Top 10 “Gotchas” for Buy and Hold Properties
Finding out later that your rent won’t cover your financing costs. Not only do you need to cover your mortgage payment but property taxes, insurance and maintenance costs as well. If the property is currently rented, income will be listed in the multiple listing service. If not, work with your agent. If it doesn’t cash flow, it’s not an investment.- Know how much cash you’ll need at the closing table. Including your down payment there will also be closing costs associated with your new mortgage. Coming up short will leave you scrambling for dough. Your bank or mortgage company can give you a good idea how much you’ll need.
- Speaking of banks, know in advance you’re qualified for financing. Your purchase is for the long haul and the best type of financing is with a conventional loan underwritten to Fannie Mae or Freddie Mac guidelines.
- Lock in a fixed rate and avoid hybrids or ARMs. That way you can always forecast holding costs and raise rent over time. The longer you hold onto a property, the higher your rent will ultimately be. That means more cash flow when you’re closer to retirement compared to just starting out. There’s no gamble with fixed rates.
- Who’s going to collect the rents? Mow the lawns? Fix the busted hot water heater? If you’re just starting out, you’re employed elsewhere. You’ll need to find someone to handle those daily duties for you while you’re out looking for more deals. Hire a professional property manager.
- Renting to relatives or friends isn’t a very good idea. Bad things can happen over time and if your nephew falls behind on the rent will you really evict him? Keep family and friends at bay and keep your rentals strictly a business relationship, not a family one.
- Don’t worry about making a lowball offer. You’re not buying a property to make sure you don’t insult the buyers. Make the lowest reasonable offer you can. Don’t walk away from the closing table wondering whether or not you could have gotten a better deal.
- Review your deals with your insurance agent. Don’t be caught on the wrong end of a liability claim. Your tenants and their guests could slip and fall and it might be your fault. Beyond insurance to cover damages to the unit, make sure you’re protected from a legal perspective.
- Take advantage of other people’s money. An all cash transaction freezes liquid assets. The only way to get those funds back is to sell the property or obtain a more expensive equity loan.
- Speaking of cash, make sure you have plenty on hand. If a new deal hits your radar you’ll need funds to finance the deal and you’ll also need cash on hand for maintenance costs. There are legal obligations as a landlord and one of the most important is to provide a safe, habitable environment for your tenants. Don’t put off needed repairs.
Top 10 mistakes made by House Flippers
Lead with your mind, not with your heart. Don’t let emotion blind your logic. If you find a property and you absolutely fall in love with it, that’s fine. Just don’t try to make something work if it clearly won’t.- Know in advance what you’re going to do with the property. If it’s a flip, search your database for potential buyers. Always know how to get out from under a purchase before you make an offer.
- The more you remodel or repair, the less you’ll make when selling. Work with your contractor to find out what must be fixed and what might be fixed. Certain upgrades can be left for your buyers, no need to renovate the entire house knowing you won’t get 100% of your money back when sold.
- Flying solo is a disaster in waiting. Surround yourself with professionals who will profit from your investments as well as drive new business to you. When you win, they win. You’re talking about attorneys, contractors and banks. You can’t be an expert in everything but you can put them on your team.
- Speaking of teams, don’t flip around, be loyal. Establish solid working relationships and nurture them. Doing so, team members will be out there looking for deals for you. If you constantly move your business around, you won’t have that type of commitment.
- Don’t be a chicken. If the math works and your team members agree with you go ahead and make the offer. If it’s a good deal, someone else can find it and bid it out from under you. Early on you’ll be hesitant but as time goes by you’ll gain the confidence you need to strike when the iron is hot.
- Your profit is sales price less expenses. When evaluating a potential investment, get a realistic selling price from an agent along with a days-on-market calculation. The higher your asking price, the longer it will take to sell.
- Speaking of value, forget online valuation tools that are popular today. Don’t rely on assessed values from the county, either.
- Using your own walk-through as your property inspection will cost you. Some investors not only hire one professional property inspector but get another for a second opinion, especially for bigger deals. Real estate is an asset you can’t return to the seller after you close. Know what’s ahead.
- While it’s good to be familiar with an area, don’t limit your prospects to your own backyard. There are always areas that are ideal for investors beyond your own zip code.
10 Things You Absolutely Must Know About Hard Money
“Hard” money doesn’t mean “stupid” money. The hard money lender wants to be paid back on time and doesn’t want to foreclose. Hard money lenders are no different than any other lender in that regard.- Hard money is an important player in the real estate industry. Hard money is used to acquire and renovate properties that traditional banks won’t touch in the property’s existing condition. Once the property is renovated and brought into proper condition, buyers can find financing anywhere.
- Hard money loans require more down payment, higher interest rates and closing costs. You might expect to put anywhere from 30-50 percent down, pay three to five points in addition to traditional closing costs. These costs must be considered when evaluating a potential acquisition.
- A clear exit strategy is a must for both you and the hard money lender. The lender needs to understand how the loan will be paid back. Will you obtain a conventional loan to replace the hard money or sell the property to pay back the investor?
- Hard money loans are for a very short term, some as short as 90 days. The hard money lender will extend the loan for as long as needed to buy, renovate and flip the property. If renovations are taking longer than expected, hard money lenders can write up a loan extension, for a fee.
- Different hard money lenders will have different preferences for property types. Some hard money lenders may only like to finance single family residential rehabs while others will finance a strip mall or an apartment building.
- Don’t start shopping for a hard money lender once you’ve found a property. Plan way ahead. Before making an offer on any property that needs a hard money loan, review the prospect with at least one hard money lender to see if it’s a viable deal.
- Because hard money lenders can go after particular properties, if one hard money lender declines your proposal, keep going. If the deal makes sense and you can back it up with documentation, you’ll find a hard money lender.
- Hard money lenders get their money in three primary ways: solicit investment funds from individuals to finance a lending pool, solicit funds from individuals as each potential project arises and obtaining short term funds from a conventional bank. Sometimes hard money lenders want to make a loan but the funds aren’t readily available.
- When hard money lenders solicit individual investors for a project, the individual investors can decide on their own whether or not to invest. They’re not obligated to finance anything they don’t like and use their own due diligence to review a project even after the hard money lender has approved the project.