Investing in Real Estate 9 - Scrapes, Pops and New Construction

This blog will discuss a type of real estate investment, scrapes, pops and new construction, in the Ken Caryl area in Denver.

What this investment is:  Purchasing a small home in an expensive neighborhood that may or may not need work.  The home is bulldozed and a new home or duplex is put on the lot.  Alternatively, the existing home is renovated and more square footage is added on.  A pop-top is adding a second story to an existing home to add more square footage (commonly, a master bedroom suite).

Equity needed:  Being able to document your income and your assets will be critical.  For a commercial loan, your net worth should generally be at least as much as the loan you are seeking.  The good news is that the commercial loan usually does not show up on your credit report, so it doesn't count towards the "four investment home limitation" from Fannie / Freddie.

Importance of credit:  Essential.  A 720 FICO is a must.  A 740 would be better.

Importance of experience with contractors:  Critical.  If you have never done it before, start with an easier "paint and carpet" project to build your skills.  The more sophisticated the project, the better your contractor management skills must be to make money.  Not surprisingly, the simpler projects have lower profit margins than the complicated projects.  Make sure you can take the time to really focus on the project.  We run classes on how to do this from time to time.  Go to http://www.yourcastle.org/events.cfm to see when the next session is.

Important of experience with property managers:  Generally not important for this type of investment.

Investing in Real Estate 8 - Condo Conversions

This blog will discuss a type of real estate investment, fix and flips, in the Ken Caryl area in Denver.

What this investment is:  A synthesis of the fix and flip and rental operations - purchasing an apartment building in a neighborhood dominated by owner occupants, then converting the building from apartment building to condominium.  Often requires renovation of the units to meet the expectations of owner-occupant buyers in that area.  Complex and time consuming, but has wonderful tax advantages compares to fix and flips and often has superior returns to all other asset classes.  Ideally suited for the sophisticated investor with extensive experience. 

Equity needed:  Being able to document your income and your assets will be critical.  For a commercial loan, your net worth should generally be at least as much as the loan you are seeking.  The good news is that the commercial loan usually does not show up on your credit report, so it doesn't count towards the "four investment home limitation" from Fannie / Freddie.

Importance of credit:  Essential.  A 720 FICO is a must.  A 740 would be better.

Importance of experience with contractors:  Critical.  If you have never done it before, start with an easier "paint and carpet" project to build your skills.  The more sophisticated the project, the better your contractor management skills must be to make money.  Not surprisingly, the simpler projects have lower profit margins than the complicated projects.  Make sure you can take the time to really focus on the project.  We run classes on how to do this from time to time.  Go to http://www.yourcastle.org/events.cfm to see when the next session is.

Important of experience with property managers:  Not important; the majority of our clients manage their own rentals when they get started.  Ideally you will have started with some smaller investment rentals and built property management experience.  Now, when you have to finally manage a property manager, it will be easy since you have done the job yourself in the past.

Investing in Real Estate 7 - Fix and Flips

This blog will discuss a type of real estate investment, fix and flips, in the Ken Caryl area in Denver.

What this investment is:  Purchasing a home that needs work.  The scope can range from the basic "paint and carpet" to extensive overhauls to scraping a decrepit property and completely starting over.  Usually does not involve tenants, and the objective is to get in and out of the property as quickly as possible.  Great for beginners with the right skill sets or the willingness to learn.

Equity needed:  With hard money loans (defined in next paragraph), potentially 0% and they'll finance the construction costs, too.  Expect a LOT of strings to be attached.  A small local lender might give you 75% of the purchase price and the renovation budget, and the terms will be a lot more pleasant than the hard money option.  Or you can do 20% down and get a convention, non-owner occupied loan and pay for the renovation with cash or your Home Depot credit card.

Importance of credit:  If you get a hard money loan, your credit will not matter as much.  These are harder to find than they were last year.  If you get a traditional loan, it'll be a non-owner occupant loan, credit score will be very important.  A 720 FICO score would help a lot.  Being able to document your income and your assets will be critical.  A hard money lender will lend you money based on the value of the property you are purchasing.  If the property is worth $200,000 and you are able to purchase it for $150,000, a Hard Money Lender will probably give you a loan regardless of your down payment or credit score.  However, the fees and the interest rate will be much less desirable than more conventional forms of financing.  Hard Money Lenders can usually close very quickly, and from the Sellers' point of view, you are purchasing with Cash.

Importance of experience with contractors:  Critical.  If you have never done it before, start with an easier "paint and carpet" project to build your skills.  The more sophisticated the project, the better your contractor management skills must be to make money.  Not surprisingly, the simpler projects have lower profit margins than the complicated projects.  Make sure you can take the time to really focus on the project.  We run classes on how to do this from time to time.  Go to http://www.yourcastle.org/events.cfm to see when the next session is.

Important of experience with property managers:  Not important. 

Investing in Real Estate 6 - Lease Options

This blog will discuss a type of real estate investment, lease options, in the Ken Caryl area in Denver.

What this investment is:  A lease option (L/O) is Acquiring control of a property (though not necessarily ownership), then leasing the property to a tenant.  The lease is bundled with an option, so the tenant can (but does not have to) purchase the property for a given price within a given time frame.  Again you are seeking a tenant for a property, but usually for a slightly longer term (12-18 months) and frequently (though not always) with the goal that the tenant purchase the property from you at the end of the lease.  If you purchase the property, then it's an easier process; if you find a highly motivated seller to let you re-lease the property to another tenant, it can be a lot of work to set up.  However, the re-lease method doesn't require any cash out of pocket and does not rely on your credit score, so it is appealing to many investors.  Great for beginners with the right skills and attitude.

Equity needed:  If you get seller financing, potentially just a few thousand dollars for your operating account.  If you purchase the property, 10% down (best case); more likely 20% down.

Importance of credit:  If you leverage seller carry, not important at all.  If you purchase the property, credit is important.  A 720 FICO score would help a lot.  Being able to document your income and your assets will be critical.

Importance of experience with contractors:  Some exposure would be helpful, but you are not likely to encounter construction projects any more difficult than you have maintaining your own personal residence.

Important of experience with property managers:  Not important; the majority of our clients manage their own rentals when they get started.  We run classes on how to do this from time to time.  Go to http://www.yourcastle.org/events.cfm to see when the next session is.

Investing in Real Estate 5 - Large (5+ unit) Apartment Building

This blog will discuss a type of real estate investment, large apartment buildings, in the Ken Caryl area in Denver.

What this investment is:  Still targeting tenants for 6-12 months at a time, buildings with more than five units are considered "commercial" property.  The loans are more difficult to qualify for, and usually a larger down payment is needed.  Uncommon for the new investor; this is usually what landlords with several years of experience "trade up" to.  Cash flows on larger buildings are more stable than for smaller buildings, and the economies of scale make it practical (and desirable) to hire a property manager to take over most the work for you.  This takes reduces the hassle factor of the landlord process. 

Equity needed:  Being able to document your income and your assets will be critical.  For a commercial loan, your net worth should generally be at least as much as the loan you are seeking.  The good news is that the commercial loan usually does not show up on your credit report, so it doesn't count towards the "four investment home limitation" from Fannie / Freddie.

Importance of credit:  Essential.  A 720 FICO is a must.  A 740 would be better.

Importance of experience with contractors:  Some exposure would be helpful, but you are not likely to encounter construction projects any more difficult than you have maintaining your own personal residence.  We run classes on how to do this from time to time.  Go to http://www.yourcastle.org/events.cfm to see when the next session is.

Important of experience with property managers:  Not important; the majority of our clients manage their own rentals when they get started.  Ideally you will have started with some smaller investment rentals and built property management experience.  Now, when you have to finally manage a property manager, it will be easy since you have done the job yourself in the past.

Investing in Real Estate 4 - Small (2-4 units) Apartment Building

This blog will discuss a type of real estate investment, small apartment buildings, in the Ken Caryl area in Denver.

What this investment is:  Purchase of duplex, triplex or quadplex to be rented to tenants, usually for 6-12 month terms.  Usually what the rental home / condo landlords graduate to.  In most markets they cost a little more than a rental home, but are much more likely to cash flow on the average month.  Less cash flow risk; if one unit is empty you have other tenants that still help you with the mortgage payment so it doesn't all come out of your pocket.  Many owners will start to delegate some of the property management tasks to an on-site assistant (typically the most responsible tenant), such as yard maintenance and showing empty units.  The financing process is only slightly more involved than a residential loan.  Relatively small down payment requirements make it affordable.  The purchase process is also very similar to purchasing a home.  It's a good way for beginners to get started.

Equity needed:  20% - 30% down would be typical.

Importance of credit: Very important.  A 720 FICO score would help a lot.  Being able to document your income and your assets will be critical.

Importance of experience with contractors:  Some exposure would be helpful, but you are not likely to encounter construction projects any more difficult than you have maintaining your own personal residence.

Important of experience with property managers:  Not important; the majority of our clients manage their own rentals when they get started.  If you get a property manager, you'll be able to figure it out easily on this small of a scale.  We run classes on how to do this from time to time.  Go to http://www.yourcastle.org/events.cfm to see when the next session is.

Investing in Real Estate 3 - Rental Condo or Rental Home

This blog will discuss a type of real estate investment, rental condos or rental homes, in the Ken Caryl area in Denver.

What this investment is:  Purchase of a residential property to be rented out to tenants, usually on a 6-12 month lease term.  This is how most new landlords get started.  You can hire out all of the property management functions, but in many cases you will do many of them on your own.  There are smaller down payment requirements than for larger rental buildings.  The purchase process and financing process is very similar to what you experienced buying the home you live in now.  It's a great way for beginners to get started.

Equity needed:  Currently 20% - 25% Downpayment.  In some cases you might be able to do it with 10% down, but expect the second mortgage to be at a higher rate.  While Freddie / Fannie lenders might only let you have four loans, smaller local lenders will let you have more than that if you have strong credit.  Contact me and I'll put you in touch with the right people.

Importance of credit:  Very important.  A 720 FICO score would help a lot.  Being able to document your income and your assets will be critical.

Importance of experience with contractors:  Some exposure would be helpful, but you are not likely to encounter construction projects any more difficult than you have maintaining your own personal residence.

Important of experience with property managers:  Not important; the majority of our clients manage their own rentals when they get started.  We run classes on how to do this from time to time.  Go to http://www.yourcastle.org/events.cfm to see when the next session is.

Investing in Real Estate 2 - Assignments

This blog will discuss a type of real estate investment, assignments, in the Ken Caryl area in Denver.

What this investment is:  An investor who is interested in Assignments gets a property under contract for an attractive price then assigns the contract to another buyer, usually another investor.  The first investor will be paid a fee for the work.  If you don't have much equity to work with, and/or if your credit power is limited, assignments can be a way to get started in real estate investing.  You will need to have a strong "sales" personality to succeed at it, though. 

Equity needed:  None, just earnest money.

Importance of credit:  Not important, since you are not purchasing the property yourself.

Importance of experience with contractors:  Not important.  The person that you ‘flip' the property to will be doing the work.

Important of experience with property managers:  Not important.  The person purchasing the property from you will be managing the tenants.

 Topic:  Special considerations for Investor loans 

The talk around the water cooler these days is all about LOANS. Who can get them? At what price? What if I already have a few loans, do I still qualify?  A year or two ago the question was at what price do I get a loan (those were the days!).  Today it is "am I still in the game?"   

 Here's the deal:  if you have an owner occupied loan and 3 investor loans you cannot buy any more properties and get Fannie Mae / Freddie Mac financing, meaning you can't get a conventional 30-year fixed loan. Now, my hope is that someone reads this and tells me I'm wrong. That would be great!  But as far as I know that is the case.  

 Where does this leave you?  You can pursue loans that are warehoused by lenders, meaning they are not sold on the backend to Fannie or Freddie. You are probably looking at a minimum of 20% down but more importantly it will be almost impossible to get a 30-year loan.  But a 5/1 ARM is not out of the question. (Lenders, please start a dialogue here and let folks know who has what products available.)  There is also Hard Money available.  I met with a group of high-end Hard Money lenders today to discuss options and the consensus is that they are proceeding...but with extreme caution.  

 A final version is to contact smaller local lenders.  You'll need 25% down, but if your story makes sense, you'll get your loan - and usually at an attractive rate.  Let me know what your situation is and I'll try to refer you to the right person. 

Colorado Mortgage Broker Licensing

In response to the troubled national real estate market and Colorado's high volume of home foreclosures, efforts have increased to make higher caliber professionals involved in real estate. Licensing, rules and regulations have become more stringent for agents, appraisers, title companies and mortgage brokers.  In regards to mortgage brokers, the below items are mandatory.  No longer can someone open up the Yellow Pages, claim to be a mortgage broker and then be compensated for placing a loan --- what a novel concept.  Before committing to a mortgage broker, please make sure that they are licensed in Colorado by searching for them on the following link:  http://eservices.psiexams.com/crec/search.jsp

Licensing
All mortgage brokers conducting business in CO must be licensed with the Division of Real Estate and pass the criminal background check. Only those mortgage brokers who are licensed or exempt from licensure by law may broker a mortgage, offer to broker a mortgage, act as a mortgage broker, or offer to act as a mortgage broker.  Licensing Fitzsimmonstration and renewal is $200 every three years.

Surety Bond
Prior to licensing, an applicant for license shall post with the Director of the Division of Real Estate a surety bond of $25,000.  Yearly premium approximately $190.00.

Errors & Omissions Coverage

All CO mortgage brokers must carry Errors & Omissions coverage.  For mortgage brokers with less than five years of experience, the annual premium is $600.  With five years or greater lending experience, the premium is $500 per year.

New Pre-Licensing Education & Continuing Education

1. Complete 40 hours of licensing education and pass the two-part licensing exam (Mortgage Lending Basics & State and Federal Law) by January 1, 2009.  Approximate cost for course is $250 and $74 for the exam.
2. Complete a minimum of nine hours of continuing education every three years.