Not all flippers / rehabbers are cash buyers. Most of them are bound to the lending criteria of an asset based lender, AKA hard money lender.
A hard money lender will generally not lend more than 50% to 70% of the properties after repair value. (ARV) The total percentage they loan will be the total amount they loan, including setting aside money in an escrow account for construction purposes.
And let me tell you, those folks are not cheap. The average hard money lender charges 3 to 5 points, as well as 14% to 20% interest.
Most savvy investors factor in the cost of construction, the cost of the money, re-listing the property with a Realtor, insurance premiums, title fees, etc when buying the home so they don't have to come with any money out of pocket as a down payment.
The formula I use when I purchase a rehab property is as follows:
1) After Repair Value (ARV) - (minus) Repairs = As-Is Value
2) As- Is Value (divided by) 2 = Offer Price
It's funny when I was in high school I slept through algebra, but now I use it on a regular basis. :-)
Let's use a real life example:
$100,000 (ARV) includes stainless steel appliances, granite, ceiling fans in every room, new paint / carpet
$30,000 (Repairs) Cost to get home up to after repair value, which is top market values standards.
$70,000 (As-is Value) I simply subtract the top market value from the repairs needed
Then I divide the AS-IS figure by 2 and offer 50% of the homes AS-IS value, and that figure is:
$35,000
If my hard money lender agrees to lend me 70% of the ARV, my loan amount will be for $70,000 dollars. Here are how the fees break down:
$35,000 purchase price
$30,000 repair budget
$3,500 5 points to borrow the money
$3,500 $875 dollars per month interest only payments at 15% interest x 4 months holding time for resell
(We are using 15% interest only payments as an example, which would equal $875 per month pre-paid for a $70,000 loan)
$1,000 Insurance
$73,000 Total
In this example, the investor would have to bring $3,000 to closing in cash.
Now, let's say the investor fixes it up really quick and puts it on the market. Within 60 days, he gets a full price offer:
$100,000 purchase price
(minus)
$73,000 loan pay off (including $3,000 cash invested at the table)
$750 title fees
$6,000 realtor commissions
$3,000 buyers closing costs (common)
$17,250 dollars net
In a nutshell, the investor had to risk $3,000 dollars, his reputation with the hard money lender, manage contractors, deal with marketing concerns, and wait 4 months to get paid back $17,250 dollars. If you break that down to NET profit, that is $14,250 dollars in 4 months. If you break that down to a monthly salary, that is $3,562.50 per month for a great deal of risk.
Showing posts with label real estate investment. Show all posts
Showing posts with label real estate investment. Show all posts
Tuesday, November 29, 2011
Tuesday, February 23, 2010
How Do I Know What To Invest In?
First:
Before you know the quickest path to take, you have to know where you want to go. Do you want to invest in order to pay for your child's college? To retire? Or for reasons that are short term, like going on a trip? Are you looking to quit your job and just live off your investments? These are questions you must ask yourself before you know which vehicle is appropriate for you.
Second:
Once you have a figure in mind about why you are investing and the time line it is going to take to get there, educate yourself as much as possible.
The three types of investments are:
1. Real estate
2. Paper assets
3. Business
The majority of the world will advise you to invest in paper assets, but it is a very slow and risky way to become wealthy.
Look at it this way:
There is a reason why the bank won't lend you money to invest in the stock market, but they will lend you money to buy investment property.
There is also a reason why the insurance company will secure your real estate, but not stocks, bonds and mutual funds. I am sure you've noticed at your bank that mutual funds are not "FDIC" insured.
Banks and insurance companies are the leading financial institutions in the country, if not the world. Part of being a good leader is being a good follower! If you want to get rich, do what rich people do!
Real estate is a very lucrative investment for 3 major reasons:
1. Cash flow
2. Equity
3. Future appreciation
For instance, if I buy a house that appraises for $100,000 for $60,000 dollars, I have created a very lucrative investment for myself.
I can either:
A) Put it on the market for $100,000 dollars and net $80,000 once Realtor fees and closing costs are paid, and make $20,000 using NONE of my own money to buy the real estate in the first place. It is hard to do in this market climate, but still possible.
B) I can offer owner financing on the property to these sea of buyers who are denied bank loans, due to the financial crisis. I can sell the property to them for $100,000 and 20% down - which would be $20,000 upfront. The new balance on the note would be $80,000. And if my original payment on $60,000 dollars was close to $400 dollars - I could charge 9% interest to my owner financed buyer on $80,000, which would be $600 dollars per month.
In this example, I would make $20,000 upfront, and cash flow $200 dollars per month, month after month. And when the buyer refinances, I make an additional $20,000 (without Realtor fees, because you don't need a Realtor to sell an owner financed deal)
C) I could simply rent out the property for let's say $850 per month (if the market warrants that) and cash flow $450 per month and wait to sell when the market conditions improve. Because in 5 years, the property value may appreciate (especially if you live in the Midwest, where real estate markets are not so volitile) So the same property that is worth $100,000 may be worth $110,000 or more in 5 years or so.
I can also take the proceeds of the sale I make, and reinvest them BACK into real estate tax free. It is called a 1031 exchange. So, I can continue to re-invest over and over and over again, using Uncle Sam's money interest free.
And last but not least, you can start your own business.
Right now is the age of the entreprenuer, with all of the jobs going overseas and corporate lay offs - more and more people are starting home based businesses online. It can be something as simple as writing an Ebook one time, and selling it for $20 dollars. Just in case you don't know, an Ebook stands for an "Electronic" book, or a digital product.
You create the asset, and it is something you can sell over and over again for the rest of your life. You can also sell OTHER PEOPLE'S Ebooks for a commission. This is just one example out of millions for a business you can start online. You can also open a restaurant, or any number of things.
The most important key is to find a person you really admire and respect when it comes to money. Some people have greater ambitions than others. But the most important thing I can tell you is to not take advice from somebody who's driving a Honda if you want to drive a Mercedes.
A lot of people take financial advice from 20 somethings fresh out of college who work at investment firms. They make $40,000 per year, and it is their job to sell you their companies products. So OF COURSE they are going to tell you their companies products match your needs the best!
The best thing to ask your financial advisor is "How much money do you make per year?" And if that is the type of money you want to make yourself, then listen to them. If you want to make one million dollars per year, find a person who has that level of income. (They are more common than you think!) Most of those people hang out at a business that they own, or at the real estate investors association.
Find a person you admire, who has what you want, and let them help you draw up a plan. You have to know what it is that you want before you can make a plan to achieve it. If you want to retire in 5 years, you will have a certain plan. If you are comfortable retiring in 20 years, you may want to invest in mutual funds, CDs, or maybe buy one or two properties per year.
YOU have to decide what is best for your situation, and know that anything is possible.
Before you know the quickest path to take, you have to know where you want to go. Do you want to invest in order to pay for your child's college? To retire? Or for reasons that are short term, like going on a trip? Are you looking to quit your job and just live off your investments? These are questions you must ask yourself before you know which vehicle is appropriate for you.
Second:
Once you have a figure in mind about why you are investing and the time line it is going to take to get there, educate yourself as much as possible.
The three types of investments are:
1. Real estate
2. Paper assets
3. Business
The majority of the world will advise you to invest in paper assets, but it is a very slow and risky way to become wealthy.
Look at it this way:
There is a reason why the bank won't lend you money to invest in the stock market, but they will lend you money to buy investment property.
There is also a reason why the insurance company will secure your real estate, but not stocks, bonds and mutual funds. I am sure you've noticed at your bank that mutual funds are not "FDIC" insured.
Banks and insurance companies are the leading financial institutions in the country, if not the world. Part of being a good leader is being a good follower! If you want to get rich, do what rich people do!
Real estate is a very lucrative investment for 3 major reasons:
1. Cash flow
2. Equity
3. Future appreciation
For instance, if I buy a house that appraises for $100,000 for $60,000 dollars, I have created a very lucrative investment for myself.
I can either:
A) Put it on the market for $100,000 dollars and net $80,000 once Realtor fees and closing costs are paid, and make $20,000 using NONE of my own money to buy the real estate in the first place. It is hard to do in this market climate, but still possible.
B) I can offer owner financing on the property to these sea of buyers who are denied bank loans, due to the financial crisis. I can sell the property to them for $100,000 and 20% down - which would be $20,000 upfront. The new balance on the note would be $80,000. And if my original payment on $60,000 dollars was close to $400 dollars - I could charge 9% interest to my owner financed buyer on $80,000, which would be $600 dollars per month.
In this example, I would make $20,000 upfront, and cash flow $200 dollars per month, month after month. And when the buyer refinances, I make an additional $20,000 (without Realtor fees, because you don't need a Realtor to sell an owner financed deal)
C) I could simply rent out the property for let's say $850 per month (if the market warrants that) and cash flow $450 per month and wait to sell when the market conditions improve. Because in 5 years, the property value may appreciate (especially if you live in the Midwest, where real estate markets are not so volitile) So the same property that is worth $100,000 may be worth $110,000 or more in 5 years or so.
I can also take the proceeds of the sale I make, and reinvest them BACK into real estate tax free. It is called a 1031 exchange. So, I can continue to re-invest over and over and over again, using Uncle Sam's money interest free.
And last but not least, you can start your own business.
Right now is the age of the entreprenuer, with all of the jobs going overseas and corporate lay offs - more and more people are starting home based businesses online. It can be something as simple as writing an Ebook one time, and selling it for $20 dollars. Just in case you don't know, an Ebook stands for an "Electronic" book, or a digital product.
You create the asset, and it is something you can sell over and over again for the rest of your life. You can also sell OTHER PEOPLE'S Ebooks for a commission. This is just one example out of millions for a business you can start online. You can also open a restaurant, or any number of things.
The most important key is to find a person you really admire and respect when it comes to money. Some people have greater ambitions than others. But the most important thing I can tell you is to not take advice from somebody who's driving a Honda if you want to drive a Mercedes.
A lot of people take financial advice from 20 somethings fresh out of college who work at investment firms. They make $40,000 per year, and it is their job to sell you their companies products. So OF COURSE they are going to tell you their companies products match your needs the best!
The best thing to ask your financial advisor is "How much money do you make per year?" And if that is the type of money you want to make yourself, then listen to them. If you want to make one million dollars per year, find a person who has that level of income. (They are more common than you think!) Most of those people hang out at a business that they own, or at the real estate investors association.
Find a person you admire, who has what you want, and let them help you draw up a plan. You have to know what it is that you want before you can make a plan to achieve it. If you want to retire in 5 years, you will have a certain plan. If you are comfortable retiring in 20 years, you may want to invest in mutual funds, CDs, or maybe buy one or two properties per year.
YOU have to decide what is best for your situation, and know that anything is possible.
Wednesday, January 13, 2010
What Are The Costs Involved When Purchasing An Investment Property?
I am a house flipper in Oklahoma. Of course, you aren't going to have a lot of out of pocket expenses that somebody with a mortgage would, but here is what you can expect:
1. Title insurance and research: $1,100
2. Doc stamps (To file the titlework at courthouse) $250 (give or take)
3. $1,000 for one year insurance policy (It is so expensive, because house is vacant and has higher risk for vandalism) Of course, if you are paying cash for the property, you don't have to get insurance - but it is obviously smart to do so.
4. You do not have to buy this, but it would be nice to buy an appraisal and get a professional opinion on what the after repair value of the home is worth. AFTER REPAIR VALUE is very important, not in it's current condition. The cost of appraisal is $300 dollars.
5. Also, it would be nice to have a home inspector tell you what repairs need to be done in order to make the house go FHA financing. The reason you want to make sure that the home will go FHA is because that is the type of loan 90% of your buyers will have. It is what is known as the "poor man's loan" because it is backed by the government and requires the buyer to have very little to absolutely no money out of pocket. However, the house has to be in pristine condition, according to government regulations. The cost of an FHA inspection can range from $150 to $250 dollars.
6. You also might want to figure how far away you live from the property and how often you plan on making trips to the property. I don't know if you are fixing it yourself, or hiring contractors - but you have to hover over contractors to make sure they are getting the job done. At the very least, you will have additional gas expense. Plus, you may have to rip and run up the road to get contractors supplies (or get them yourself) or sometimes, the contractors will get everything for you - but they will tack on as much as 20% to their invoice for drive time.
This isn't part of your question, but I would create a budget for each phase of your rehab. And also, here is the formula I use to figure out if the house is a good buy to fix and flip (or not)
1. Calculate the After Repair Value (ARV) in the neighborhood (These are top of the line homes featuring granite countertop, new paint, new appliances, completely remodeled, etc.) Write this number down, once you figure out what your remodeled home will be worth on the market.
2. Subtract the amount of repairs the property will need from the after repair value. If you are a former contractor or have a contractor who can give you a bid on the repairs needed, this is the figure you can use. You may also use the figures based on your inspection report.
3. Once you subtract repairs from the after repair value, you will have the homes CURRENT market value (without repairs)
4. I never pay more than 50% of what the homes current market value is.
To give you a visualization, let's say I am buying a home. And the top market value in the area for my home is $100,000. However, the home needs about $20,000 in repairs to get up to that point.
What I would do is take $100,000 and subtract $20,000 in repairs to come up with $80,000 - which is the properties current value.
I would then offer the home owner half of this amount, which is $40,000 dollars.
So, my total investment would be $60,000 dollars to make the home worth $100,000.
Of course, you have to factor in Realtor commissions as well, which are generally 6% of the homes top market value. Also, most buyers do not have cash out of pocket to pay for their closing costs, so most sellers have to foot the bill - especially in this market.
So right away, you can shave 10% profit right off the top of the $100,000 dollar mark for Realtor fees and closing costs.
Also, what I do is intentionally make the property a little bit lower than the other homes in the neighborhood to be competitive price wise. In this example, I would probally list the home at $90,000 dollars to start out with. Then I would factor in $9,000 dollars for Realtor fees and the buyers closing costs. That means I would net $81,000 dollars - or a $21,000 dollars. (But remember, you bought title work, doc stamps to file title work, insurance, the cost of gas driving back and forth to the property and of course, property taxes) So you are looking at about a $10,000 to $15,000 profit
I say "profit" but then there are capital gains taxes. If you reinvest the money into buying more real estate, you will owe 0% taxes until you sell the next property, and claim it as income. But if you take the $10,000 to $15,000 as earned income, depending on your tax braket - you could end up giving Uncle Sam between 20% to 50% of your gross profit. So, I think it is wise to reinvest your earnings into buying more houses. As always, talk to your accountant.
As you can see from this example, it is smarter (in my opinion) to stay within the $150,000 to $300,000 range when flipping homes. The reason being is there is a bigger spread for profits. However, other investors might argue with me - because investors who buy $100,000 properties or lower tend to sell a higher volume than an investor who focuses on the $150,000 to $300,000 range. It's just a business philosophy that I hold, it is not necessarily the common view of most investors.
Call or text Rose @ 405-881-5958
1. Title insurance and research: $1,100
2. Doc stamps (To file the titlework at courthouse) $250 (give or take)
3. $1,000 for one year insurance policy (It is so expensive, because house is vacant and has higher risk for vandalism) Of course, if you are paying cash for the property, you don't have to get insurance - but it is obviously smart to do so.
4. You do not have to buy this, but it would be nice to buy an appraisal and get a professional opinion on what the after repair value of the home is worth. AFTER REPAIR VALUE is very important, not in it's current condition. The cost of appraisal is $300 dollars.
5. Also, it would be nice to have a home inspector tell you what repairs need to be done in order to make the house go FHA financing. The reason you want to make sure that the home will go FHA is because that is the type of loan 90% of your buyers will have. It is what is known as the "poor man's loan" because it is backed by the government and requires the buyer to have very little to absolutely no money out of pocket. However, the house has to be in pristine condition, according to government regulations. The cost of an FHA inspection can range from $150 to $250 dollars.
6. You also might want to figure how far away you live from the property and how often you plan on making trips to the property. I don't know if you are fixing it yourself, or hiring contractors - but you have to hover over contractors to make sure they are getting the job done. At the very least, you will have additional gas expense. Plus, you may have to rip and run up the road to get contractors supplies (or get them yourself) or sometimes, the contractors will get everything for you - but they will tack on as much as 20% to their invoice for drive time.
This isn't part of your question, but I would create a budget for each phase of your rehab. And also, here is the formula I use to figure out if the house is a good buy to fix and flip (or not)
1. Calculate the After Repair Value (ARV) in the neighborhood (These are top of the line homes featuring granite countertop, new paint, new appliances, completely remodeled, etc.) Write this number down, once you figure out what your remodeled home will be worth on the market.
2. Subtract the amount of repairs the property will need from the after repair value. If you are a former contractor or have a contractor who can give you a bid on the repairs needed, this is the figure you can use. You may also use the figures based on your inspection report.
3. Once you subtract repairs from the after repair value, you will have the homes CURRENT market value (without repairs)
4. I never pay more than 50% of what the homes current market value is.
To give you a visualization, let's say I am buying a home. And the top market value in the area for my home is $100,000. However, the home needs about $20,000 in repairs to get up to that point.
What I would do is take $100,000 and subtract $20,000 in repairs to come up with $80,000 - which is the properties current value.
I would then offer the home owner half of this amount, which is $40,000 dollars.
So, my total investment would be $60,000 dollars to make the home worth $100,000.
Of course, you have to factor in Realtor commissions as well, which are generally 6% of the homes top market value. Also, most buyers do not have cash out of pocket to pay for their closing costs, so most sellers have to foot the bill - especially in this market.
So right away, you can shave 10% profit right off the top of the $100,000 dollar mark for Realtor fees and closing costs.
Also, what I do is intentionally make the property a little bit lower than the other homes in the neighborhood to be competitive price wise. In this example, I would probally list the home at $90,000 dollars to start out with. Then I would factor in $9,000 dollars for Realtor fees and the buyers closing costs. That means I would net $81,000 dollars - or a $21,000 dollars. (But remember, you bought title work, doc stamps to file title work, insurance, the cost of gas driving back and forth to the property and of course, property taxes) So you are looking at about a $10,000 to $15,000 profit
I say "profit" but then there are capital gains taxes. If you reinvest the money into buying more real estate, you will owe 0% taxes until you sell the next property, and claim it as income. But if you take the $10,000 to $15,000 as earned income, depending on your tax braket - you could end up giving Uncle Sam between 20% to 50% of your gross profit. So, I think it is wise to reinvest your earnings into buying more houses. As always, talk to your accountant.
As you can see from this example, it is smarter (in my opinion) to stay within the $150,000 to $300,000 range when flipping homes. The reason being is there is a bigger spread for profits. However, other investors might argue with me - because investors who buy $100,000 properties or lower tend to sell a higher volume than an investor who focuses on the $150,000 to $300,000 range. It's just a business philosophy that I hold, it is not necessarily the common view of most investors.
Call or text Rose @ 405-881-5958
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