You can feel like a superhero by becoming a Real Estate Investor. It is exciting, even brave to hunt for deals, raise capital and build a team. You are “cool” being an investor. Your peers view you as a high-stakes dealer and wheeler, who slickly talks buyers and sellers into submission. Everybody knows the famous investor who throws victory punches in the air while closing deals with one arm on the steering wheel and one hand on his phone. When they win, they say “cha-ching”, and the sound of gold coins clinking fills the air. Then money pours into their bank account in a jackpot fashion with flashing red lights. Who wouldn’t like to become a real estate investor?
Let’s move on to the fun part. This is where you can actually make money. This realization occurred to me as I was looking at a triplex that appeared overpriced. Do you think the property is a good deal or a bad deal? The asking price seems high at first glance. It’s still available for sale because of this. Instead of confronting the market price, I chose to focus on the financing side of the coin. It doesn’t sound quite as glamorous as getting a “below-market deal”, so I spent some time looking for my imaginary geek glasses and crunching the financing numbers. As long as I had control over the financing, down payment, and interest rate, I was able to create a deal that offered a higher price. Are you tingling in your geeky senses? This method has one drawback: you need to be boring. However, boring can lead to wealth! To make a deal work, there are some things you need to do months ahead of time. Don’t forget about loading the gun before you make a deal. This means that you should be able to get financing. It means that my triplex and I are pre-approved for the maximum 30-year FHA loan, with 10% down payment and a 3.5% maximum interest rate.
I am able to make strong offers in my area and still have Cash Flow in Investment Properties that were not available. The 10% down payment was a reasonable amount I could have in liquid assets and still be able to pay six months’ mortgage payments. Although strategic and boring, I am looking long-term and choosing the path of least resistance. The long-term appreciation of a property will be rewarded if you are looking in a growing region and have the cash flow to keep it.
To prepare for great financing, I made a list with five boring things. This will enable me to make offers on deals that were overlooked by the competition. Grab your geekiest glasses and put the pen in your pocket protectors. Then, get ready to heat up your copy machine. These five boring things will make you a finance super nerd.
1. Consolidate All Liquid Assets — Lenders and sellers want proof of funds before you make an offer or apply for pre-approval. Consolidating all liquid assets is one of the easiest ways to do so. I had several CDs which held my money hostage. I closed them when they matured and transferred the funds into my savings account. After that, I empty my safe deposit box and added funds to my account. To make sure that my savings were as large as possible, I increased my spending. These things didn’t happen overnight. It took three months for CD’s mature. Make sure to plan accordingly.
2. Monitor Your Credit Score. You can’t improve what’s not measured. MyFyco.com was my first choice and I started tracking my credit score. While there are many websites that can track your credit score online, vairt.com offers a more precise service and will show you your mortgage credit score. You can also run virtual scenarios to assess how your score will change. The number you should focus on is your mortgage credit score. To qualify for the best rates, you need to get that number up.
3. Establish A Relationship With Your Lender. While I don’t think lenders are boring, financing isn’t necessarily the most exciting part of the business. Remember the old saying, “Fall in love with numbers.” Your lender doesn’t have to be your love, but you should love the interest rates they offer. A mortgage broker or lender can help you find great rates and financing options by helping you to get a proof-of-funds letter, pre-quall letters, and pre approval. You should get one as soon as possible.
4. Paying Off Credit Card Debt — I was able to pay off my credit card debts in a few months in order to improve my credit score. My credit score soared 40 points as a result. While credit scores may not be important for some investors, lenders will still need to know your debt-to-income ratio and net worth in order to help you find capital. This detail should not be ignored.
5. Important Paperwork Should Be Collected. I saved the boring stuff for last. There is a lot of paperwork involved in qualifying for financing. I needed to collect the following: my social security card, last two pay stubs, last two years’ income tax returns, last two years’ worth of W-2 forms, last two months bank statements and a copy or my driver’s license. All of these documents had to be submitted along with an agreement to allow my lender to check my credit score in order to approve my application. It was more fun than staring at my palm, but it was better than slapping myself on the forehead for not being ready to pull the trigger.
This list should help you increase your purchasing power in a boring way. Next time you are eligible for financing, make sure to put on your geek glasses and shout “Cha-ching!” as you visualize gold coins flowing into your account.