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10 Ways to Reduce Financing Costs

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1. Some financing costs and be reduced and some simply cannot. There are two types of financing costs, recurring and non-recurring. Non-recurring fees are one time charges by third parties associated with closing a loan. Recurring costs are interest payments, insurance and property taxes. Investors have more control over recurring closing costs compared to non-recurring.

2. The easiest way to reduce financing costs is to simply ask. Some entities have the authority to bargain with a buyer while others do not. Don’t expect a vendor to voluntarily provide their best rate.

3. When refinancing, contact the service providers previously used and ask for a discount. Title insurance discounts for example are typically issued for newer policies. You may also get discounts for title insurance if you get your policy at the same place where you hold you close escrow.

4. A seller can provide a copy of an existing survey and sign an affidavit stating there have been no permanent changes to the property such as more square feet, a fence or other impervious cover.

5. Ask the seller to pay for all or part of your closing fees. Sellers are allowed to pay buyer’s closing costs up to 2.00% of the sales price. For a $200,000 purchase, that’s up to $4,000.

6. Your lender may also pay for your closing costs. Sometimes lenders have both “required” fees and fees that may be waived at the discretion of the loan officer. But if you don’t ask you won’t get them. The best time to negotiate is while you’re still shopping around. Get all agreements to costs in writing.

7. By paying a discount point to lower your rate, you can also increase your interest rate and receive an automatic lender credit. On a 30 year loan, raising your rate by about 0.25% can result in a 1.00% lender credit. On a $200,000 loan that’s $2,000. Compare the higher rate with cost savings but it almost always makes sense.

8. Lower your insurance premium by increasing your deductible. Speak with your insurance agent to make sure you’re sufficiently covered and for any discounts that are available.

9. If you close at the end of the month, you’ll save on prepaid financing charges. Mortgage interest accrues in arears and the interest collected at closing is in reality your first mortgage payment. If you close on the very last day, you will only pay one day of interest.

10. Ask if there are any affiliated providers, companies that have a formal business agreement with one another. For example, one parent company may own a title insurance firm, legal, settlement services and other real estate related businesses. You may be able to negotiate discounts using one firm that provides multiple services.

What to Expect from Turnkey Properties

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houseA turnkey real estate company finds a property, renovates where needed, finds a tenant and manages the property for an investor. Not bad, is it? Instead of actively pursuing the next deal, crunching numbers and researching demographics, an investor can work with a turnkey operator who essentially does all the “dirty work” as it relates to finding and selling real estate. All the investor needs to do is a good share of due diligence, confirming the numbers and making an offer or otherwise deciding whether or not to participate.

The turnkey real estate company takes care of the details and your job is to confirm those details. It’s relatively easy to do simply by comparing market rent for the area, the neighborhood, schools and the like and say “yes” or “no.” A turnkey does the same things you would do when actively finding and rehabilitating properties to sell or rent.

Beware! It is not that easy. There is no clear definition or standard of what a turnkey operator should provide and some investors have learned the hard way so do your due diligence and you should be fine.

What makes a quality turnkey real estate company?

Getting the Best

A turnkey company may be a local brand in the area or part of a regional or national firm. Like with any other investment property, the numbers need to work. If you’re on the receiving end of an aggressive sales pitch about a particular property or area it’s time to give pause. You don’t need a cheerleader, you just need a little time to evaluate the opportunity. A good turnkey operation will:

  • Have extensive experience in real estate
  • Solid character references of principals
  • Provide a long list of successful properties along with references of other investors
  • Fully renovate the property providing a lower cost of ownership to the investor
  • Use standardized materials making repairs less costly
  • Buy and renovate with quality and the long-term owner in mind
  • Provide a description and some kind of warranty on the work completed
  • Produce or openly welcome an independent inspection of the building by certified assessor
  • Manage the property by experienced teams collecting rents and making repairs
  • Provide a long term lease with professionally screened tenants
  • Produce quarterly or annual income statements for the investor
  • Provide immediate cash flow

Turnkey real estate firms make money buying distressed real estate, renovating them, finding tenants then selling the investment. They can also make money managing the property for the investor. I like the teams that also manage and especially the ones that only manage their own. They have a vested interest in a long-term relationship and low cost of operation and management. Investors who purchase turnkey properties can’t expect to buy a home that is 20-30 percent below market value, the turnkey firm has taken much of that as their profit but you should be able to buy lower than surrounding real estate as turnkeys want to sell the asset as soon as possible and is rarely entered into the local multiple listing service, keeping other buyers at bay.

Okay, now you know the characteristics of a solid turnkey real estate company, what are the signs of a bad one?

  • Little experience in real estate
  • Principals with previous litigation or licensing issues
  • Few transactions
  • No property management or management experience
  • Lofty projections that don’t match surrounding real estate
  • No description of work provided or independent inspection report
  • Return on investment too aggressive, like including depreciation but no vacancy expense

If any of these statements are true, nothing else matters. Move elsewhere.

Recap

  1. Turnkey real estate do all the work
  2. You need only to validate the numbers
  3. Do you diligence on the company, get 3 investor references and see previous transactions
  4. Don’t buy without an independent certified inspection report or seeing the leases
  5. We provide a 20 point diligence checklist and interview questions in our Education Center

Ignore the Hype: News from Realsville

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get rich quickReal estate investing means committing to a long term strategy. It’s not a get-rich-right-now scheme that’s portrayed so many times on cable T.V. You’ve seen those shows haven’t you? If you’ve ever channel-surfed, and who hasn’t, there’s no shortage of “Flip This” or “Flip That” portraying “real” investors who buy a property well below market, fix it up and make $30,000 in 30 days. It looks easy, doesn’t it? Of course it does, it’s a simple, buy-fix-sell strategy. What could be easier?

What you don’t see are the bombs. Do you think a producer is going to air a show about real estate investing only to show how these “investors” lost their tail on multiple properties? Of course not. There’s not much drama in that.

If you’ve done any research at all on the internet about real estate investing you soon found yourself reading ads that magically appeared telling you about a one-day real estate investment seminar, free of course, that will show you how the presenter made $100,000 in 90 days and you can too! No money down! No credit needed! Anybody can do this! It might be easier to give in to the hype. After all, they can’t just be lying about their success, can they? And it’s free, right?

Look, I don’t want to burst anyone’s bubble or spoil someone’s parade, so to speak, but let’s get real here. Sure, those “flipping” shows are fun to watch and there’s no harm attending a seminar that’s “free” but making $100,000 in 90 days is smokescreen. I’m not saying it’s impossible but do you think it’s really true? A little skeptical? If you are, that’s a good thing. That means you’re taking this seriously and treating it as a business and not a quick trip to Las Vegas. Creating wealth through real estate is a process, not an event.

10 Loan Choices You’ll Have to Make

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Loan choices

1. Fixed, hybrid or adjustable. If you’re holding the property for the long term, get a fixed rate. For shorter term flips, choose the lowest rate and fee combination available.
2. Discount points are available for all mortgage loans. A discount point is so-called because it “discounts” or lowers the interest rate on a mortgage. Typically, one point (one percent of the loan amount) will reduce a 30 year mortgage rate by 0.25%. Work the comparisons with your loan officer and never pay points for an adjustable or hybrid mortgage.
3. Will you live in your rental property? Financing a duplex or 2-4 unit can get you a lower rate and lower financing costs if you occupy one of the units as your primary residence.
4. How long should you finance your purchase? The shorter loan term has much less interest but higher payments, affecting your monthly cash flow. Most lenders offer loan terms in five year increments from 10 to 30 years with some lenders extending terms to 40 years although those are much more difficult to find in today’s environment.
5. If you’re buying a foreclosure in an area where there are several such properties, it’s possible you may have a valuation issue. If the appraiser states property values overall are declining, the appraisal may come in lower than the sales price. In such an instance, you’ll have to decide whether or not to continue. Either the price will need to be renegotiated or you’ll have to come to the closing table with the difference between the original sales price or appraised value.
6. Where will you get financing? Most loans today are almost identical for investment property and lenders compete for your business. Decide in advance not only what type of loan you’ll get but where. Work to establish a long term relationship with your lender.
7. Do you want to save some cash? Talk to your lender about getting a lender credit for your loan. Lenders can adjust your interest rate slightly higher and pay for some or all of your closing fees. Lenders don’t have a preference and can provide you with various rate and fee combinations.
8. Some higher end properties will approach and exceed conforming loan limits. Sometimes jumbo rates are higher than conforming and vice versa which means you may decide to put more or less down and still meet loan guidelines in order to get a better rate.
9. You can choose to get your financing from a bank, a mortgage banker or a mortgage broker. Banks typically have slightly higher rates than what is currently available as their customers already have various bank accounts with them. Mortgage bankers approve and fund mortgage loans and do nothing else. Once the loan is funded, it’s usually sold to other lenders or directly to Fannie Mae or Freddie Mac. Mortgage brokers arrange funding between a lender and a borrower. A mortgage banker or broker is most often your better deal.
10. When deciding to refinance, it’s usually because rates have fallen. Yet you can also refinance for other reasons such as pulling cash out, changing loan terms or switching from an adjustable to a fixed rate loan.