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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

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Is Your Mortgage Weighing you Down? Short Sale v.s. Foreclosure

February 3, 2012
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What Home Owners Need to Know about Avoiding Foreclosure

By Jeff Donnellan RE/MAX

25% of Home Owners are underwater on their mortgage due to 5 straight years of home price declines and home prices have reverted back to 2001-2002 values in most markets.  This means that anyone who  has purchased a home in that time & didn’t make a large down payment owes more than what their home is worth.  During this time  many Americans have lost their job, experienced wage reduction or other hardships that made paying their mortgage extremely difficult.  This is nothing to be ashamed of because most people in this situation spend all of their savings just trying to keep their home.

Our neighbors are suffering in silence. 1 out of every 7 homes in the U.S. is in some state of foreclosure.  7 out of 10 do absolutely nothing about it.  It doesn’t have to be so.  Their are foreclosure alternatives such as a short sale, renting the home or a deed-in-lieu.  A foreclosure is an extremely traumatic event for a family and the worst thing that can affect your credit score (worse than bankruptcy).

Reason Against Foreclosure

  • A foreclosure is worse than bankruptcy
  • A foreclosure is public record for 10 years
  • A foreclosure could jeopardize future employment because employers check credit.

Reasons for a Short Sale

  • Home owner is in control of the selling process, allowed to sell and move with dignity
  • Less impact on credit score. Can drop as little as 50 points v.s. foreclosure 300 or more
  • Owner can qualify for another mortgage in 2-3 years, 7-10 after a forclosure
  • Short sale will be recorded as ” Paid in Full” or “Settled”
  • Owner can receive up to 3K to moving expenses under HAFA guide lines

Most mortgage companies and banks are now more cooperative than ever by participating in programs such as HARP, HAFA, & HAMP.  These programs are meant to help home owners  refinance or modify their mortgage and stay in their home or short sell their home if the hardship is too great.  In a previous blog  Why Would Your Bank Accept a Short Sale I detailed why banks don’t want to foreclose and how they are trying to help home owners relieve the burden of a mortgage they just can’t afford.

To find the best option contact an experienced short sale Realtor.  Since each person has a different situation, an experienced short sale Realtor can make recommendations what is best for you.

This Article was written by Jeff Donnellan RE/MAX CDPE (Certified Distressed Property Expert).  Find more information about Foreclosure prevention and short sales at www.webhomesearcher.com