Investing in Real Estate Module 7 of Family Financial Freedom

Workshop
Module Six:
Real Estate
Investing
Saunders Learning Group, Newton, KS

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

Agenda
Home Ownership
Mortgage Options
Check Your Credit
Determine How Much You Can Afford
Get Prequalified for a Loan
Real Estate as an Investment

"Don't
wait
to
buy
real
estate.
Buy
real
estate
and
wait."
Robert
G.
Allen
4

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.

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

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.

Steps in Loan Origination
Stage 6
Closing
Loan
documents
signed
and
recorded

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.

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.

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

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.

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.

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).

Federal Home Administration

Fixed Rate Mortgage
! This
is
the
most
common
type
of
residenKal
home
loan.
! It
is
repaid
through
fixed
monthly
payments
of
principal
and
interest.

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.

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.

Adjustable Rate Mortgage
The adjustable rate mortgage or ARM is a combination of a fixed rate mortgage
and a floating rate mortgage.

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:

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.

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.

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.

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.

How good is your credit?
Source: myFICO.com
FICO
Score
Lender
Grade
760-850 A+
700-759 A
660-699 B
620-659 C
580-619 D
500-579 F

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.

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

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

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.

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.

Real Estate Investment Trusts
Equity
Trusts
own
income-‐
processing
properKes
like
shopping
malls
and
self-‐
storage.

! 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.

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.
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.

Questions

Post Workshop Action Plan
! Complete
the
Post
Workshop
AcKon
Plan
36

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.

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

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