Why use a Construction Loan?

Building your dream home or rehabbing your investment properties, though exciting, may present many challenges. Although you may be familiar with the traditional mortgage process, a construction loan includes additional elements of risk. In a typical construction project, the contractor will request funds when work is completed. Many times a homeowner will build their dream home without the use of financial institution funds. There are various ways to pay your contractor, many people feel they should pay cash, use a home equity line of credit from another property or cash out an investment.

This presents unique challenges for the homeowner. The homeowner must manage the additional responsibility of ensuring all subcontractors and suppliers are paid in a timely fashion. The homeowner must also understand the statutory documentation requirements in their state. If the draw process is not properly managed and the contractor does not pay the subcontractors and suppliers, the homeowner may be subject to mechanics liens. To mitigate your risk throughout the fund control process, consider the benefits of a construction loan and the process. The construction process is a complicated one and the construction draw process will ensure all subcontractors and suppliers are paid so that you don’t have to pay the bill twice.

A construction loan is a check and balance of the funds that are dispersed throughout the build of a new home. With the help of the lender(s), inspectors and draw processing staff your funds are reasonable protected.

Understanding the Costs Involved
As you begin the process of building a new home, you’ll want to understand the costs associated with your construction and permanent loans. You’ll also need to know when the expenses occur so that you can prepare an accurate budget.

• You can begin construction with as little as a 10% down payment or 10% equity in the total cost to acquire your lot and build your new home. If you don’t own your lot, the first draw of your construction loan may be used to pay off your lot. There are instances that a borrower will not be required to have any money down.
• The interest rate on your construction loan is typically tied to the Prime Rate. You will be billed monthly for interest only, and your payments will be based on the current balance of it at the current interest rate for the previous 30 days. Borrowers can build in an interest reserve account to pay the interest payment during construction.
• When you finish building your new home, we will modify your construction loan to a permanent loan of your choice. Various options for locking in your rate are available depending on the product selected.

Total Project Costs
This is the cost to complete the home and consists of soft costs, hard costs, land value, closing costs, contingency and interest reserves.

• Soft costs: Permit fees, engineering fees, architectural fees and other costs associated with building the home but not directly a part of the actual construction costs. Many times the borrower has already paid some of these costs. To consider these paid items as “equity,” the borrower must document the cost with a bill and a canceled check or a paid receipt.
• Hard costs: The actual cost of construction covering all materials and labor associated with the building of the home. Typically the borrower will enter into a contract with a contractor to build the property. Like a purchase contract for an existing home, this contract will set forth the work to be done and the costs associated with that work. All contracts must be for a fixed price; “Cost Plus” contracts are not acceptable. To support this cost, we require a signed and dated copy of the contract along with a detailed Line Item Cost Breakdown prepared by the contractor. All contracts and budgets must be reviewed by, and contain terms acceptable, to standard lending guidelines.
• Closing Costs: Costs associated with the closing of the loan (e.g., title costs, loan fees, discount fees, inspection fees, appraisals, etc.)
• Contingency: In certain circumstances a reserve account will be needed to cover unforeseen cost overruns in the construction of the home. A required 5% of the hard costs will be established in the Contingency Account (Contractors may hold a reserve other than what usually required by the Lender.)
• Interest Reserve: At loan closing, an account is established to pay the estimated interest costs during the construction of the home. Since the borrower is only charged interest on the amount of funds disbursed, an estimate of the average disbursed amount is made. Our construction specialists will estimate that, on average, 60% of the loan amount will be disbursed during the term of the construction period. This interest reserve account is paid up front and is held to pay the interest during the time of construction.

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Tags: construction loan, Flipping Houses, hard money, HML, loan, mortgage, real estate, real estate investing, rehab loan

In the 60s, Sonny & Cher (before Sonny crashed into a tree while skiing) had a big hit with the song “And The Beat Goes On”–or something like that. Now, in real estate, 2008, a good song title might be “And The Debate Goes On!”

The “debate” is whether or not this is or isn’t a good time to invest in real estate. There are those who argue that real estate is always a good investment (see “Gone With The Wind” Chapter 6, page 147, paragraph 4, sentence 7, Scarlett’s dad to Scarlett : “There is always the land, Scarlett.”) And, as we know, in the end, it was the land that Scarlett returned to after the South got the s–t kicked out of it by the North (okay, I’m from New York, so I am partial to this version of reality..which happens also to be …well…reality!)

Now, the cool thing about fictional characters is–they are fictional. They don’t really have to feed their families or save for retirement or worry about paying for their kids’ education. Heck, all Scarlett had to do was hope that Rhett would come back one day and wisk her away to an even better chunk of real estate.

Time To Get Real. This Ain’t No Novel

That’s right. This is the real world. No authors to help us along our way by dreaming up another chapter or another character to save the day.

In the real world, a bad investment–and, yes, there is a Santa and, yes, there are real bad real estate deals–can actually hurt you. The point being, if you are going to invest in real estate in the current climate, you had better do your homework and know what you are up against.

The economic picture is bleak and seemingly getting bleaker each day.

Just this week, The National Association of Realtors said sales of existing single-family homes tumbled last month by 2 percent,while the median price of a home declined 7.7 percent from a year before.

Yes, there are pockets in the country where this is not the case. But, that is the exception and most certainly not the rule.

What began as a subprime mortgage crisis has ignited an economic fire burning around the world and devastating all sorts of different businesses…from banks, to brokers, to airlines (three of the biggest U.S. airlines this week reported large quarterly losses pegged to soaring fuel costs), to automakers, to newspapers, to broadcasting, to resorts, to …..well, you get the idea.

No one…no one…really knows where this recessionary train is taking us and how many stops there might be till we get to the terminal?

Conventional wisdom…not so wise

The “conventional wisdom” is to buy real estate when there are bargins to be had. And, under normal times, this makes total sense. But, the point is—these are far from “normal” times.

When times are not “normal”–so-called conventional wisdom gets tossed out the window.

This is not to say that no one should invest in real estate at this time. Someone has to. But, as I said before, this is NOT the time to learn on the job.

Tags: and the beat goes on, gone with the wind, home prices, median home prices, national association of realtors, real estate investing, Real Estate Market, recession, sonny & cher, subprime mortgage crisis

There are several trends I’ve seen emerging. One has to do with cyber-shopping — online buying seems to be a trend that will only increase. Nothing is ever certain in our fast-changing world, but the convenience of cyber-shopping seems to have taken hold as consumers gradually get over the distrust of online buying and break their dependency of mall addiction.

From recent observation I’d say the mall addiction hasn’t been altered drastically, but common sense tells me more and more people will be shopping online. This doesn’t mean products will be magically transported from the screen to the consumer’s homes, it means there will be more and more need for storage — something physical an investor might take note of. It’s funny sometimes how the new technology continues to depend on the structure of the old, but land, space and buildings will always be needed no matter how technologically advanced the forms of buying and selling become. There may be less department stores and more office/warehouses, but there will something that exists that has to do with real estate.

Another trend that goes along with needed space for online businesses to store and ship their products is decentralization of industry. Many small companies, high-tech and low-tech, are spreading out all over the country. A wise investor might want to analyze these two trends in their area to determine if there is a shortage of flex space and a growing demand for such space.

Many small businesses will find certain areas around the country appealing when they begin comparing labor costs, leasing costs, cost of living, taxes and such. For the investor he/she might find flex space a good investment that requires less expensive construction costs than other investments (hi-tech or bio-tech would have construction needs that are a little more costly, of course) that require building anew — and if there is a shortage of flex space, the investor might be able to lease at a healthy rate still attractive to businesses relocating from areas where land cost, construction costs and other costs of doing business are higher.

A little snooping around the city development department could reveal an increase in interest from small businesseses with flex space needs. If the trends I indicated above are growing as I suspect they are, in many areas around the country there will be a demand looking for a supply. It would be good to start on the ground floor of such an opportunity than to be the last when your area is glutted like has happened to many investors in larger areas.

It seems to me the need for storage and shipping will grow tremendously if small companies increase and spread out as the result of online buying and decentralization. It’s certainly something to consider and investigate.

Happy investing!

Tags: Commercial Real Estate, flex warehousing, online, real estate, real estate investment, shopping, warehouse

A lot of the investors that I work with have some experience investing in single family homes but they want to know more about some of the advantages and disadvantages of investing in apartment buildings. The following lists are not meant to be exhaustive lists detailing every single advantage and disadvantage of investing apartment building and single family homes. The lists are just meant to reflect some of my own observations on each type of investment property. Also, these lists assume that the investor is buying the apartment building or single family home investment for the purposes of holding over an extended period of time. The lists don’t consider other investment techniques such as flipping.

Advantages of Apartment Building Investments

• Lower cost per unit than single family homes.
• Greater cash-on-cash return. Traditionally, apartment buildings offer a greater return than single family homes.
• Foreclosures! All of the families who have been displaced because of foreclosure are going to have to live somewhere! And most likely they will live in apartments.
• You start profiting instantly. You benefit from positive cash flows from day one. And you can live off that income, so you don’ have to go to a job everyday.
• You can afford a property manager. You can actually cut down your property management costs and headaches by hiring a company that specializes in apartment building management. Never talk to a tenant again
• It is easier to get seller financing. Apartment building owners are generally more financially astute and are more willing to help you finance the property. It is even possible to get 100% financing.
• Apartment buildings can appreciate faster than houses. Strong demand in metro areas with limited apartment vacancies can cause prices to soar.
• Pay HALF the taxes you now pay. Standard tax rates of 30-50% don’t apply. You will be able to pay the capital gains rate of 15% by buying and holding.

Advantages of Single Family Home Investments

• Lower start up costs. The down payment on an investment house can be extremely low. Some investors are able to obtain cash back at closing.
• Financing for single family homes is readily available.
• The acquisition costs are less then an apartment building. Generally, you do not have to perform an environmental survey or pay expensive out of pocket fees prior to closing.
• If your rent is priced right, it can be very easy to keep a single family home rented and to keep vacancy rates low.
• Many single family home investment properties will attract longer term tenants, such as families with kids.
• There is the potential to buy single family investment homes from desperate sellers thereby acquiring the investment at below market value.

Disadvantages of Apartment Building Investments

• High start up costs.
• Larger tenant turnover.
• High maintenance and management costs.
• Generally you will have to put down a 20% down payment.
• Your great FICO score won’t help you very much when qualifying for a loan.
• You need to educate yourself to determine how to identify a profitable opportunity.
• There could be hidden maintenance costs you did not perceive or anticipate that could adversely effect your investment returns.
• High out of pocket fees and expenses are required when qualifying you apartment investment deal with a commercial lender.

Disadvantages of Single Family Home Investments

• The cost per unit is usually higher.
• If you lose your tenant then your cash flow goes to zero.
• Prices in the residential market can fluctuate wildly.
• You may be required to belong to a Home Owners Association.
• Because of the higher unit cost, cash flow is lower.
• Maintenance costs can be excessivEach unit has its own roof.
• The taxes and insurance, per unit, can be much higher.
• The replacement value is higher.

Tags: apartment building, Commercial Real Estate, financing, landlord, mortgage, real estate, real estate investing, renter, SFR, single family home, tenant

People invest in real estate for a myriad of different reasons. Some people have a very clear plan for what they want to accomplish, while others jump in on a whim. It can be very seductive to see the amount of wealth that can be created in real estate. With so many different avenues available to a new investor, which one is right for you?

Do you start by being a bird dog or wholesaler? Many people choose this road because they do not have the access to capital that is required to follow other paths. Do you try your hand at being a landlord? This can be a fantastic way to amass wealth over the long-term but it can be a source of frustration as well. Perhaps you are looking to flip-and-grow-rich. There are a plethora of great deals to be had. The obvious challenge is being able to flip them to a willing buyer at a decent profit.

My Chosen Route

My path was to follow the rehab road. I was led in that direction by circumstance, not by an overwhelming desire to find my fortune in real estate. I was at a point in my life when I was looking to purchase a home for myself. I bought a “fixer” because I was able to buy a house in a better neighborhood by using my own sweat equity. I soon discovered three things about rehabbing houses:

Do What you Enjoy

With so many different aspects of real estate investing, there is sure to be something that you are good at and enjoy. Many people who invest in rental properties find that they are not cut out for it. Dealing with tenants can be very difficult and stressful. You can avoid a lot of that by using a property manager, but that has its own set of problems. Then you have to deal with repairs and vacancies. However, many others have no problem with those issues.

Nothing in life is perfect, but you need to choose what is best for you. Spend time investigating different aspects of investing until you find something that you think you would enjoy. Proceed slowly until you find out if you are suited to that particular investment style. When you discover your niche, run with it.

Finding Your “Why”

In order to achieve any significant goal in life it has to have meaning. New Year’s resolutions are a great example. Most people who make resolutions at the start of the year will break them quickly. They stop smoking for a short time, stick to a diet until they get a whiff of a fresh sticky bun, or they work to get out of debt until they see something on sale that they absolutely have to have.

If you are able to get in touch with your “why” you have a much greater chance of reaching your goal. You may think of investing as a great way to make money, but what will that money do for you? Perhaps it means more time with your family or time to pursue activities that you enjoy. Maybe you have a desire to get out of the rat race that is your typical 9-5 corporate job. Whatever it is, if you keep sight of why you are doing something, you have a much greater chance of following through with it.

What you get by achieving your goals is not as important as what you become by achieving your goals. - Zig Ziglar

Tags: goal-setting, real estate, real estate investing, rehab, Rehabbing, Richard Warren

If you’re considering real estate as an investment, there’s one thing you’re guaranteed to hear:

Now is not a good time.

Your brother-in-law, your best friend, and your Great Aunt Minnie (who keeps her riches in a cigar box under the doghouse) will all surely recite text and verse. The time for real estate is over. No one can make any money in this market. If you’d just invested back in ‘93, then maybe…

Let’s start with an over-generalized, highly categorical statement that will surely cause twitching amongst the congregation:

• There are no bad times for real estate investment. And furthermore:
• Today is always a very good time to get started.

Let’s Discuss

Real estate is a diverse investment with multiple areas of interest. Saying you want to invest in real estate is similar to announcing you want to fly. O-kay… fly how? Are we talking single engine aircraft? Jet fighters? Helicopters? Or were you hoping to sprout wings?

In the world of REI, you’ve got rehabbing, buy-and-hold, speculation, raw land development, flipping, as well as numerous subcategories within each. There are up and down cycles for each type of real estate investment but at any given moment, at any location, there will be potentially profitable and decidedly poor ways to invest depending on current market conditions (which have this nasty way of changing when you’re not paying attention. )

For example, a rapidly appreciating market makes it difficult for buy-and-hold landlords to find homes with positive cashflow while flippers are out having a blast. When list prices drop like bowling balls from an airplane, buy-and-hold investors rejoice and make merry whilest flippers make like chicken little (and rightly so.)

The Magic Key

There is no substitute for learning your market. You can’t rely on CNN and the nightly news for your intel. (Besides, those guys seem to think everyone lives in NYC or Boston.) All the stories about house prices dropping…how about we define, exactly where? Not in my area. Not in tons of other places either. But if, thanks to cable news, you think the median house price is $245,000 and show up in my neighborhood, excited to find new homes selling for $150,000, you’re liable to overpay by 20-30K and wind up with the albatross of negative cashflow draped indelicately around your financial statement.

And just for the record, ‘tis a very bad idea indeed to decide which area of REI to specialize in before learning your local market. A biggie problem we see in here are newbie investors, fresh out of some seminar with A Method. Six months later, they’re whining that ‘it doesn’t work here.’ Well, Duh! If they’d taken the time to learn the local market first, they never would’ve gone to that seminar in the first place and could’ve saved a ton of both cash and time, not to mention aggravation.

And in Closing…

As investors, we must adapt with the market. Markets change, the economy heats and cools, Wall Street bears or bulls. As big-shot investors, committed to growing a healthy portfolio padded with the increase available through real estate investment, we either Adapt or Die. It’s survival of the fittest, baby.

But one thing’s for certain:

• Someone near you knows their local market.
• Someone’s done their homework.
• Someone’s prepared to take advantage of current market conditions.

At any given time, someone in your area is making money in real estate investment.

Now is a very good time to get started. Always.

Tags: real estate, real estate investing, real estate investor

Due diligence is a term used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations. A common example of due diligence in various industries is, the process through which a potential acquirer evaluates a target company or its assets for acquisition. – From Wikipedia

It is important to not only know what due diligence is, but how everyday investors make it work in their favor when buying a home. Proper homework can not only eliminate some of the risk when buying, but it can also lead to a better return on your real estate investment. An article is not enough to outline the various forms of due diligence one could perform on a real estate transaction. However, here are five simple but important steps to take when buying a rental or investment property:

1. Neighborhood - Once you have identified a property, go find a map of the area and draw a 5 mile radius circle around the home. Look closely at the circle for parks, schools, freeways, and amenities. Also drive the streets of the neighborhoods looking for indications on whether this area is on the way up or down in terms of condition and crime. Your rental is an asset that you want to appreciate, so having a good idea of the surrounding area can help make a good decision.
2. Crime - Most metropolitan police departments either have web sites or information they can give on a particular area. High crime areas are not only difficult to rent to your ideal tenant, but are nearly impossible to sell at a premium.
3. Internet - Utilizing the websites like Zillow, Google Maps, and state and local websites can give you insight into the property from a number of perspectives. Zillow can show estimated values, recent properties sold and an area map. Google maps can give you a satellite view which allows for a close look of the neighborhood. Identifying freeway access, parks, golf courses and schools are all future marketing elements used to sell your investment.
4. Appraisal & Inspection – The value and condition of your potential property is critical to future appreciation. Investors should structure their purchase contracts to allow proper valuation and inspection of the property. Once the reports are done carefully, walk through each report with someone that understands them better than you. Even seasoned investors should have someone they trust to thoroughly walk through each report. Remember different regions and neighborhoods require local expertise.
5. Market Analysis of Rental Market – Even if cash flow is not your reason for investing, investors should analyze whether they are going to be able to cash flow the property. I have seen a number of fix and flip projects fail because of market changes and the investors could not carry the negative cash flow long term. Remember, positive cash flow can survive all market cycles. Most lenders require both Single Family Comparable Rent Schedule (Fannie Mae Form 1007) and Operating Income Statement (Fannie Mae Form 216) when funding a property with conventional financing. Your Realtor should be able to complete an analysis of the rental market using the regional MLS. Also look at Craigslist and local newspaper classifieds.

There is no way to sugarcoat due diligence; it is hard work. But it is also a way to increase your knowledge and become an expert on the property you are about to purchase.

Tags: appraisal, crime, inspection, investment property, property analysis, real estate, real estate investing