How important is your personal finance and how much influence does it have on your efforts to build your own personal wealth?
If building wealth is a tool you intend to use for your financial independence, then your personal finance will definitely be the day-to-day responsibility that is going to aid in manifesting the exit strategy you’ve envisioned, and over time get you the permanent outcome you are searching for.
Understanding The Importance Of Personal Finance
If you comprehend the importance of personal finance basics you will be forming the building blocks for the foundation of a wealthy life. When you couple your knowledge of personal finance, education, financial decisions and plans alongside your long term goals, budget and work ethic they will combine to begin painting the picture of your financial freedom. So here we are presented with the importance of personal finance; the tedious maintenance and refinement of such will begin to show its significance not over the next couple of months, but rather, over the next couple of decades.
It is wise to write out a summary of where your finances are at and where they are going. Then you are able to determine if your money is at is the most beneficial place it could be. Even contact the company that administers your 401(k) to find out where exactly your money is being invested and ask them to go into further detail if need be. I cannot emphasize enough the importance of understanding your finances.
Once you comprehend and appreciate the importance of taking control of your personal finances, coupled with the significant impact it can have on your wealth, you will then begin to seek out the openings to improve your personal finance knowledge, skills and plan. The silver lining in all of this confusion is that this is very ascertainable and really only as complex as you want to make it.
Take charge of your financial future by learning about the many aspects of personal finance and all that is available to you. Let’s examine some of them now with 6 Simple Tips On How To Achieve Financial Freedom Through Real Estate Investing.
Table Of Contents
1. Know Your Limits
The way in which homes are sold, bought or leased has been revolutionized in recent years by the internet. It provides investors with a veritable treasure trove of information at their fingertips. Although this information is easy to access, investors should be cautious about believing all the things they read, as to prevent them from falling into a few common problems associated with real estate myths. Below are a few of these myths to be avoided:
Asking for a higher price:
There are some homeowners who think that by listing their homes at a price higher than the current market value will guarantee them higher profits. This technique usually backfires since most homes that are higher than the average market price generally get overlooked by buyers therefore remaining on the market for a longer period of time. As a result, the average buyer becomes weary of homes that have stayed longer than the average number of market days, which may cause their interest to diminish.
Saving money by not engaging a realtor:
It can be beneficial for some homeowners to sell their home on their own. For the majority of sellers, however, this is not the case. In reality, realtors have negotiation skills and can resolve problems which may arise at closing time or during inspections; and the ability to execute contracts as well as knowledge of the market and/or programs available in your area. Furthermore, it should be taken into consideration that homes placed on the MLS (The portal Realtors use to market homes) usually sell faster and for higher prices, because at that point, the property is being marketed to all available agents as well as their network and prospective purchasers. As an example, Miami, Florida has over 40,000 agents. So if you just have a sign in your front yard and a listing on Zillow to sell your home, you will be missing out on thousands of prospective purchasers.
Renovating your home:
Plenty of homeowners believe that doing extensive renovations to their homes will guarantee high profit margins, but this strategy, too, can backfire. The reason behind this is simple: the upgrades might be suited to your taste and not that of the prospective buyers. In certain cases where the kitchen and bath need to be upgraded, the best move might be adjusting the asking price. A typical scenario with a major kitchen remodeling is that the seller might recoup 67% of the investments and 70% for a bathroom renovation. Overall, replacing the front door actually provides the best cost to value.
Holding on to the property until prices go up:
On average the real estate market has increases and declines in prices, as proven historically. The times when home prices decline are considered self correction periods which allow for prices and the market to readjust. Therefore, holding on to properties longer than you should with the belief that prices will always increase, isn’t a wise strategy.
2. Submit To Higher Interest At First To Expand Your Portfolio
One of the biggest hurdles and perceived obstacles for beginning investors who are interested in getting started in the fix and flip business, is the cost of the money itself. No surprise there, but what is surprising, is that there are plenty of options.Traditional institutions don’t usually lend for fix and flips, as they have stricter criteria:
- First, the approval of the property is not guaranteed. Commercial lenders follow rigid guidelines for underwriting loans. If a property is dilapidated or needs more than a minimal amount of renovations, it’s highly unlikely that the loan will be funded.
- Secondly, most good deals go quicker than the time it takes for a traditional bank to approve a mortgage. The reason is because many investors have a substantial cash amount to offer, as properties with the most profit potential receive the most attention. The short time it takes to close this type of deal would put someone seeking 3 or 4 weeks at a disadvantage.
- Lastly, a significant out-of-pocket contribution is necessary for commercial funding. There really is no foreseeable way to avoid this.
Because of these, most investors get discouraged, or at the very least, apprehensive. This is where Hard Money comes into play. Because the potential loss on this type of capital is far higher than a traditional loan, the interest rates will also be higher as a result. Savvy investors who understand this concept, often will acknowledge this as another cost of doing business, and continue to expand their portfolio. Also, some Hard Money lenders offer a lower interest rate to clients who have worked with them before and/or those who have an extensive portfolio. It is wise for investors to use Hard Money lending to their advantage.
3. Expand Your Portfolio With a Portfolio Loan
Portfolio lenders can be used as a substitute for standard banking institutions by someone who is in need of a mortgage loan. A portfolio lender can also be a bank, although a loan from a portfolio lender will often times have more flexible terms than those offered by commercial mortgage lenders.
Portfolio Lender Specifics
Community banks, privately owned banks or any other lending institution that does not sell their mortgage loans to another source, can all be portfolio lenders. These lenders keep their loans in house, so they can generate revenue through the interest. Their loan underwriting guidelines will not be as strict as those of a standard banking institution.
Benefits to You
Since a portfolio lender does not sell their loans on the secondary market, they often can provide you with more leeway on your mortgage. For example, they have the ability to issue you a term loan that is longer than a traditional bank, which will lower your monthly payment. Not only will this be saving you money, this could also allow you to purchase a more expensive property, if the request is approved by the lender.
4. Be Clear About Your Exit Plan
Unfortunately, investors will often times get too far ahead of themselves and end up losing large amounts of money, time, energy, morale and peace of mind. Although there’s no way to avoid uncontrollable circumstances and events that can happen during the whole process of fixing and flipping properties, one can evade most of these by simply applying the technique of creating, maintaining and solidifying a clear and feasible exit strategy.
The most popular flip, in part by the dramatization on Television, is the rehab. While this may seem like a hole in one, there is a lot of work that goes into this process. Starting with discovering a property in a prime location. Some investors may think that any type of work done will add value, but often this is not the case. If you don’t improve the right things, with the right quality, it can end up costing thousands of dollars without a return. The final step in a successful rehab is listing the property correctly and actually getting it sold. The longer the home sits on the market, the more likely the original asking price will not be the actual price it is sold for. The traditional rehab flip can be very profitable, but investors need to know everything they are getting into.
If funding or time to work on a rehab is an issue, investors can opt to get in and out with a wholesale flip. There are plenty of savvy investors who have made their career primarily through the wholesale side of the industry. The real trick to these types of deals is finding properties at a discount that still have some value and getting them at a price that works for your plan. Once the property is under contract, investors can then assign that contract to an end investor for a fee. It is good for the end investor because they get a deal that they would not have had access to otherwise. This works for you because you get paid on a property that you couldn’t work on yourself. If you do not have extra capital, this is a wise technique to get started or grow in the business.
Not every flip deal is going to require a massive renovation. Making improvements is one of the surest ways to add value, but many properties just need minor adjustments. As opposed to renovating every room, you can make small changes that will increase value. Adding new flooring, fresh paint and updated appliances will sometimes be all that it takes to really bring a property to life. If pouring all your resources into a full rehab is out of the question, then doing the little things is the next best option. You probably won’t get maximum value, but wise investors will take the profit and use it to fund their next deal.
The final flipping strategy is to flip it with the intent to lease or rent. There are still many good real estate deals out there that can add remarkable value to your portfolio. Instead of fixing and selling, investors can look for potential renters. Because interest rates are as low as they are, you can often buy properties and pay down your principal with the cash flow you receive from collecting rent. A lease property will not present the short term gratification, but if you buy one or two rental properties per year, you will begin to feel the significance five or ten years in the future.
5. Be Realistic About Projects and Projections
Instituting correct projections is a fundamental element to flipping properties for profit. If investors become too confident with their projections or fail to run accurate numbers, then they risk not making a profit when the time comes for the property to be sold. I really cannot overemphasize how important accurate projections are to successful flipping, and I urge you to consider the impact that projections will have on future flipping ventures.
As to not sound too repetitive, pay close attention to your projections – in particular the amount of time you are projecting to hold onto a certain property. This is an integral variable to incorporate in your overall cost analysis. It is recommended to project 6 months but still trying for 3 months. Also, make sure to run your numbers if you had to hold onto the property for 9 months and even 12 months.
Honestly examine what your holding costs would be if you were not able to sell the house 6 months, 9 months and 1 year after purchasing the property. Make sure that you will still earn a profit if you are not able to flip the house as soon as projected. At the very least make sure that you will break even. Doing so will help ensure you against a loss and assure you of a long and prosperous career as flipper.
6. Examine the Many Different Options of Hard Money Lending
There are plenty of distinct options to use Hard Money for. Whether it’s a fix and flip deal or strictly a rehab, or maybe it’s a bridge loan or transactional funding; even a construction or equipment loan… The sky’s the limit for wise investors who understand how Hard Money Lending works, and know how to use these tools to achieve the financial freedom they’ve been seeking.