The real estate market is certainly on a historic roller coaster ride. Yes, unfortunately, there are countless folks that are being caught up in the foreclosure storm that is sweeping across the country right now, but on the flip-side, this is creating significant investing opportunities for others. The following are actions that you can do to best prepare yourself to take advantage of some of these opportunities when they present themselves.
1-Start with the End in Mind: Be clear on what your desired financial outcome and work strategically backwards to your current position. Specifically, how far out into the future are your milestones and how does this compare to your current situation and available resources.
2-Credit: Lenders are becoming much more risk adverse and your credit history is becoming much more important. Do whatever you can to get your middle FICO score at 700 or higher. Tips to improve your score are: (A) Keep credit card balances at lease 25 or 50% of allowable balances. (B) Avoid a mortgage late at all costs. Underwriters evaluate a 12 month historical window regarding this point. (C) Strategically use one or the other spouse's credit only if possible. This potentially creates more options on your ratios as well as a potential backup plan if one spouse's credit becomes damaged.
3-Employment/Income Source: (A) Lenders need two years experience in the same or related field of work. Stated income borrowers may provide a CPA letter, business license, or entity formation paperwork that shows a two year history. Full documentation borrowers may provide 12 months bank deposit history in lieu of pay stubs so plan accordingly. (B) Stated income needs to make sense in comparison to a data source such as http://www.salary.com/. Make sure your job title (especially if self-employed) measures up to your true job duties in alignment to your income. Also, consider alternate job titles such as property manager, marketing consultant, or home improvement provider, if applicable, rather than real estate investor. Lastly, avoid using entity names such as Real Estate Investors Be Us, LLC. This may limit your options down the line. (C) Rental income is typically discounted 25% so plan accordingly.
4-Down Payment/Reserves: (A) Plan on a down payment of 15-25%, depending on your income type. Funds need to be seasoned two months or be prepared to provide an explanation of sourcing if less. (B) Plan on having 2-6 months of you subject property monthly expenses (worst case of total monthly expenses on credit report) left in your accounts after close of escrow (non-vested retirement discounted 30%). It's in your best interest to maintain this even after purchase of the property to cover expenses in case you experience occupancy or maintenance challenges. (C) Consider partnering or joint venturing with other parties if you need to augment your resources.
5-Compatibility of Loan Terms: (A) Make sure your loan product is compatible with current real estate cycles and your exit strategy. Always give yourself room for worst case scenarios when choosing adjustable rate products and prepayment penalty terms. (B) Make sure you are aware of existing loan terms regarding prepayment penalty, any adjustments, and existing debt-to-value ratios. In certain circumstances, especially in this declining market, it may even make sense to refinance before your rate adjusts rather than be caught in a circumstance where your options are limited. If you are unsure of these terms, contact your mortgage advisor to help you get clear.
6-Develop Team: Real estate investing is a team sport and should be treated as a business. Make sure your current team of advisors, including but not limited to, property manager, mortgage provider, CPA, attorney, and Realtor are real estate investment savvy and preferably own real estate investment themselves. That way they are personally vested in keeping up with the latest developments. Lastly, make sure your advisors are proactive and strategic and don't be afraid to trade up if you need to get referrals from competent advisors to fill in other gaps.
Real estate investing can be a great source of long term wealth building if done prudently. Position yourself to take advantage of the real estate opportunities in our current real estate cycle. Happy Hunting!
Todd Newington, CMPS
Certified Mortgage Planner
Branch Manager
First Priority Financial, Inc.
todd@superiorloanteam.com
http://www.superiorloanteam.com/
916-549-1190 mobile
916-687-6868, ext. 1 office
916-760-1895 fax
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