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Ten Things You *MUST* Know About Real Estate Investments (For Agents AND Investors)

(PUBLISHED IN 2006) Okay – here come some “industry secrets”. They really are not secrets at all but the average loan officer, real estate agent and even real estate investor do not know these key things that can sting you. Also keep in mind that these are general rules and guidelines and some or all of these may not exist on every investment opportunity and financing scenario. HOWEVER I can tell you that the vast majority of investors who purchase with no money down will face one or all of these in short order:

(1) You only count 75% of your gross rental income as net income for your next mortgage. So if you receive $1000 in rent each month you can only count $750 as income for the purpose of applying for subsequent loans.

(2) Shopping backwards by knowing what amount of rent the home will support makes it easier to decide whether to purchase that property. This is indeed a little known trick and it belongs to me so if you use it please credit it. Please do not put it on your website or anything else written without crediting it back to me. Seriously – this is a major tidbit in my Real Estate Investing QuickStart Workshop. So you know the property can support a $1350 rent based on rental comparisons on occupied properties in the area. Multiply 1350 x .75 = 1012.50 – That should be your maximum amount of PITI to really generate cash flow. It doesn’t mean don’t do the deal it means you should easily profit on this deal.

(3) 100% LTV loans can still cash flow when you buy the property below fair market value. Page 13 of my seminar booklet fully illustrates this but if you can purchase for 80% of FMV and use 100% financing you are generally way ahead of the game.

(4) To determine how much rent you should charge to break even on net positive cash flow multiply your PITI by 1.375. Say your PITI is 1000 x 1.375 = 1375. Now you don’t need to worry about net positive cash flow if the home will support that much rent.

(5) It takes an average of 3 to 5 years to recover from a 5% to 10% down payment. Meanwhile that money could have been working for you somewhere else like another investment purchase for no money down. I have a full set of spread sheets to fully illustrate this.

(6) Some lenders will only allow each buyer to purchase two homes in any 12 month period of four homes in any 24 months period. This is called rapid acquisition.

(7) Most conventional lenders who offer 100% financing on investment properties will not allow any damage to be evident, no subject to repairs comments on the appraisal. This often includes cracked windows, missing door knobs, holes in the sheetrock, missing roofing shingles, missing siding and more. It even means damage in the garage. It can need paint, new floor covering and cosmetics only. Missing plumbing fixtures or built in appliances will kill the deal.

(8) Investment appraisals are generally $100 to $200 higher than owner occupied property appraisals because of the FNMA 216 Operating Income Statement and FNMA 1007 Single Family Comparable Rent Schedule.

(9) The number one form of mortgage fraud on mortgage applications for investment properties has usually been a misstatement of intention to occupy. Here is the way you get busted. Six months to several month after you close on the loan a college student or similar knocks on the door at the subject address and asks for you. While they are there they take photos of the cars and license plate numbers. Even if you are making the payments on time it is still mortgage fraud and the FBI identifies this as Fraud For Profit in there Operation Quick Flip guidelines.

(10) Seller seasoning affects everyone from time to time. If you are a rehab/flipper your purchase prospect may be working with a lender who requires the seller to have been on title for at least 12 months. They may also not allow the seller to be a corporation.

NOTICE: This is not intended to be an in-depth guide for real estate investors. IO have those but they are hundreds of pages in length. This also may differ from your experience however it is the average, the norm, from which I am writing. Hope this helps you understand better what to look for in an investment and how to handle the transaction!