Today I refinanced my triplex in Boyle Heights. I bought it with an FHA-backed loan, which is meant only for primary residences between 1-4 units. It’s quite difficult to use an FHA loan in most good areas of L.A. nowadays, as FHA loans have stricter closing requirements than traditional loans. However, I bought this Boyle Heights triplex in December, 2014 when it was a different world out there.
One interesting point about this refinance is that I actually refinanced out of primary residency and still saved money. When I bought the apartment building, mortgage insurance was higher and so were interest rates. So now I’m saving $264/month and I can legally move wherever I want. I recommend it to you investors who still have your FHA loans.
Dear readers – most of you know I’m quite the practical real estate agent. But corporate marketing compels me to let you know that I’m now a top 2% Coldwell Banker nationwide agent. I’d be much prouder, however, if I could properly calculate the total net worth I’ve helped increase for my clients by selling and buying. Being a top 2% agent doesn’t quite reflect that – most of us in the top 2% sell giant mansions. I wonder how many of us work primarily in income property, and within that number, how many have repeat clients, etc. I think you get my point.Read More
I couldn’t really ask for a better testimonial from a client. Thanks, Paul.
“What is increasing net worth, worth?”
Total Assets: $2.26M – Net Worth $1.122M – Total Liabilities $1.138M. (see image above)
Why was this meaningful? Three years ago I had a net worth that was negative – essentially my $45,000 of student loan debt.
In that same year, 2013, I decided to buy income properties to build wealth and have a good long-term plan for developing passive income. My realtor, David Brundige, helped me find an undervalued fourplex in Koreatown. I bought it and, through some strategy and work, rented all the units at 50% higher rents than the seller estimated was possible. Now I had a cash-flowing fourplex in Ktown, minutes from Silverlake, Echo Park and Downtown LA.
One keeps a solid, cash-flowing property for 30+ years, right? That was the plan according to the standard “buy and hold” strategy. But as I considered how much I’d already increased the value of the property in year one with higher than expected rents, and how long it would take me to save up enough for my next property, I began to seriously question whether to hold or to sell the property. I discussed my impatience with David and he told me if I sold the property through a 1031 exchange I could buy something bigger, or maybe two properties, to replace my original fourplex investment. Then I’d have increased my equity and assets considerably while shielding profit and cap gains from taxes.
Against the advice of the fairly vocal “buy and hold” crowd, and after owning it for only one year, I put my first fourplex up for sale in 2014. David helped me sell well-above list price and just as planned the significant profit and 1031 tax deferment allowed me to buy two more properties with the proceeds. And a year later, in 2015, using the same formula that we used to sell my first fourplex, I sold my second fourplex and bought two more properties, bringing me to a total of three properties.
This brings me to my post’s title: What is increasing net worth, worth? Is it worth selling a property that will likely appreciate over time? Is it worth the energy it takes to reposition your property and increase its value? Is it worth the risk that when selling and buying in a 1031 exchange you may not hit your targets? For me, the answer to all of these questions is an emphatic yes. David helped me go from a negative net worth in 2013 to a $1.122M net worth in three years through two 1031 exchanges. If you feel handcuffed by your current property’s income stream and you have the potential to become a successful income property investor, David can help you to develop that potential—and you’ll find yourself making much smarter real estate decisions than you imagined you could.Read More
According to this recent article that’s been going around my office, Zillow CEO Spencer Rascoff sold his Seattle home for 40% less than its Zestimate this year.
Why are real estate agents happy? Because one of the most common obstacles we face in pricing a house is the owner saying “but my Zestimate says [40% higher than the actual price].” Now there’s ironic proof that Zillow plays games with us.
Why does Zillow inflate prices? If you think your house is worth more, you’re more likely to sell with them. This is the fallacy: “If the Zillow agent thinks my house is worth X => he is more likely to get me X.” I know agents at other firms who are famous for this, as well. To them, if they win the listing, they don’t mind having their name outside your house for eight months while you reduce the listing price down to its actual price, eventually. It’s free marketing for them, and in the end, they still get the commission.
Why don’t I do that? My clients are smart, and finding actual comparable sales is part of my job. When the evidence is there in front of you, I don’t have to do any convincing. I don’t stress about Zillow or Redfin or any of that. I’m not a flashy agent so I know my clients come to me for knowhow and honest feedback.
Once in a while, I like to touch on the basics. But if this is obvious stuff, skip to the next post. Here are the questions I’ll be answering:
- What is a real estate loan?
- What loan programs are available today?
- How do I qualify?
- What are the hidden costs and benefits of a loan?
1. What is a real estate loan?
A real estate loan allows you to buy a property whose purchase price (or, value) is a lot more than you have in cash. Banks and mortgage companies will lend you large sums of money so that they earn loan origination fees, plus fees for selling your mortgage to a third party, who then collects interest on your loan.
2. What loan programs are available today (as of 4/21/2016)?
For a single family home as your primary residence, you can put anywhere between 3.5% to 25% cash down, or more. If you put down less than 10% of the purchase price, you will likely have to pay hefty mortgage insurance up to 1.75% of the total loan up front, plus 1% annually. These loans are usually 30-year fixed loan (your interest rate doesn’t change for the life of the loan) and government regulated.
For a duplex the same rules apply, except you’ll pay mortgage insurance if you put down less than 20%.
For 3-4 units as your primary residence, the same rules apply, except you’ll pay mortgage insurance if you put down less than 25%.
If any of the above are investment properties only and not primary residences, you have to put down 25% minimum.
For any residential income properties with 5 or more units, you must likely put down around 50% in order to qualify for a loan, based on today’s market. For five or more units you must get a “commercial loan” which is based on the gross annual rental income, and therefore varies by how much your property currently cash flows. These loans are usually amortized over 30 years, but the interest rate is fixed for a shorter time period (usually around 7 years).
3. For 1-4 units, you qualify partially based on the rent, but mostly based on your average annual income over the past two years (the rent counts toward your income). Banks use a standard formula to determine if your annual income is enough to secure the loan, despite these loans usually being non-recourse.
By contrast, for 5 or more units, your personal income is not a factor because the loan is based on gross annual rent from the subject property. This makes these properties better for investors who can’t show regular income on their tax returns.
4. The hidden cost of your loan is obvious: all the interest and mortgage insurance you pay during the life of your loan adds up.
The hidden benefit of your loan is twofold: if your rental income is covering your mortgage and expenses, that 75% LTV (loan to value) that the bank gave you is turning into money in your pocket over the course of the loan. In other words, if your interest rate is less than the your annual return on your loan, you are making money off the loan.
Make sense? If not, feel free to ask any questions you may have at: email@example.comRead More
Many clients who read this blog shop for investment properties with the understanding that they will need a loan. The idea of a loan is pretty simple (for a brush up read here), but what you may not know is the actual implications on the real estate transaction, and why on earth there is so much power granted to cash buyers.
The main issues lie in
(2) hassle, and
(3) the value of going through only one escrow.
Off the bat, a cash transaction requires no more than a 21-day escrow, whereas a loan requires between 30-45 days or more. No deal is done until escrow is closed, so those extra weeks cause not only expediency problems, but psychological ones, as well. That’s 2-3 extra weeks that everyone has to worry about closing the deal.
The hassle is real but manageable. Here are the extra steps for closing a loan deal from the Seller’s point of view:
a) pre-approval process to determine the buyer’s ability to close
b) initial appraisal of property by bank
c) loan and appraisal contingency periods
d) fixing physical issues that the bank finds objectionable (this could be anything from exposed studs to unstrapped water heaters to chipped paint — yes, chipped paint)
e) re-inspection by appraiser to confirm those fixes are completed
f) field review by second appraiser to confirm value (this is a new one)
For example, yesterday and today I went to two different properties my clients have in escrow and personally fixed two last-minute physical issues that the Sellers weren’t willing to fix and for which my Buyers couldn’t get a handyman in time. That wouldn’t happen with a cash deal.
There are only two reasons why a loan is more likely to fall out of escrow than a cash deal. The first is that the Buyer may not qualify for the loan. The second is that the property does not qualify for the loan if those physical issues above cannot be fixed. If a deal falls out of escrow, the property may lose value because (a) its market momentum slows, (b) it’s tinged with the question of “what’s wrong with it,” or (c) the backup buyer finds another deal in the meantime.
So what is the real consequence of needing a loan? If there are enough buyers interested in the property, one or two of them are likely to be cash and they have an advantage if your offers come in around $10,000 of each other. That’s why, as a buyer using a loan, you have to be slightly more creative than cash buyers in the types of properties you buy, the terms you elect on your deal, and our approach with the listing agent.
All that said, 83% of my closed deals have used one kind of loan or another. Don’t count yourself out; just know what you’re up against.Read More
Real estate agents, whether I’m representing the buyer or the seller, get paid a percentage (%) of the sale. This % is determined in a contract between the listing agent and the seller, and paid out of the seller’s proceeds once escrow closes. What are the ramifications of this payment structure?
Ideally nothing. An agent should represent his or her client to the best of his or her ability. But you have to wonder what motivation a buyer’s agent has in getting his client the best deal on a property if he’s losing 3% of $10,000 or $300 by negotiating his client a discount.
Conversely, what motivation does an agent have in getting his client $100,000 over asking on a sale if he’s only making $3,000 extra for being good at his job? After all, a relatively competent agent could sell a million-dollar house for a million dollars and make $30,000 commission. So is being a great agent really worth the extra couple grand?
From a financial perspective, the only reward for being the best agent possible is referrals. I average selling my listings for over $100k or 6.9% over asking price, for which my reward is approximately $3,000 per listing. I guarantee you that extra bit is not my main motivation. My financial motivation is to tell you, my new client, that I sell my listings at an average of over $100k or 6.9% over asking so that you will trust me with your next listing. My reputation is my most important financial resource and getting my buyers and sellers the best deal possible is always the means to that end.Read More
Closing my recent listing, the Glendale fourplex (1414 Dixon), at $1,305,000 this week answers the age-old question of “why sell.”
Not only did we negotiate $110,000 above asking, but the property also went into escrow like lightning speed. We had strong interest from several buyers, but ultimately the Seller favored the Buyer with the best financials and was most likely to close. The property went into contract 7 days after it went on the market, and closed in a 47-day escrow.
The hidden story behind this fourplex is that the Seller bought it with me in late 2014 for $860,000 and made $445,000 difference on the sale in less than 18 months time, minus closing costs and improvements on the property. Now we’re targeting two more properties that he can buy with these proceeds in a 1031 exchange (tax free), and hopefully do the same thing again next year.
There was no reason to sell 1414 Dixon, except that the landlord knew that he had maximized the property with the resources he had, and could do the same to a different, under-utilized one with new resources from the sale. If you have a property that you are curious about selling, please get in touch.Read More
Today a listing agent on a hot fourplex said her Seller accepted my Buyer’s offer, which was $25k less than two other offers, because the Seller liked me at the open house. How did my likability become worth $25,000? It’s not my worn-out jeans.
As a seller, your greatest fear is someone tying up your property through escrow, canceling, and wasting not only your time, but the momentum your property builds when it goes to market. Therefore, any good buyer’s agent builds a reputation of doing what he says he’ll do, and following through on deals. Thankfully, that reputation not only precedes me most of the time, but when it doesn’t I know what’s important to the Seller and make sure she knows that.
What I learned from selling a $2.5M single family house is that income property agents often take for granted that the person on the other side of the transaction is just that–a person. Most landlords who have properties with 2-10 units often spend a great deal of personal effort caring for their properties and getting to know their tenants. That’s why it’s important not only to understand how income property numbers and laws work, but also how to treat the person on the other side of the transaction like a homeowner.
[Note: I originally intended to be more detailed in this post, but I realized that I’m not retiring yet, and so describing too much of how to transact as an agent doesn’t make much competitive sense.]Read More
If anyone knows someone in the market for a mid-century modern classic in Brentwood, 1115 N. Norman Place is on the market for $2,450,000.
If you ask any Brentwood agents, this property will move fast. Check out 1115Norman.com for details.Read More