Investing in Real Estate can offer great cash flow for your portfolio. This week we discuss the next two options you should consider before investing in rental real estate in Orange County.

A short sale in Orange County, or anywhere, is when a homeowner puts their property on the market for sale and sells it for less than the amount they owe to their bank. You may ask…”How can this be possible”? Well this type of transaction, the Orange County Short Sale Process, has become very popular over the last few years and should still be here over the next few years.

When a homeowner is behind on their mortgage payments, heading toward foreclosure, filing for bankruptcy, or has any sort of financial or health related hardship that is holding them back from making their mortgage payments consistently and on time…they will and should attempt a short sale.

See, this short sale process is very extensive and thorough. It may take several months to complete. Think about it this way….Let say we use the following for our example:

Seller: Jon Doe

Bank: Bank of America (BofA)

Property address: 123 Front St.

Mortgage Balance: $500,000

Market Value: $300,000

Let’s say that Jon Doe lost his job and has no way of making his mortgage payments on time anymore, so he is heading towards foreclosure. An alternative to a foreclosure is a Short Sale, so once the property is placed on the market for sale and an offer is received, then the offer and the completed Short Sale package will be sent to the lender for review.

From here the bank looks at various items, including all of the seller’s financials to determine if he/she really does have a strong case for a Short Sale or not. In our example we said that our client owed $500,000 and let’s say that the offer that came to us was for $300,000. We would communicate with BofA in this situation and continue to provide to them whatever information they require. During this time an appraisal has also been done by the bank to see what price they would agree to sell this property for.

Once the bank has come to a final decision they will send us and the escrow company a Final Short Sale approval and we can then, close out the transaction just like any other deal.

Since the bank, BofA, would be taking a large loss on this property they have to take their time and review all the details of the short sale. This is a HUGE reason why short sales take as long as they do.

In the majority of cases a Short Sale is a much better solution for a struggling homeowner than letting the property Foreclose.

In today’s Local and National Real Estate Market, it has never been a better time to buy real estate investment properties. Yes, I know, this statement coming from a Realtor (Me) is cliché. But…just hear me out, and then make a judgment call. (We would love your comments below as well).

When investing in any market it really comes down to the numbers. All investors want to know what the expected rate of return on their money will be and what is the risk involved on that investment? Wouldn’t you be asking these two same basic questions with any investments? I would!

So when I say, it comes down to the “Numbers”, I am referring to the purchase price, down payment amount, mortgage payment, taxes, expenses, rental rates, cash-on-cash return, etc. Below is an example of a simple analysis that I would do on a property that one of our clients is considering:

Investment Property Example #1

(This is an actual property that we did an analysis on in Orange County in the past 60 days)

So what do all these numbers mean???

Let me break this example down…First you want to see what your purchase price is going to be on a property, or at least what you think you can purchase it for. In this case it was $185,500. Then you want to figure what your down payment is going to be if you are getting a mortgage. Typically the minimum down payment for an investment property is 25%. In this example, it would be $46,375. The remaining 75% ($139,125) will be your loan amount.

Based off a 30 year fixed mortgage at 5% interest, your mortgage payment will be $747 per month. Then you want to add the Homeowners Association (HOA) Dues of $267 per month, the property taxes of $170 per month, and the Insurance of $40 per month. So your total monthly expenses on this investment property would be $1,224 per month.

Next you want to research what the current market rent is for a property and in this case it is $1,550 per month which would become your Gross Income for this property. Subtract your total expense of $1,224 and you are left with a net income or net cash flow of $326 per month.

Now multiply the monthly net income of $326 by 12 and that gives your $3,912 net return per year on this property. When you divide your return of $3,912 over the actual money you invested ($46,375) you get your Annual Cash-on-Cash return which is 8.4% in this situation.

When you put your money into a CD at the bank they might tell you that it will be a 1% yield. Meaning your cash-on-cash return is 1%. Or when you open an IRA account and the financial advisor says, “Historically these investments have averaged a 4% annual yield”, they are referring to your cash-on-cash return.

I’m not saying that bank CD’s or IRA accounts are a bad investment; I have simply given you a basic formula to calculate your ROI on any real estate property in Orange County, California or anywhere in the nation. So do your research to see what the best investment for you is and what will provide you the best return on your investment.

Right now there are many investors buying up as many investment properties as they can, because the ROI is looking great! Combined with the low interest rates and low prices, buying real estate investments in Orange County or anywhere in the nation is in large demand right now and is a smart long term investment!

In this week's Friday with Fred we discuss what to expect in a home inspection. What you need and when to expect it to be completed.

• Offer package coversheet : On this cover sheet will be all the major details of the offer and what is included in this package. This will help a seller and their agent review the important aspects of the offer.

• Personal Letter : When putting in an offer on a standard or equity sale, you are dealing directly with an owner. For the most part an owner has some sort of emotional attachment to their home and they want to make certain that the person they accept to buy their home will take great care of it. The personal letter is for a buyer to directly connect with that owner, and to express their interest and how they will treat and take care of the home.

• Pre-approval letter (if getting a mortgage) : A pre-approval or pre-qualification letter has become pretty much mandatory when offering on any property. With today’s mortgage market being the way it is, every seller wants to make absolute sure that you, as a buyer, are fully qualified for your loan and that there will be no hiccups during the transaction

• Proof of funds for the down payment : This simply is a bank statement that shows proof that you as the buyer, have the full down payment amount and the funds necessary to close the transaction.

• Purchase agreement (offer): In California this is called the Residential Purchase Agreement or RPA-CA. This 8 page document has every detail regarding the offer terms, agreements between buyer and seller, and all of the timelines and guidelines. This is a very important document that is review by both parties, escrow, and the lender (if a mortgage is needed)Here is a sample copy of the Residential Purchase Agreement:

• Agency Disclosure: This is a disclosure that states which broker and agent will be representing you, the buyer, on a specific transaction. It also goes over and states exactly what there fiduciary responsibilities are towards you.Here is a sample copy of the Agency Disclosure:

• Copy of Deposit Check : This is a copy of the earnest money deposit check. The amount of this check is written on the first page of the RPA-CA. Typically it is anywhere from 1%-3% of the purchase price.

• Comparative Market Analysis : As a buyer you will be provided with comparables or comps, of the property you wish to place an offer on. With this information you and your buyer’s agent will determine an offer price. So that the seller of the home is on the same page as you, make sure and send them a copy of the comps that you used to determine the offer price. This will make the negotiation process easier and smoother.

What are your thoughts? Would you add anything else to an offer package, we would love your feedback and comments below