Real Estate Investing for the Long Run, and Taking Action

Real Estate Investing No Comments »

This is a good article on getting into real estate investing, and it lines up very similar to my strategies regarding buying and holding. There is an interesting point about today’s lenders looking at the title history on the house you are trying to sell. If it is only a few months ago, it could be flagged as a flipper, and according to this article, that could be a real problem. It would be worth doing some investigation of your own to find out if you lender would have any problems with you flipping a house, or if they have any problems in general with a house that has been purchased recently when evaluating the loan of a new buyer.

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Buying Mortgage Points Follow Up

Mortgages, Buying a Home 3 Comments »

Yesterday, I talked about Buying Mortgage Points and the potential money that could be saved using this loan structure. I received a comment basically stating that you would be better served by investing the money you would have spent buying mortgage points into something else that would yield a better return on your money. While this is true, yesterday’s post was geared toward buying the points, and then financing those points back into the loan. This is where the real benefit of buying mortgage points pays off. In this scenario, you are not spending any extra cash up front. You are merely restructuring your loan to provide the lowest possible overall cost.

But not only the comment I received on that post, but I also was researching and found that most people who buy mortgage points (and pay for them up front at the closing table) often do not keep there house long enough to reach the break even point, and therefore don’t justify the cost of buying the points. After seeing that, I felt inclined to extend the example I presented yesterday, and give you a formula to find out just how long it will take to “break even” on the cost of buying points. Here’s a quick recap on the example:

PMT on $100,000 at 6.5% = $632.07 (Principle and interest only, based on a 30 year loan)

PMT on $100,000 at 6% = $599.55 (Principle and interest only, based on a 30 year loan with 2 points)

So that is a difference of $32.52 per month. But the 2 points cost you $2,000 at the closing table. Therefore, we can determine how many months, and the corresponding years it will take to recapture the initial $2,000 investment.

$2,000 / $32.52 per month =  61.5 months / 12 months per year = ~5 years

So what that means is that you will need to own your home for at least 5 years just to get back the $2,000 you invested in your home. So if you are considering buying points up front, make sure you plan to stay in your home longer than the break even point. Otherwise, as I suggested before, ask your lender about financing the points back into the loan, and you will start saving money immediately on the loan (in most cases, be sure to follow my calculations and verify the numbers with your lender). If you are wondering how I came up with the payment calculation, just use the PMT function in a spreadsheet program like Excel to determine the payment. Here are the variables I used:

Rate:  6.5%/12
NPER: 360
PV: -100,000

Stay tuned for more great personal finance help and resources to come.


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Buying Mortgage Points

Mortgages 6 Comments »

Ever thought about buying mortgage points when you go to your lender to buy a home? You should. Buying mortgage points is a fantastic and easy way to reduce the total amount of interest paid to the bank over the life of a home loan. I have been involved in more than one deal where the buyer has purchased points, and does not regret it later. Among other things, buying mortgage points offers the following benefits:

  • Points are tax deductible.
    This has to be done on a depreciation schedule, but nonetheless, it is another item you can add to your itemization schedule for your taxes. This is above and beyond the deduction that you get for mortgage interest every year.
  • Points cut down the interest rate you pay on a loan.
    In the deal I have done, it seems that buying one point is about the equivalent of reducing your interest rate by about 1/4 of a percent. Thus, if you are quoted a rate of 6.5%, you would be buying it down to 6.25%. The banks have a formula on how they come up with the percentage equivalent of the point bought, so it vary depending on your lender.
  • Often, points can be financed.
    In other words, if you were to buy a point on a $100,000 loan, you can roll the cost of the point back into the loan, thereby increasing your loan amount to $101,000. I will explain in more detail in a moment.

Buying Mortgage Points Example

Now that I have covered some of the benefits of buying mortgage points, I would like to go through an example so you can see how this works in the real world. Let’s look at a $100,000 loan amount with two points (often banks will limit you to only 2 points - I guess because they will lose too much money if you buy more :) ).

$100,000 * .02 = $2,000

Each “point” is priced at 1% of the loan amount. So in this case, it will cost you $2,000 to buy two points. So let’s see how that will affect your mortgage payment. Let’s say that you were approved for a 6.5% loan and the bank took 1/4 of a percent off the interest rate for each point.

PMT on $100,000 at 6.5% = $632.07 (Principle and interest only, based on a 30 year loan)

PMT on $100,000 at 6% = $599.55 (Again, principle and interest only, based on a 30 year loan)

So that is a difference of $32.52 per month, which is $11,707.20 over the life of the loan. Neat huh?

But what if you don’t have an extra $2,000 at closing to be able to pay for these points. Well, as I mentioned before, ask your lender about financing the points as well. If they did, here is what the principle and interest payments would like for the same 30 year loan amounts.

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When to Refinance

Paying Off Debt, Mortgages No Comments »

If you are on the fence about when to refinance your home mortgage, then consider these several factors. I have done a lot of real estate investing and property management, and have a good deal of knowledge when it comes to mortgages as well. There are many things you need to be careful to consider other than just a better interest rate when it comes to refinancing your home. First, ask yourself these questions:

  • How long do I plan to stay in the home?
  • Do I plan to use this home for a second home or investment property after I leave?
  • Am I looking to get cash out of the new loan, or am I looking for a lower payment?
  • If I am looking to get cash from a refinance, what will I use it for?
  • When is the best time to capture the lowest possible rate?

Length of Time in Your Home
These, among other questions are good starting points before shopping rates, etc with your local lenders. The most important question is how long you are going to be staying in the home. If your kids are graduating high school and you are planning on moving, refinancing is not a good option for you. Even if you can get your closing costs down to $2,000-$3,000, you are still having to pay for 2 sets of closing costs - 1 when you refinance, and another when you sell the house. The fees to procure a new loan are just too high if you do not plan to own the house for very long.

On the other hand, if you plan to stay in the home a long time, then look at the potential savings this new lower rate will provide. You have to consider more than just the monthly savings, because you are getting a new 30 year loan, and so your payments are going to be extended by the same number of years as you have already been paying on your home (if you have been paying on your house for five years, and you get a new 30 year loan, the total amount of time paying on the house is now 35 years).

Keeping the Home After You Move 

If you plan to keep the home after you move, you should consider refinancing for a lower rate. My philosophy in holding rental properties is to get the most amount of money possible in rental income every month. Some investors look for appreciation over time, but I want to see results right away. So to me, the risk involved with an investment property (tenants and damages, vacancy, etc) merits getting paid as soon as possible. Over time, the rental unit will gain equity, and can still be sold later for a profit. So when it comes to long term second homes and rental properties - yes, go for the lowest payment possible. The renter is paying all of the interest anyway, so interest charges don’t really matter in this case.

The Dangers of Cashing Out Your Equity 

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Grocery Shopping on a Budget

Budgeting No Comments »

If you have ever needed to go grocery shopping on a budget (and who hasn’t?), then this post is for you. I wanted to give you several tips to help you meet your shopping budget, as food expenses can get out of control. Even if you are meeting your current grocery budget, there is always room for improvement. Trust me, with escalating gas prices and high inflation rates imminent, food is going to become more and more expensive. But let’s get into some of these money saving tips:

  1. Never go grocery shopping on an empty stomach.
    This may be the important tip to controlling the budget. If you are hungry, you will almost always compromise and spend more in the grocery store than you originally intended. Especially if there are free sample stations, etc as you will get a taste of something (and food always tastes better when you are hungry) and will be a lot more likely to buy it than if you had just finished a meal.

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Motorcycle Gas Mileage

Car Shopping 14 Comments »

As gas prices continue to climb, I find myself considering more and more to move a motorcycle, gas mileage being the most important factor in considering the change. But at what price does gas have to get to before you will make a change in your vehicle? Just check out this list of Honda motorcycles and their gas mileages (chart taken from http://www.totalmotorcycle.com/MotorcycleFuelEconomyGuide/Honda.htm):

Year Make Model AVG MPG / L/100km MPG City/Hwy
2006 Honda Shadow Aero

46.9/5

43.6/50.2

2006 Honda VTX 1300C

40/52

2006 Honda CBR1000RR

41/5.7

2005 Honda CB1300

34/41

2005 Honda Silver Wing Scooter

53/4.4

2005 Honda VTX1800F

31.4/7.5

2005 Honda Big Ruckus

57.4/4.1

2005 Honda CBR600RR

36/6.5

2005 Honda VTX1800N

36.2/7.5

2005 Honda 599

40.6/5.8

2005

Honda

Shadow Spirit 750

50/55

2005

Honda

VLX600 Shadow

49/61

2005

Honda

Rebel 250

73/86

2005

Honda

Shadow Aero

53/4.4

2005

Honda

Unicorn

129/1.8

118/1.6

2004 Honda CBR600RR

34.1/6.9

2004 Honda CBR1000RR

31.8/7.4

2004 Honda 599

49/4.8

2004 Honda 599

47/5

2004 Honda Shadow Sabre VT1100C2

48/5

2003 Honda CBR600RR

35.6/6.6

2003 Honda VTR1000F

29.4/8

2003 Honda Nighthawk 750

41/48

2003 Honda VTX1800R

38/6.2

Now, I of course chose Honda motorcycles for my example because I just love Honda. They are pretty much the only thing I drive, with the exception of Toyota (I would drive a Toyota as a second choice). But think about, let’s say you had a car like mine, where you had a 12 gallon tank and averaged around 25 miles per gallon. So you would average around 300 miles on a tank of gas, and at the forthcoming price of $4 per gallon, you are looking at $48 each and every time you fill up at the gas station.

Now, let’s compare that to the average of the chart above, based on just the AVG MPG / L/100 km column. That average over all the models with data displayed is ~46.5 miles per gallon. So that is almost twice the gas mileage. So to drive the same 300 miles, now it will only cost you $24 at the pump, instead of the $48. So the question is - how many times a month do you have to fill up your gas tank? I usually have to fill up once a week, which means I spend (at $3 per gallon for gas) about $130 per month in gas. Would I like to be able to spend just $65-$75 per month in gas? You bet.

Here’s my problem though (and maybe you can relate). My wife does not like the safety risk associated with driving a motorcycle. So to this point, I have obliged and not bought a motorcycle. But if gas continues to get more and more and more and more….you get the picture…and more expensive, that may be just what happens.

The other thing about motorcycles that is so great - they depreciate even faster than cars and trucks. So realistically, you can get a bike that is 3-4 years old, in good condition, for $1,000-$2,000. So for me, it may just be a matter of time before I take the plunge and go ahead and buy a motorcycle. The gas mileage is phenomenal, and the cost to acquire is low as well. A perfect mathematical equation for financial success.


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Car Depreciation

Car Finance, Car Shopping No Comments »

Whether you want to face it or not, when you buy a car, count on car depreciation, or a continual loss in value over the life of the car. With older used cars, the rate of depreciation is a lot less to you, because they have already lost most of their value. But with new cars, the sting is extremely heavy, in fact, when you first purchase a new car, you could stand to lose upwards of 20-25% just driving it off the lot. Why? Marketability.

Consider this - if you decided to sell the car immediately after you bought it, what kind of a price do you think you will get? Probably much lower than the dealer sold it to you. Ask yourself if you would pay retail for a car that was just recently bought by someone else, instead of going to the dealer directly. And if you wanted to sell it back to the dealer, well…they aren’t going to give you a price anywhere near what you paid for it. They want to make sure they make their money.

A good rule of thumb on car depreciation is to figure anywhere from 10-20% loss each year on the vehicle. Now, if you buy a car that is ten years old, most of the value has already depreciated, and it is nothing to worry about. If you spend $2,500 for a car, who cares if it is only worth $1,500 in the next 2-3 years. When I write posts like Should I Buy a New Car or a Used Car?, and the Ramifications of Making Payments on a Car, this is what I am referring to.

So here is the bottom line from my opinion. If you are considering buying a new car (many people do to get something that will have low maintenance costs for the first few years and be very reliable), plan on driving it for years. I’m talking 10 years or longer. The absolute worst thing you can do is to buy a new car, and sell it or trade it in during the first 2-3 years. You will almost definitely find yourself “upside down”, or in financial terms, with negative equity in the vehicle. My suggestion is to buy a used car that is 5-10 years old, and driving it into the ground. My last vehicle I purchased was a 1993 Acura Integra; it currently has around 160,000 miles and it still drives good. I plan to have it for another 5 years or more, hopefully. When buying an old car, just make sure you have your mechanic look it over thoroughly, because chances are high that it will need significant repairs when you buy it, and as long as you are prepared for the repairs, you can use the information to negotiate down the price of the vehicle. Two quick pieces of advice, don’t be afraid of repairs and make sure to buy foreign cars like Hondas and Toyotas. They just last a lot longer and have fewer maintenance problems.

One last thing, I found a car depreciation calculator if you are interested in seeing an estimation of what your car might be worth in the future. It isn’t as good as waiting until the time you are ready to sell and checking the blue book value, but it might be useful when you are considering purchasing that next car. Here’s the link:

http://www.money-zine.com/Calculators/Auto-Loan-Calculators/Car-Depreciation-Calculator/

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Lease with Option to Purchase

Real Estate Investing No Comments »

You may remember the articles I wrote in the past on Residential Lease Option and Residential Lease Purchase. These were how to articles to give you ideas on how to further your marketing effort of a particular property by opening up more options for you to get into buyers, and not just renters. And often, with these contracts, you will end up getting the house back anyway, as most people with bad credit who are unable to buy (and therefore in the market to do a lease option or lease purchase) will likely still have bad credit at the end of the lease period. But I wanted to go a little further with this post and tell you about a hybrid deal that I just recently completed.

I manage a property for an ex-business partner, who has now moved out of state. We were looking to rent the property, but with the property being a middle income type property, the rent we needed to get was just a little out of range of the typical family that would be interested in such a property. So I marketed the property as a “for rent” or “for sale” property and told perspective clients that I would be interest in a lease option contract. We were not as interested in a lease purchase agreement because we wanted to make sure we got a good chunk of change up front, as it serves to put the buyer into the property, and we expect less damage to the house if someone has some money in it up front (something to lose).

Well, it took two months to find a buyer, but we finally negotiated a deal with a nice couple with one child. The deal was interesting as it had some of the mechanics of both a lease option and a lease purchase agreement. In the end, the details of the deal were as follows:

  • Option fee of $2,750 up front from the buyer
  • $875 per month in rent
  • $50 per month credited to buyer at time of exercising the option to buy
  • 3 year lease agreement
  • Final purchase price of $96,700

So, as you can see, in a typical lease option, you would get the initial option fee, monthly rent, lease term agreement, and a final purchase price. Whereas in a lease purchase, you would get a higher monthly rental fee, with part of it being credited to the buyer’s purchase price, a lease term agreement, and a final purchase price. So the hybrid we did here is creative, and it met both the need of the seller and the buyer.

So this is just one example of how you can use creative finance to more effectively market your real estate holdings. This hybrid lease option / purchase is just one of many ways to open up the available buyers / renters in your area.


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Real Estate Rehabbing

Real Estate Investing No Comments »

Have you ever asked yourself, what is rehabbing? Or been to a meeting, and wondered what real estate rehabbing was? Some people talking about remodeling, and other ways of fixing up a house, but they are using the terms incorrectly. Simply put, real estate rehabbing is the act of restoring a house to its previous condition. Remodeling, on the other hand, is the act of upgrading or improving the property in some way as has not been done to it in the past. Some examples of remodeling are:

  • Adding a new room to the house.
  • Adding a garage or storage shed.
  • Tearing out a standard bath tub and replacing it with a large, jacuzzi or garden tub.
  • Adding an island to a standard kitchen.
  • Replacing carpet with hardwood floors.
  • Replacing A/C window units with central heat and air.
  • Significant landscaping upgrades.

On the flip side, when you are talking about rehabbing a property, generally you are talking about things that are really necessary to fix, things that are obvious eye sores or code violations, such as:

  • Replacing worn out carpet with new carpet.
  • Re-painting the interior/exterior.
  • Replacing a dysfunctional dishwasher with a new dishwasher of similar size and capabilities.
  • Fixing or replacing a leaky roof.
  • Fixing worn out plumbing and electrical.
  • Replacing non-working light fixtures and faucets, etc.
  • Mowing the grass and removing weeds.

So you see, in the first group, when we are talking about remodeling, we are talking about significant upgrades and improvements to a house. Improvements like adding rooms, central heat and air conditioning can actually increase the value of the house. But when you are strictly talking about rehabbing, all you are doing in that scenario is fixing only the things that really need to be fixed, you aren’t adding any value to the house, you are simply preparing the house to sell at market value. Often, when you remodel, you end up spending more than you stand to make by when you sell the house (unless of course you wait for years and let the property appreciate). So I normally go for properties to rehab, because you can get them cheap, spend a minimal amount of money in repairs, and then get market value for the sale of the property.

So to recap, just remember that rehabbing is just fixing the things that are broken or old in the house, and remodeling is making significant upgrades to the house. If you found this article interesting, sign up for my RSS feed to get free, automatic updates as they become available in your favorite RSS reader. Don’t know what a RSS feed is? Learn more about property rehabbing


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Best Used Car to Buy

Car Shopping No Comments »

That headline may be a bold statement, but I am going to give you, in my opinion, the best used car to buy. If you have followed this personal finance blog very long, you probably already know what I am going to say. But I assure you, this is real, I have actually owned one of these cars, and I believe in them above all others on the road, and I am going to explain why I feel that way. All I buy are used cars, so you are in the right company.

But before I tell you what car is best to buy used, I want to give you my criteria for selecting a used a car. So here it is, in descending order of importance:

  • Price
    The most important of all. I look for cars that are $3,000 or less in asking price, and I normally look to private owners, not used car dealers. Some used car dealers are legit (although many aren’t), but even if they are honest, they still have to make a profit, and you are going to pay a higher price than buying direct from someone through the pay, internet, etc.
  • Gas Mileage
    With gas expected to go to $4 per gallon, the gas mileage that a car can get is becoming a front and center issue. My current vehicle is an Acura Integra 1993 model, and I am disappointed, as it only gets about 26 miles per gallon, whereas my previous vehicle got 30+ miles per gallon. Think about a 13 mile trip one way to the store, bank, etc. If you have to pay $4 per gallon, then round trip you just used 1 gallon of gas, and paid $4, just to run a routine errand!! Trust me, gas mileage is going to become increasing important in the future.

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