Private investors often act as lenders to finance deals that provide reliable security on which to earn income and asset growth. This sector of real estate lending and investment is the least regulated, which is a good thing because you can get creative to add value in the deal; it also means that you need to have professional advice on hand at every stage of the process.
The Local Hard Money Lender
A private investor can help you get ownership of real property; you can then install a tenant and refinance at a lower interest rate. These hard money loans secured by real estate are an excellent way for investors to negotiate favorable terms on the right properties.
The investors who make hard money loans have the experience to judge the issues of asset value and risk to make intelligent choices about the loans they write. These lenders make quick decisions, so you get the leverage of a quick close, which gives you leverage in negotiation with owners who are motivated to sell.
Hard money loans are relatively expensive, and short-term solutions but they allow you to gain the title, make all the necessary repairs and improvements, and then rent out to a new tenant at the market rate. Once you have a cash flow from your investment, banks will view it as suitable for lending on favorable terms; you will be able to refinance for the long-term, at a market rate of interest.
Hybrid Debt And Equity investments
A more elaborate variation on this strategy is to find a private lender who will consider becoming an equity partner as well as a creditor. Your offer to this investor is to borrow half the buying price from them and to exchange half of your equity in return for the remainder of the price. If they agree, they earn interest on the loan plus they are entitled to an equal share of the gain as the asset grows value.
The ownership ratio does not have to be a half; it can be any split that you can agree with your lender, who will also be your partner. For example, instead of lending a half, they may consider two-thirds of the value and a half stake in the equity. It is a matter of the market, the property in question, and your negotiating skills.
Banks Love Portfolios
Once you have established a strong track record and a reputation in your business community as a smart developer, you will find doors opening more readily. Banks will consider funding your projects earlier in the process. They will also consider offering portfolio loans secured against some or all of your investments, which will be less expensive and simpler than first borrowing from hard-money lenders and refinancing it later.
Hit The Syndicate Circuit
Create a syndicate of several investors as partners who each take a smaller share in your project; this is more widely used to finance multi-unit properties that are beyond the reach of these investors individually. You become the general partner, responsible for every aspect of the project, and the others become limited partners who provide capital but remain in the background awaiting their shares.
Investing Requires Sound Legal Guidance
Forming a syndicate or any of these you are the general partner and your investors take a passive role demands the sharp eye of a competent real estate attorney. You can be sure that your hard-money lenders get and limited partners get sound legal advice and if you want a chance to succeed you should too.
Talk to hard money investors in your community; it is not hard to find them in any metropolitan area. Build a network of contacts and start looking for that potential first investments. Once you have cash flow coming in from that first rental unit, you will be at the starting point of a career as a real estate investor.
The Adjustment Depends On The Index
When you take out an adjustable rate mortgage (ARM), you agree to allow your lender to make periodic adjustments to the interest rate that you pay on the balance of your home loan. The mechanics of the adjustments come from the terms that you agreed to at the beginning of the loan. The most critical factor that influences the rate hike is the index. When it is time to adjust the new rate is determined by the sum of the index and a margin, also defined in your loan.
Your lender will select the index and margin that suits their purposes from one of many that are in everyday use as references for mortgage lending. The index will itself be influenced by external factors, many of which are interconnected. Lenders select their indices based on a concern to keep lending rates competitive and profitable; therefore they choose an index that they believe will reflect the state of the home loan market at the time your rate adjusts.
The Factors Behind The Index
Common indices are six-month Treasuries rate, one-year constant maturity Treasuries, Certificate of Deposit Index, and the six-month London Inter-Bank Offered Rate. In turn, these published rates come under the influence of the state of the economy and the actions of the Federal Reserve.
The Federal Reserve funds the lending industry by providing cash to the banks; these funds are the lifeblood of the economy, the banks borrow at a discount lending rate and then loan the funds to their customers at a retail rate, profiting on the difference. The Fed changes the discount rate to influence the economy, to forestall recessions, and to control inflation.
The economy influences the indices through the behavior of investors and the state of businesses. If businesses prosper, employment increases, and the economy expands, it creates demand for goods and services; this increases borrowing and banks increase their rates, which tends to push indices upward. If the economy contracts and businesses experience a downturn, they will cut costs and lay off workers, resulting in decreased demand for loans, influencing indices to drop.
Initial Rates And Following Adjustment Fluctuations
One of the most annoying hazards of having an ARM is rate watching whereby you fixate on the index before the adjustment date. If you have a mortgage that resets periodically based on a published market index the current level of that index becomes a focal point that grabs your attention and holds it.
You might assume that the interest rate on you ARM will adjust upward, but that is not necessarily the case. If the conditions are right, it may remain unchanged or reduce slightly. If you had an exceptionally low introductory rate, a drop is unlikely, but subsequent adjustments will track the changes in the index rate, which will fluctuate with the condition of the economy and the sentiment of the Federal Reserve Board.
Adjustable rate mortgages are an excellent way to get a competitive initial rate. Once the adjustments start they become something of an adventure; the fluctuations in the economy and the index that determines your adjustment set the extremes of the ride.
The question of the cost of refinancing your mortgage is simple enough on the surface, but the details and the fees add up and appear before you begin and then over the lifetime of the new loan. You need to look carefully at the costs of a refi before you commit to even formally applying for it.
Paying To Qualify
You will have to pay to initiate a mortgage application fee that could be as much as $500. Your refi is for a new loan contract, and the lender will demand a fee for the privilege of starting a new loan. As with any lending, the bank is interested in the qualities of both you and the property.
Credit reports – You will have to show that you are still in good standing with your creditors. Obtaining copies of your credit reports will cost anything up to $100.
Appraisal report – The property that provides the security for your loan also has to prove that it is creditworthy. The appraisal will also have to confirm that there is sufficient equity to repay the previous loan and cover the new lending, which may cost around $400, and you still do not know for certain that you will get approval for the new mortgage. If there is something wrong with the condition of the property or it just does not have the value that you assumed, it could turn out that you spend $1,000 or more only for the lender to decline your application, ouch.
Cost At Closing
Once everything meets the approval of the lender, there is another round of fees to pay at the time that the loan closes. In fact, this is quite a list if you break it down. You will have an origination fee, document preparation fee, title search and insurance fees, recording fee and a host of lesser fees that add up quickly to around 1.5 percent of your initial loan value or more.
Is it worth additional costs? The answer depends on your objectives: If you want to save money in the long-term, and you have found a new loan package that gives you a lower interest rate the savings of interest payments will cover the extra costs to refinance.
It does not take much of a rate reduction to create savings over the life of a thirty-year loan. Likewise, if you reduce the term from thirty to fifteen years, you will save thousands in interest payments. If you plan to sell long before the end of the new amortization period, it will probably be more expensive to pay the up-front cost of refinancing.
How much can you save? Over the life of a thirty-year mortgage, you can save tens of thousands by shaving just a quarter percent from your current rate. If you experiment with an online repayment calculator, you will find that the amount you can save over the life of a loan is on the order of the original balance of the loan, depending on your choices for interest rate and amortization it may be more, or less. If you compare that to the costs detailed above you can see that the key is that re-fi saves in the long term, but it is expensive in the near-term.
What Is A Home Equity Line Of Credit?
Do you have enough equity in your home to cash out and use it to increase your overall wealth? If you do, be forewarned that this is both an opportunity and a temptation that you could potentially misuse to your financial detriment.
A home equity line of credit or HELOC is a line of credit secured by your real estate. Rather than advancing the full sum of the loan, like a conventional or FHS loan, the lender sets a term and a limit, and you only take out the cash you want to use, up to that limit and within a period typically limited to between 5 and 25 years. HELOCs are home loans that require you to qualify in the same manner as other loans secured by your real estate, and defaulting on your payments could ultimately result in a foreclosure.
The most prudent uses of HELOCs are those big-ticket life-changing items like education and home improvement. This loan format suits these purposes well because of the flexibility; you only borrow as much against your equity as your expenditures mount. Since you are taking away from the stake that you hold in your home, you should only invest it either in bettering yourself or raising the market value of your property.
Mistakes That Homeowners Make With Home Equity Lines Of Credit
Trading in your equity to use for retail purchases or transient experiences is not an efficient financial strategy for the long-term. Case in point, when property values dipped significantly in 2007-2008, overuse of this type of financing for personal spending caused many homeowners to discover that their secured debts were greater than their home values.
In extraordinary circumstances your HELOC could be reduced by a nervous lender before the end of the term and before you can utilize it, which is what happened precisely as the real estate market crumbled in 2008; the banks revoked previously secured lines of credit in response to falling levels of homeowner equity. This drastic pullback was a result of the economic conditions of that era and a drastic measure.
Making Judgment Calls About Opportunities
There are alternatives to HELOCs that might better suit many homeowner circumstances. If you have a large proportion of equity, say fifty percent of the value of your home or more it might prove to be less expensive and simpler to refinance or take a conventional second home loan and take out the equity as a lump sum. However, there is no point in paying interest on cash that you do not intend to put to use immediately. Scooping out the equity that you have accrued in your home with a HELOC is best used as to trade for higher value elsewhere.
As a borrower, you might consider that once your line of credit is exhausted you may then decide to refinance. As the last decade has shown, your home value can go down as well as up. As a sensible homeowner, you should always allow for changes in fortune. However using a HELOC in the short-term to advance your education, career prospects and enhancing your property value are likely to be wise choices in the long-term as well.
As A Borrower, Either Millennial, Gen-Xer or Baby-Boomer Be
There are three distinct stages in a homeowner’s life. Let’s call them Millennial, Gen-X, and Baby-boomer, and while these terms imply distinct generations you can think of them as a series of financial stages that lead one to another, ascending the ladder of wealth.
Arguably, homeownership proceeds in stages because it is all about building and managing wealth; wealth itself is about having the lifestyle you have earned from the accumulated rewards of hard work. In the United States of America, owning your home is still one of the most significant factors associated with financial independence and membership in the middle class.
Financing for The Millennial Generation
If you are at the leading edge of the millennial generation, you are likely to be finished with school and starting to build a career. Now that you have gotten the travel bug out of your system paid down the majority of your student loans, and your career is on track, you might start to look around and get a home of your own.
As a person with just starting out, you might wonder if you are better off renting or buying. Once you decide that ownership is the right choice, you will have to start taking your credit history seriously and make an effort to get qualified for your first home loan.
Fortunately, first-time homeowners are reasonably well served by programs intended to get you into your first home. If you don’t have the savings to make a deposit of twenty percent or more, an FHA loan will facilitate making a small down payment, but that will add costs to your borrowing, this is an institution that has helped generations of Americans buy their first homes. If you are a veteran of the United States military, you might qualify for a Veterans Administration loan with even more generous terms.
Mid-life Gen-X Financing Options
You have bought that first home; you have paid down the loan balance and maybe the house of condominium is looking a little too small now, you have a career that is expanding and a two-income home. If you made it through the last decade with your assets intact you are in a good position to move up, you might decide to move up to a luxury home in an exclusive neighborhood.
With a low level of debt relative to the equity you hold in your assets, you can qualify for a jumbo loan unrestricted by the limits imposed on conforming loans, loans that fall within the limits set by Federal regulators on mortgages to conform to FHA and other government-backed lending programs.
Once your big move is behind you, maybe it is time to start expanding your assets. Do you dream of buying a vacation home or a rental property as an investment? Buying a second home or a rental unit could be a convenient and enjoyable way to increase your wealth.
Baby-Boomer Asset Consolidation Financing
You are in the stage of life when you want to consolidate your assets and downsize and focus in preparation for retirement. You may be wondering about how to get more out of your investment properties, reinvesting your gains or just converting to cash. These are questions that you need to work with your financial advisors and your family. Borrowing against your assets may not be the best choice if you have built up a large nest egg. However, holding a moderate level of debt could be financially efficient if you can take advantage of the tax deductions relating to interest.
All three stages have variations and creative possibilities and if you have a plan you can make each of the first two stages flow on to the third. Real estate finance still offers the American public the opportunity of ownership and advancement; it can bring a more comfortable and exciting lifestyle for those who are motivated to take advantage of it.
Dreaming The Dream
Ironically the key to building your own home from scratch is having the right professional support to put the whole process together and to ensure that the process goes smoothly from start to finish.
The thought of building your own home is extremely appealing to homeowners. If you could live in a unique house that was designed to your exact personal requirements, why would you not? Who would not want that? It is a real aspirational dream to start from scratch and come up with a house unlike any other.
Building your own home is an epic challenge because of the costs and complexities involved. But after it is completed, a successfully self-built home that stands out with charm and character is likely to become a landmark and icon of the community in future decades. This is also because the owner made their mark on society prior to construction.
Listing The Build Your Own Home Resources
As always, real estate and home ownership is about location. So the first element of the project will always be the finding of a suitable plot of land. If you already have that then you have made a significant first step to committing to a long and elaborate journey.
Your land will need to have the right permissions to construct the type of building that you want. This process could be straightforward or frustratingly difficult depending on how inline your plans are with the surrounding properties and the community in which it is situated.
Bring In Professionals
You will start when you hire an architect or select a published building design that suits your needs. An architect can do much to help you organize the plan and will come up with a unique design for your site and your lifestyle. Many construction companies have off-the-shelf plans ready to go. The advantage here is that they will do the work and already have the bugs worked out. So, it could be a smoother ride through the process.
You will also need to have a plan for completing the project. This is not a design for your home but a roadmap to get through the process of doing all of the work to make it happen. This is critical because there is a sequence of events from clearing the land to connecting the utilities.
On a related note, you will need to decide if you are going to employ a builder to manage and supervise the project or if you are going to act as show-runner and manage the build yourself. Even if you do choose to self-build you will likely need to consult with a builder to make sure the details come out right.
The combinations and permutations of how you go about building your own home are almost limitless. Some of the things you need to be aware of are the steps in the project plan and follow how progress is going in relation to the plan. One of the most important issues you should be concerned with is costing. Even small cost overruns can add up over the life of a project. An alternative would be to work with a builder that provides a turnkey solution.
Building your own home can be a fantastic adventure or a difficult long, drawn-out process. It is not for everybody. Most home seekers will be satisfied with the new homes offered by developers or the many choices of the existing home sales market.
If you decide to go the route of building your own home make certain that you do your research and find qualified professionals to support your objectives. If you get it right you will have a unique and remarkable home that is unlike any other in your neighborhood.