Happy Dance!

On the 15th, Tanna & I sold our first investment property. We bought at the right price, didn't overdue the rehab process and successfully sold the property for a property in a very difficult real estate market. We put $8,000 into the property and made almost $10,000 in profits. Tell me where else anyone can see that kind of return on their money?

It was a peice of cake... Or not.

I will say that I just passed real estate investing 101. However, it was NOT easy. It was one of the most challenging and rewarding tasks that I've ever taken on.

I feel like a giant gorilla just climbed down off of my shoulders...

Some advice for those of you considering real estate investments:

• It won't sell tomorrow. Plan on hanging onto the property for 5 years. That being said, do enough updating so the property can be rented out. Wait until the market starts to take off before 'flipping' the property & putting it on the market.
• How long is your snorkel? Know your worst case scenario. If the property goes vacant or unexpected expenses pop up what is going to happen? Will you find yourself calling relatives and friends to stay out of foreclosure? Don't get in over your head!
• Get past appreciation. You make money buying at the right price and cash flowing. If you are banking on appreciation, you're going to need to hold onto the property for a long, long time.
• Get the right loan product. The right loan will help you meet your goals and maximize the return on your investment. There is no 'one size fits all' loan. Get the right loan for your needs.

I'm not an investment expert (yet). I believe that I am on my way. Wishing you all phenomenal returns on your real estate investments in 2008.

5.875% + 6 months no payment!

This morning, I heard an ad on the radio selling an amazing loan program!

5.875% 30 year fixed rate + No Payment for 6 months!

Wow! It sounds too good to be true.

It is. I haven't called in to shop this loan program, but before getting excited let's take some time to guess where 6 months of payment freedom comes from. It's going to be one of two places:

1 - EQUITY!
2 - Closing Costs (Since we'd be talking about 6 months of payments rolled into your closing costs, I think its fair to say that this 'payment freedom' will in fact be 'equity payments.')

There is no such thing as a free lunch. This program simply offers you the opportunity to eat up your equity. However, it may be a good fit for a select few people.

Let's say you have great credit but have just experienced major unforeseen expenses and need some help to get back on your feet. Perfect!

On the other hand, if you are incapable of living within your means and need payment freedom to pay down $15,000 in credit card debt, this isn't a solution. It's a band aid. The real problems? Financial management, self-control and budgeting.

Shady marketing is just that.... shady! The company has one goal, and that is phone calls. Once you've called, I hope you are ready to be told that you don't qualify because of ________ (select one or more: credit, employment, assets), but you do qualify for this higher interest rate loan that will allow you to skip two months payments!

I hope they mention that every refinance allows you to enjoy no mortgage payment for two months.

I also hope that they disclose where the money for this payment freedom is coming from.
A - Equity
B - Closing Costs

I encourage you all to trust your home to financial professionals who are not transaction driven, but people driven. You deserve a consultation where your needs and goals are discussed. Let's all get past minimum payments and start talking about how you can work towards financial freedom! It can be a reality, but it's not going to fall into your lap!

Wishing you all a wealth of real estate knowledge in 2008.

What To Do?

"Matt, we're buying our first home in June. How do we get the whole process started?"

Congratulations!
Buying a home (especially your first) is an extremely exciting time. Many times, it is a roller coaster process as you find the perfect home, make an offer and obtain financing.

1. Establish a Budget & Get Preapproved. I would run numbers based upon a 6.5% interest rate. Rates are lower than that right now, but we're still 6 months out. Establishing and remaining within your budget is vital! When you are preapproved, find out when your rate will be locked.
2. Find a Realtor. Typically, references are the best resources. Know anyone who has purchased a home recently and had a great experience? Make sure that your Realtor treats this purchase as an investment.
3. Start shopping. Take notes to remember each property. As you narrow down your choices, have your Realtor pull some comparable sales in the neighborhood to make sure that you're getting into a sound investment.

“Should we put money down? If so, how much?”
I'm not a financial investor and won't pretend to be one. However, some basic financial principles need to be applied.

I would start with 3% down in order to qualify for FHA financing. You'll obtain great rates & will lower your mortgage insurance premiums. The more money you put down, the lower your mortgage insurance payments. However, mortgage insurance is only required on homes whose financing exceeds 80% of the value. For that reason, I would not recommend putting more than 20% down as it will not improve your financing. Conservative investments offer returns that exceed the 6 – 7 % mortgage rates so reducing your principle may not always be the wisest investment.

There is one big problem when you pay down your mortgage. Liquidity. Once additional payments have been made, your monthly payments do not change. Should you run short on cash, the bank will not float your payments for 30, 60, or 90 days, they will begin foreclosure proceedings. Ugh.

Always have a plan for a worst case scenario. If you do decide to put additional money towards principle, obtain a HELOC first. This line of credit will provide the necessary liquidity while allowing you to accelerate the pay off. This is a win, win. You have access to your equity & you will reduce the amount of time you are exposed to the interest rate, thereby reducing your effective interest rate!

Hope this helps! Happy home buying!