Archive for the ‘Investing’ Category
Saving Money on Your Mortgage in the Long Run
January 22nd, 2012 | 
Author: When purchasing a home, you have the option of buying it outright, or you can get a mortgage from a lender.
Over ninety-five percent of home buyers choose to get a mortgage for their home, especially due to the high costs in our society today.
A mortgage is simply a loan that used to purchase some sort of property that is known to increase in market value over the future.
The mortgage rate will signal the cost of borrowing the money from the lender. If you take a look at the amortization schedule for the payment of your mortgage, you will see that much of the payments from the first few years go towards paying down the interest incurred.
Throughout this context, we will be looking at the various ways you can save money on your mortgage by paying the lowest amount of interest in the long run. The most common method is to make the mortgage payments come up even more frequently. If you talk to a mortgage broker, you will be able to learn more about how this concept really works.
When you make weekly payments on your mortgage, you will be paying much less in the long run. If your monthly mortgage payment is eight hundred dollars, and you switch to a weekly payment schedule, you will be only required to pay one hundred and ninety dollars, which will save you ten dollars every month.
A huge portion of your mortgage payment is put down towards the interest and not towards the principal. Your goal should be to pay down the principle as soon as possible. Keeping an open mortgage will allow you to make extra payments without getting charged a penalty fee. At the end of the year, you will have the option to make a lump sum payment on your mortgage.
This lump sum payment will be paid towards the principle, which is great as you will be decreasing the overall interest paid for the mortgage. Paying down as little as ten thousand dollars a year would save you over five thousand dollars in the long run.
You would be able to save the most amount of money when you are first getting your mortgage approved by the lender. It is important that you use a mortgage broker when getting a mortgage, as they could help you get a better mortgage rate. Brokers and advisors have access to market information and would be able to find you the best rates in town, without you having to spend time and money.
Brokers do not work for a specific lender, so regardless of which lender they select, they are still making their money. Going straight to a lender would not technically give you the best rate, so you will be paying more money in the long run for interest payments. Being able to get the lowest possible mortgage rate and taking advantage of special promotions is the smart thing to do.
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How to Make Money Investing in Real Estate: Determining Value
Making money investing in real estate really starts with determining the properties value. There typically is much confusion, especially for new or budding real estate investors, on determining the actual value of a property for resale. This is particularly true for single-family homes. The maximum amount, one could be expected to receive for any given property, is referred to as the ARV or After Repair Value. As you embark on your real estate investing career, you will find that inaccurate property values could have multiple repercussions, none of which are desirable for long term success. This is even more true if you want to wholesale properties. Over-valuing a property makes you look inexperienced and eventually could lead to a loss of credibility with your buyers. Worse, your buyers could take advantage of your inexperience and exploit it or even worse yet, you could undervalue your deals so much you leave huge profits on the table.
As an example, my first wholesale deal was an older brick single-family house in Columbia, SC. A hot lead came in from an extremely motivated seller. They lived out of state, had been taken advantage of by several local contractors and decided to cut their losses. The sellers wanted $10,000 for the house, and agreed to pay the back taxes and closing costs also. Sure sounded like a great deal and figured if I couldn’t make this work, perhaps real estate investing wasn’t for me. Immediately after getting the contract signed I called an investor who did a lot of rehabs in the area. Now I had valued the house at $115,000 based on a few houses nearby that sold for $120,000 each. They were a little bigger in square footage and I found their sales prices on Zillow.com, so I felt pretty confident on my ARV. My house needed a lot of work in the kitchen and outside, but was in good shape for its age (old!).
My asking price was $45,000 for the deal and this investor immediately began negotiating the price down. Since another investor had already contacted me (there were quite a few after I placed some ads), we went to the house together. The second investor asked how I had determined the home’s value, and I showed him the other two houses on the same street. At that point, this investor informed me that those were new houses, built in an old style in keeping with the community. Whoops, it quickly became apparent the more realistic ARV of my house was around $95,000. Fortunately, my deal was so good I really couldn’t lose money. I ended up selling the house for $27,000- and then that investor resold it for $33,000. However, I quickly learned a valuable lesson.
In my next article, we will look at more accurate and reliable methods to determine the ARV or After Repair Value of Residential Real Estate. This is a must if you will become a successful Real Estate investor.
The 6 Most Common Property Investment Mistakes
1. Not Planning – Having No Exit Strategy
New investors often lack a definite plan, rely on guesses and buy an investment property without planning their exit strategy and calculating yields. You will first have to plan a concrete investment strategy, taking into account your resources, financial expectations and current market conditions. Are you looking for long term profits and a large passive income or quick profits and property resale? You can combine these two strategies, eventually reselling a buy to let property, but your initial considerations need to be focused on a solid investment plan and exit strategy. This also means that you will have to sit down and do the numbers and calculate potential cash flow.
2. Doing it all alone
Even experienced investors will need legal and real estate advice. Building a team of good professionals can be a key to success, and you will most probably need to consult an estate agent, appraiser and home inspector, depending on the type of the investment property.
3. Not doing enough research
Building up a team of professionals doesn’t mean that you don’t have to do your own research. Due diligence, and comprehensive research are crucial for a successful property investment. You will first have to educate yourself about property investments, and ask for the advice of property investment consultants. You can then take stock of your own financial resources, expectations and your desired investment outcome. As a next step, you will have to research market conditions, and the current property market, popular locations, prices, calculate potential yields, which will help you find the best property investment opportunities.
4. Not buying the property in view of the exit strategy
Buy a property that is suitable for your investment plan and exit strategy, and remember that you are not buying the property for yourself. If you are purchasing for example a buy to let property, you need to consider the attractiveness of the property from the point of view of potential tenants. So it should be close to local amenities and the property should be in good condition. If you are buying with the intention of quick resale, short term economic and infrastructural developments in the area are going to be very important.
5. Not buying at a low price
Buying investment property at the lowest possible price is a key to success and results in much higher net yields. If you pay too much for a property, your risks are also going to be higher and a lot will also depend on external market conditions. Dedicating enough time to look for BMV properties is thus worth your while, and will lead to a more lucrative deal.
6. No risk-mitigation
While thinking too much about potential risks and negative outcomes is not helpful, you will need a risk-mitigation strategy. This enables you to come up with solutions faster when unexpected events happen. You should thus ask yourself some of these questions: What if economic development fails to pick up in your chosen location? What if you cannot find tenants for a long time? What if you cannot resell the property as you planned to? What if your property burns down or it gets seriously damaged? While these events may seem improbable when you buy the property, a solid risk-mitigation strategy can protect your profits and give you assurance.
Ways to Assess If a Real Estate Is Worth Investing
1. Gross Rental Multiplier
Gross Rental Multiplier (GRM) is one of the commonly used methods of assessing if a property is worth pursuing when buying completed properties from the secondary market. Although one can estimate the values, it requires one to have access to current and detailed financial information about the selected property.
The Gross Rental Multiplier is calculated by dividing the sale price of the property by the annual gross income, i.e. the gross rental receivable. The result of this calculation will give you a result that will assist in determining if the property is indeed worth purchasing.
An example:
Price of Property: $1 Million
Annual Gross Rental ($5,000 per month x 12 months) = $60,000
Gross Rental Multiplier = Annual Gross Rental divided by Sale Price = $60,000
divided by $1 Million = 0.06 x 100 = 6%
Thus, the answer is 6 percent per annum. When compared with the current fixed deposit rate anything from 1.5 to 2 times indicates a good buy.
2. Cash Flow
Regardless of its location or design, a property has to generate a cash flow, as investment decisions are largely based on cash flows.
Rental returns of properties around the area are an important issue. Good occupancy rates (above 90 percent) escalating or declining rental in the area, and more demand than supply, are some of the considerations that determine if rental returns are attractive.
Cash flow is calculated by adding monthly cost of quit rent, assessment, taxes, insurance, repairs, maintenance, to the calculated mortgage payment. To get the monthly cost, divide the yearly amount by twelve.
Apart from looking at the Gross Rental Multiplier and Cash Flow, property out-goings affects the overall yield and it is important to understand what they are.
i) Quit Rent
The State Government collects an annual land tax from owners, payable to the state land or district office. This tax is paid by land owners in most countries and may have a different name in each country.
ii) Assessment
The Local Authority or Council provides public facilities and services such as roads, street lights, drains, markets and other utilities, which have a form of tax attached to them.
iii) Agent Fees for Securing a Tenant
Where monthly rent is above five figures for commercial properties, agent fees may be negotiated.
iv) Vacancies
A vacancy occurs when the property is unoccupied resulting in a loss of rental income. For practical calculation purposes, include one month’s vacancy per year when calculating your overall yield.
v) Service Charge
Retail outlets and office suits, and of late, new commercial shop offices charge a monthly fee for allocated parking spaces and/or security patrols.
vi) Maintenance and Repairs
Landlords of most commercial properties are required to maintain and repair the structure of the building, and attend to leakages from the roof or piping.
vii) Capital Appreciation
When considering property in a particular area, inquire into the capital appreciation record of properties similar to what you are looking at. 10 percent capital appreciation in one year, or 30 percent within three to five years is adequate. Property market trends in most countries follow a natural five to seven-year cycle in which the property prices double. Future market trends are expected to be shorter and sharper, thus carefully selected property will appreciate over time for basic reasons as it will cost more to build the same building due to rising construction material and labor cost, and inflation.
Property Investing – When You Can Become A Bank
An idea that doesn’t always immediately spring to mind when selling your property is that instead of selling it for a lump-sum monetary settlement, why not sell it to your buyer by an agreed instalment plan? This instalment plan can be organised over a mutually agreed timeframe so that you have cash flow coming in each month and your buyer can pay within their budget.
The beauty of this is that if your buyer does fail to make their payments, the house remains in your name so you do not lose your asset.
By selling your house in this way, it is you rather than a bank or other financial lending institution that is providing the buyer the means to buy – they will not need to go anywhere for mortgage as it is theoretically you that has become the financier. The majority of the profit that you gain from doing this (it is called house wrapping), is interest and most of the risks of owning the property are passed on to the buyer.
Positive Net Cashflow
When your buyer is paying you more each month than you need to pay on your own loan repayments, you are seen to be in positive net cashflow – this is an ideal situation to be in as you don’t really need to think about how the mortgage on the property is made each month. It is a great idea to receive your instalment payments from the purchaser via direct debit.
Why Wrap?
There are many people who are desperate to own their own properties but for whatever reason can’t get a mortgage. This is often because they are self-employed. Banks don’t like to take the risk in offering a mortgage to self-employed as they do not consider that it is a safe enough bet that the buyer’s business will survive the term of the mortgage. However, often business owners are the most responsible when it comes to money, after all it’s their own livelihoods that are on the line if their business fails and what the banks also do not appear to consider that in today’s climate, no paid employment is bullet proof safe either.
There have been many concerns about the ethics involved in house property wrapping and this has mainly come about because of the minority of people who clearly are out to gain purely for themselves and not consider the welfare of the property buyer. There are always risks involved and that’s why it is of the utmost importance to go to an expert in property wrapping such as myself to ensure that you are getting the best deal.
When a house wrap is done with a win-win situation in mind, rarely are problems created. This technique can offer not only an excellent return for the financier (current house owner), it also provides a fantastic opportunity for the new buyer to finally own their own property when they have probably been turned down so many times before by other lending institutions.
It has to be said though that you should not rush in and try and make these deals yourself until you have had some expert guidance – each situation is different and you need to create the house wrap that caters for both you and the other party involved.
For this reason, I have come up with a unique house property wrapping guide and full one-on-one coaching program that will take you through all the steps needed to ensure that your first property wrap is a successful one. Ultimately this will save you thousands of dollars in the long run.
