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Investing in Real Estate Module 7 of Family Financial Freedom

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Investing in Real Estate Module 7 of Family Financial Freedom

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he seminars are available to anyone including financial planners, and other professionals in the financial services industry who would like a set of the materials, participant's workbooks or the Family Financial Freedom book (discounts for volume purchases)You can now view the presentation here, order the Family Financial Freedom book from any of the ebook sites for iPhone, iPad, Kindle, Nook, Kobo reader etc. contact me at floyd.saunders@yahoo.com for a copy of the presentation or more information on how to get seminar materials.

he seminars are available to anyone including financial planners, and other professionals in the financial services industry who would like a set of the materials, participant's workbooks or the Family Financial Freedom book (discounts for volume purchases)You can now view the presentation here, order the Family Financial Freedom book from any of the ebook sites for iPhone, iPad, Kindle, Nook, Kobo reader etc. contact me at floyd.saunders@yahoo.com for a copy of the presentation or more information on how to get seminar materials.

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Investing in Real Estate Module 7 of Family Financial Freedom

  1. 1. Workshop Module Six: Real Estate Investing Saunders Learning Group, Newton, KS
  2. 2. Saunders Learning Group provides a variety of training programs, workshops and seminars targeted to the financial services industry. Programs are available in a wide range of topics, and we are specialists in developing custom programs that are targeted to your needs. Contact the founder, Floyd Saunders at 316-­‐680-­‐6482 or at floyd@floydsaunders.com for more informaKon. Saunders Learning Group, Newton, KS Real Estate Investing 2 Training from Saunders Learning Group
  3. 3. Agenda Home Ownership Mortgage Options Check Your Credit Determine How Much You Can Afford Get Prequalified for a Loan Real Estate as an Investment Saunders Learning Group, Newton, KS Real Estate Investing
  4. 4. "Don't wait to buy real estate. Buy real estate and wait." Robert G. Allen Saunders Learning Group, Newton, KS Real Estate Investing 4
  5. 5. Home Ownership ! Home ownership has long been a part of the American dream. ! Yet the housing crisis of 2005-­‐2010 effected one in 700 homeowners, with millions of homes going into foreclosure. ! Interest rates are at record lows, and loan qualificaKon procedures more difficult. ! Real Estate Investors have taken advantage of the crisis by buying up foreclosed homes and converKng them to rental properKes. ! Understanding the new rules of home ownership will help restore the American dream to millions of Americans. Saunders Learning Group, Newton, KS Real Estate Investing
  6. 6. New Rules of Real Estate ! Buy your home to live in, not as an investment. Flipping a home every 24 months, because of rising prices is dead. Enjoy your home for what it is, a home. ! Mortgage loan requirements are tougher, but you can do it! — You need: a job, an income, a down payment and a good credit score — You also need a stable neighborhood (few foreclosures) and a property with good appraised value. ! Work with a great real estate agent you understands the local market, short-­‐ sells, foreclosures, financing and how to help you with a great deal. ! It is an amazing Kme to buy investment property. ! Plan to stay in place for seven to 10 years in order to realize a return on your investment Saunders Learning Group, Newton, KS Real Estate Investing
  7. 7. Saunders Learning Group, Newton, KS Real Estate Investing
  8. 8. Current U.S. Mortgage Requirements ! Credit Scores — A credit score of 600 or higher for FHA loans, and 620 or higher for convenKonal mortgages. ! Down Payments — A veteran or VA loan does not require a down payment. With an FHA the down payment could be as low as 3.5%. ConvenKonal mortgages generally require a down payment of at least 5%, and ogen 20%. ! Debt Ra5os — Lenders are concerned with your combined debt raKo (a comparison between monthly earnings and debt expenditures). Generally not more of 45% of your income to cover your debts (including the new mortgage payment). ! Funds for Closing — Your lender will check your bank account to make sure you have enough money to cover your closing costs. There are the various fees and charges you’ll accrue during the home-­‐buying process. You may need to have these funds on deposit for at least 60 days in advance of loan closing. ! Employment — Many lenders want to see at least two years of steady employment, documented with W-­‐2s and paystubs. ! Documents — As of 2012, documentaKon requirements became more stringent These include federal tax returns for the last two years, bank statements, pay stubs, employment lekers and a list of any other assets you have. Most lenders today want the tax records to be sent directly from the IRS ! Cash Reserves —Some leaders require extra money in the bank at closing, theoreKcally earmarked for your first few mortgage payments. Other lenders only care that you have enough to cover your down payment and closing costs. Saunders Learning Group, Newton, KS Real Estate Investing
  9. 9. Steps in Loan Origination Stage 6 Closing Loan documents signed and recorded Saunders Learning Group, Newton, KS Real Estate Investing
  10. 10. Down Payments and PMI Avoid Private Mortgage Insurance with 20% or more down. Prospective Home Buyer Visit Real Agent, looks for home Finds dream home to purchase Visits Mortgage lender and completes mortgage application Puts less than 20% down payment Lender obtains insurance to cover risk of default Puts 20% down payment Mortgage approved Bank completes mortgage loan to homebuyer Bank sells mortgage to secondary markets, gets money to make more loans. Saunders Learning Group, Newton, KS Real Estate Investing
  11. 11. Mortgage Interest Rates ! The stated rate on a mortgage loan is determined by three rates: " Market Rates: general rates on Treasury bonds " Term: longer-­‐term mortgages have higher rates " Discount Points: a lower rates negoKated for cash upfront ! The next slide shows the relaKonship between mortgage rates and long-­‐term treasury rates. ! As can be seen, mortgage rates are typically higher than Treasury rates, but the spread (difference) between the two varies considerably. Saunders Learning Group, Newton, KS Real Estate Investing
  12. 12. Mortgage Interest Rates Lenders typically match the interest rate on a mortgage to an index like 10 year treasury bonds. Saunders Learning Group, LLC, Andover, KS
  13. 13. Mortgage Interest Rates & Points ! Paying points will reduce your mortgage payment each month. However, you pay interest $2,000 upfront. (Which may be tax-deductible) ! You can see that the decision depends on how long you want to live in the house, keeping the same mortgage. " If you only want to live there 12 months, clearly the $2,000 upfront cost is not worth the monthly savings. " If you plan to live in a home for more than five years, paying points might be worth it. Saunders Learning Group, Newton, KS Real Estate Investing
  14. 14. Conventional Mortgage Loans ! A type of mortgage in which the underlying terms and condiKons meet the funding criteria of Fannie Mae and Freddie Mac. ! About 35-­‐50% of mortgages in the United States, depending on market condiKons and consumer trends, are convenKonal mortgages. ! In other words, Fannie Mae and Freddie Mac guarantee or purchase 35-­‐50% of all mortgages. ! ConvenKonal mortgages may be fixed-­‐rate or adjustable-­‐rate mortgages. ! ConvenKonal Mortgage Loans are eligible to be resold by the loan originator in the secondary mortgage markets. Saunders Learning Group, Newton, KS Real Estate Investing
  15. 15. Non-Conforming Loans Non-conforming loans are offered to borrowers who do not qualify for conforming loans. Though they are the only borrowing option for some home buyers, they typically have higher interest rates, and may carry additional upfront fees and insurance requirements. Loans can be non-conforming for several different reasons. The best-known type of non-conforming loan is the jumbo loan. ! Jumbo Loans # Jumbo loans are too large to meet the guidelines of a conforming loan. For example, if you are buying a home and the conforming loan limit is $417,000, but need a single mortgage for $500,000, it would be jumbo loan. # As jumbo loans do not meet the standards of a conforming loan, they are more difficult to sell on in the secondary market. # Reasons for Non-Conforming Loan: # Loan-to-Value Ratio (LTV). # Credit Score and History. # Documentation Problems. # Total Debt. # Recent Bankruptcy. # Debt-to-Income Ratio (DTI). Saunders Learning Group, Newton, KS Real Estate Investing
  16. 16. Federal Home Administration Saunders Learning Group, Newton, KS Real Estate Investing
  17. 17. Fixed Rate Mortgage ! This is the most common type of residenKal home loan. ! It is repaid through fixed monthly payments of principal and interest. Saunders Learning Group, Newton, KS Real Estate Investing
  18. 18. Fixed Rate Mortgage Advantages ! Stability: With your mortgage rates fixed, the loan period set, you know what your mortgage payment will exactly be for the whole life of the residential loan. " Given the certainty of your mortgage loan payment, you can plan your finances accordingly. " Lower payments in a low mortgage interest rates environment: A lower monthly mortgage payment frees up your purchasing power and gives you greater financial flexibility. " Using a 30 year fixed mortgage of $150,000 as an example, if the borrowing rate is 6.50%, the monthly payment would be $948.10. " If the mortgage interest rate is 8.50%, the mortgage monthly payment would amount to $1,153.37. " The difference in monthly payments is $205.27. Saunders Learning Group, Newton, KS Real Estate Investing
  19. 19. Fixed Rate Mortgage Disadvantages ! Affordability: If mortgage interest rates are high, you might have difficulty making the high mortgage payments. The home loan in this situation might not be approved. ! High payments in a high mortgage rate environment: Nobody wants to be saddled with high home mortgage payments over the long term. " When borrowing rates are lower, you can refinance your mortgage. " A refinance mortgage is the process of replacing your current mortgage with a new residential mortgage with better borrowing terms. Saunders Learning Group, Newton, KS Real Estate Investing
  20. 20. Adjustable Rate Mortgage The adjustable rate mortgage or ARM is a combination of a fixed rate mortgage and a floating rate mortgage. Saunders Learning Group, Newton, KS Real Estate Investing
  21. 21. The Adjustable Rate Mortgage (ARM) • The market derived interest rate which is used as a base to set future rates of the ARM mortgage loan. The rate could be adjusted monthly, quarterly, semi-annually or annually. The index could be pegged to the following: Treasury Bill Rates, The Prime Rate, Libor and 6 month CD. Index: • The spread added to the index to determine the actual rate charged to the mortgage borrower. Example: Index is based on One Year Treasury Bills 3%. The margin is 2%. The mortgage rate the borrower pays is 5%. Rate = Index Rate + Margin. Margin: • The duration for which the mortgage interest rate is fixed. If the adjustment period is one year, then the interest rate will remain fixed for one year, after which time it will adjust. Adjustment Period: • The maximum the interest rate can adjust either up or down for each adjustment period. Example: The adjustment cap is 1 point. The index based interest rates since the last adjustment period went up 1.5 points. Adjustment Cap: • The maximum mortgage interest rate charged over the duration of the arm mortgage loan. The cap can be as high as 6%. The cap is based on the interest rate from the first year adjustment period. Lifetime Cap: Saunders Learning Group, Newton, KS Real Estate Investing
  22. 22. The Adjustable Rate Mortgage (ARM) ! With low interest rates, more people will select a fixed-rate loan as they will be more affordable. ! An ARM is more attractive when interest rates are rising, as you can still qualify for a mortgage, and plan for a rate increase if it happens. Saunders Learning Group, Newton, KS Real Estate Investing
  23. 23. Adjustable Rate Mortgage Advantages " Teaser Rate: The starting interest rate of an adjustable rate mortgage. It is usually referred to as the teaser rate, since it is lower than the fully indexed rate. # The initial low mortgage rate is used to attract people. # An arm mortgage is ideal for people who intend to stay in their homes for no more than 5 to 7 years. # The benefits of an arm are realized at the beginning. " Affordability: If current mortgage rates are high this may be the only option available to you. # You may have a better chance of getting the home loan since the lender incorporates the gross monthly income and the monthly loan payment amount to determine how much you qualify. # The monthly amount will be less with a lower interest rate so you might qualify for more. Saunders Learning Group, Newton, KS Real Estate Investing
  24. 24. Adjustable Rate Mortgage Disadvantages " Complicated to understand: Unlike a fixed rate mortgage that is simple to understand, " there are many variables that go into calculating adjustable rate mortgage loans. " Interest rates have bottomed out: By going with an adjustable rate mortgage arm at the bottom of the interest rate cycle, successive borrowing rates will likely go higher as interest rates go down. " Your monthly mortgage payments will become less affordable. " Uncertainty: If you plan to be at your property for more than 7 years, you will be dealing with the uncertainty associated with an ARM mortgage. " After each adjustment period, you will be getting new mortgage payments. Saunders Learning Group, Newton, KS Real Estate Investing
  25. 25. Biweekly Mortgage ! Mortgage payments are made every two weeks. You make 26 biweekly mortgage payments. ! You’ll save significant amounts in mortgage interest and pay off your home mortgage years earlier. " Example: 30 year fixed mortgage $175,000 Interest Rate: 6.75% " you will be saving $54,257.52 in mortgage interest. " your mortgage will be paid off 5 years 9 months earlier. Saunders Learning Group, Newton, KS Real Estate Investing
  26. 26. How good is your credit? Source: myFICO.com FICO Score Saunders Learning Group, Newton, KS Real Estate Investing Lender Grade 760-850 A+ 700-759 A 660-699 B 620-659 C 580-619 D 500-579 F
  27. 27. Building a Credit History ! Establish a steady work record. ! Pay all bills promptly. ! Open a checking account and don’t bounce checks. ! Open a savings account and make regular deposits. ! Apply for a local store credit card and make regular monthly payments. ! Apply for a small loan using your savings account as collateral. ! Get a co-signer on a loan and pay back the loan as agreed. Saunders Learning Group, Newton, KS Real Estate Investing
  28. 28. Credit Report Payment Codes status type of account code O Open (entire balance due each month) R Revolving (payment amount variable) I Installment (fixed number of payments) status timeliness of payment 0 Approved not used; too new to rate 1 Paid as agreed 2 30+ days past due 3 60+ days past due 4 90+ days past due 5 Pays or paid 120+ days past the due date; or collection account 6 Making regular payments under wage earner plan or similar arrangement 7 Repossession 8 Charged off to bad debt Saunders Learning Group, Newton, KS Real Estate Investing
  29. 29. How Much Can You Afford? (the 36% rule) Debt-to-Income Ratio = What your bank says you can afford for a home. >36% Risky <36% Good Housing Expenses >28% Maximum mortgage payment = $2340 - $750 = $1590 Saunders Learning Group, Newton, KS Real Estate Investing
  30. 30. Get Prequalified vs. Pre-approved for a Loan 1. A pre-­‐approval leker is more reliable than a pre-­‐ qualificaKon leker. 2. You'll know how much money you can qualify to borrow. 3. Your real estate agent will work hard on your behalf 4. You'll have more leverage in negoKaKons with the seller. 5. A few caveats: Pre-­‐approval lekers aren't binding on the lender, are subject to an appraisal of the home you want to purchase and are Kme-­‐sensiKve. Saunders Learning Group, Newton, KS Real Estate Investing
  31. 31. Real Estate As an Investment When considering real estate as an investment, be sure an evaluate all four of these components: Cash flow from rents Tax Benefits Appreciation of the property Equity increase from the mortgage payment. Saunders Learning Group, Newton, KS Real Estate Investing
  32. 32. Real Estate Investment Trusts Equity Trusts own income-­‐ processing properKes like shopping malls and self-­‐ storage. Saunders Learning Group, Newton, KS Real Estate Investing
  33. 33. ! Mortgage Trusts are involved in the financing of real estate. Mortgage REITs provide money to real estate owners and operators either directly in the form of mortgages or other types of real estate loans, or indirectly through the acquisiKon of mortgage-­‐backed securiKes. ! Hybrid Trusts generally are companies that use the investment strategies of both equity REITs and mortgage REITs. Saunders Learning Group, Newton, KS Real Estate Investing
  34. 34. How do I invest in a REIT? 1. An individual may invest in a publicly traded REIT by purchasing shares through a securiKes dealer. 2. An investor can enlist the services of a broker, investment advisor or financial planner to help analyze his or her financial objecKves. 3. These professionals may be able to recommend appropriate REIT investments for the investor. Saunders Learning Group, Newton, KS Real Estate Investing 4. An investor may also contact a REIT directly for a copy of the company's annual report, prospectus and other financial informaKon. 5. REIT.com maintains a list of publicly traded REITs and provides links to websites. 6. Many financial websites and local libraries offer a wide range of investment research and informaKon on REITs. 7. Another alternaKve is to buying shares in a REIT mutual fund or exchange-­‐traded fund. A list of REIT mutual funds is also available on REIT.com. 8. Investors can compare and evaluate fund performance at Morningstar.com.
  35. 35. Questions Saunders Learning Group, Newton, KS Real Estate Investing
  36. 36. Post Workshop Action Plan ! Complete the Post Workshop AcKon Plan Saunders Learning Group, Newton, KS Real Estate Investing 36
  37. 37. Reference Material Family Financial Freedom 140 pages ISBN 978-1-60-746269-9 Available Formats: 6"x9" paperback PDF download eBook download Link to order: http://www.fastpencil.com/publications/4498-Family-Financial-Freedom? tid=bookbuy#read_book Also available on Kndle, Nook, iPad and other popular e-readers can be ordered from Amazon or Barnes and Noble in paperback (available soon). Book summary: You might be struggling to make ends meet, but achieving true financial freedom is still possible. The good news is virtually anyone with a desire to learn and the willingness to plan can achieve a considerable degree of financial security. This book is a road map to the personal financial freedom you want and deserve. There are no quick-rich schemes here, just common sense advice on how to manage your money, protect your family from risks and start making the moves to being more financial secure. Saunders Learning Group, Newton, KS Real Estate Investing
  38. 38. Family Financial Freedom Seminars • This series of seminars on family financial freedom is available to all trainers, educators and professional advisors in the financial services industry. • The series of seminars can be taught with or without the book, “Family Financial Freedom”. • Here is a full listing of seminar topics: 1. Gemng Started 2. Making Your Money Work For You 3. Building the Base 4. Securing the Base 5. Financing Your Future 6. Mutual Funds 7. Real Estate 8. Your investments 9. ReKre in Comfort 10. Passing On Your Wealth 11. How Professional Can Help • A leader’s guide and participant’s workbook is also available. Order your copy from Scribd • Contact the author, Floyd Saunders for pricing and order details to purchase the entire series of seminars: floyd.saunders@yahoo.com Saunders Learning Group, Newton, KS Real Estate Investing

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