Tips & Tools : financing

Thinking of investing in real estate?

RE.com Tips & Tools — Tue, 16 Jan 2007 21:12:00 GMT

Buying a second home as an investment can be very rewarding. But do your homework before you jump into the market.

Often investors are attracted to the real estate market because it seems like a sure thing. In the last quarter-century, average home prices in the US have climbed almost every year.

But most people have enough difficulty carrying just one mortgage. Is it really possible for the average Joe or Josephine to finance a real estate investment?

There are many strategies for investing in real estate. Some, such as buying land and building new houses, apartments and commercial buildings, are the domain of developers. But you don’t have to have deep pockets to buy a second home as an investment.

Getting started

As with so many things, success at investing in real estate depends on doing your homework. Bookstore shelves are full of how-to guides for the neophyte. There are also seminars and home-study courses available. Whatever your method of educating and preparing yourself to invest, you need to learn how to locate a property, inspect it to make sure it isn’t a money pit, run the numbers to see whether rental income will cover your carrying costs, secure financing, negotiate a deal and close the transaction.

Strategies

Buying a house and renting it out while it grows in value sounds easy, right? This strategy can be an effective way to invest in real estate: you buy the property, sit back and watch it appreciate while someone else’s rent checks pay the mortgage, taxes and maintenance. But be prepared for the headaches of being a landlord. You’ll have to cope with plumbing emergencies and the like, as well as general upkeep, or pay someone else to do it. You’ll also have to deal with tenants who are tardy with the rent, make noise, upset neighbors and abuse the property. And you must ensure that the investment will be a paying proposition. A rule of thumb is that you’ll need to charge 10 to 15 percent of the value of the property in rent each year to cover management costs. Remember that landlords can usually deduct management costs, taxes and mortgage interest from their tax bill. Consult your tax advisor to find out the details of tax treatment.

Buying and flipping

It’s every handyman’s dream: you purchase a neglected house in a good neighborhood, put a few thousand dollars into renovations, and sell it a few months later at a profit. This can be a successful strategy for those who are good at estimating renovation costs as well as handy with a hammer and nails. To come out ahead, you’ll also need business smarts, or you’ll have to hire some -- you may need the help of a lawyer, accountant and escrow company, among others. To make your investment worthwhile, experts suggest that you aim to add two dollars to the home’s value for every dollar you spend on improvements.

Risks

While real estate has proven to be a reliable investment, there are risks attached to both of these strategies. If you are buying and holding a rental property, a slump in the local rental market could force you to reduce the rent to a level that isn’t profitable, or leave you tenant-less for a period of time. If you are renovating and flipping, local layoffs or a sudden hike in interest rates could make your fixer-upper hard to resell and force you into the role of landlord in order to offset your carrying costs for the property.

Financing

With either of these strategies, you’ve got to arrange financing at the lowest possible interest rate to maximize your profit. That means timing your investment to coincide with low market rates, and shopping around to get the best mortgage deal available.

If you are planning to buy and hold a rental property, you can consider a long-term adjustable rate mortgage (ARM) or a traditional fixed rate loan. If you are going to renovate and flip a property, you are probably better off choosing a one-year or two-year ARM, to take advantage of the very low initial interest rates currently available for these products.

You also need to think about where the down payment for your investment property will come from. The most cost-effective source of financing could be the equity in your own home. You can take out a low-interest home equity loan to make a down payment on a rental property, and repay it out of rental income. But remember, that increases the debt secured by your primary residence.

If you are renovating and flipping, consider a home equity line of credit that you can draw on for renovation expenses as well as your down payment. (Some lenders will lend as much as 125 percent of your home’s appraised value, less outstanding mortgages).

Step 5: Closing on Your Home Sale

RE.com Tips & Tools — Mon, 15 Jan 2007 18:14:00 GMT

Getting to the closing table can take time.

Prior to most home closings, there are contingencies that must be met and paperwork that has to be taken care of.

Contingencies

A contingency allows the buyer to back out of a contract if certain conditions are not met within a certain period of time. Some of the most common contingencies include the following:

Inspection – Almost all home contracts have a contingency requiring the home to satisfactorily pass inspections. The buyer pays an inspector to examine the home and find any potential problems. The buyer and seller then agree on what has to be fixed and when. This must be done prior to closing.

Financing – Usually, home sale contracts also have a contingency involving financing. The buyer must be able to get the mortgage specified in the contract. If this cannot happen, the contract is void.

Appraisal – Many buyers make a contingency that the home must appraise for at least the selling price. Since the financing is dependent on this, it is important. Either the buyer or your REALTOR® will arrange for the appraisal.

Once all the contingencies are met, the sale can go forward. Your REALTOR® will draw up all the closing documentation, including the settlement statement or HUD-1. This lists out all the costs of the sale to the buyer and the seller. Read over the settlement statement carefully to make sure everything in the contract is indeed reflected in the actual sale. If the document is correct, all that’s left is to sign the paperwork and hand over the keys to the new owner.

In today's market, home buyers can negotiate winning deals

RE.com Tips & Tools — Fri, 12 Jan 2007 21:52:00 GMT

In most areas, it's no longer a seller's market. Use this to negotiate a home purchase contract that gives you what you want.

A traditional buyer’s market, in which the supply of for-sale homes exceeds the demand to buy those homes, can be a great opportunity to negotiate not only the price of the home you want to buy, but also the terms of your purchase agreement. Financing, inspections, closing costs and other deal points might be yours for the asking in this type of market.

Purchase may depend on financing

Some of the purchase-offer terms you might want to negotiate with the seller concern the financing you need to buy his or her home. Examples include:

the amounts of your deposit and your down payment and the dates by which you will come up with those funds,
the dates by which you will first obtain and then approve of (or reject) an appraisal of the home’s value,
the type of mortgage you will be willing to obtain, the maximum interest rate and fees you will be willing to pay, and the dates by which you will first apply and then be approved unconditionally for your mortgage.

Walk away if inspection isn’t right

One of the benefits of shopping for a home in a buyer’s market is having time to think about your purchase and make sure that you are buying a home that meets your needs. Inspections are an important part of that process.

You might want to negotiate permission to hire a home inspector to evaluate the condition of the home or to hire other experts to look for structural problems or wood-destroying pests (e.g., termites), mold, radon, lead-based paint or other potential hazards. You also might want the right to not purchase the home if you aren’t satisfied with the findings of those inspections. You can also ask the seller to purchase a home warranty that would cover certain problems with the home that could surface after you purchase it.

Close on your schedule

A buyer’s market also might enable you to make your purchase dependent upon the sale of your current home and on specified terms that are acceptable to you. This type of contingency is often difficult to negotiate in a seller’s market because sellers are less willing to wait for the buyer’s home to be sold when buyers are plentiful.

You also might want to negotiate a walk-through shortly before the deal closes, the closing date and the time when you will take possession of the home. The closing date can be crucial if your purchase of the home depends on the sale of your current home. Payment of closing costs might be a point of negotiation as well.

A win-win is the perfect deal

Don’t be shy about asking for other contingencies, terms or concessions that you need or want to facilitate your purchase of the home. If you ask for what you want, you may get everything on your list and then some, but if you don’t ask, you might not get some very important protections that you need to complete the transaction.

Negotiation is a powerful way to buy a home on favorable terms, but don’t forget that the seller can nix the deal if he or she believes your demands are unreasonable. That’s why it’s a good idea to discuss your needs, wants and negotiation strategies with your real estate agent before you make an offer to purchase a home.

Five Rules for Smart Home Buying

RE.com Tips & Tools — Thu, 11 Jan 2007 17:07:00 GMT

1. Arrange financing before you make an offer. Increase your chances of buying the home you want by getting pre-approved for a mortgage and waiving financing as a condition on your offer to purchase. In a competitive market, sellers have been known to ignore an offer that is conditional on obtaining financing. Some will even accept another offer for less money if there is a firm commitment behind it.

2. Know your limit. No matter how much you love a home, decide on the maximum amount you are willing to spend and stick with it. Write the number down as a reminder. If you act on emotion or find yourself in a bidding war, it’s easy to forget your limit and wind up paying a lot more than you bargained for.

3. Hire a home inspector. A home that has basic curb appeal and a stylish interior may also have a neglected roof, broken furnace or other hidden flaws in need of repair. Know what you’re getting before you buy. Make your offer to purchase conditional on a home inspection. Get the seller to cover the cost of any necessary repairs or deduct the estimated cost involved from your final offer. If the seller is unwilling to accept these terms and you still want to proceed with the sale, be sure to factor in repair costs on top of your mortgage.

4. Budget beyond the down payment. There’s more to affording a home than coming up with a down payment and negotiating a mortgage rate. Remember to budget in extra money to cover your moving and closing costs (which can often add up to between two and six percent of your loan). Ask your lender or mortgage broker to give you a Good Faith Estimate of the loan-related fees you’ll have to pay. Your REALTOR® can also help you compile a list of other expenses.

5. Get a move on moving. Try to synchronize moving/closing dates so you can move from your existing home to your new home on the same day. Otherwise you may have to arrange a short-term rental or camp out with family or friends and put your furniture in storage. You don’t want to have to move twice.