10 Tips for Real Estate Investing: II
by Michael Lam | Jan 30, 2016
Tip 4: Organization
Organize your Funds. This is similar to Tip 1, but this has to do with more organizing than planning. It’s absolutely important you organize your funds and the “story” you tell lenders. You have to plan your finances in a way that fits that “story”. A “story” is the financial strength and stability you paint to the lender. One of the most important things a lender look at is how financially stable you are. So it’s important you have accounts that have seasoned money. Money that has been sitting in your account for at least 3 months without any withdrawals. The income you make should be stable. Lenders love people who can produce a W2 form. Unfortunately, if you’re like many who are self—employed you have a much more challenging path, especially when you’re trying to leverage some of the tips in this article such as the next tip, leveraging OPM. That will be another discussion dedicated to self-employed people. Keep all proof of income stored somewhere easily accessible and safe. Keep all debt/recurring documents that are active. Lenders will want to get a snapshot of your current debt. Save your W2 and tax documents in electronic forms. Having these organized and structured in a way you can easily access them will save you time and is something you’ll be able to leverage in a repeatable process.
Tip 5: Leverage OPM (“Other People Money”)
One of my favorite pillars of real estate investor principles is to avoid using his/her own money. Using other people money with limited risk is far better than using your own money when that money could be put somewhere else. In the game of finance, you have to diversify and just like in real estate, your money can’t be tied all in one investment play or one asset or one strategy. You must spread your money while leveraging other people’s money who are willing to give them out at a cost. OPM is generally related to working with lenders and pulling out a mortgage. If you had an opportunity to purchase a $500,000 home by only putting 20% down and the rest financed, why wouldn’t you? The $100,000 down gets you a $500,000 home that appreciates over time. Some might say that a conservative appreciation of 3% might be too low of a ROI on $100,000, but what people fail to realize is the math they did is wrong. You put down $100,000 to obtain a $500,000 asset. That asset, not your $100,000, appreciates 3%. So really your $100,000 investment really appreciated by 15% by leveraging OPM.
Formula: 500K * 3% = $15,000 /yr.
Your own money you put in $100,000, is getting back $15,000 for a $100,000 investment is: 15,000 / 100,000 = 15% ROI on your own money. That’s the power of leveraging OPM. The less money you can put in while your asset appreciates, the bigger your ROI.
Below is an excellent calculator that can calculate your ROI based on your down payment and future appreciation rate to really get your ROI on your money.
OPM ROI Calculator:
|Home Value Estimate:|
|Annual Appreciation Rate:|
|Your Calculated ROI:|
There is even more strategy to get to a point where you making ROI on 100% OPM without your own cash stuck in the asset. Once you get to this point, you’ve really coasting. This requires a separate blog in itself to discuss such strategy.
Tip 6: Good debt is your friend, not your foe
To be a shrewd investor, you must be comfortable with accumulating debt. I can tell some readers may be saying this is contrary to some financial advisers who preach becoming debt free.
This concept of debt-free is a fallacy concept that hinders your trajectory to wealth building. Again this is not the blog to discuss such topic and will be reserved for another blog. Come back to the site to see an update to this.
Not every debt is created equal. So I’m not saying to rack up your credit card bill to be a good investor. What I’m saying is when you learn to leverage OPM, you naturally will incur debt, but its good debt that has a purpose. It’s debt you pay for playing this game. If you can understand that and understand the risk and rewards, you’ll come to terms accepting this debt. As you grow your portfolio and other assets, your debt will naturally increase. Keep in mind there are ways to hedge this debt and that plays a part in the type of ROI you get on your investment play or the strategy you embark on.
Tip 7: Leverage your own equity
Once you get a hold of your first home, your primary home. You naturally will build up equity over time. Equity is the amount of value your home appreciates or the net value of your home after removing your mortgage debt. For example, if your home is worth $500,000, but your loan on that home is $100,000, then $500,000 – $100,000 gives you a net equity of $400,000. You can use the equity to make significant improvements to your home and increase the value of your home, thus increasing more equity by unlocking your existing equity.
One way to leverage your own equity could be one of several ways.
- Do a Cash-Out refinance on your home. This will reset your loan but leverage gained appreciation and pull that money out without incurring immediate tax. (its delayed).
- Do a HELOC – Home Equity Line of Credit
- Apply for a 2nd mortgage on the appreciation
Each of those options are valid options to leveraging your own equity you gained by appreciation. Each of those options have plus and minuses which will be part of another blog.
Keep reading >HERE< for the final series of my Top 10 Tips on how to become a real estate investor…
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