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Quick-Start Guide to Investing – Part 3: Finding Financing and Strategies

Toy house placed on money

Getting a real estate business started can be overwhelming for a brand-new investor. Rather than getting caught up in all the details that cause people to be overwhelmed, we are breaking it down into 8 basic steps:

  1. Understanding Real Estate Cycles
  2. Identifying the Key Indicators in Your Market
  3. Building Your Power Team
  4. Making Offers
  5. Finding Financing Sources for Your Deals
  6. Implementing Finding Strategies
  7. Understanding Exit Strategies
  8. Constantly Learning and Mastering Your Craft

Today, we’ll be covering Steps 5 and 6.

Step 5 – Finding Financing Sources for Your Deals

 This is the step many new investors fear. The truth is if you have done your homework and secured a good deal, financing is usually the easier part of this business. People with money will always come forward if the deal is right.

Don’t get caught in the trap of focusing only on one approach. Once you have an offer accepted on a property (or even before it is accepted), take a four-step approach to getting the money for the deal:

  1. Traditional Loans
  2. Hard Money Loans
  3. Wholesaling
  4. Finding a Partner

If you pursue all four methods on every one of your first deals, the money should be there.

Remember, you can’t have too many sources for financing. Start now and find these sources as outlined in our training courses.

Step 6 – Implementing Finding Strategies

To sustain a growing real estate investment business, you must have a constant stream of potential properties.

A real estate agent can be one way of finding properties. However, it’s not the only way. Some popular finding strategies include:

  • Marketing and Advertising
  • Foreclosure Properties
  • Probate Properties
  • Getting Deals from Wholesalers

Many investors have a marketing budget and use that money to advertise. Done properly, this gets sellers calling them about buying their property. The more phone calls you get, the easier your life will be as an investor. Usually, the most motivated sellers will call you because they need a fast solution to their housing problems.

Foreclosures can be a constant source of finding deals. Keep in mind, foreclosures are more of a finding strategy than an investment technique. Why? Because foreclosure properties can be rentals, lease options, wholesale deals, etc.

Probate properties can also be a great way of finding investments. In many cases, the home must be sold to help pay the estate’s creditors. As a result, you can find some very motivated sellers that have probate properties.

To create that constant source of potential deals, determine what is going to work best for your situation, needs and goals as an investor.

Only two more steps to go! Next time, we’ll finish up with Step 7 and 8.

By Mark Justice

Rich Dad® Education Elite Training Mentor

Real Estate Financing

Real Estate Financing

Observations on Real Estate Financing

Here are some current observations on financing in today’s real estate market.  Since the economy is up and inventory is down, the prices are up in several markets.

I have noticed from information that I have gathered from students in the Creative Real Estate Financing class and from mentoring students, as well as from banks that we have talked to while mentoring, that the financing terms for real estate are finally loosening up.  Depending on the markets that you are in, here are some observations on financing for Owner and non-Owner occupied single family homes.

  1. The owner occupied LTV was 80%, now it is up to 90 and 95% in some cases.
  2. Banks are taking a 90% 1st and a 5% 2nd.
  3. We have not seen 2nds since 2007.
  4. FHA is still at 96.5% LTV, however, now they allowing the co-borrow to come in on the loan if you have a poor credit score or debt coverage ratio.
  5. Debt coverage ratio on Owner occupied was 30-45%. Now it is up to 50% ratio.
  6. For investment property on SFD, non-owner occupied max loans were 4. Now some places will allow 10 loans or higher.  This will allow you to buy more investment properties.

Jumbo loans were $417,000. In some places, it is as high as $728,000. Up until recently, jumbo loans required 20% down or higher.  Some lenders are offering 10% down and offering 5% interest only.  Again, we have not seen these types of loans since 2006.  This is a great time to be purchasing Single Family properties, with interest rates at 60 year lows and property appreciation increasing.  This is also an excellent time for a great ROI on properties.  Talk to several lenders, credit unions, and banks to see what kind of financing you can get for your project.

Richard Maryanski
Rich Dad Education Elite Trainer

Commercial Lease Terms for Due Diligence: Frequently Asked Questions

Commercial Lease Terms

Commercial Lease Terms

In a previous blog, I introduced Commercial Lease Terms for Due Diligence.  Based on that article I have had a few requests for more information.  The following are some of the most frequently asked questions after Due Diligence begins.

Tenant Improvement Allowance:

As a rule of thumb we give an allowance of about $5.00 a sq. ft. for cosmetic rehab or renewal incentive.  If you are bringing in a new tenant with a complete build-out, you may be looking at closer to $15.00 a sq. ft.  If you are purchasing a property with a TI be sure the work has been completed and paid for prior to the purchase or receive a credit from the seller for the liability.

Turnkey:

I believe this one causes confusion because I have seen it used in two very different ways.  Some real estate professionals will refer to a finished unit as a turnkey unit, meaning what you see is what you get.  No allowance for improvements just turn the key and use the space.  These types of units would have very little upfront expense for the landlord.  The other way Turnkey is used is to imply completely furnished or equipped as in all the tenant needs to do is walk in.  Clearly there is a wide spread in these operating costs so be sure to ask the necessary questions to determine your ongoing costs.

The next few items are numbers the lender will review.

Expense Ratio:

This is the percentage of expenses to the Effective Gross Rent (EGR).  When you are analyzing Office, Retail, and Industrial there will be variations based on the tenant expense reimbursement for Net, Net Net or Triple Net Lease.  While apartments still have some variations, you can assume that any expense ratio under 30% may be suspect to a lender.  A newer building may have an expense ratio of 30 to 35%, but most apartments will be 40 to 45%.  In order to stay on top of current trends and variables, you may want to investigate the National Association of Realtors reports “Income and Expense Ratio – Apartments” and “Income and Expense Ratio – Office.”

Difference between Initial Capital Improvements and Reserves for Capital Improvement:

The Initial Capital Improvements are items that you will do within the first 12 to 18 months of ownership to improve or repair the asset.  Often the lender will want to see this money in a reserve account prior to approving the loan.

Reserves for Capital Improvement are funds you are setting aside to insure the ongoing integrity of the asset.

Initial Capital Improvements will depend on the current condition of the property however the following are guidelines for a few commercial products.

Capital Expense Reserves:

  • Apartments: $300 per unit per year
  • Retail:  between 3-5% of Effective Gross Rent
  • Office: between 3-5% of Effective Gross Rent
  • Industrial: between 2-4% of Effective Gross Rent

*A conduit loan may be .15 per sq. ft. per year for Office and Industrial

  • Self-Storage: between 3-5% of Effective Gross Rent
  • MHP: between 3-5% of Effective Gross Rent

One final item to remember is the importance of professional management in securing your financing.  Even if you plan to self manage your onsite personnel, please build in approximately 5% of the EGR for asset management.  If the lender will consent to self-management, the money is in the budget to compensate you. If they require licensed approved management, you have the funds to cover the expense.

Diane Bowman
Rich Dad Education Elite Commercial Course Instructor

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