Finance Guide

So now that you know what your basic plan is, it’s time to start getting a little serious and put some structure into your actions. The first thing you need to do is to get ‘pre approval’ for a loan. In other words you need to find a lender that suits your needs and get them to agree ‘in writing’ to lend you a certain amount of money to buy a Property. I remember when I bought my first property feeling completely over my head when it came to getting my finance into place. I had so many questions – most of which I managed to answer by trial and error. I will try to give you a detailed overview of all the question, problems and answers that I have encountered with getting finance.

Q. Why do I need to get ‘pre approval’ of a loan?

A. You don’t NEED to get pre approval but I highly recommend you DO for a number of reasons.

- Pre-approval will let you to know EXACTLY how much your budget is and therefore allow you to exclude properties that are out of your price range. This can save you valuable time.

- If you are competing against other buyers then having ‘pre-approval’ will definitely give you a big head start and allow you to take advantage of Vendors who are looking for a quick sale. Think about it – If you were the vendor and two people both offered you $350k for your house BUT one of them had ‘pre-approval’ whilst the other didn’t. Who would you choose? It’s a no brainer, there are even times when you offer $1k -$30k less than somebody else and they still choose you. Why? Because for one reason or another the vendor needs to sell straight away and they can’t wait to find out if the other offer will be approved.

- Keep STRESS to an absolute Minimum. There is nothing worse than having your offer accepted and then having to wait for the bank to make their decision. This is especially the case if you haven’t got a home loan before or are self employed.

Q. Should I use a Mortgage Broker?

A. Yes, a good mortgage broker should save you thousands of dollars and help you get a loan easily. If you are buying your first property then you will appreciate as much help as you can get. Mortgage brokers deal with banks every single day and they should know how to get you a loan and more importantly WHAT loan to get. Have you noticed that there are a million different loan options these days? A good mortgage broker will know which one suits your situation and save you lots of time and money. Always do your own research but if you find someone who you trust you should have no problems. Best of all you don’t even have to pay them; the bank will do that on your behalf. So really there is no reason NOT to use one. Just remember find a Broker who you trust and get along with.

Q. What sort of loan should I get, and what does Interest only mean?

A. The best person to advise you on this is your broker but generally speaking Investors only ever use Interest only loans. What this means is that they will never own the house outright, instead they make smaller repayments that only cover the interest bill. This can be a crazy idea to get your ‘head around’ at first but the reason is quite simple. The lower your repayments are on your property the less restricted your cash flow is, therefore you have more excess money to help finance your next investment property. The logical question is – but if you never pay off the house how can you make any money? As we learnt in Chapter 1, you can still access the equity in your property without selling or completely paying off the house (see chapter 8 for more details). It’s also worth mentioning that the Interest component of an Investment loan IS tax deductible whilst the principle repayments are NOT, just another reason why Professional investors always use Interest only loans.

Q. Should I fix my Interest rate or leave it variable?

A. I have a basic rule or recommendation when it comes to this question. When you first see banks raise their long term fixed rates you know it is time fix your loan. Using this rule and some common sense you should be able to work out what’s best for you.

Q. How much do I need to save for a deposit?

A. Once again it depends on your situation and circumstances. A ‘normal’ property loan would include a 20% deposit but professional investors will always try and pay as little deposit as possible. So, would I recommend getting a 95% loan? With caution and common sense, yes I would – BUT every situation is different and I obviously wouldn’t recommend for someone who is earning $20,000 a year to get a 100% loan for a $500,000 property. Use your common sense whilst doing everything possible to make it happen for you. The worst feeling in the world is when you have saved a decent deposit but decide to wait another 6 months to save that extra little bit only to find out that house prices have risen and your deposit is now effectively worth less than it was 6 months ago.

1. Leverage (Other People’s Money). Leveraging will make every dollar count. You do this by pooling you money with other people’s money. It’s simple: If you have $50,000 and pool with three other people with $50,000 each, together you have $200,000 to invest. This makes is it easier and more profitable for all of you. And because you organized this deal and worked to make the investment property profitable, you will keep the majority of that profit. The investors didn’t have to do anything but put up their money, but they made a profit as well.

In order to gain the trust of other investors is by having a strong credit history, good character (ethical), and have good references. They need to know that they are doing the right thing by putting their money into your hands. This is a trust situation. They are trusting you to be who you say you are and do what you said you would do – turn a profit.

2. Pre-approval with an equity line of credit. If you’re a property own now, and have a good credit history, you may be able to get and equity line of credit for the quick purchase of your investment property. This line of credit is drawn against the equity of your current home. You have a check book and a line of credit that you can draw funds from with little restriction. The interest is charged only on the current balance from this credit line. If you don’t use it, you don’t pay interest on it. But, when a property comes up that meets your criteria and passes all of your tests, you will be able to purchase it immediately with this line of credit.

3. Pledged Account Programs. This is a very short term line of credit, used to get the purchase of your investment property finished. It is a no down payment loan. This is also an adjustable rate mortgage plan, so selling quickly is extremely important. If you can’t sell quickly, then refinance at a fixed rate to keep payments under control. Then you can use the property for rental purposes, with the tenant making the mortgage payment, until you can sell.

In a pledged account, the borrower or his/her relatives pledge certificates of deposit to a lender for security on the no down payment program. The principal and interest earned continue to belong to the borrower or their relatives. But, the CD secures the no down payment loan and lowers the lender risk.

There are other creative ways to finance the purchase of foreclosure property. Check with your local banks, credit union, or savings and loans.

I was on a conference call earlier today and wanted to see if my first impressions and thus conclusions were sound. Please advise me on your take. I will attempt to be as open as possible on talking from the other side of the conversations.

I was contacted on a real estate investment opportunity. Maybe some of you have heard of this even though I am not going to mention any names.

For mere $34,900 I can invest into a company where they would find me a home (usually in the mid-west) and rehab it for me. I would then be the owner of the home. The ARV market prices of these homes are in the mid to upper $50,000s. They would then provide up to a year of payments at $400 per month while they find a buyer for my home. I would then carry financing on that home for the end buyer on a 30 year PITI note. There is no balloon payment thus you have strong cash flows. Mortgage payments are based on a 9.9% interest rate and the market RENTS. Thus, the end buyer is paying based upon the market rents. Their down payment is about 2% of the value of the home, normally around $1000.

The Cash-On-Cash Return on these in the first year is approximately 16 to 18%, plus the equity difference of your buying the home and the actual value.

Here is my dilemma. I believe in the speed of money. Thus, when you are investing how quickly do you get your money back. These are all cash deals. At a 18% cash-on-cash this would mean you are cashed out in about 6 years. A little slow for my tastes, but ok.

Another issue is I am in the profession of lease options in Las Vegas, NV. Thus, for an option the tenant/buyer (not the actual end buyer at the time the contract is signed) is putting down at least $2000. I would ask the same on an option in the mid-west even though the price point of the home is lower. This would mean a larger percentage of a down payment. Thus, someone putting down $1000 to buy a home is not as productive as a lease option. And you lose control of the home.

Third issue is these are all done through a separately owned LLC holding the note (and originally the property). If you have to foreclose this is a bit more costly than an eviction — in most cities and municipalities.

In conclusion, I did not see the advantage of doing a program like this unless you are doing this as a small part of your investing portfolio (maybe 20% of your real estate investing) over simply doing a rental or a rent-to-own. I understand the humanitarian and philanthropy benefits, but the math to me doesn’t make sense.

Please give me your input on this. The numbers and returns are higher than most stock or commodity markets and I wouldn’t mind promoting this to certain investors. I just need to know if your initial reaction is similar to mine or am I missing something.

Thanks for your feedback and Happy Investing!

The recent negative investment climate for residential real estate investment property has provided investors with new reasons to explore investing in business opportunity and business finance options. This report will offer some guidance for business financing and commercial mortgage loans plus an overview of primary reasons for exploring possibilities to buy a business or commercial investment property.

Commercial Real Estate Investment Property and Business Finance Strategies:

Investing in Unique Businesses and Special Purpose Properties

Commercial real estate and business opportunity choices include special purpose situations such as funeral homes and golf courses. The unique characteristics of such business investment options translate to enhanced possibilities to differentiate a commercial business and provide added value.

Specialized commercial real estate investing will involve special business financing programs such as gas station financing and motel financing. Locating business opportunity financing or commercial mortgage that is suitable for the business and the business owner will be a key element in successful real estate or business investment results.

Business Loan and Commercial Mortgage Options using SBA Loans

The potential use of a Small Business Administration loan offers a business finance strategy not possible for residential real estate investments. SBA business loans are an option for most business owners and can be helpful in buying business opportunities or commercial investment property.

Business Opportunity Finance Choices to Avoid Real Estate Investing

Acquiring a business opportunity excludes commercial property investing. Without real estate, the business opportunity finance and business loan investment value will be primarily determined by the business instead of real estate. The lack of a commercial real estate loan can end up being a profitable advantage in a falling real estate investment environment.

Commercial Loan Appraisals:

How Income Effects Value of Commercial Investment Property and Businesses

Commercial real estate financing and commercial financing will require an appraisal that reviews historical income data. Residential investment property appraisals are primarily driven by location. Business opportunity value and commercial real estate valuations are primarily impacted by business income data. Because of this simple but important difference, valuations for business opportunities and commercial business are likely to be insulated from real estate property value fluctuations.

Copyright 1995-2007 Stephen Bush and AEX Commercial Financing Group. All Rights Reserved.

Most personal finance gurus continually stress the importance of budgeting for monitoring and modifying poor spending habits. However, I have noticed that most people who attempt to implement a family budget eventually give up on the activity, mainly because it takes the fun out of spending money. You know what, I agree! An impulse purchase here and there feels good! And as it turns out, an impulse purchase made on occasion won’t necessarily create a big problem for most us. The problems arise when we decide to make them on credit. Here’s an excellent personal finance tip for all you budget-haters out there – pay cash for all non-investment expenditures and eliminate your need to budget.

What is a Non-Investment Expenditure Anyway?

First off, let’s define investment expenditure. By my own definition, an investment expenditure is a transaction that involves the purchase of an asset that appreciates in value. On the flip side, a non-investment expenditure represents all other transactions. One quick check you can make before whipping out your credit card to buy something is to ask yourself, “Is there a high likelihood that I will be able to sell this item in the future for more than I am paying now?” If the answer is “no,” pay cash. If you don’t have the money, you can’t make the purchase. It’s that simple.

Examples of Non-Investment Expenditures

Unfortunately, the vast majority of our everyday spending is classified as non-investment expenditures. Groceries, fuel for the vehicles, dining out, your cell phone bill, a new pair of designer jeans – these are all non-investment expenditures. Some of these items may be extremely important, even life sustaining. But purchasing on credit, even for life sustaining expenditures, encourages excess. Let’s take food, for instance. To purchase enough food for the family to survive really does not cost much money. What costs us a pile of money are the rib-eye steaks, junk food, alcoholic beverages, and sodas we routinely buy. Moreover, these foods are bad for our health! Grocery shopping with cash forces us to reconsider the food choices we make, in terms of both health and money. And that’s a good thing.

What Else is There?

You may be asking yourself, “Would any of my spending be classified as investment expenditures?” For me, two things come to mind – your home and your education. A home is rather obvious because, over time, houses have always increased in value. A college education would also be considered an investment because it provides one the opportunity to earn more money than he would otherwise make. Because these two items are considered investments, taking out a loan to pay for them can be justified. In addition, home mortgages and college loans offer some of the lowest interest rates of any form of credit, making them even more attractive expenditures.

One Caveat to Consider

Although following the above advice can eliminate the need for a budget, one other choice must be made to assure financial success in the future. An automatic investment plan must be initiated to make certain your investment accounts are funded before all the money is spent. If you work for a company that offers a 401k plan, this is done automatically. If you have outside accounts, you will have to notify the firm to initiate automatic transfers from your checking account. With most firms, you can set up the automatic transfers yourself from your online account interface.

Summary

Although a budget is a fantastic tool for monitoring and modifying our spending habits, the cold hard truth is that many of us will never stick to one. Should these folks be doomed to financial hell for the rest of their lives for this so-called lack of discipline? Of course, not! Just follow our simple personal finance tip to pay cash for all non-investment expenditures and you, too, will reach financial success in the future.