that you can cash out or reinvest.
  • Compound interest: Not touching your principal and allowing it to gain in value.

The investment model best suited for you really depends on why you are in real estate investing and for how long you plan to keep the property. If your goal is to buy a property in a desired area and sell the property down the road once prices have risen, real estate appreciation may be for you. If your goal in real estate investing is for extra monthly income, cash flow investing might be a wise choice for you.

The good news is the experts at RLG are here to help you figure out which approach is better for you. Call us today!

Purchasing A Home or Investment Property Through Financing vs. All Cash

Cash, Investment Lending, Investment Property

Cash, Investment Lending, Investment PropertyWhen purchasing a home or investment property most homebuyers provide a down payment and rely on financing for the rest. But did you know that some 20% of home purchases in the United States are made with cash? Some finance gurus even urge folks to avoid debt as much as possible. So, it may be logical to think that, if your coffers allow, paying cash for a home or putting down as much as you can is the sound approach. But there is a lot to consider before deciding to finance a home or paying cash. Let us take a look at the pros and cons of buying a home or investment property with cash versus mortgage.

CASH

Pros of buying a house or investment property with cash:

  • No interest – the cost of interest on a 30-year loan can be many thousands of dollars.
  • No closing costs – you will avoid loan origination fees, appraisal fees, and other fees.
  • More attractive to sellers – private sellers may be keener to accept cash offers over financed offers as they do not have to worry about buyers backing out due to financing issues.
  • Faster closing – by skipping the mortgage process, closings are generally much faster.
  • It’s your home – You will own the home outright, which will make it easier to sell.

Cons of buying a house or investment property with cash:

  • Loss of liquidity – Tying up a lot of money in a house can be risky. Cash tied in real estate is not easily accessed in case of financial misfortunes.
  • Loss of leverage – Most people eschew debt or work to pay it off quickly. However, being leveraged in real estate presents an upside to debt. If your mortgage is locked in and you have a low interest rate, you may make money having a mortgage due to the effects of inflation. Paying cash would give up that leverage.
  • Cheap financing – Mortgages are typically the cheapest source of financing.
  • ROI – You may miss out on other investments that could yield high return.

FINANCING

Pros of buying a house or investment property with a mortgage:

  • Affordability – Spreading payments over many years translates to manageable payments.
  • Flexibility – Tying up less of your money in the house purchase, you can put more money into a reserve account or invest it elsewhere.
  • Low rates – Mortgage rates are low compared to other types of loans.
  • Tax Benefits – You can deduct mortgage interest.

Cons of buying a house or investment property with a mortgage:

  • Interest – The total you pay back is much more than the cost of the home.
  • Process – You must qualify for a mortgage and the mortgage process can be lengthy.
  • PMI – If you put less than 20% down, you will have to pay a mortgage insurance premium, which increases your monthly payment.
  • Debt – A mortgage is the highest form of debt most folks will ever have.

This is just a broad overview of the pros and cons between using cash to buy a home or investment property versus working with a lender to secure financing. The best place to start is by running the numbers. Contact the professionals at RLG today who are ready to work with you to see what best fits your needs in home and investment property purchasing.

Credit Requirements for Investment Property Loans

There is no easy answer as to what credit score you need for a residential or commercial investment property loan as credit requirements can differ greatly among lenders and are based on numerous factors. Let us look at credit requirements for a conventional mortgage for an investment property.

You will need a credit score of at least 720 to obtain a conventional investment property loan from a private lender. However, this requirement is flexible depending on other factors, such as your debt-to-income ratio and credit history. Interest rates will run 1-3% higher than those of traditional home loans. You can expect to be required to make a down payment of at least 20% on a conventional mortgage for investment property. The loan-to-value ratio will need to be 80% or less and you may need as many as six months liquid cash reserves.

Call your mortgage professionals at RLG today and we will be happy to discuss in more detail how to set you up with an investment property loan that will fit your growth needs.

What is the 1% Rule for an Investment Property?

The 1% rule is predicated on the idea that for an investment property to generate positive cash flow, the monthly rent earned from it must be greater than or equal to 1% of the total purchase price. The end goal is to ensure that the monthly mortgage payments never exceeds the rent. For instance, assume you purchased an investment property for $250,000. Using the 1% rule, we can determine that your monthly mortgage payments should be less than $2,500 and your rental income equal to or higher than $2,500.

In addition, the 1% rule can be a helpful tool when used in reverse to calculate a maximum purchase price for a rental property. The formula is given as follows:

100 x Monthly Rent = Maximum Purchase Price

Suppose you are an investor looking to buy a condo listed at $200,000. To cover upfront repair costs, you would factor in an estimated $20,000, for a total of $220,000. If you know that comparable properties in the neighborhood rent for $2,000, you can quickly deduce it is not in your best interest to pay more than $180,000 for it. This is particularly useful as you put together an offer on the property or negotiate contingencies to include in your offer.

While this rule serves a baseline for most real estate investors, it is only one step of several in determining whether a property is a good investment or not. A high cap rate is another popular metric to gauge your returns on a rental property. Other points to consider in your decision-making process may include the local market, forecasted price appreciate, and projected rent growth, to name a few.

A property that does not quite meet the 1% rule could still be a lucrative long-term investment based on appreciation if your goal is to build equity over time. An attractive commuting distance, easy access to or ongoing expansion of transportation systems and hubs, as well as steep demographic growth all suggest a desirable area that can be worth investing in.

Do you have more questions about rental homes? Are you ready to invest in real estate and build wealth?  RLG has the tools and resources at its disposal to get you on your way. Call us today to learn more and experience firsthand the dedicated, personalized customer service and undivided attention that RLG has to offer!