Monthly Archives: November 2007

How to Use Subject To in a Real Estate Investment

Posted on November 13, 2007 | 1 Comment

I’m going to talk to you about a special way to acquire property.

And that way is called “Subject To”.

What is Subject To?

It’s one of the fastest and easiest ways to get property into your real estate portfolio. It allows you to add to your investments by using a simple and easy technique while giving you an ability to help people that are in need of a quick real estate position. And that’s always a good thing.

There’s risk, but that’s obvious whenever you’re going into real estate investing. As an investor, you know that risk equals reward. You have to deal with some risk in order to get that reward of a big fat payday. The way you mitigate the risk is with knowledge. Knowing what to do and when to do it gives you an advantage that many other would-be investors don’t have. By constant learning and getting new investment techniques and really integrating them, you’ll have new ways of getting investments under your belt.

Using “subject-to” you can actually buy properties without cash. Yes, that’s right, without a dollar in your hand. Hear me out though, I definitely do not suggest you do this if you don’t actually have the ability to front this money if you had to. You really want to have the money available or at least access to the money. If you really want to lower your risk, you should do a “subject to” as if you signed the mortgage. We’ll get into what I mean in a second.

When you’re buying real estate via “subject-to” you are getting this property “subject to” the financing that currently exists. What this means is that the loan that’s currently there stays there without any formal declaration on your side. This means that the seller will deed the property over to you and you take over the payments just like the old owner used to.

Who’s liable on the debt

You might ask yourself, “Sounds good on my side, but why would the seller offer to give me this property and still stay liable on the debt?”

The reasons are simple. Maybe the owner needs a fast sale. Maybe the seller just wants to get rid of the home. They want a quick solution to their problem. That’s where you as a real estate investor come in. You come in, sweep away their old problem, and they’re happy because they finally got that property off their hands and you’re happy because you added a nice piece to your real estate investment portfolio. Win-win.

In case you were wondering, buying properties “subject-to” is completely and totally legal. But I want you to keep something in mind. This is a powerful technique, so don’t use it lightly. The people you’re going to be buying properties from are expecting you to be responsible for the loan. So be responsible! As an investor you give solutions to people’s problems. So be the solution-giver! As such, you have to keep the promise to keep those mortgage payments current.

Keep yourself on the safe side

To be safe, I suggest that you have a minimum of three months of reserves to cover your payments. This gives you time to secure a tenant or buyer, depending on your intentions. Flexibility is key! You need to have the ability to feel comfortable about looking for buyers and renters in a relaxed way, not thinking that your financial livelihood rests in the balance! Real estate investment is not something you jump into without the proper ability to cover yourself in case events don’t line up perfectly. You have to always think ahead and expect the unexpected. This keeps you ahead of the game and puts more money in your pocket in the long run.

→ 1 Comment

Posted in Real Estate Investing

Tagged ,

The Major Role Credit Plays in Real Estate Financing

Posted on November 12, 2007 | 1 Comment

The status of your credit plays a major role in helping you to obtain commercial real estate financing.  It helps to determine how much financing for which you will qualify and what kind of an interest rate you will get on the loan.  Unfortunately, most people do not pay attention to or monitor their credit files on a regular basis.  If you are going to invest in real estate, this is an absolute “must.”

What is good credit?

Good credit for a commercial real estate investor usually means about twelve to fifteen “trade lines” of seasoned credit in a credit report, with several real estate loans either showing as active or having been paid off successfully.  For example, car loans, current mortgages, and charge cards which are at least two years old and show no late payments.  Again, for real estate investors, successful maintenance of real estate loans is a “must.”

Now granted, not everyone is perfect (in fact, very few are!) and we all have our ups and downs, so don’t be worried if you have a few 30-day late payments or some old collection accounts on your credit report.  Today, credit reporting systems use a complex method of evaluating credit patterns which is distilled into and issued as a “credit score.”  The higher the number, the less risk there is that a borrower is likely to “default” on a loan.

While this process, called “credit scoring,” is in full use for residential loans, the commercial lenders are only now starting to adopt it.  There is a trend to use them by certain non-bank lenders for loans less than $2,000,000 or so.

Most underwriters (the people who would approve your loan) and underwriting systems that review your track record are looking for trends.  In other words, they’re looking for a history or recent pattern of good or bad credit.  Isolated incidents should not affect your ability to get a loan.

How Can You Repair Your Credit?

In most cases, a simple letter or phone call to the credit card company or business that originally gave you the “credit” can put you on the right track to having that “scar” removed from your report.  It may not even be necessary though, based upon your recent credit patterns!

Sometimes they’ll require you to pay-off the balance of your debt or send in a letter explaining why you were late with your payment.  Don’t pay any creditor off without talking to a qualified professional financial advisor or mortgage consultant first!

However, if you have a history of recent late payments, you’re probably going to have to let time take its course (although there might be trick or two here you can use).

There are a million scenarios I could review, but I think it’s important you walk-away with two key thoughts from this:  1) Your credit can make or break your ability to acquire a loan; and 2) you must know what is on your credit report, your credit score, and begin to examine and, if necessary, repair any credit problems immediately.

What Role Does Your Investment History Play?

Your investment property loan history or “track record” will play an important role in whether or not a lender will want to finance your next property.  Investment properties, and their respective loans, are often looked upon as a higher credit risk than if you were buying your own home.  So, if you have a proven track record of successfully selling or managing investment properties loans, with no late payments, then you are more likely to get your loan approved.

The bottom line is that “credit” or, more accurately, “credit history” is a major determinant in your ability to finance commercial real estate.  Pay close attention to this area of your finances if you intend to be an active investor and manage your credit as you would one of your properties:  Actively.

“The Investment Property Insider” is published by Craig S. Higdon, a veteran commercial mortgage broker. He publishes the weekly e-zine and blog, www.InvestmentPropertyInsider.com, for commercial real estate investors, developers, and industry professionals. Visit the blog and get this free report: “The 7 Biggest Loan Mistakes Real Estate Investors Make And How To Avoid Them.”

→ 1 Comment

Posted in Real Estate Investing

Tagged , ,

Rule to Grow Rich By #1: The Best Home Renovation

Posted on November 9, 2007 | 9 Comments

This is one part of a series where we’ll be looking at the real estate-related rules in Money Magazine’s “25 Rules To Grow Rich By”. We’ll be taking these rules one-by-one and going in-depth as to whether it’s a rule “to grow rich by” or not. Take a look at the rules we’ve covered at the 25 Rules list.

Rule 1: For return on investment, the best home renovation is to upgrade an old bathroom. Kitchens come in second.

If there is such a thing as a home improvement “fact” it’s that kitchens and bathrooms are the first places to look at when you’re remodeling your home. They tend to give you more bang for your buck in terms of resale value. The reason for this is that when buyers come to look at your home, they know they will be spending an inordinate amount of time in these two rooms. So if you’re selling your home, then give the buyers what they want!

But wait a second. Are you selling your home? Because this conversation just became way more interesting if there are some out there that aren’t selling their home.

So it this a conversation on selling your home for the most money and highest possible profit at the closing table or is this a conversation on what’s a better improvement to do to live in your home?

What’s better: Just to live in the home

Ok, I’ll give you a quick answer in this case, if you’re just looking to improve your house and you plan on living there for at least a few years. Whatever you want! Seriously. Just do whatever you feel like. Why should you care what the resale value is if you’re going to be living in the house for years and years! How do you even know for a fact you’re going to leaving the house and selling it anyway? For all you know, you might just retire in that same house you’re getting all concerned about future market value about!

If you’re looking at home improvement when you plan on living in the house for a long time, then do so purely thinking from a pleasure, not a profit standpoint. What rooms in your home do you feel the least comfortable in? Do a little exercise for me. Walk around your home. Take a mental note about how you feel in certain rooms. Do you like the way your kitchen looks? Is your bedroom painted the right way, with the fixtures you like? How are the bathrooms, do you like them and is there a comfort level there? How’s the patio? How’s the entrance to your home? Landscaping looks ok?

If you’re doing home improvement from a pleasure standpoint, forget about the profit and focus on how the house makes you feel! You want to feel comfortable in your house, you want to feel happy you live there, and you want to get excited about coming home after a long day at the office or business. You don’t want to blow thousands of dollars on a home improvement project just because you read in a real estate blog that it’s good for profit, yet you have a bedroom that looks like it came out of Saturday Night Fever.

What’s better: Selling the home for the highest possible profit

Now, if you’re doing this home improvement project in order to make some serious money for investment purposes, then we move out of personal emotions and move onto facts and the emotional impact on the potential buyers.

Kitchens and bathrooms are usually the most expensive home improvement projects to undergo. There is some expertise involved, since there are pipes and fixtures to contend with. Water and electricity usage is a huge concern. Infrastructure of the property must be considered. Adding an extra room is also something to consider, since bigger homes usually equal bigger money, but not always bigger profits.

One of the worst home improvement projects you can do is add a swimming pool. Think of a swimming pool as a hole where your money drains into. Many buyers don’t want that maintenance chore of a swimming pool – that’s extra money they have to pay on a regular basis. Either that, or that’s monthly back-breaking work of cleaning their swimming pool. Of course, some buyers will like it – but that’s the minority. For the most part, steer clear of building a swimming pool for real estate investment selling purposes.

Home offices are in the same category as swimming pools. Only a small percentage of your potential buyers will want a home office. Only a minority of buyers will need or want a home office. With these buyers, your home office project will go to waste.

Let’s take a look at kitchens. Don’t think that splurging on a huge kitchen makeover is going to make a monster of a difference in your pocketbook come selling time. Small improvements such as refinishing old surfaces, painting outdated wall colors, and upgrading antiquated or broken appliances definitely gives you the most bang for your buck when it comes to the kitchen and most home improvement projects in general. A good tip in painting is stay with neutral colors – this usually appeals to the broadest scope of buyers.

When it comes to bathrooms, make sure the basics are taken care of. All faucets, showerheads, and toilets must be in excellent working order. Fix all leaks. Painting the walls with a gloss latex paint is a good investment of time and money. Either clean the grout or re-grout if it’s not in good condition. If the bathtub/shower uses a curtain, consider installing a sliding shower door – much classier and definitely in style.

Kitchens versus Bathrooms: Which do I focus on

This is a very situational question. Bathrooms are usually rated slightly higher in most regions, but for our purposes they are almost equal in resale value. Your best bet is to take an honest look at both these rooms and evaluate which is in the worst shape. Simple answer: Fix that one! The weakest link between those two rooms will bring the home value down so if one of these rooms is obviously worse and a major sorespot, then focus all your attention on getting that one done right. And, again, if you’re planning on living in the home for a while, forget what I just told you and just do what you want!

Revised Rule #1: For return on investment, the bathroom and kitchen bring the highest return-on-investment (ROI) almost equally so improve the worst of the two to get the most bang for your buck.

25 Rules | Jump Forward to Rule #2

→ 9 Comments

Posted in Home Improvement, Real Estate Investing

Tagged , ,