Smith Business and Finance

Foreclosure investing is actually quite another world when people have finally taken that risk and go for it. This really applies to anything else in life. Remember all those late nights where you’d stay up and watch those “how to make millions in your sleep” commercials. Or perhaps you remember all those times you went to the book store and purchased tons of real estate investment study guides.

In fact you probably have a impressive home library and collection of real estate, investment, and how to get rich quick type books by now. Some people may get a feeling of being overwhelmed after wading through those thick books and studying all the complex terminology.

The truth is, if you are a naturally goal-oriented and self-disciplined person than you can probably achieve a full-time income in real estate within a year with the right system. So how do you choose the “right” system when everyone and his uncle says they are an expert or guru within the real estate domain?

One thing you might want to consider doing is to align yourself with a acquaintance or relative who is already successful in real estate investment or at least in the branch of real estate that you are interested in doing. Don’t be shy, definitely get in touch with them.

It may be a friend from high school or university, or perhaps even a former room mate that you knew when you were just getting started with your own life and needed someone to share the rent costs with in order to have your own place, etc. I am sure that if you brainstorm for a bit, you may even surprise yourself at how much opportunity there is in your own circle.

That is actually a very good idea- the number one way to get into real estate successfully is to have a mentor or at minimum someone that can really show you the ropes and provide feedback in real-time. No matter how well written the courses you’re looking at is, nothing really compares to a trusted friend or adviser that can actually walk you through this process step-by-step.

Even if it isn’t step by step, it’s still great to be able to call someone up and ask for advice on what you are doing as well as to add some motivation to the process. Folks this relationship is priceless. You can save hundreds of hours of time learning things on your own, and also save thousands upon thousands of dollars in costly mistakes.

Ultimately you will have to walk the path yourself in order to learn and profit from this wonderful industry. But the initial first steps will furnish you with the momentum to be able to soar on your own two wings.

The secret in real estate business is to use other people’s money. This is how most real estate tycoons are made. Unlike traditional residential real estate mortgages, real estate financing offers much broader financial options, including lending or financing from various financial institutions. Transactions like these call for above-average negotiation skills.

It’s not advisable to invest your own money in a real estate as for a few very important reasons. First, you you tend to give most of your profits away by not leveraging your investment. Second, real estate is a very risky business – you don’t want to jeopardize everything you have.

This is not to say that real estate investment is all about losses. On the contrary. if you know how to make money work for you, you may actually garner a great deal of money in return for your investment.

Here’s how:

If, for example, you purchase a $100,000 property that increases an average of 7 percent per year (in reality that number could be higher or lower), you would see a net profit from renting your property resulting in an approximately 15 percent return.

If you’re content with little return of investment, you might settle with your 15 percent return. But if you really want to earn on your investment, consider the possibility of what leveraging can do for you. At present, a typical real estate investor can find financing as high as 95 to 97 percent of the purchase price. There even some instances where you may be able to get a 100 percent financing but we won’t use this for our example as it’s an inadequate comparison.

So, if you’re are an investor who is already content with a smallreturn of investment then 15 percent sounds like a lot. But for those who really want to make it big in the real estate, 15 percent is far from being considered a noteworthy return.

How does leveraging work?

Let’s assume that the rental income will cover all your expenses, including the mortgage payments. Taking the same example, a 7 percent appreciation of your property results in a $7,000 profit per year. With a 95% financing in place, you’ll be able to get a $7,000 return on $5,000 (your 5 percent down payment on a $100,000 real estate property). This will provide you with a 140 percent return on your investment. Not only that, with the same $100,000 you can go out and purchase 20 investment properties, finance 95% percent of them, and make an amazing $140,000 profit a year. This totally beats the $15,000 profit with an all-cash transaction.

In terms of the additional 20 properties, expect to have a hard time getting financing for them since usually only five or six new rental property mortgages are the maximum that lenders presently allow. Which is why you need to have an above-average negotiation skills.

There are a number of mortgages out there that give you low payments each month. Some of these mortgages, such as interest only, adjustable rate mortgages, and a few others, gave you the low payment up front – but it was at the expense of building up your equity. Here is how refinancing your mortgage can enable you to start building up your equity faster.

Equity is the amount of cash you have available after you have lived in your home for some time. It is the difference between the current value of your home and the amount you still need to pay on your mortgage. Mortgages that allow you to make low payments up front, though, usually will use your cash to pay the interest – and it does not reduce the principal much – if at all. Your equity, however, can only be built up when you pay down the principal.

This could leave you with a couple of options if you want to build up your equity quicker. The first option would be to put down a large chunk of cash at one time. Most of it would be applied to your principal. Most people, however, do not have the opportunity to do this.

A second option would be to refinance your mortgage. If you watch the market and apply when the interest rates are down, you could save thousands of dollars. If, besides this, you shorten the repayment time by at least five years, you could save tens of thousands of dollars in interest. This results in more money going toward the principal each month.

A fixed rate mortgage would give you stable payments. You always know what they will be, and you can always confidently plan around it. You do not have to worry about what the economy is doing. Even better, though, is that a larger portion of your monthly payment goes toward your equity than most other types of mortgages. By getting a fixed rate mortgage, and reducing your time to pay off the mortgage, you can build up your equity even faster.

Since you are considering refinancing, you may also want to tap into some of that equity – perhaps for home renovations. Some renovations, such as siding, remodeling a kitchen or bathroom, or adding a room onto the house, can also put a lot more value into your home – as soon as the project is finished. Obviously, this would also quickly raise the amount of equity you have, too. Be sure, though, that you check with your local Realtors or contractors in your area to find out which renovations actually add the most value – some renovations do not change the value much.

Be sure to shop around some for the best deal. Lenders vary quite a bit in their prices and fees, as well as in their interest rates. Building your equity fast means not letting too much of your hard-earned cash go unnecessarily into the lenders pockets. When you refinance, stay away from mortgages that have penalties for paying off your mortgage early.

One of the things I first noticed as my husband and I moved from the financial cellar to financial stability and, eventually, wealth was how the conversations in our lives changed. I don’t mean the conversations between us, but the conversations we had with friends, colleagues and total strangers. A new topic developed that we had never chatted about with our family. That topic was money.

When Brad and I were in debt and living in a 4 room mobile home, the subject of money never came up at parties, work get-togethers or family events. It was taboo to talk about legal tender unless you were discussing a decrease in income or how Uncle Sam managed to cut you out of more cash. However, as our financial situation became stronger and we started investing our savings account, a whole new world opened up to us. We noticed we were having more and more conversations about money with everyone that wasn’t our family and friends. It was the weirdest thing.

One particular conversation stands out from the rest. I was in the break room at work finishing off a bagel and cup of coffee when a co-worker of mine popped in and sat down next to me. He was a gentleman of 52-years of age. After exchanging pleasantries he hit me with a bombshell. “I’m going to retire next month.” I responded with a blank stare and a, “You’re WHAT?” He repeated his reply and then he said he had noticed how I never ate lunch in the cafeteria and that I always brought my own coffee in a thermos to work. He asked me what my retirement plans were. I was 31 at the time.

I laughed and said that I figured it would take Brad and I another 30 years or so before we could retire. He then looked me straight in the eye and said, “You can do it faster than that, if you want to.” He then outlined for me a 15 year plan that he and his wife had used to get them to a financially secure spot to leave the work force for good. I was stunned. No one had ever talked to me about money like that. What I came to realize was this, wealthy people talk about money, but the middle class and others do not unless it is the negative view of money.

What does this mean for you? Simply this. Start acting like the wealthy and initiate conversations about money with people who can help you. When was the last time you had a discussion about money with that “rich” Uncle of yours that didn’t relate to a loan? Start asking people who have money advice on how to handle it and work with it. Don’t get personal about their finances or ask for details, but talk to them about what their advice would be. If you’re like me, my family rarely had a savings account so the first time I had $5,000 in an account, I panicked because I knew I HAD to do something with it, but I had no idea WHAT to do with it. As far as I was concerned having a strategy for investing money was like shooting a rocket to the moon. I didn’t know the first thing about it!

Initiate conversations with financial professionals, talk with wealthy family members, if no one in your family is wealthy then set up an appointment with the “wealthy” person in your town. The one everyone knows and ask them what their advice would be to someone who is just starting out. I did this very thing when I was 32. I called up a gentleman who was worth 25 million dollars and asked for a 30 minute appointment and I offered to pay him his consultant rate. He was charging $400 an hour.

The best way to obtain a wealthy mentality is to start forming strategies and goals for what to do with the money that you are saving. If you have no idea about what to do with money, like me, then chat with folks who obviously invest and discuss strategies with them.

Many people do not consider the importance of a budget. They indulge in spending according to their earning and do not leave room for emergencies. This usually ends up in the incurring of debts and sometimes, personal bankruptcy. A budget helps to counter these consequences.

The essential calculations in a budget are income and expenditure. The purpose of a budget is to ensure that the expenses do not exceed the income and also provide for savings for the future.

A budget needs to be documented in the form of a chart or table. This needs to be easily comprehensible and provide a quick summing up of the relevant details. The chart needs to effectively reflect the different heads of expenditure. Suggested heads are housing and utilities, entertainment, health and beauty, transportation, communication and household. These can be further subdivided as follows:

Housing and utilities

- Mortgage payment or rent
- Insurance
- Taxes and electricity
- Natural gas
- Water and garbage pick up

Entertainment
- Cable television or satellite service
- Internet access
- Dining out
- Bars clubs

- Sporting events, parties, lessons and recitals

Health and Beauty
- Hair-cuts, perms etc.
- Make-up
- Medical, dental, vision, weight loss, diet products
- Nutritional supplements

Transportation

- Car payments, insurance
- Gas
- Routine maintenance, repairs
- Air travel
- Rental cars, public transportation

Communication

- Telephone
- Cellular phone
- Voice mail

Household

– Groceries
- Cleaning supplies
- Laundry, dry cleaning
- Home improvement
Projects, towels, linens

Others

- Credit card payments
- Other loan payments
- Child care, items for baby/elderly
- Allowances for children, book clubs, magazines, music, etc., fast food
- Investments, vacation, spending money, donations to church or charity
- Gifts (Christmas, birthdays, anniversary, etc.)
- Emergency fund
- Cigarettes.

If you have any other expenses that are not covered, you could add them to the list.

Next, try to reflect all expenses on a monthly calculation. For example, if you pay yearly taxes, calculate the monthly expense by dividing the yearly amount by twelve. Having done this, add up all the figures to arrive at the total monthly expense figure. Then subtract this amount from your take home salary amount. If you find the remainder in negative, you need to look for expenses where you ought to cut down. For example, if your take home salary is $1000 and your expenses total to $1150, you would need to trim down $150 each month, from the expenses.

If you need to cut down on your expenses, you would be the best judge to decide where to make the changes. However, it would be prudent to cut back on the extra subscription channels of the television. If you are smoker, cut down on smoking instead. Take home cooked lunch to office instead of eating fast food. Economize on power consumption by avoiding unnecessary use of the air conditioner and heating and make less use of the phone.

Creating a budget is absolutely necessary to manage your finances and is not dependent on the size of your income. It helps to prevent overspending and personal bankruptcy, allowing you keep track of your income and expenditure.