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Building Financial Freedom Through Real Estate Investing

March 28, 2012
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Jeff Donnellan Re/Max

A book that I recently read had this quote and I was deeply impacted by the thought of having control over my time.

” What do you consider the signs of a successful life?  Many people think that accumulating wealth & belongings is the central sign of success: others are happy to have their health and retirement security.  You need to come up with your own definition,  but here is an idea about success that deserves consideration.  Success may be defined as achieving complete financial and personal freedom.  That allows you to do as you please while maintaining complete control over how you spend your time.”  – Michael Thomsett

Everyone has a dream about their future and how they would spend time if money was not a factor.  Your work doesn’t define who you are, but provides a means to an end.  A way to pay for living expenses, obligations and hopefully enough to save for investing or retirement.  Real estate investing can be a means to an end and a way to take control of your time while becoming financially free.  Rental properties have four advantages that no other investment can combine.

– Cash Flow

– Appreciation

– Leverage & Loan Amortization

– Tax advantages

A rental property can generate monthly income that can be used to pay bills or reinvest into the property to increase its value or overall ownership.  Most real estate appreciates over time.  A home purchased today for $250,000 that appreciates at 3% per year will be worth $336,000 in 10 years.  Residential home loans can leverage your down payment.  With a 20% down payment a buyer can borrow five times more than what they put in and over time the loan is amortized to pay down more principal.  This allows the owner to gain more equity each year of ownership.  The tax advantages of owning real estate can be significant.  The interest paid on the loan is a tax deduction as well as depreciated home value.  The IRS allows the value of a home to be depreciated down to zero over 27.5 years.  This creates a paper lose when the home is creating cash flow and appreciation every year.

Real estate should be viewed as a long-term non-liquid asset and its value compounds over time.  This period is usually 5-10 years and called seasoning.  If a property cash flows the owner can choose the correct time to sell for maximum profit in a good market,  instead of being forced to sell and lose value in a bad market.

Many people who I speak with are interested in real estate investing, but don’t know how to begin.  Saving enough cash for down payment can be difficult and usually doesn’t come quickly.  I tell them to think of the time used to save as a learning period as well.  Learn as much as possible about mortgages, properties available and plan the details of the purchase.  One way to begin investing immediately is to buy a 2-4 flat and live in one of the units.  By taking this approach you can get owner occupied financing ( lower rates, better loan terms & smaller down payment).

Another way to begin is called move up and rent out.  This is where the owner of an existing home rents out their current home and purchases a different home to live in.  Again the advantage of owner occupied financing comes in to play so cash flow is more likely.  The challenge in this scenario would be financing.  Today you would have to qualify for both loans or have more than 20% equity in your current home.  This is to prevent a “buy & dump” which is when some one purchases a new home and stops paying for the old one.

The next most common way to begin is buying real estate as pure investment.  Usually a larger down payment of 25% is needed, but the larger down payment will help the investment cash flow because less money is going toward paying a mortgage.  Real estate investors at this stage are looking at properties for ROI or return on investment, and not as a stepping stone.  Make sure your Realtor or real estate adviser can provide details on ROI for each property so you can make an informed decision.

Real estate investing is not for everyone.  There are some down sides like dealing with tenants needs, repairs, & possible vacancies.  Choosing the right team to help you is of the most importance.  A Realtor with investment experience can help in the selection of properties or help manage rentals.  A mortgage lender can suggest the best form of financing and qualify you for the appropriate purchase price.  An accountant can plan your taxes in order to take advantages of the most deductions and pay less in income tax each year.  Real estate attorneys act as an insurance policy & protecting your interests from losses.  Selecting the correct advisers will set you up for success.

http://www.webhomesearcher.com


Steps to Purchasing a Chicago Home

March 2, 2012
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Jeff Donnellan

www.webhomesearcher.com

So you’ve found that perfect home after searching for a week, a month, or a year.  So what’s next?   Most likely you’ve already done your pre-approval and financially qualified the home to make sure it’s in your budget.  The next steps will show in detail of how to make that perfect home yours.

1.  Ask for the Home owner’s disclosures such as “lead paint”, “Radon”, and the Seller’s disclosure that lists about 20 items that are critical to a well-functioning home.  If you are buying a foreclosure the seller will not provide disclosures.  So a home inspection is crucial.

2.  Next a CMA or Comparative Market Analysis prepared by gathering at least 3 sold homes with in close proximity and similar features will help determine value and offer price.  If a home is asking 200k and the comparable sales are 195k, the home is well priced.

3.  Making the offer:  These are the 5 negotiable parts of the contract.

  • Price
  • Earnest Money ( good faith deposit kept in escrow until closing when it is returned)
  • Closing Date
  • Personal property ( appliances, fixtures, furniture)
  • Financing (FHA, VA, Conventional, Cash)

4.  After the contract is negotiated it’s time to get busy.  A home inspection should be scheduled in the 1st 5 days after acceptance.  The inspection will help determine if there are any defective parts of the home and issues that need to be repaired.

5.  An attorney should be contact as well to review the contract and get in writing  home inspection issues that the seller agreed to fix or give as cash credits. (with in 10 business days  after contract acceptance)

6.  Contact your mortgage lender and let them know you have an accepted contract.  They will take a mortgage application and start your loan processing.  They will ask for additional documentation such as bank statements, pay stubs, w 2’s and tax returns.

7.  Many of the next steps take place behind the scenes.  The underwriting your loan will begin to make sure all documentation is place and the appraisal will be order to verify the property’s value meets the loan amount.

8.  A mortgage commitment will be issued stating that funds are approved and awaiting the closing.

9.  You will want to do a final walk through of the home usually the day before or morning of closing to make sure no damage was done to the home when the seller moved out and that all agreed upon items have been left in place.

10.  And finally the Closing.  Your mortgage funds will be wired to the title company where the closing is taking place and loan documents will be signed.  Items needed:  A cashier check for down payment, & closing costs made out to the title company and Identification like drivers license or passport.

Congratulations!!! You’re now the proud owner of  a home.