Use LOGIC not EMOTION when Investing

emotion2The more you treat your real estate investing like a business, the more successful you will be.  You want your decision making focused on maximizing return on investment.  By removing emotion from the equation, you will be able to logically evaluate all available data for profit potential. This due diligence step is essential.

Here is some reasoning you do NOT want to use when making an investment decision. Do NOT invest in a market simply because you live or used to live there, because you have a friend/family member that lives there, or because you think you might want to retire there. These are emotional reasons to buy real estate and the #1 cause of bad investment experiences relates directly to people using this thought process when buying. You need to use unbiased logic based on research, data, profit potential, risk and return.

Instead of using proximity between you and the house or where you like to vacation as a deciding factor in where to invest, consider these intelligent and logical questions to ask:

  • Where will I get the best return on my investment dollar?
  • What is the long term appreciation outlook for the area?
  • What is the vacancy factor?
  • What is the strength of the job market?
  • What are the school district scores?
  • What is the distance to the job center?
  • Is there convenient shopping close by?
  • Is the neighborhood generally well maintained?
  • What is the crime rate?
  • Is it median priced for the area?
  • Is the rent affordable for the area?
  • Is it in a Landlord-Friendly state?

Use OPM (other people’s money) like bank loans, and OPT (other people’s time) like property managers to speed your success in real estate investing. You are most likely good at what you do, so let others do what they are good at doing.  By surrounding yourself with a team of professionals, it creates a win-win investment environment.

If you are investing in California (other than your own home) chances are you are probably making an emotional decision based on speculation, fear, or lack of knowledge. California is a “Tenant-Friendly” state and one of the most unaffordable places to buy property in the country. Even with a 40%-50% down payment it is hard to break-even. As the saying goes, “Live where you want and invest where the numbers make sense.”

Another word of advice: Don’t fall in love with the house, fall in love with the returns. The property is just a vehicle to get you where you want to be – financially independent. You MUST set your investment criteria specifically to fit your own investment goals and needs and not copy someone else’s. Setting your investment criteria can be a simple assessment of your investment goals, age, experience level, amount of capital to invest, ability to qualify for financing, and desired returns. When you’re buying a rental property it doesn’t matter where YOU would live but rather where other people want to live. Consult with one of our experienced Real Estate Advisors if you are looking for assistance in setting your unique investment criteria.

Quote of the week: “No matter what the situation, never let your emotions overpower your intelligence” ~ Author unknown

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How to Avoid Renting to Poor Quality Tenants

pick-me-300x292Cash flow projections can look good on paper, but in the final analysis cash flow will be dependent on the quality of your tenant, vacancy factor for the area and ongoing maintenance of your property. The time you spend on property selection and managing your property manager will pay you big dividends in the future. During a vacancy, don’t settle for a poor quality tenant just to get it rented quickly. Take your time to understand the tenant screening process and choose wisely because although the property manager handles the applications, it’s up to you at the end of the day to decide who lives in your property.

Screening is the most important part of the tenant selection process. Some neighborhoods attract lower quality tenants based on the price and quality of the homes. Purchasing in median priced, well maintained neighborhoods will help attract higher quality tenants. It is said that your tenant will look like your house and your house will look like your tenant. If you are having trouble attracting quality tenants, you may have to begin buying in more upscale A-class neighborhoods.

The quality of the tenant you select is critical to the stability and profitability of your investment. The screening and selection process is best left to a professional property manager; however it is your job as the landlord to give the ultimate approval. The most common mistake owners make when screening tenants themselves is not doing an adequate background check and verifying income and employment. Placing a call to the present employer and 1-2 previous landlords is a must. You need to verify that they work where they say they do, are in good standing at their company, and that there current employment is not temporary. When contacting previous landlords, you or ideally your property manager will need to ask what condition they left the property (or properties) in, if they would rent to that person again, and if they continuously paid on time.

Simply running a credit check is not enough to ensure a good quality tenant. Requesting a copy of the last two pay stubs has become a common screening requirement. Having eviction and criminal background checks run are also important when screening. Most applicants will have some credit blemishes, and that’s fine so long as there haven’t been any recent evictions. There are exceptions to every rule, but people with high FICO scores are usually home buyers, not home renters.

The screening process is important but in some markets and neighborhoods, low quality renters are almost inevitable. If you don’t want to rent to poor quality tenants, you need to be buying in a higher price range in more affluent markets with a stronger economy. Cash flow is great on paper but remember, there is always a tradeoff. If you want low maintenance and/or you are a new investor, don’t go for the highest possible cash flow because it will come with more inherent risk. Stick to hitting consistent doubles and triples which eventually leads to winning the game.

Suggested reading: “25 Big Mistakes that Cost Landlords Thousands

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Fed Tapers another 10 Billion, Changes Position on GDP Growth for 2014

Federal Reserve Chairman Janet Yellen Testifies Before Joint Economic Committee HearingAnother round of tapering was announced on Wednesday, June 18th 2014 as the Fed pulls back on its QE Bond purchases by another 10 billion per month. The Fed is now currently purchasing 35 Billion per month in Mortgage Backed Securities (Mortgage Bonds) and Treasury notes  and most importantly has decided to keep the Fed Fund Rate (the interest rate at which depository institutions actively trade with the Federal reserve) unchanged from previous months. The Fed Fund rate will have the largest impact on interest rates as this is the rate at which banks borrow money from the Federal Reserve. It is tied to not only mortgage rates but all types of financing offered by Depository institutions.

The Most significant information mentioned in Wednesday’s Fed Minutes was the position the Fed took on US Economic Growth in 2014. The previous projection for GDP (Growth Domestic Product) in 2014 set by the Federal Reserve was 2.8% – 3.00% growth (this reading is low considering the growth we saw in the previous 2 years but is expected after 2 solid years of very high economic appreciation) but has now been revised down to 2.1% – 2.3% following a negative 1.00% reading for GDP over the first quarter of 2014. GDP is expected to be over 1% for Q2 of this year which shows we are definitely not back in a recession and instead seeing a much expected correction in our markets due to 2 very solid years of growth. The Fed, on a positive note, modestly lowered its expectations on where the unemployment rate will end in 2014 from a previous forecast of 6.1%-6.3% to now 6.0%-6.1%. Lastly, inflation projections are still sitting at 1.5%-1.7% for 2014 and the Feds consensus on inflation remained virtually unchanged from previous months.

All in all, this news is generally positive for Mortgage Rates and Mortgage Backed Security (Mortgage Bonds) saw solid appreciation following this news (investors buying mortgage bonds, causing the bond to appreciate and driving interest rates down). Rates came down intra-day .0125%. Currently the 30 year fixed for investment property purchases is in the mid 4% range which is roughly 3/8ths of a point lower than the first quarter of 2014.

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Achieving Peak Performance

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25 BIG Mistakes that Cost Landlords Thousands

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Keeping Your Property Rented

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Questions For Interviewing Property Managers

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How to Avoid Real Estate Scams and Fraud

house_inspected

Whenever large amounts of money change hands, encountering scams or fraud can be a risk. Real Estate is often a target because uninformed buyers do not use the safeguards that have been built into the purchase process to help protect them.

I recently read of a scam where a guy would find empty foreclosed homes, break in, change the locks, and put up a “For Sale by Owner” sign. He would then meet with prospective buyers and offer to carry the financing with only $5,000 down. He would pocket the down payment money and do the same thing again a few more times before moving on to “sell” another house that wasn’t his to sell.

Caveat Emptor is Latin for “buyer beware”. You must remember that an ounce of prevention is always worth a pound of cure. No one except attorneys win when things go through the legal system. To help avoid potential pitfalls in purchasing a home, start by using a licensed agent to represent you. They can guide you to the best licensed and insured escrow and title insurance companies to help you locate a licensed home inspector and licensed appraiser. These professionals can help assure your transaction goes smoothly and your best interests are protected.

Escrow companies gather documents from the buyer and seller and hold funds in a trust account to disburse as instructed by the purchase contract at closing. They are also responsible for preparing the title for transfer and recording it. The escrow officer will not allow the escrow to close until all documents are received, reviewed and signed. In some states, attorneys specializing in real estate transactions oversee the closings.

Title companies review the chain of title and check for any liens, judgments, or encumbrances that need to be cleared before the title can transfer. They will issue clear title and defend you if a lawsuit is brought by another claiming an interest or ownership in the property. Title companies work closely with escrow officers to ensure a smooth transaction.

Home inspectors are an important part of the purchase process. They are hired by the buyer to thoroughly inspect the property for functionality of all appliances and systems, such as heating and air conditioning (HVAC), water heaters, roofs, etc. Their report is often used to have the seller correct noted deficiencies before close of escrow, or to make an allowance for these repairs in the purchase price.

Appraisers determine the market value of the property for the buyer and lender. They use a variety of methods to determine value, the most important of which is recently sold “comps” or comparable sales in the local area. Appraisers must be licensed and are paid for by the buyer, however they are now regulated by a third party Appraisal Management Company and are chosen at random from a Rolodex so the lender cannot chose who appraises the home. In fact, the buyer’s agent cannot communicate with the appraiser once the appraisal has been developed and sent to the client.

When you use a conventional lender to finance a piece of real estate that you are buying, they require you to use these 4 professional services to ensure they are protected on the property that they are lending you money to purchase.

When you pay cash or use seller financing on a property, you are not required to review anything or use any of these services. However, the only way to assure you have a great investing experience no matter what is to go through the proper steps of being a wise investor. No matter your level of investment experience, the Marshall Reddick Real Estate Network (MRREN) always encourages our investors to follow these simple steps. The cost of these services is minimal compared to the protection they provide.

When you take the time to do things correctly, you will have peace of mind since everything is being handled properly by professionals.

Happy investing!

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How to Earn Passive Income from Trust Deeds and Mortgages

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BIG News in the Bond Market: Where are Rates Headed?

The Fed announced this week that they will continue to taper 10 Billion per month on their Quantitative Easing (QE) bond purchasing program and will purchase 55 Billion in the next 30 days down from 65 Billion last month. We anticipate this will continue month over month as Unemployment (despite the bad weather) has continued to improve and world economic issues (Global issues with Russia and Ukraine which have been pressuring US and other world markets) are expected to improve in the coming months. Remember, bad domestic and global economic news generally causes rates to go down, and good news causes rates to go up.

The Fed also announced it will begin raising its Federal Fund rate (rate at which the Federal Reserve lends money to banks) within 6 months after the QE bond purchasing program ends. This is HUGE news for rates as the previous census was they would not raise the FED FUND RATE for CONSIDERABLE time or even within our own lifetime after the QE bond purchasing program ends. Yesterday, the bond market sold off nearly 100 Basis points (1.00%) and rates went up nearly .25% in one trading session (15 and 30 year fixed) following the news.

To put QE in perspective: Before the recession in 2006, the US Federal reserve held 700 Billion in mortgage backed securities. Today, the fed holds nearly 2.1 trillion of all US mortgage debt and the number will continue to rise month over month until the QE bond purchasing program is finished (estimated in November of this year).

There will be a tipping point where buying mortgage bonds will no longer be a way to artificially keep rates low as the fed will own nearly all US mortgage debt and the QE bond purchasing program will have run its course (bubble in the bond market). This tipping point could hit as early as June of this year and already many large institutions are hedging themselves for a higher rate environment before QE is over.

We don’t know if this will happen before the Fed completes its QE bond purchasing program but all economic indicators are pointing at significantly higher rates by late summer. Rates on all fixed products (10 year, 15 year, 20 year and 30 year fixed loans) are still are still at historic lows but not for long.

If you would like to speak to an MRREN qualified mortgage consultant about qualifying for a new purchase or refinance, call us at 949-885-8180 or email info@mrren.com

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