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October 19 - November 23, 2019
Michael Jordan said, “Some people want it to happen. Some wish it would happen. And others make it happen.”
You will likely be obtaining an owner-occupied loan with a house hack. This means that you will be required to live in the home for a year.
They save and invest their money in assets that provide a passive stream of income.
Once the income stream from these assets cover their expenses, they can quit wage work and do whatever it is they want with their lives. This is financial independence!
An asset is something that puts money in your pocket every month. A liability takes money from you every month.
These are assets because you receive income from owning them.
Fannie Mae and Freddie Mac. These two government-owned operations purchase mortgages from banks, accept lower priced mortgages and require a smaller down payment from people who purchase a property with the intention of living there for at least one year.
Since I started tracking United States real estate values back to the early 1900s, the average growth rate for a property in the U.S. is about 6 percent.
Appreciation builds the most wealth through real estate investing. A 6 percent interest rate on a $100,000 property will net you $80,000 in appreciation over ten years whereas the property itself may only cash flow $100 per month or $12,000 over ten years.
Tax write-offs and depreciation are two of the major tax benefits when it comes to buying and holding real estate investments.
The caveat to a 1031 exchange is that the investor must identify a larger property within forty-five days and close on that property within 180 days of close.
However, if you continue to do 1031 exchanges or hold the property until your death, the capital gains expense gets wiped away.
This part of the tax code says that if you live in a property for two of the last five years, you are able to sell the property without any capital gains tax up to $250,000 if you are single, or up to $500,000 if you are married.
They are too busy worrying about themselves to have the time to worry about you. If you purchase anything to impress someone, you are doing it wrong. Only purchase things that add value to you and your life. If someone is going to like you based on the things you have, they are shallow and you should not want to be friends with them anyway.
Single-family homes are known to appreciate more quickly than multifamily homes. This is the case because both investors and non-investors are interested.
It is easier for a buyer to develop an emotional attachment to the single-family property, which means they will often pay a premium, versus the average buyer of a multifamily property.
A class A location is an area that has the newest buildings, hottest restaurants, best schools, wealthiest people, and highest-cost real estate.
A class C location is likely a lower-income area with homes that are slightly run down.
Frequently attend these meetings, and become a regular. As you build your network, you will get insights to which parts of the city are going to be developed, therefore, which places are best for your future investments. If your city does not have a meetup, then go to the town hall meetings or other regular meetings that are open to the public and establish relationships with the other attendees. There is a high probability that they will talk about the city’s plans, and you will be able to purchase a property before they break ground and the general public learns of the plans.
While some people believe there are a tier of “elites” that are 800-plus, the banks look at anything over 700 as top tier.
There are two types of debt-to-income ratios: front-end and back-end.
The differentiation is that front-end DTI only takes into account property expenses (mortgage, insurance, taxes, HOA, and PMI) in your debt obligation, whereas back-end DTI takes into account all of your debt obligations (mortgage, student loans, and car loans) and then divides that by your monthly income.
All lenders are different, but most allow for an “after purchase” debt-to-income ratio of 43 percent to 57 percent.
If you plan on purchasing a two- to four-unit property, then the lender will take 75 percent of the appraised rents for the unit(s) that you are not occupying and add this amount to the “income” portion of the equation.
Even though most loans are sold to Fannie Mae and Freddie Mac, I have noticed that different lenders are often able to offer different loan products.
As a heads up, they will need to see a lease signed and a deposit into your bank account to confirm that the rental income is in fact truthful.
You calculate the LTV by taking the loan amount and dividing it by the value of the property. The larger the down payment on the property, the smaller the loan you will need; and the lower the LTV will be. The lower the LTV, the less risky it is for the lender.
What is the maximum/typical debt-to-income ratio you would lend to? Do you focus on front-end or back-end DTI?
If you have student loans, a car loan, or credit card debt, you will be more likely to receive the loan if they focus on front-end DTI because it only spotlights the property. However, I have found that it is most common for lenders to focus on back-end DTI, which takes into account all debt in your name. However, be sure to talk to your lender. Depending on the loan type you receive, some of your projected rent may counter the debt.
The higher LTV that is allowed, the more likely you will be able to qualify for a loan. At this time, most lenders require 75 to 80 percent for conventional investments and 90 to 96.5 percent for owner-occupied.
Your best bet when finding a contractor is to find a part-time investor who has done a few projects with the same contractor, and has seen good results.
How long do you expect it to take to complete this project? You want to have an expected timeline. We highly recommend incentivizing the contractors to finish early or on time. We do this by giving them a $100 premium for every day they are early and charging a $100 fee for every day they are late.
11. Can you please provide a list of references that I can contact? Be sure to contact the list of references they give you to make sure that their prior customers are happy with the outcome of their work. If not, this is a huge red flag, and you know to keep searching.
Although you do not need to be a first-time homebuyer, the FHA Loan is popular with first-time homebuyers and house hackers because of the 3.5 percent down payment, and the lower credit score requirements. However, as a result of lending to riskier borrowers, FHA Loans come with PMI, a monthly premium that is added to your principal, interest, taxes, and insurance (PITI).
the 203k Loan is one that you should consider. It is a type of FHA Loan that allows you to lump any rehab costs into the same loan that is used to purchase the property.
Anything from a major rehab and/or structural repairs to new additions or the elimination of safety hazards are all fair game for the 203k Loan. However, you are on a tight timeline and need to make sure the project is finished within six months.
The USDA Loan’s base annual income limit is $82,700 for a one- to four-member household or $109,150 for a five- to eight-member household. To find out if you are in a rural area you can google “USDA loan map” and determine whether or not your area is eligible for a USDA Loan.
My favorite time is on a Friday or Saturday night, or even over a holiday. It is unlikely that there will be any other offers coming in during those times. And if the seller sees it at the right time and your offer seems “good enough,” then they might just want to move on with the process and accept your offer.
Owners who have a high likelihood of selling are those who have owned the property for 30+ years, absentee owners, or landlords going through an eviction.
You can usually determine the “mom and pop” operations when they have photography that is not professional, lack details in their description or if they have a phone number listed in the ad.
Travis discovered that he could take a personal loan for up to 50 percent or $100,000 (whichever is less) against his 401k.
Always try to get a warranty anytime it’s possible.
Either way, to calculate the NWROI, you are going to add together your increased net worth through: cash flow/rent savings, loan paydown, and appreciation. When you get that sum, you will divide it by your total initial investment to determine your net worth return on investment.
NWROI = (cash flow and rent savings + loan paydown + appreciation) / initial investment
The main reason why you can achieve these high returns can be attributed to the fact that initial investment is incredibly low relative to what you can make on the returns.
Monthly rent – monthly debt – reserves = expected profit
In order for me to do these deals, my profitability bar was set at $750 per month above the mortgage. This allowed me to set aside $250 to $400 in reserves each month while still cash flowing $250 to $500 per month.
Does your strategy work if you move out? In many locations—Denver to name one—there are laws that require all short-term rentals to be a primary residence. Once you move out, the short-term rental strategy will not be a sustainable strategy for you. If you are pursuing this strategy, you will want to make sure that the property works as a full-time rental as well as a short-term rental.
The only way you lose the earnest money is if you decide to back out on a deal for any reason not originally specified.
