Investing in real estate in today s market

Transcription

1 Investing in real estate in today s market

2 Objective Module 1 Establishing your investment Defining your investment objective Advantages vs. disadvantages Managing two home loans Debt-to-income ratio Financing How much should you borrow? The loan application Module 2 Maximizing your investment Property types Second/vacation home Investment property Condos, co-ops, mixed-use Resale strategy Repairs Comparing purchase types Rental strategy Becoming a landlord Tenant screening Property management companies 2

3 Module 1 Establishing your investment

4 Defining your investment objective Increase assets/ recreational use Source of income/ business investment Effects on liquidity Time and resources Risk to financial investment portfolio Cost of acquisition/maintenance compared to use Landlord/property management responsibilities Cost of acquisition/maintenance compared to income potential 4

5 How will a real estate investment fit into your larger financial plan? Purpose and use of property Rental Second home Quick resale Investment objective Increase assets Generate income Improve tax position Overall financial goals and risk tolerance Available resources Money Time Expertise 5

6 Weighing the advantages and disadvantages of investing in real estate Advantages Potential tax benefits 1 Equity in property ownership over the long-term 2 May be a good investment during a down market Could save money in vacation costs, college or elderly housing costs Potential source of additional income Disadvantages Maintenance and repairs No guarantees that the property will appreciate in value Alternative investment choices may have a greater rate of return Maintenance and repairs may out weigh the money saved in vacation costs and college or elderly housing Landlord/property management responsibilities 1 Please consult your tax advisor for details about the potential tax benefits of a real estate investment 2 Increase in equity may result from an appreciation in the property value and/or the amortized repayment of the mortgage loan balance. 6

7 Managing two home loans 1 Lenders will look closely at your debt-to-income ratio (DTI) when applying for a new mortgage 2 DTI is the percentage of your gross monthly income that you pay toward all your debt including: Your primary existing mortgage payment Your projected total monthly home payment for the new property All debt that is paid monthly, including credit cards, student loans and car loans and leases Home Owner Association (HOA) dues and private mortgage insurance (if applicable) 3 Understanding your debt and DTI will help you make informed decisions about investing in real estate Lenders often want your DTI to be no more than 36% of your monthly pre-tax income; some loan programs may require lower ratios 7

8 How to calculate your debt-to-income ratio (DTI) Add up your total monthly debt payments (such as credit cards, car loans and leases, or student loans, plus your existing mortgage payment, property taxes and insurance). Then add your projected additional monthly mortgage payment and divide by your monthly pre-tax income to get your debt-to-income ratio. Existing debt payments including current mortgage New projected mortgage payment Your monthly pre-tax income DTI For example: $3,000 monthly debts (includes monthly projected mortgage payment) $10,000 monthly income 30% debt-toincome ratio *Self-employed borrowers income calculations may differ 8

9 How to lower your debt-to-income ratio If your DTI ratio is too high, consider how you can lower it - Pay down your credit cards or reduce other monthly debts - Increase the amount of your down payment - Consider a less expensive home - Consider whether refinancing your current home to pay off other loans and debts could be an option for you* Refinancing is a big step and may not be something you should do if you are planning to sell your home within the next 6 to 12 months By understanding what your debt picture looks like, you can develop a plan to address any areas of weakness * The relative benefits of a loan for debt consolidation depend on your individual circumstances and your actual debt payments. You will realize interest payment savings when you make monthly payments toward the new, lower interest rate loan in an amount equal to or greater than what you previously paid toward the higher rate debt(s) being consolidated. Refinancing may increase the total number of monthly payments and/or the total amount paid when compared to your current situation. 9

10 10 What you should know about real estate investment financing Depending on the type of property and the reasons for buying it, financing could be more expensive than the financing of a primary residence Properties such as condos and townhomes have other fees in addition to maintenance that should be considered, and approval of the entire condo project is required before an individual buyer can be approved for financing Properties in retirement communities may have resale and/or other restrictions that you must comply with when financing this type of property Higher down payments may be required for second homes and investment properties There may be restrictions on the use of rental income when qualifying for a loan

11 What you should know about real estate investment financing Certain loan programs may not be available for second and/or investment properties Lenders may have a maximum number of loans that a borrower can finance in addition to their primary residence Maximum loan to value (LTV) requirements are typically more restrictive, ranging from 50-80% depending on the loan program, property type, and the occupancy type of the property being purchased The reason for the purchase and the property use will determine whether the property is considered an investment property The use of the property will determine: - The cost and type of financing - The potential tax benefits* *Please consult your tax advisor for details about the potential tax benefits of a real estate investment 11

12 Define how much you should borrow An important question: How much should I borrow? instead of, How much could I borrow? Owning an investment property will involve costs that you may not be used to paying, such as: - Homeowner Association fees - Property Management fees - Additional Maintenance fees - Tenant screening fees - Legal and other professional fees, such as tax preparation fees and an attorney to review your rental agreement fee A reputable lender can help you: - Assess your eligibility for prequalification - Determine down payment and closing cost requirements - Determine the loan amount that you qualify for and that meets your goals based on your current income and expenses 12

13 The home loan application Once you ve determined what loan amount you can comfortably afford on your second property, the next step is the home loan application process. You will be asked for information about: - Your employment - Your income - Your assets and debts - The purpose of the home loan and property You will be asked to submit the following with your loan application: - W-2s and last two years federal income tax returns - 30 days of paycheck stubs for all borrowers - Three most recent monthly bank statements - Documentation for other income sources or assets Rental income Social Security Alimony* Child support* Pension Stocks, IRAs, 401k, etc. 13 *Applicants do not need to disclose income from alimony, child support or separate maintenance if he or she does not want it considered in the credit decision

14 Module 2 Maximizing your investment

15 What you should know about property types Once you have defined your real estate investment objective, the next step is determining the type of property you will purchase The type of property as well as the intended use will determine - Cost of financing - Down payment and reserve requirements Real estate investments generally fall into two categories: - Personal use: second or vacation home - Rental property: can be single family units, 1-4 units, mixed-use, or a condo 15

16 Second home One unit property that the applicant occupies in addition to their primary residence Typically located in resort or vacation area The property must be available for the applicant s exclusive use, not subject to rental agreements or control of property occupancy by management firm Time shares do not qualify as a second home 16

17 Investment property Non-owner occupied 1-4 units Applicant is usually required to have a 2-year history of managing rental properties if they are relying on the rental income to qualify for the loan The entire amount of rental income may not be used in the qualifying income calculation 17

18 Condominiums Individual unit in a real estate project, each unit owner has title to: - A single unit - Undivided interest in the common areas - Exclusive use of certain limited common areas Public Offering Statement (POS) binds additional recorded legal documents - Master deed - Declaration of covenants, conditions and restrictions - Homeowners association articles of incorporation - Bylaws - Rules and regulations - Amendments Note: Condominium projects usually have owner occupancy requirements which must be met and the entire condo project must have lender approval before you can apply for financing 18

19 Co-ops A housing cooperative is a legal entity usually a corporation that owns real estate, consisting of one or more residential buildings You do not own the unit in which you live, instead - You own shares in the corporation - The corporation is managed by a board of directors (co-op board) Owning shares in the corporation gives you right to occupy a housing unit The unit and occupants are subject to rules and regulations of the bylaws which govern the corporation 19

20 Retirement property A retirement property is a housing tract or project designed for older adults who are generally able to live independently General characteristics include: - The property is intentionally planned for older adults, and age and other requirements may be in place - The properties are usually in a specific housing tract When you buy a retirement property, consider the resale restrictions and other requirements that could affect future resale 20

21 Mixed-use properties Mixed-use properties contain both residential and commercial/business use, such as a day care facility, beauty shop, doctor s office or grocery store Mixed-use properties are often classified as more risky by developers and lenders since the success of the development can be dependent on the various users all remaining in business - Lending criteria are usually more restrictive, such as down payment and reserve requirements - Cost of financing can be higher - Not all loan programs support mixed-use properties - Mixed-use properties are usually limited to Single Family Residences Construction and maintenance costs may be higher due to fire separations, sound reduction, ventilation, and safety exit requirements 21

22 Comparing property purchase types Evaluation criteria Traditional home purchase Short sale purchase Bank-owned property purchase Property condition Listed at fair market value and may sell above or below listing price depending on a variety of factors Most properties are sold as-is and the condition of the property may vary from move-in to a property in need of repairs Property is a foreclosure and may be sold in current condition. It is recommended that the buyer inspect the home to assess the need for repairs Transaction approvers Requires approval from the seller Requires approval from the seller, lender, other lien holder, and sometimes a third party investor Requires approval from the lender and sometimes a third-party investor Length of time before a completed transaction days including seller acceptance of offer and successful mortgage loan application Up to 50 days for offer approval not including mortgage loan application process of up to 45 days days including seller acceptance of offer and successful mortgage loan application. May take longer depending on finance type and unexpected title issues. Length of time before move-in Immediate, as agreed on by the buyer and seller Immediate or after repairs are made Immediate or after repairs are made Finding a property Listed by a seller-selected real estate agent Listed by seller-selected real estate agent Listed by seller-selected real estate agent Purchase price Listed at fair market value and may sell above or below listing price depending on a variety of factors Listed at fair market value and may sell above or below listing price depending on a variety of factors Listed at fair market value and may sell above or below listing price depending on a variety of factors Paying for repairs Before the sale the seller and buyer will negotiate repair costs, often resulting in seller agreeing to pay for repairs Most properties are sold in current condition, other than health and safety repairs the seller does not plan to make any repairs Most properties are sold in current condition, other than health and safety repairs the seller does not plan to make any repairs Out-of-pocket expenses Negotiated between the buyer and seller prior to purchase Buyer pays for preliminary title search, home inspection, appraisal and any repairs made after closing Buyer pays for preliminary title search, home inspection, appraisal and any repairs made after closing Please note there may be other considerations to take into account when purchasing a home. We encourage consumers to work with a real estate agent/broker, attorney, or financial advisor for assistance when buying a home. 22

23 How are repairs categorized? A formal property inspection provides a detailed report of the condition of the property and allows you to determine the types of repairs that will be required. Structural and system Cosmetic Nice-to-have Ensure habitability and safety of the property - Roofing - Plumbing - Electrical - Heating - Foundation Usually these types of repairs can be very costly and do not add to the curb appeal of the property Improve the appearance of the property - Paint - Carpet/flooring - Tile Investment in these types of repairs should be managed closely to ensure maximum return on your investment Repairs or upgrades that are not necessarily required but may improve the return on investment or resale timeframe: - Appliances - Plumbing fixtures - Lighting These types of repairs should be considered only after the cost of structural/system and cosmetic repairs have been calculated and there is room in the budget 23

24 Which improvements pay off? Recouping property improvement costs depends on several factors - Direction of the boarder housing market - Value of the homes in the neighborhood - When you sell the home the longer you keep the property, the less likely you are to recoup the value - Nature of the improvement - State/city in which the property is located Top yielding improvements Improvement Recoup % Kitchen 70-80% Creating new space attic or basement conversions 75% Bathroom remodeling 65-75% Bathroom addition 65% Windows and other green updates 65% Source: July 2,

25 Landlord readiness checklist This checklist will help you determine if you are ready to become a landlord. Am I ready to take on the role of a landlord? Am I willing to run my property like a business? Am I being realistic about the profit I can potentially make? Source: SmartMoney.com Ask yourself Yes No Am I willing to know and comply with the laws that apply to landlords and tenants? Am I willing to take responsibility for knowing the local state and federal laws that govern my property and tenants' rights? Am I prepared to deal with the tenant screening process and manage difficult tenants? Can I afford the costs of keeping the property insured? Can I afford the cost of professional help such as property management services, accountant and attorney? 25

26 Tenant screening As a landlord you must comply with the Fair Housing Act - This law was established in Protects the buyer/renter of a dwelling from seller/landlord discrimination - Unlawful to refuse to sell to, rent to, or negotiate with any person because of that person s inclusion in a protected class: Race Color Religion National origin Age Conduct background check - Credit - Length of employment - References Sex Familial status Disability Veteran status Genetic information 26

27 Safety tips for showing your property Meet at your office or another public place to take an application Always let a family member or friends know when you are showing the property and provide the name and phone number of prospective tenant(s) Do not take valuables inside the property, such as cash, jewelry, etc. Leave the front door open Establish a distress code with your family Park on the curb rather than the driveway Get to know your neighbors 27

28 Selecting a property management company If you do not want to manage your real estate investment yourself you can hire a property management company Most states require property management companies to be licensed real estate brokers if they are collecting rent, listing properties for rent or helping negotiate leases Research the state in which the property is located for references, most states have online research tools Fees are usually based on a percentage of the property rent and the number of services they provide Property management services include - Property listing - Rent collection - Property maintenance - Payment of mortgage and taxes 28

29 Ways to invest in real estate Objective Property use Property types Increase assets Generate income Improve tax position Rental Investment (rehab/sell) Second or family home Rental Investment (rehab/sell) Rental Investment (rehab/sell) Second or family home Single family residence Condo Mixed-use Single family residence Condo Mixed-use Single family residence Condo Mixed-use 29

30 What to do next Talk to an expert: - Mortgage loan officers - Your tax advisor - Real estate professional - Licensed contractor - Property inspector - Property management company Learn more online: - bankofamerica.com/homeloaneducation for Bank of America s interactive home loan guide and home loan planner - Landlord.com offers information on conducting your own tenant screening - zillow.com provides rent estimating tools Other Bank of America curriculum - A short sale property or bank owned property may be an option worth exploring. - Learn more at bankofamerica.com/reolistings 30

31 The foregoing content is provided for your convenience and information only. Bank of America assumes no liability for loss or damage as a result of your reliance on information contained herein. We do not guarantee the accuracy or completeness of the information presented Credit and collateral are subject to approval. Terms and conditions apply. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice. Bank of America, N.A. Member FDIC. Equal Housing Lender 2013 Bank of America Corporation. All rights reserved ARFA7DA1 PRES