financing

Finding Financing For Real Estate

Finding Financing For Real Estate

Getting Financing for Your Investment Property Or Your Renovations

Financing For Real Estate

There are countless ways to make money in real estate, all which require skill, foresight and preparation and some hard work. A renovation is no different. Whether your project is a purchase to flip, repairing a rental property or improving your personal residence, there are a few things to consider which we will go over in this post.

First, you must ask yourself whether injecting any money into the property will actually increase its value. To answer this, you need to understand your market. This requires becoming an expert on property values in your neighborhood through sales comparable and so good old research.

You must know:

  • What properties are selling for in your area?
  • How long properties have been on the market?
  • When a property sells did they get asking price?

For us, what we have recently been doing is looking at current comparable’s and tax  assessments to get a better picture of property values for my area. Sometimes finding direct comparable’s is tough. It is always best to find out what the selling price per square foot is going for in your market.

When working and purchasing rental properties I highly recommend doing repairs on rental units in order to keep happy tenants, but tackling a fix and flip or renovating your home for profit must be considered carefully prior to commencement.

If the numbers look good and you decide to move forward, the next step is creating a specific “game plan” for the renovation. Understanding exactly what to fix and what not to fix will give you the biggest “bang for the buck.” Typically the kitchen and main bathroom, including sinks, counter-top’s, fixtures and flooring will provide the most upside. Painting the entire house, both inside and out with a neutral color provides a “flow” to the house and paint is more affordable when you buy a large quantity of the same color.


Landscaping is another area which is relatively inexpensive, yet adds a lot of value and “curb appeal.” The property may also require larger improvements such as windows, roof or furnace replacements, however it is often difficult to justify these amounts of renovation dollars unless your calculations still allow a profit.

To gain perspective on properties in your area, it is important to check out other houses in the neighborhood and understand to what degree people are renovating. This is easily accomplished by visiting open houses or buy checking building permits that are being pulled in local neighborhoods.. Never make the mistake of renovating to a standard that is higher than that of the market.

If the “fix and flip” model is a little too daunting, a very affordable, slow and steady strategy is to renovate your principal residence for profit. Once the renovation is complete, you have presumably increased the value. The next step is to refinance the property and use the capital to purchase another property and repeat the process. This is a great way to begin building a portfolio. Remember, you can continue to purchase with as little as 5% down, move in, renovate and repeat. Make sure you are buying properties that will gain profit once you move and continue the cycle. By repeating this process, many people ultimately wind up in their dream home, often with a fair amount of equity.

You may simply want to renovate your home to make it more energy efficient or accommodate a growing family or just bring a new look to the house. Either way, strategic renovation comes into play.

As a side note, there are many government grants and rebates available for a number of these renovations that will add to your savings on your renovations.

Before you jump into buying supplies and hiring contractors, ask yourself the proverbial question… how are you going to pay for this renovation?

The first thing to do, whether you are paying with your own cash or intending to get a loan, talk to a financing specialist, A good financial adviser will be able to help you understand your options and pre-approve you for a specific amount of money needed for your renovation, fix and flip or your next purchase. Let’s look at some of the options to consider.

Cash

If you have saved adequately, use your own funds. Make sure the cash outlay won’t overly affect your ability to qualify for your next property or affect your cash flow. When choosing to cash in an investment such as a stock or mutual fund to do the renovation, measure the loss amount it could be making in interest and include any early redemption fees versus the amount of interest paid on the renovation loan.

Credit Cards

The convenience of plastic allows the renovation to begin immediately rather than waiting for a loan approval. Remember to pay them off quickly or be faced with high interest rates. Be careful not to carry a high balance relative to your limit as this can significantly affect your credit score.

Credit cards from one of the big box stores can be an option. Some of these stores have been known to offer zero interest charges for 6 months. Again, consider your ability to pay off the card quickly as well as the credit bureau “hit” when considering any credit card.

Unsecured Personal Line of Credit

An unsecured “personal line of credit”  could be just the thing to pay the renovation costs. Banks give an unsecured personal line of credit based on a favorable credit bureau, confirm-able income and an amicable history with the bank. These vehicles allow the borrower to pay off as much as desired at any time. They are available in fixed rates but are more commonly offered with variable rates.

Secured Line of Credit

A secured line of credit, commonly known as a “home equity line of credit or HELOC” is a lower interest way which lets a homeowner use the equity in their home to borrow money, where the home is used as security. This allows payments that can be as low as interest only. You can pay as much as you want above the minimum required payment.

You can access up to 80% of the appraised value (or purchase price) of the home and as you pay down the outstanding balance, the available credit increases. Most lenders will allow a conversion into a lower fixed rate mortgage.

Bank Loan

A bank loan is perhaps the simplest way of financing your renovation. Payments on the loan will be withdrawn at regular intervals from your bank account to repay the loan. Just like a mortgage, if you can pay down the principal faster, you pay less interest. Therefore arrange your payments for a bi-weekly or weekly payments.

Refinancing Your Mortgage

When you refinance a mortgage, use the existing equity in your house to increase the mortgage amount up to 80% (or more based on the lender and insurer’s approval) of the home’s appraised value. This enables the mortgage payments to be spread over a longer period of time which take advantage of lower mortgage rates, ultimately resulting in lower payments than a PLC or HELOC.

There are costs involved which may include appraisal fees, legal fees and possibly a penalty for breaking the mortgage. Crunch the numbers and determine if this makes sense against other options available.

 

Second Mortgage

Depending on the amount of equity in the property, a second mortgage for renovation can be acquired in the form of an equity based 2nd mortgage. This is typically repaid over a shorter time period than a conventional mortgage. A second mortgage can be acquired from private lenders or many “B” lenders and will be registered as a second charge behind the first mortgage.

Many second mortgages commonly have higher interest rates as well as lender, broker and lawyer fees which are often paid upfront as a deduction to the mortgage advance. Second mortgages typically have a term of one year with interest only payments, although an open 2nd mortgage is possible.

Joint Venture Partners

Joint venture partners can become money partners, mortgage qualifiers, bird dogs or fix and flip partners. Whatever level you are at, just make sure that you partner with someone who is involved full time in real estate that can help you gain knowledge, experience and profit.

In closing, make sure to crunch the numbers and carefully consider the amounts you will pay for these loans, mortgages, credit lines or partnerships as compared to the potential profit or equity value you expect to gain from the property, prior to deciding to move forward with any renovation.

Posted by Tom in Business, Finance
Setup Your Finances In Order To Homestead Properly

Setup Your Finances In Order To Homestead Properly

How to finance your homestead

Many people have asked me over the years how I went about setting up my finances in order to homestead properly? For our family we work very hard to live on half of the income that comes into the home. This is not easy for us but we do our best in order save as much money as possible. We pour in a lot of blood sweat and tears into our work instead of hiring things done and this helps us to save money. The other thing that we did that most people hate to think or talk about is budgeting. We will discuss budgeting in more detail in a later episode. Today we will just touch on a few key points of a budget.

The cost housing

Like I have mentioned in another post we live in the nature coast of Central Florida. The housing cost here is much much less than living in other areas of the country and even in the State of Florida. Many people would rather live in a more city type areas like Orlando or Tampa in order to enjoy all the fun and materialistic lifestyle that city life can give them. But living closer to these cities the housing cost would be three to five times higher than where I live now. In order to keep our housing cost down we choose to live here and by doing so we were able to pay off our house and property and live mortgage free. I will admit that there are days when my materialistic mind says let’s sell everything and build a new fancy home, but then I think what would happen if the economy tanks and the banks call in all their mortgages, we would be homeless. Since our home is paid off I don’t have to worry if the country falls back into a depression my family will have a roof over our heads.

Think before you buy

One of the main problems with our country today is the economy. From our government leaders all the way down to the blue collar worker we purchase things on credit. People need to stop pulling out their plastic credit cards and start paying for items in CASH ONLY. If for any reason you need to finance something do some real soul searching and decide if the item is really a need or a want, and if it is a need then try to work out some creative financing in order to keep the interest payments to a bare minimum. Many young people today finance everything that they own, credit card companies play these games with travel points to cash back deals and so on. Don’t fall for these scams, they sound great but they sucker you in with these scams and the next thing you know your credit is maxed out and you will be paying thousands of dollars in interest fees.

Weigh out your needs versus your wants

Do I need a new car or do I want a new car? These are questions that we all need to sit down and decide. The car I am driving has 228,346 miles and it runs great plus I get fifty miles to a gallon. But would I love to have a new car or truck, of course. But what comes with a new car or truck, a payment. I love so much not having any car payments, this money I save in car payments goes directly into the bank. I have friends that have three or four car payments, according to bankrate.com the average car payment in the U.S. is $479.00. Three to four car payments in a household like this would wipe out some families finances if one of the family members lost their job.

Take television, here in Central Florida we have one maybe two cable companies that supply cable television to the homes. The average cable bill according to USA News is $124.00 a month. In our home I purchased a high definition cable antenna and I pay nothing for television. I pull in over thirty television stations even though I live over sixty miles from a big city. That $124.00 a month can purchase a lot of other items that are needs not luxury items.

Eating out is another area that you can save a lot of money. Food is one of my downfalls, I love food and I love to eat out. I have friends and family that eat out for every meal, can you imagine what their food expense is every month. When I go to places like Outback, Olive Garden or etc my dinner bill for my wife and I comes to around $50 – $60 each time. This is such a waste of hard earned money. When I go to the grocery store and figure the cost of the same meal I could save more than half the cost of eating out.

These are just a few things that you need to sit down and decide for you and your family. If you truly want to be homesteaders and put cash away you may need to adjust your family expenses and get rid of some luxury items in order to live on much less and have additional funds for your homesteading projects.

Get the family involved

Homesteading is a family lifestyle. It takes hard work by everyone in the family. When it comes to finances the entire household needs to be on the same page. There needs to be family conversations and open communication with everyone in order to have everyone working towards the same goals.

Budgets

Like I said in the beginning living on half of a family’s income is hard. It takes serious discipline and special planning. If you put your mind to it you can make anything happen as long as you have a plan and stick to it. The key elements that led us to be able to live on half was making wise choices, work to cut out all debt, and being creative. In some future articles we will take a much closer look at budgeting and setting some financial goals.

Related Links:

5 Budgeting Tips

Budgeting ideas for mom’s

Helpful tips for family budget

 

 


Posted by Tom in Budgeting, Homestead