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We are committed to giving up-to-date information that helps you to make smart investment decisions. Our goal is to save you time and increase your profits.
Your Road Map and Action Plan
If you want to go from New York to San Francisco, you would save time and money by having a map and a plan. The same is true in order to achieve your goals through Real Estate Investing. You need to know where you're starting from, what you want to achieve and how much money you have to start with. Whether you're new to investing, or have a portfolio you would like to take to the next level, you still need a plan. Too many people jump in and make hasty decisions without first considering the objectives and asking for the advice they need to make informed decisions. We are not talking about advice
from relatives and friends, but from trained professionals and other successful investors.
What are your reasons for including Real Estate as a part of your investment portfolio? Are you looking to create a monthly stream of cash flow or are you looking to achieve wealth building through appreciation? Do you intend to hold the property for the time period that allows for the best tax advantages and to utilize a tax deferred 1031 exchange to grow your property holdings and increase your cash flow potential? There are many questions to address before you decide on the right first or next step on the road you want to travel. There is no get rich quick formula! Historically the wealthy have
built and maintained wealth with a plan that involved time.
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Investing in Real Estate is not a get rich quick endeavor. A written plan, proper guidance, ability to analyze and time are all-important to success in Real Estate Investing. It is true that more wealth in America has been produced through Real Estate than any other vehicle. Utilizing the professional services of Realtors, Lenders, CPA’s, Property Managers and Attorneys will help you wisely stay on target with your goals. Knowing when to take advantage of market conditions and tax advantages is paramount. Using a great software program such as Star Investment Analyzer will help you know when it is the best time do a cash out refinance to purchase more property, 1031
exchange or sell. Getting the proper advice from a CPA regarding building and personal property depreciations helps you determine the optimal holding period.
There are two main reasons to own Investment Real Estate – Cash Flow and creating Building Wealth through Appreciation. You need to determine if one or both are important to your wealth-building plan. Once you are clear about your goals you should put them in writing and attach time-lines to the results you are looking to accomplish. Review your goals from time to time to see if you are on track. For example, you can start with a property with a purchase price of $150,000. If it appreciated an average rate of 10% annually for five years, it would be worth approximately $241,500. You could do a
tax-deferred exchange for two properties. Now take the new depreciations for another five years and multiply the properties into four new properties. Get the idea? This is a solid way to build wealth over time.
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Types of Financing
Our Exclusive Lenders and Realtors specialize in investment properties and investor loans. Our brokers have extensive knowledge of the underwriting requirements of these products. For new investors, there are programs allowing investment in real estate with lower down payment requirements. Every transaction is different; there is no one investor loan that is the right answer for each investor and each situation.
We encourage you to call or email Our Exclusive Broker with the specifics of your proposed transaction. There are many factors that a lender will assess in determining whether to loan to an individual or on a particular property. The lending industry has changed rapidly over the last ten years. In the past in order to purchase investment property a borrower needed a substantial down payment, that is no longer the case.
To determine the right loan program, loan type and interest rate that is best for your situation you should always consult with a mortgage consultant who specializes in investment properties.
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Most programs fall into two categories: Fannie & Freddie and Portfolio Investor Programs. Investor loans sold to Fannie Mae or Freddie Mac require a down payment ranging from 10% to 25%. The interest rate for investor loans will usually be .5% to 1.5% higher than an owner occupied property loan. These conforming loans are available as either fixed rate or an ARM. These loans can be a good choice if your goals are to maximize cash flow and you plan to hold the property for a 3 to 5 year period. Ratios are normally 28/36, but with automated underwriting, excellent credit and some liquid reserves
the ratios can go higher. Rental income is decreased by a 25% vacancy factor but there are underwriting methods that eliminate this issue for experienced investors.
There are Portfolio Investor loan programs which allow investment purchases with either no down payment or 5% down. The interest rate on Portfolio loans may be slightly higher than conventional investor loans because the Portfolio lender is willing to accept loans with higher risk factors.
Zero down real estate investment financing is now available at reasonable rates. While the rates for the program are considerably above the conventional market, they are nowhere near what a "hard money" lender would charge. Generally, these loans are set up as either 80/20 or 75/25 combination financing with the first loan set at 80% (or 75%) of the sales price to eliminate the need for Mortgage Insurance and with a second loan for the balance. Pricing on the first loan is somewhat more attractive on the 75% first with the second priced the same in all situations.
The zero down real estate investment financing program requires excellent credit (the higher the credit score the lower the interest rate) and you will need to verify 6 months of PITI reserves available. It is a fully documented loan and is available for a single family, townhouse, or condo.
These loan programs allow you to acquire property with limited out of pocket costs. Full documentation loans will give you the best interest rate. The lender will require that income and assets be fully documented. This requires 2 years employment history supported by W-2 or tax returns and one full month of pay stubs. Cash to close and reserves must be supported by 2 to 3 months statements of all asset accounts as well as the source of the down payment. Often, it is easier to use an alternative documentation type when self-employed or income comes from multiple sources or when your funds to close
are not "seasoned" (have been in your account for more than 60 days).
Stated income mortgages are the least expensive option. The lender will verify employment and assets, income is stated on the application but not verified. Your stated income must be reasonable for your occupation and assets. Rates are usually only .500% above conventional rates. A No Ratio loan is a good choice as you do not state any income information and your rate will be less than for a "No Documentation" loan. Because the lender does not need income information, no debt ratios are calculated. The lender will verify employment and assets. Typically you need to have a higher down
payment for this type of loan.
No Documentation Loans require no employment, income, or assets to be stated on your application. No information is verified beyond your credit profile and value of the property. Usually the lender will require a larger down payment. Rates are 1 to 1.5% higher than conventional financing and are available on both fixed rate and adjustable mortgages.
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Credit scoring is a quick, accurate and consistent scientific method for assessing credit risk. Your credit scores are based on data stored by a credit repository about your credit history and payment patterns. Credit scores are calculated by statistical models that assign points to factors indicative of repayment. These scoring models exist in software utilized by credit bureaus or lenders.
Credit scores are based on data rather than human judgment, making credit scoring an objective risk assessment tool as opposed to a subjective, possibly discriminatory, human interpretation of information. Even the best underwriter cannot match scoring's statistical ability to weigh and measure hundreds of factors and reach a number indicating relative credit risk in a matter of seconds. The resulting score is a "snapshot." It sums up what your past payment performance and current usage of credit say about your level of credit risk to the lender. Because the score is a composite of all
the applicants' credit information, NO single factor like a late payment or even a bankruptcy will be the sole cause of an unacceptable credit score.
How is Your Score Determine
Past Payment Performance
(35% of the Credit Score's Weight)
The fewer late payments, judgments, liens or collections, the better. Zero negative entries on your report usually indicate lower risk.
Recent late payments are more indicative of future default by you than those that occurred more than 24 months ago.
A 30-day late by you today will have a greater negative impact on your score than a bankruptcy five years ago with clean credit since.
Types of Credit in Use (30% of the Credit Score's Weight)
Low balances on several credit cards are better than high balances on a few cards. Balances on your cards should be kept at or below 35% of the potential credit limit. Do not lower your credit limits.
Too many credit cards can be detrimental.
Warning: Do not close any of your accounts without first discussing your complete credit profile with your mortgage professional. Your score could go down.
Credit History (15% of the Credit Score's Weight)
The longer accounts have been opened, the lower the risk indications are about you.
Opening new accounts and closing your seasoned accounts will negatively impact your score. Avoid credit surfing.
Established credit history is relative to your past payment performance and how high or low your credit usage may be.
Short credit history does not automatically indicate that you are a high credit risk, as long as you are not a heavy user of credit and your payments have been made on time. Keep your balances on cards Low!! To get a score, you should have two accounts that have been opened for at least six months.
Types of Credit In Use (10% of the Credit Score's Weight)
Finance company accounts will score lower than the accounts you secure through banks or department stores. (Appears that you could not qualify for a better type of credit.)
"90 days same as cash" and deferred payments generally are funded by finance companies.
Inquiries on Your Report (10% of the Credit Score's Weight)
Looking for new credit can indicate higher risk if several credit cards are applied for in a short period of time and your existing cards have been charged to their maximum limits.
Multiple inquiries, regardless of the number, for mortgages or autos, in a 14-day period of time, only count as a single inquiry in their impact on your score.
Any mortgage or auto inquiry made about your credit file within 30 days of the current lender's inquiry, will not impact your score due to buffers within the credit-scoring model.
Promotional or administrative inquiries shown on your credit report do not adversely impact your score.
Only the first seven inquiries made by different trade lines shown on your credit report will actually be factored into the impact on your score. Only Inquires Authorized By You For the Purpose of Being Granted New Credit Lines Will Impact Your Score.
Credit Scoring Guide
In a nutshell, credit scoring is a statistical method of assessing the credit risk of a loan applicant. The score is a number that rates the likelihood an individual will pay back a loan. The score looks at the following items: past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit, number of inquiries.
Credit scoring will place borrowers in one of three general categories:
First, a borrower with a score 680 and above may be considered an A+ loan. The loan will involve basic underwriting, probably through a "computerized automated underwriting'" system and be completed within minutes. Borrowers falling into this category may have a good chance to obtain a lower rate of interest.
Second, a score below 680 but above 620 may indicate underwriters will take a closer look at the file in determining potential risks. Borrowers falling into this category may find the process and underwriting time no different than in the past. Supplemental credit documentation and letters of explanation may be required before an underwriting decision is made. Loans within the FICO scoring range may allow borrowers to obtain 'A' pricing, but loan closing may still take several days or weeks as it does now.
Third, borrowers with a score below 620 may find themselves locked out of the best loan rates and terms offered. Mortgage professionals may divert these borrowers to alternate funding sources other than FNMA and FHLMC. Borrowers may find the loan terms and conditions less attractive than the 'A' loans, and it may take some time before a suitable funding source is located.
As more companies utilize credit scoring, the loan approval and closing time will be compressed for most consumers. In the future, a high FICO score may be your ticket to a speedy and competitively priced mortgage loan.
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The normal settlement procedure varies from state to state and county to county. In some areas, attorneys handle all closings. In other areas, Title Insurance Companies or Settlement Companies handle the bulk of the closings. In still other areas, it is a combination of both. In some states a real estate transaction is not consider "closed" until the documents record at the local recorders office. In others, the "closing" is a meeting where all of the documents are signed and money changes hands.
If using an Attorney to handle your side of the transaction, it is important that any potential Attorney is experienced in Real Estate transactions and handles them on a regular basis. Regulations are constantly changing, and your personal Attorney may or may not be up to date on the changes. Attorneys who specialize in Real Estate matters are obviously the best equipped to handle closings and escrow.
The type of deed and the type of security instrument used varies from state to state and county to county. The closing agent in an area will know the appropriate type of deed use. Some states are mortgage states and some are deed of trust states and some use both. The lender will use the appropriate loan type for the area. The main difference in the use of security instruments is the foreclosure procedures used. The right of redemption is different for a mortgage than for a deed of trust and the foreclosure process varies from state to state.
Buyers and sellers pay closing costs in all real estate transactions. Who pays these costs varies from state to state and county to county. There are standard practices as shown on the following chart, but who pays is always negotiable, and should be stated in the purchase contract. Closing costs are separated into what are called "non-recurring closing costs" and "pre-paid items."
Non-recurring closing costs are any items that are paid just once as a result of buying the property or obtaining a loan. "Pre-paids" are items that recur over time. Non-recurring closing costs include such items as loan origination points, loan processing & underwriting fees, appraisal and inspections fees, credit report fees, title insurance premiums, escrow or closing attorney fees, document preparation fees, recording fees, flood zone certification fees, overnight courier fees, document transfer (or tax stamp) fees, etc. In some cases the lender will allow the seller
to pay non-recurring closing costs up to 3% to 6% of the purchase price. In no case can the credit exceed the actual non-recurring closing costs.
You can either pay the Property taxes and Property insurance when they become due or you can set up an escrow/impound account with the lender. If an impound account is set up you pay the taxes and insurance monthly with your mortgage payment. The escrow amount will be equal to 1/12th of the annual tax and insurance amount. The lender will require one year of insurance be paid at closing and may require an upfront amount for the impound account depending on when the taxes are due and when the closing takes place. This is to insure that the lender will have sufficient funds in the
account when the taxes become due.
There are standard loan and closing documents that you will need to sign that you should be aware of upfront such as property taxes and homeowners insurance. A lender makes an attempt to estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate that they must issue to the borrower within three days of receiving a home loan application.
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1031 Exchange
Here at The Halyn Group, we like to think of ourselves as the conductor between our investors and clients and the myriad of investment options and instruments available to them. One of our main core competencies is to provide educated counsel for our clients so that they can make an informed and intelligent decision regarding their investment strategies. This is truly analogous with the IRC 1031 tax deferred exchange. By outlining the steps and guidelines, as well as criteria, for the 1031 exchanges, we are able to provide yet another investment vehicle opportunity for our present and
future clients.
When investing in real estate and real property that may net our clients a gain upon sale, accredited and sophisticated investors should consider their options regarding the most beneficial and profit generating alternatives. One of the most advantageous options is the 1031 tax deferred exchange. The IRC 1031 exchange states that investors can defer capital gains tax by selling his or her real property owned, and then reinvest the net gains in ownership of a like-kind property. Although the major gratification of the 1031 exchange is the abundant tax advantages that may be realized by an investor, there are numerous factors that add to the complimentary
make-up of the Internal Revenue Code.
The 1031 exchange not only defers paying capital gain taxes but can also provide tremendous leverage, a diversified portfolio with tremendous growth up-side and can potentially increase your cash flow. In addition, an investor can complete a IRC 1031 tax deferred exchange with a "Tenants-In-Common” TIC interest ownership. This will allow for the investor to defer their capital gain tax and to also upgrade their invested real property into larger institutional grade properties without the property management hassles, which can offer extreme flexibility, liquidity and accessibility. See our Tenants-In-Common section.
In order to take full advantage of the 1031 exchange, investors must know the terms and regulations surrounding the investment instrument. The Halyn Group can offer assistance by providing for our investors a complete breakdown of how the 1031 exchange operates and how it relates to our investors and clients. We are able to implement a comprehensive network to locate, acquire and identify like-kind properties to serve as replacement properties for our investors looking to buy and sell. The IRC 1031 exchange is a tremendous growth tool for investors looking to invest in multiple transactions and defer their capital gain taxes.
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Tenancy in Common
Although Tenancy-In-Common ownership and investment of real estate has been a viable option for accredited and sophisticated investors for some time now, we are seeing an exuberated amount of new interest due to the fact that the TIC serves as a conduit for those investors looking for replacement property for their IRC 1031 tax-deferred exchanges.
The advantage of a TIC investment is that it allows an individual to experience tax advantages through the tax deferral provisions of the IRC 1031 exchange by procuring fractional, ownership interests in real estate. The TIC investment offers our clients the diversity to participate and reap the rewards of a leveraged and accessible investment instrument. Through The Halyn Group vast network or relational opportunities, we can match prospective accredited investors with a customized real property opportunity, which will offer extreme flexibility, liquidity and accessibility.
For investors seeking to take advantage of the tax deferral benefits inherent within the IRC 1031 exchange, a TIC investment may be a viable investment instrument. Please contact an agent of The Halyn Group to discuss the aspects of the TIC investment and to determine whether or not it is a viable resource for your tax and investment needs.
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