Top 10 Real Estate Investor Mistakes

Top 10 Real Estate Investor Mistakes

Top 10 Real Estate Investor Mistakes

Many people have learned that Investing in real estate is not as easy as it seems. At least that is true for investors trying to get a fair deal. For those of us who have been investing for years, and learned many hard and expensive lessons, here are issues you should think through, understand, and consider before jumping into the real estate investing arena. These are in no particular order, since an individual would be smart to read and think through each and every “lesson learned” in the list.

1. Not penciling out your real estate deal

Top 10 Real Estate Investor Mistakes

This describes about 80 percent or more of real estate investors.They don’t take the time to put pencil to paper and make sure that the rental revenue from the property will be more than all the property expenses – and leave some monies left over to return to one’s bank account.

A negative cash flow property will virtually guarantee a measly – at best – investment return on your money.

2. Not penciling out your deal with conservative numbers

For those few fortunate ones who do know how to pencil out a deal, many use unrealistic numbers. They overestimate rental income, underestimate the vacancy, then underestimate the expenses associated with operating a property. That turns into low or negative investment returns for the property owner.

3. Getting renovation costs wrong

Most buyers have little idea how much it costs to renovate a property. They listen to the home inspector, their real estate agent, and just throw out a number like $25,000 for everything. Then they start getting bids for the work and quickly see it will actually cost $80,000 for everything. Word to the wise: Always do a lot of homework and be very conservative in your renovation budget estimates.

4. Underestimating renovation time

Additionally, inexperienced investors believe a good renovation can be done in 30 days, or 60 days. Many times it takes much longer to finish these projects than originally estimated. As a real estate buyer, you should talk to others who are experienced to get a realistic expectation of the time involved in a property rehabilitation.

5. Thinking something can only cost ‘that much’

It never does, it always costs more; many times much much more. So whatever the expense, renovation, service, contract, capital item, etc; chances are it will cost more than you think.

6. Thinking that stocks, bonds and real estate are all comparable investments

People often say they want to buy real estate to get better returns than their stock, bond or bank account can provide. Real estate is a unique asset that comes with clogged toilets, challenging tenants, nebbish neighbors, etc. It’s not an asset where you can invest and just look at an account statement every few months like you could with a stock, mutual fund or bond. Owning rental properties is a business, it can be time consuming and stressful. Make sure that makes sense for you before you buy.

7. Thinking it’s a “turn-key” real estate deal

Earning money with almost no work on the investor’s part? Never! Not going to happen!

8. Believing that flipping properties is investing

Flipping is “speculating” for most real estate buyers. Unfortunately, most lose money. Sure, it looks easy on TV and those shows are fascinating! I personally enjoy watching them; but they are not realistic. Not everything you see on TV or the Internet is true you know…..

9. Thinking that real estate is low risk

There are all kinds of risk issues that come along with owning real estate. Many an investor can mitigate and/or remove some of those with prudent behavior and the proper due diligence. Most investors do not do any of that, leaving them exposed to a myriad of items and issues that can and sometimes do become financially painful.

10. Believing what others say about their “profitable” real estate investing acumen

There is also no way to verify what someone else is telling you about how they did on their real estate investments – unless they show you their tax returns and credit report. But since people love to boast, we often only hear about the winners, not the losers. Many times the statements from those supposed “winners” are embellished with questionable claims. Be careful, do your own homework, but verify your own conclusions.

Those are many mistakes that investors can make. Some are very challenging to mitigate. Experience will teach you a multitude of lessons over your real estate investing career. Just try to avoid the big expensive ones that could clobber you; and end your investing career before it even gets off the ground.

How Much Home Can I Afford

How Much Home Can I Afford?

How Much Home Can I Afford?

How Much Home Can I Afford

How much mortgage money can I qualify to borrow?

This is typically the number one question mortgage professionals are asked by new clients.

Of critical importance when considering mortgage financing: There is sometimes a difference between what a client ***can*** borrow and what they ***should*** borrow.

In other words, what makes for a comfortable long-term mortgage payment?

The Quick Answer:

If we’re simply considering the financial math, lenders will calculate your Debt-to-Income Ratio and generally allow for 28-31% of your gross income to be used for the new house payment with up to 43% of your gross income to be used for all consumer related debts combined.

Sample Mortgage Scenario:

Let’s use a gross monthly income of $3000 and a qualifying factor of 30% Debt-to-Income Ratio:

$3000 multiplied by .3 (30%) = $900 max monthly mortgage payment

This means that your mortgage payment (Principal, Interest, Taxes, Hazard Insurance) cannot exceed $900 a month.

“Ballparking” a Qualifying Loan Amount:

Simple step:  We use a safe average of $7 per month in payment for every $1000 in purchase price so…

Step 1)  $900 a month divided by $7 = $128.50

Step 2) $128.50 multiplied by 1000 = $128,500 loan amount.

Remember, these are average ratios and guidelines set by most lenders for common mortgage programs .

Keep in mind, while most consumer debts are listed on a credit report, there are some additional monthly liabilities that may contribute to the overall qualifying percentages as well.

Regardless of how your personal income and credit scenarios factor in, it is important to consider your overall budget when trying to determine how much of a mortgage you should qualify for.

Other items to consider in your monthly budget:

1. Confirm all debts are taken into account
2. Any private notes or family loans
3. Short-term expenses – medical, auto repairs, travel, emergencies
4. Plan on additional expenses for the home such as water, electric, maintenance, etc…
5. Keep a cushion for savings and financial planning

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When to Lock in a Mortgage Rate

When to Lock in a Mortgage Rate?

When to Lock in a Mortgage Rate

When to Lock in a Mortgage Rate

4 Things Home Buyers Should Know About Rate Locks

A rate lock is a guarantee from a mortgage lender that they will give a mortgage loan applicant a certain interest rate, at a certain price, for a specific time period. The price for a mortgage loan is typically expressed as “points” paid to obtain a specific interest rate. (Points are basically prepaid interest, so the more points you pay, the lower the interest rate; 1 point equals 1 percent of the loan amount.) A rate lock protects the borrower from rising interest rates: So, if the borrower locks in a rate of 4 percent, he will only have to pay 4 percent interest even if rates rise while he’s going through the loan application process. Usually, a rate lock is good for 30, 45 or 60 days, though that time period can be shorter or longer; once that period expires, the borrower is no longer guaranteed the locked-in rate unless the lender agrees to extend it.

Here’s what you need to know about rate locks:

1. What happens if the rate goes up or down after you lock in the rate?

If interest rates rise during your lock-in period, you will not be impacted — you will still pay the lower rate that you locked in. If, however, you lock in a rate but then rates drop, you typically will not be able to take advantage of those lower rates; instead, you’ll pay the higher rate that you locked in. There are some exceptions to this: First, if you have a so-called “float down” provision — which states that if rates drop during the rate lock period, the borrower can take advantage of the lower rates — in your written rate lock agreement, you should be able to get a loan with the lower interest rate. (But beware — putting this provision in your agreement can be costly, so you need to think about how big of a risk falling interest rates might be to you). Second, you can rewrite your rate lock so that it reflects the new, lower rate, but this, too, can prove costly.

2. When should you lock in your rate?

For most people, it makes sense to first sign a purchase agreement on a specific property before trying to lock in a mortgage rate. Then, find a mortgage loan with a good interest rate (do your homework online to look at available rates) and consider asking your lender to (in writing) lock in the rate. But before you formalize the rate lock, consider these things: First, you don’t want to lock in the rate too early on, as rate locks are usually only good for between a few weeks to 60 days, so if your loan doesn’t process within that period, your rate lock offer will no longer be good. Therefore, you need to make sure that the duration of your lock-in will give the lender enough time to process the loan. To do that, ask the lender to share the average loan processing time and try to get the lender to lock-in your rate for as long as possible to protect yourself.

3. Should you choose a longer rate lock period?

All things being equal, consumers should choose a longer rate lock period (these usually range from a few weeks to 60 days) to ensure they can get the agreed upon rate even if there are delays in processing the loan. But there’s a catch: Sometimes if you pick a rate lock with a longer duration (say 90 days) the interest rate won’t be as good as with a shorter duration rate lock period, or the lender may charge a fee for this longer duration. Normally if a loan fails to close within its lock period, the borrower will be charged the “worst case scenario” price for a re-lock (the worst price between the original lock and the current interest rate). Ask your lender to spell out the differences in cost and rates for different duration periods.

4. Does it cost money to lock in your rate?

Sometimes rate locks cost money and sometimes they don’t. The rate lock fee may be a flat fee, a percentage of the total mortgage amount or added into the interest rate you lock in. The fees may be refundable or non-refundable. Typically, short-term rate locks (those less than 60 days) are free or cost roughly up to about 0.25 – 0.50 percent of the total loan, or a few hundred dollars. Lenders typically charge more for longer-term rate locks.

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Myths About Homebuying

Myth 1: Buying a home is always a good investment

Depending on your financial circumstances, needs and life choices, it may be better for you to rent rather than buy. Also, it used to be that property prices would mostly steadily increase so a homeowner would sell their house for a good profit. The crash of the housing market a few years ago evidences that this is not always the case. The housing market of today is quite different.

Also, even when the figures look good on paper, the real story may be different. Say a home purchased in the 70s for the price of $50,000 and sold in 2005 for $300,000 which adds up to what appears to be a $250,000 profit.  Although there was a 500% increase in price, it does not factor in a number of factors related to the cost of owning a home.

For instance, based on the price, the annual compound return is just 6.15% annually. Inflation was not also factored in. It reduces the returns to an approximate actual return. There is also mortgage interest, homeowners insurance, taxes and the cost of maintenance and repairs incurred from when the house was bought up to the time it was sold.

In the final analysis, what looks like a sweet deal may actually have been a loss. It does not always work out this way but it is important to understand the figures and understand that you will not necessarily be able to sell your house at a profit should you ever choose to do so.

Myth 2: You will always get added tax deduction for your mortgage interest

Mortgage interest is deductible but it is not always wise for you to take the deduction. This is an individual matter and you should talk to your accountant or mortgage advisor before you decide. To accept the mortgage interest deduction, you have to itemize each deduction as compared to taking a standard deduction. Typically, standard deductions are higher than itemized deductions. It would therefore not make a lot of financial sense to choose to itemize your deductions.

Myth 3: Paying down your mortgage as fast as possible is always best

This advice became popular during the high interest rate 1980s. However, the advice may not have been ideal even at that time. Homeowners tend to focus on the interest rates and get into a panic. However, putting everything you get into paying into your mortgage may not be the best. There may be other uses for the money that would be more profitable.

For instance, you may choose to make long-term investments such as in stocks and bonds that would bring you some very good returns over the years. If you own a business, you can invest into expanding and diversifying it.

The important factor to consider is the rate of return. Work out which ones puts you in a better financial position in the long run: is it the saving you’ll make when you pay down the mortgage or the returns you would make from the investments that you make? Creating wealth is all about making your money work for you.

Bonus Myth: The Perfect Home

There is another myth that those buying a first home are especially susceptible to. It is the myth of the perfect house. With a first home, the focus should be on a home you can afford depending on your financial situation.

While there is nothing wrong with having the highest aspirations about the house that you buy, reality must reign. Otherwise, your mortgage applications will keep on getting turned down because lenders feel you cannot afford the payments or you will get yourself into a corner with a house that you can’t really afford.

If what you can afford is a smaller house, a fixer-upper or a home in a location that is different from what you wanted, take it. You can always remodel and renovate or wait for it to gain value and sell. There are renovation loans that lend buyers the money to buy the home and finance the necessary renovations.

What’s right for you?

When it comes to mortgages especially buying your first home, the fact is that there is no black or white or hard and fast rules that work for everyone. It depends on your individual financial circumstances. Take the time to do thorough research into the options. Listen to your mortgage advisor or broker too and use a mortgage calculator to see both the small and the big picture.