If you’re the DIY type, you may wonder why anyone bothers using a mortgage broker when they could just talk to lenders directly.
For some people, the direct path really is the best option.
The majority of new real estate investors, however, can benefit from working with a mortgage broker.
Here are four reasons you should consider using one.
1. Using a Mortgage Broker Can Save You Time
Comparing mortgage offers is one of the most important things that you can do when buying investment property, as people often find that they can find vastly different offers from different companies.
Some lenders may decide that you don’t meet their expectations, so they don’t want to give you a mortgage at all.
Other lenders, however, may decide that you’re just what they’re looking for, so they will give you a low interest rate.
This may sound ridiculous if you haven’t worked in real estate or finance before, but it’s actually quite common because lenders use different criteria to measure how risky borrowers are.
If you don’t use a mortgage broker, then you will have to fill out applications for dozens of lenders. This takes a lot of time, especially since each company has its own set of documents.
Using a mortgage broker makes this process considerably easier.
Instead of filling out documents for several lenders, you just work with one person.
You will still have to provide plenty of documentation to prove your creditworthiness, but you will only have to do it one time.
That’s a big time-saver when you consider that most lenders will want:
W-2 forms from the last two years
A copy of your most recent federal tax return
Recent paycheck stubs
Canceled checks showing you have made rent and mortgage payments on time
A complete list of your assets and debts
If you own a business, then you will also need to supply loss and profit statements from your 1099 forms.
Renting property counts as owning a business, so you will need to give the lender this information if you already rent a property to tenants.
You will likely save hours of research on this issue by working with a mortgage broker.
2. Brokers May Have Access to More Loan Options
When you approach a lender, your loan officer will make certain assumptions about what you qualify for.
Even if you have a good credit history, the lender may choose to show you certain types of loans over others.
Mortgage brokers have enough experience to know what types of offers you can potentially use.
They also know what types of products lenders offer other clients. That could make it possible for you to access more loan options. They may not fit your needs, but at least you will get to consider them.
3. You’ll Likely Get Lower Interest and Other Costs
Since mortgage brokers have connections to a lot of lenders, they can often find loans with lower costs than the ones you would get by going directly to your bank. Having the option to look at more offers gives you an opportunity to lower the overall cost of borrowing money.
Lenders are also more likely to lower their interest rates and closing costs when working with brokers.
The lenders, after all, know that most mortgage brokers will work hard to find the best options for their clients.
This encourages lenders to compete with each other.
If they don’t lower their costs, then they aren’t likely to get much business from the broker.
In the long run, they can make more money by lowering interests, points and closing costs because that means the broker will get them more business.
Some real estate buyers worry that they will end up spending more money by using a mortgage broker. After all, the mortgage broker has to get paid.
However, this is unlikely to happen, especially since new regulations that went into effect in 2014 prevent brokers from making more money by selling expensive mortgages to their clients.
The new rules have also decreased the number of mortgage brokers. Considering that those brokers left the industry because they could only make good incomes by fleecing their clients, you should consider that a benefit.
4. A Mortgage Lender Can Give You Expert Advice
All investments come with some level of risk. Rental properties aren’t excluded from this.
Considering that you will likely spend $100,000 or more on your investment property, you will probably feel a little nervous about it.
Even if you know you can make money from the opportunity, it’s scary to hand such significant savings over to someone.
A mortgage lender can give you expert advice that will help you avoid common mistakes, and if nothing else, a good mortgage broker will help you feel more at ease. Sometimes, that’s all you need to move forward with an acquisition that will earn you steep profits.
Mortgage brokers aren’t right for everyone.
If you have a lot of experience in real estate and finance, then you may feel that you can do the job well on your own.
For most people, though, a broker offers experience and advice that can help them make smarter decisions when buying investment properties.
So, you have made the decision you want to get into the real estate business, but not necessarily by becoming a landlord. It is no surprise that this is a popular choice when investing in property is a decision that is bringing financial freedom to many, but the first obstacle can be a tricky one.
How are you going to afford to finance your new business venture?
One creative route that is starting to be used for this very reason is real estate crowdfunding. As surprising as it may sound, this method of investment is redefining the world of real estate, and is proving to be a very lucrative method of earning a passive income.
Crowdfunding is rather different from the traditional route of investing in property, and has leveled the playing field to such an extent that people with a moderate budget are able to invest and diversify their portfolio, something that would be unheard of in recent years. Real estate investment via crowdfunding is quick and easy … it takes only minutes to sign up on a site that offers investment properties to choose from at your fingertips.
Justin Pierce from The Washington Post is passionate about the concept as we can see here:
“Through crowdfunding, iFunding has opened the opportunity to invest in private real estate to millions of individual investors by lowering the minimum investment to $5,000. Crowdfunding is the future!” [source]
The opportunity to invest and make money is easier than ever with this route, but there are some important points to understand in order to remain informed about just what you are financing and how to protect your investment.
What Exactly Is Crowdfunding for Real Estate?
Real estate crowdfunding is the pooling of finances in a real estate project by multiple investors. The types of property available to invest in are varied, with everything from family residences to commercial property on offer in a broad geographical region across the various platforms. It works in two ways:
Equity Investment – Each investor holds a stake or shares in the property (commercial or residential), and in return, receives a portion of the rental income. This is typically paid out on a quarterly basis.
Debt Investment – Each investor pays towards the mortgage loan for a particular property. The loans are paid over time with interest, and the investors receive a share of the interest as the loan is repaid. This may be received on a monthly or quarterly basis.
The two options vary in their degree of profitability and risk. Equity investments tend to result in bigger returns, but they can be riskier and take longer to pay off. On the other hand, debt investment is limited by the interest rate set on the loan.
What Are the Benefits of Real Estate Crowdfunding?
Real estate crowdfunding, using either of the two methods (debt or equity investment), is considered to be a lower risk investment compared to other methods of financing property. This is because it is possible to spread funds across a variety of options, rather than pooling all of your available resources into just one property. With a Real Estate Investment Trust, also known as REIT, for example, investors are required to pay 25% upfront of the property’s value. When compared with real estate crowdfunding, which often stipulates a minimum investment in each property of just $5,000, you can see that the scope for diversifying your portfolio is huge.
When compared with REITs, real estate crowdfunding brings greater benefits to investors in many ways:
Crowdfunding deals are vetted thoroughly, offering increased transparency for investors. Take a look at what Patch of Land have to say about their due diligence in this regard: We ensure that borrowers and projects meet our stringent risk profiles and high underwriting standards using our technology, data analytics and vast real estate experience. [source]
The financial barrier to entry is far lower with real estate crowdfunding.
Through real estate crowdfunding, investors may enjoy certain tax benefits (including depreciation) that are not applicable to investors in REITs.
Thanks to the affordability, investors can diversify their portfolio, combining equity and debt investment, across commercial and residential properties.
The following except from RealtyShares explains the benefits in further detail.
“Commercial real estate investing in other contexts often involves large investment amounts and limited regional opportunities. RealtyShares, on the other hand, allows accredited and institutional investors to invest for as little as $1,000, all from the convenience of an investor’s laptop or tablet computer. This means that investors have the ability to participate in opportunities that historically may have been available only to large institutions. You’ll also be investing “passively” — similar to stocks and bonds — so that you don’t need to directly be concerned with the management headaches associated with a property.” [source]
Do Real Estate Crowdfunding Investors Actually Own a Piece of Property?
This is a good question, and the answer isn’t exactly straightforward. The truth is, investments are structured differently across the various crowdfunding platforms – and, therefore, what an investor actually owns, can differ, too.
In some circumstances, a crowdfunding site will create a separate limited liability company for each investment opportunity – and investors own shares within this, which reduces their liability and provides certain tax benefits too.
It is important to read the terms and conditions of any real estate crowdfunding site that you choose to be a part of, so that you are clear about what you are purchasing and how that will affect you, before you go ahead and invest your money.
How to Choose a Real Estate Crowdfunding Platform
As we always reiterate, it is vital to thoroughly research your options before investing in real estate, as there is always risk involved when it comes to money. While it is true that crowdfunding can offer a simple solution to becoming involved in real estate investment (without the need to become a full-fledged landlord with 100% responsibility for a mortgage), it is vital you know exactly what you are getting into, before you start financing a project.
You need to remember that each and every platform for real estate crowdfunding is different. They are individual companies, with differing terms and conditions. Some may suit your needs better than others, so take the time to find out the finer details and identify the strengths and weaknesses of each option.
Remember to call on expert advice for specific information on the viability of investments. The crowdfunding platforms themselves are there to offer you a service, and they want you to sign up, so don’t forget that they are not investment advisors.
Take note of the ‘lock in’ periods for each investment, this is a very important factor to take into account when deciding on deals to finance. The liquidity schedule can have a big impact on the profitability of a project for you.
Be aware that there is always risk involved in any investment, and while real estate crowdfunding may seem like a safe option, it is important to consider the options, and the benefits of diversifying with a combination of properties spread geographically, for example. Take a look at the following FAQ from Realty Mogul, to keep your feet on the ground.
“Are these investments risky?
Yes. Similar to investing in the stock market, there is no guarantee when you are investing in real estate. The real estate market has economic cycles and it is difficult to know how and when the economy will change.” [source]
In conclusion, real estate crowdfunding has opened the industry and leveled the playing field, allowing more and more people to invest in property than ever before. Yes, there are still risks involved, but the great news is that lower barriers to entry mean that investors can diversify their portfolio to such a degree that these risks are largely minimized.
The important points to remember are that each crowdfunding real estate platform comes with its own set of terms and conditions that you should read carefully to ensure you understand exactly what you will own, as well as how long you are committed to any deal.
Be sure to check out the particulars of any deal with a professionally qualified financial adviser, too, and don’t be swept up in the emotions of a “great deal.” The real estate crowdfunding platforms are offering a fantastic service, but we must remember they are there to sell investments. So, keep your head straight and don’t let emotions run wild.
Once you have your information straight and are ready to invest, you can celebrate the fact that investing in real estate crowdfunding offers more transparency than other options, allows greater diversification and, best of all, has been producing greater returns. It seems that this could be the answer many individuals have been waiting for to become involved!
Do you know how to spot a real estate opportunity? Can you spot a “time waster” property before you pay out for surveys?
Initially, it can be more difficult than you might think. This is especially true when looking at two of the same kinds of property on the same street. How can you quickly compare the merits of both in terms of financial return?
This post aims to show you how to spot real estate opportunities quickly and easily, allowing you to move on from duds and choose properties to investigate more thoroughly.
Why Invest in Real Estate?
Investing in real estate is growing in popularity and is widely considered to be a better choice versus stocks when it comes to return on investment (ROI). People also enjoy the control over their cash when investing in property. As the landlord, you can choose whether to upgrade a property, raise the rents, etc. You are the CEO. There are also tax advantages to investing in real estate over stocks, and a house is, of course, a tangible asset.
But, in the recent times of economic change people are beginning to panic and the market is changing. This is the perfect time for great entrepreneurs to strike. Look for an opening in the confusion and buy when sellers are nervous about the value of their home.
There are also benefits to be found in certain tax rules, so investigate the aspects that appeal to you and your goals. A financial advisor may be able to assist you with this.
Indicators of a Good Real Estate Opportunity
1. Accelerating home prices in one particular area compared with other surrounding areas is a sure sign that things are changing in that location; try to catch this trend early to make the most out of the upward growth.
2. Look for early signs of development in an area, for example, land clearing, construction of roads, widening of lanes, etc. Spotting early signs of growth in a town is a great way to keep abreast of changes in housing prices before other investors sweep in.
3. Visit the town hall to find out about major projects in the area and details of upcoming developments. This can provide you advanced notice that an area may soon experience declining housing values.
4. Look for the construction of new schools and shopping centers in an area. This indicates that new people will start to take an interest in the location.
“When buying a property to live in, you should always check the surrounding schools, and the same goes when buying an investment property. Good school districts often mean a more stable housing environment, which can play an important role when you eventually decide to sell. Plus, they might act as a draw for tenants that have or are considering a family.”
5. Investigate the tax structures of an area. Sometimes two almost identical locations can demonstrate a striking difference when it comes to housing prices, and this can sometimes be due to the tax structures. The lower tax location tends to be more desirable. With a little further investigation, you can find out when an area is due to be reassessed … a useful bit of information.
6. Identifying the ratings of the local schools is a great way to determine if an area will attract buyers. Parents are often governed in their real estate choices by the results of the schools in the area.
7. Another factor to watch out for is whether a town has become either overpopulated or overpriced. In these instances, it is useful to start watching the outlying areas, analyzing early signals of growth in the outskirts.
8. Once you have identified opportunities within a particular area, it is still useful to know how to find which properties within your chosen zone could be investment opportunities. The following quick calculations can narrow the pool further, allowing you to uncover a real estate gem.
Quick Calculation for Rental Income
Below is an overly simplistic but useful calculation to implement when narrowing down properties. It will give you a rough idea of how much rental income a property will command.
2% of the purchase price = rough estimate for rental income
This is not to be used as the final rent, but it will give you a ballpark figure. You should know if a property is worth considering for rental or not in a few seconds with this figure.
Quick Calculation for Profit from Rent
The next way to identify if you are looking for a good real estate opportunity is to determine the amount of the rental income that will reach your pocket. Below is the calculation.
50% of the rental income should go to expenses, not including mortgage payment.
The remainder is your income.
Once again, this is overly simplified but it is helpful for quickly spotting opportunities. The expenses include repairs, builds a buffer for times of vacancy, taxes and insurance. Fifty percent seems high, but landlords nearly always underestimate how much they should set aside.
The remaining 50% of the rental income should pay the mortgage repayment and remainder is your “passive income.” Most landlords are satisfied to receive $100-$400 per month from each unit.
When Is a Refurb a Good Opportunity?
One type of property that catches the most entrepreneurs out is the “fixer-upper.” The asking price is usually nice and low and surely it will only need a bit of work … right?
It is nearly always not as simple as that. The first thing to do before even considering a property that needs to be refurbished is to accurately estimate the after repair value (ARV).
“It is vital to estimate the ARV figure as accurately as possible, as it is one of the most important determinants of the profit you will make with your investment.” (Landlord Station)
This means walking around the place with a trusted contractor and obtaining a quotation for the materials you will need and the labor required to make it happen. You should also find out how long the updates will take as that will affect how long your property will stand vacant.
Quick Calculation for Fixer-Uppers
Once you have the ARV of a property requiring refurbishment, you can apply this overly-simplified but useful calculation to decide if you are looking at a good opportunity or not.
70% = the maximum purchase price you should offer, based on ARV minus repair costs.
You will find this calculation rules out several properties you may be considering.
Purchase Price Is Everything
Never forget when buying real estate that the profit is made at the point of purchase. Be sure to stop your emotions from getting in the way when you are buying investment property; this is not your personal family home.
Decide on the exact criteria you are looking for in your real estate, keeping your “shopping list” handy as you search to avoid being sidetracked by something that is almost right. Do your research so that you know what is on the local market and how much property is selling for right now. Be aware of the trends and stay focused.
If you haven’t enlisted the expert services of a real estate agent, you will have to learn to find a seller that is motivated to sell. This could be the deciding factor on whether you make money or not. The earlier comment about taking action during economic unrest comes into play here. Nervous homeowners may be more likely to sell for under market value.
Whatever happens, do not overpay! You should always aim to purchase investment property for below the market value and let your head govern the final decision.
Finding a good investment opportunity in real estate may not be as difficult as you initially think. There are a few key indicators of growth in an area you can look out for and with these, the earlier you can act, the more potential for profit.
Accelerating home prices in one particular area compared with other areas surrounding it, early signs of development (e.g., land clearing and construction of roads), town hall announcements about major projects in the area plus the construction of new schools and shopping centers are important signals when deciding to purchase property. It is also useful to watch for towns that have become overpriced or overcrowded and begin to analyze the growth of the outskirts.
The calculations shared here are overly simplified and are meant to be used as tools to enable you to quickly sift through the properties on the market to find the potentially great opportunities hidden amongst them. With these to hand, you can think clearly and quickly make decisions without wasting time on non-profitable investments.
Everybody knows there’s a huge potential to make lots of money in real estate. But if you’re working with a brokerage, the pressure to close a sale can be killer. And if you’re the individual running the brokerage, you take home a larger sum of money with each sale, but the nonstop work of acquiring properties, finding referrals and closing sales is enough to make even a seasoned professional’s head spin.
It’s important to educate yourself about the basics of how to make money in this potentially volatile, exciting field.
Read on to learn some basic tips on how maximize the amount of money you make in real estate.
Remember: You Work on Commission
Some brokerages work differently, it’s true. But if you’re like most realtors, you only get paid when you sell a house. Never lose sight of that. Your goal is always to close a sale.
Most jurisdictions require that, as a realtor, you learn the basics of real estate law and ethics.
They won’t teach you how to close a sale or make a property look most enticing. It’s up to you (and your brokerage) to teach you that, so grab a book (or find an experienced broker to tutor you) and start educating yourself.
Don’t Be Afraid: Network!
Early on, when you’re just breaking into the business, it can be very difficult to make the connections you need to make a sale.
It’s easy to conceive of your relationships with other realtors as strictly competitive, especially if you’re working in the same area.
And to be fair, an element of that does exist.
But don’t forget about referrals.
Houses aren’t identical commodities. If someone knows they can’t close a sale with a potential customer, and they know you have a property that’s more in line with the customer’s needs, they may very well send the customer your way — so long as you’ve forged a positive relationship with them, and are willing to pay a portion of the resultant commission.
Likewise, if you can’t meet a client’s needs, reach out to someone else in the area and offer to hook them up in exchange for a portion of the commission.
The going rate may depend on your area, but many brokers charge up to 30 percent for a referral.
Reach Out to FSBOs
People who try to sell their home themselves are typically trying to avoid having to pay a brokerage like yours to do the legwork for them.
But the fact is that the legwork is exhausting, and is often best left to the professionals.
If you’re aware that a for-sale-by-owner house has been on the market for a while, you may want to reach out to the owner and see if they’re interested in switching things up and going through your brokerage.
Make it clear what you have to offer and why it’s to their benefit.
If you succeed in convincing them, you’ll make a percentage of the money they get from the sale – how much, exactly, is something for the two of you to negotiate.
Consider Becoming a Broker or Branching Out
While laws vary from place to place (and the precise names used to refer to each profession may vary), many jurisdictions draw a distinction between real estate agents (who work for a brokerage) and real estate brokers (who are able to run their own brokerage, and have greater independence in general).
If you’re serious about making it in the field, and have the time and money to spend on the additional education required, you should think seriously about taking steps to become a real estate broker as soon as you can.
By starting your own real estate brokerage, you’ll be able to work independently and make decisions about what properties you acquire, and how much money goes into your pocket. There’s more potential for risk here, and you’ll have to learn how to make wise investment decisions, but the rewards can be great.
Investigate the laws in your area, but be aware that if your brokerage is holding on to properties you can’t sell, it may be better to try to rent them out instead.
And if you’re having a really hard time finding clients, in a lot of jurisdictions you can take your talents — and your real estate license — and work as a property manager instead or on the side.
There’s a stereotype that real estate brokers make a ton of money.
It takes time to find your sea legs as a broker, and it’s all about building connections, refining the art of closing deals and figuring out exactly what each customer needs.
You may not make a lot of money for your first year (or your first several!) in the industry.
And if you’re operating your own brokerage, you’ll swiftly find that finding properties to sell (or acquire) can be far more taxing and expensive than you’d estimated. If you’re actually acquiring the properties, you run the distinct chance of actually losing money.
But be patient.
Stick with your work, network, research and continue to educate yourself.
You’re getting better, and success will come over time. Good luck!