Posted: 15 May 2014 02:30 AM PDT

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McDonald's was only meat and potatoes until America fell in love with fast food. Facebook was a fad for college kids until everyone had to have their own site to be social. Wall Street's clients were largely America's upper crust until 401Ks and IRAs democratized securities trading and launched the most prosperous era Wall Street has ever known.

These are examples of how the mainstreaming of products and services breaks down barriers that restricted access to only a few. Mainstreaming transforms entire industries, creates new wealth and changes the way Americans live.

The next business for ripe for mainstreaming is residential real estate investing. Over the past seven years, investors have saved millions of American homeowners from disaster, rehabilitated more than four million foreclosures and turned them into single family rentals, the fastest growing rental category, just in time to house millions of families unable or uninterested in owning homes.

The secret is out about real estate investing. The magic of cash flow and appreciation working together, the relative stability of the real estate economy, the appeal of owning property and providing a home to deserving families—for these and other reasons interest in investing in property continues to grow.

Since 2007, millions of individuals and small partnerships have discovered the magic of real estate. Their success caught the attention of some of the nation's largest private investment companies. Backed by billions from many of America's wealthiest private equity investors, they have bought up over 200,000 homes. Now they are securitizing them to sell to institutional investors worldwide because the profit potential of single- family rental homes is so high and the risk is so low.

At the same time, individual investors are looking for an alternative to securities. Public confidence that the stock market will rise in the succeeding year is at its lowest since 1998. Interest in real estate investing is on the rise and it is not diminishing as foreclosures diminish and property values rise. That's because real estate:

Creates a constant cash flow that pays back investors in good times and bad;
Can be leveraged to increase investors' buying power; and
Appreciates over time to create, with cash flow, an extraordinary return on investment that other investment options can't match.

For middle- aged investors seeking to improve their retirement fund in the remaining years in the workplace, young investors who realize how real estate offers tremendous potential and entrepreneurs looking for a better alternative, real estate is increasingly popular.

Until now, however, investing in real estate, especially properties in distant markets that offer the best prospects. Finding the right market and the right property, securing financing, getting it rent-ready, retaining the right property management—these and other tasks are often more than the average investor can handle.

Now, companies like HomeUnion are reducing the learning curve and taking the guesswork out of real estate investing. HomeUnion's new investment platform matches investors with properties based on each individual's investing goals and interests. Each investor fills out an extensive online interview that feeds critical data into the site's algorithm to create a profile that is used to select markets, price range and particular properties. HomeUnion also provides professional support from expert local brokers, lenders and property managers in each market. In a matter of days, an investor can be the proud owner of a new property in one of the nation's best markets, ready to receive his first rent check.

Just as the first burgers, Facebook pages and 401ks seemed odd and foreign at one time, the process of mainstreaming them began with familiarization and accessibility. Today, real estate investing is the province of the very rich, the investor-landlord, or the full time professional. Tomorrow, it will be open to everyone who wants to share in its rewards.

<b>Real Estate Investing</b>: Closing Costs (Rental Property #3 Example)

Posted: 15 May 2014 12:15 AM PDT

If only buying or selling a piece of property was as simple as signing a contract and transferring the funds over from buyer to seller at the agreed upon purchase price. Unfortunately, when completing a real estate transaction, there are closing costs involved. For anyone who has never closed escrow before, this kind of thing can be intimidating because there are so many items to account for.

Getting Started

Naturally, you might be wondering what all of these items are, and worried about overpaying.

Closing costs will always vary from lender to lender (and from property location to location), but I will provide a real example to give readers an idea of what to expect. I will use Rental Property #3 as an example, which closed in July 2013.

When first engaging with a lender, they will typically provide you a good faith estimate (GFE) document that estimates all the closing costs involved in the transaction. In general, the GFE is conservative and will tend to overestimate the closing costs that you will actually need to bring to the table.

Good Faith Estimate (GFE): Chicago

GFE for Rental Property #3:

Here's a breakdown of each item:

Origination Fee: This activation fee is an expense the buyer pays the lender for setting up an account for the processing of your loan.

Rental Property #3: Origination Charge: $990

Origination fees typically varies from about 0.5% to 2.0% of the purchase price.

Points: Depending on the lender, it may be possible for the buyer to secure a lower interest rate by paying an upfront charge to purchase points. Also, during the loan process, at some point, the lender will ask you about locking in your interest rate. A rate-lock protects the buyer from rising interest rates. Typical rate-locks expire somewhere around 15-60 days. From my own experience, most lenders will lock the rate for around 45 days or so.

For Rental Property #3, the rate-lock was set for 49 days. Should the rate-lock expire, the buyer would need to buy points to extend the rate-lock, or accept the current market rate. If you are attempting to close escrow at a time when interest rates are rising, it makes sense to do so before the rate-lock expires. With Rental Property #3, I wasn't able to close on time and needed to pay extra to preserve my 30 year fixed, 4.5% interest rate. At the time of expiration, my lender was quoting me around 4.7% or so. So, I should have done a better job of closing on time (although not always within the control of the buyer since there are many other parties involved with closing).

Rental Property #3: Points Charge: $378

Appraisal Fee: An appraisal is typically ordered by the lender 1-2 weeks after the loan origination. With residential real estate, appraisals are set using the "Sales Comparison Approach", which is one of three valuation methods (Cost Approach and Income Approach being the others). The value of your property will be assessed based off of what nearby comps have been selling for recently. The appraiser will do their best to handpick a few "like" properties, similar in makeup/characteristics.

Rental Property #3: Appraisal Charge: $350

In my own experience, I've seen appraisals priced anywhere between $350 to $500.

Lender's Title Insurance: The Lender's Title Insurance, or Loan Policy, protects the lender in case there are issues with the title of the property you are purchasing. This charge is typically paid for by the buyer. A Lender's Title Insurance is required for a lender will issue out a loan for you. It protects the lender ONLY, not the buyer.

Rental Property #3: Lender's Title Insurance Charge: $2,600

In my own experience, the buyer has ALWAYS been responsible for paying for the Lender's Title Insurance. Also, I've seen this charge vary A LOT! I've been quoted as little as $595 to $2,600.

Owner's Title Insurance: The Owner's Title Insurance is needed to protect the buyer in case there are issues with the title. This can be due to liens, legal judgement, or unpaid taxes. Although purchasing an Owner's Title Insurance may be optional in some cases, it is always better to be safe than sorry.

Rental Property #3: Owner's Title Insurance: $2,000

In my own experience, the seller has ALWAYS paid for my Owner's Title Insurance. This will vary from state-to-state, but so far, I have never paid for my own policy in: Bay Area, Chicago, and Indianapolis.

Government Recording Charges and Transfer Taxes: These are fees assessed by the state and local agencies for recording your deed and documents, and entering them into official record. Transfer taxes will vary from location to location.

Rental Property #3: Government Recording Charges: $400

Rental Property #3: Transfer Taxes Charges: $1,182

Initial Deposit to Escrow: This is the initial payment you make into your escrow account to get it funded. It may, or may not be different from your monthly payments moving forward, depending on what your lender requires. The money in this account is used to pay for property taxes, insurance, and flood insurance (if required). I do not have an escrow account setup for any of my Bay Area properties (Rental Property #1 and #2). Escrow accounts are convenient, and I plan on using them for all purchases moving forward.

Rental Property #3: Initial Deposit to Escrow: $2,799.30

Daily Interest Charges: Daily interest charges are for any daily interest that will accrue on your loan from the period of settlement until the first day of the period covered by your first scheduled mortgage payment.

Rental Property #3: Daily Interest Charges: $218.45

Credit Report: Credit report is obtained through a credit reporting agency. Your lender will run your credit at the beginning of the loan application process to qualify you and determine what interest rate you are entitled to. The three major credit bureaus are: Equifax, Experian and TransUnion. You will receive a credit score from each of the three bureaus, and the middle score will be the one your lender uses.

Rental Property #3: Credit Report: $5

Credit report fees typically range from $5 to $15.

Flood Certification: Flood Certification is needed to verify that the property is not located in a flood zone.

Rental Property #3: Flood Certification Charge: $5

Flood Certification fees typically range from $5 to 20.

Total GFE Breakdown: The GFE estimated that the total settlement charges that I would be responsible for to close escrow was $10,927.75. This is the additional funds needed on top of the downpayment for the actual property itself (typically 20% to 30% for a residential investor property).

Final HUD: Chicago

As mentioned above, the GFE is conservative, and tends to overestimate the amount you will need to bring to the closing table. This isn't necessarily a bad thing, and it helps insure that the buyer has sufficient funds available to close escrow. When in doubt, aim to have at least the amount estimated in the GFE on the day of closing.

Here's the breakdown of the Final HUD for Rental Property #3:

Origination Fee (GFE): $990
Origination Fee (Final HUD): $990

Points (GFE): $378
Points (Final HUD): $378

Appraisal Fee (GFE): $350
Appraisal Fee (Final HUD): $400

Lender's Title Insurance (GFE): $2,600
Lender's Title Insurance (Final HUD): $1,935

Owner's Title Insurance (GFE): $2,000
Owner's Title Insurance (Final HUD): $0 ($1270 paid for by seller)

Government Recording Charges (GFE): $400
Government Recording Charges (Final HUD): $146

Transfer Taxes (GFE): $1,182
Transfer Taxes (Final HUD): $1,181.25

Initial Deposit to Escrow (GFE): $2,799.30
Initial Deposit to Escrow (Final HUD): $606.46 (3 months insurance; 2 months property taxes)

Daily Interest Charge (GFE): $218.45
Daily Interest Charge (Final HUD): $131.07

Credit Report (GFE): $5
Credit Report (Final HUD): $5

Flood Certification (GFE): $5
Flood Certification (Final HUD): $5

Total Closing Costs (GFE): $10,927.75
Total Closing Costs (Final HUD): $5,777.78

Summary

The above example shows that for a GFE of $10,927.75, the actual costs came out to be $5,777.78 for a 2-flat purchase in Chicago. For one, the GFE budgeted $2,000 for an Owner's Title Insurance, which is customarily paid for by the seller (in Chicago). Also, other items such as: Lender's Title Insurance, Government Recording Charges, Initial Deposit to Escrow, and Daily Interest Charge were overestimated. Of course, your mileage will vary, depending on both the location of the property, and lender you decide to use.

One thing to keep in mind is this — Closing costs are not fixed, and like most things in real estate, are negotiable. It doesn't hurt to shop around, getting quotes from various lenders. Also, when negotiating with a seller, don't be shy about bringing up the subject of closing costs. If negotiations reach a standstill, concessions made towards closing costs can help bridge any gaps in the deal. Always work with the other party (both seller and lender) and see what they can concede to you; this can help you save hundreds, if not thousands of dollars in closing costs.

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<b>Real Estate Investing</b>: More Than Just a Business? - FI Fighter

Posted: 09 May 2014 10:07 AM PDT

I've been investing in rental property since 2012. Over time, I've expanded my network and gotten to know other real estate investors, many much more successful than myself. So, it's only natural that I try and pick the brains of these people to expand my own knowledge base.

Survey Says…

In general, I've met some wonderful people and learned a lot. One common question I often ask investors is, "What is the most important thing you've learned through your years of REI?"

Not surprisingly, many will often reply saying: Treat REI as a business!

To that, I respond (internally): YAWN!

YAWN… Really??? Yes, really… No, I'm not trying to be condescending or rude. And no, I don't think I'm a better investor than these people. Far from it! I just think that "treating REI as a business" is a really boring and dull (generic) reply… It's a typical short-sighted investor answer we give when we forget that money isn't the main objective in life.

The Journey to Early FI

This is Year 3 of my journey to early financial independence. I realized some time ago (2011) that going down the road of conformity was not the right answer for me. Quite frankly, I think there's much more that life has to offer than simply going through the motions and working 9-5 until 65… or later.

Since I've decided to chase after my dreams and true desires, I've accepted the fact that I probably won't be a "success" in life. From society's vantage point, success is simply measured in terms of one's monetary wealth. The more money you have, the better the person you are, right?!? Sadly, most adults don't know any better than this… Why else would we revere so many wealthy idiots?

Anyway, my views on life are probably not universally accepted by most. In my mind, we are all operating on borrowed time… That is, we don't actually ever own anything because nothing lasts forever. We come into this world with NOTHING and leave with NOTHING… All we really own are the memories and experiences created from t = 0 to t= final.

But it's not like I approach life like it's all doom and gloom. Actually, because life itself is so fragile, I've made a conscious decision to do my absolute best to MAXIMIZE what very little (and precious) time I have on this world as much as possible. This means cherishing: people, experiences, and the blessings of everyday life. I'm a glass is overflowing type of guy… Give me sunshine, good company (positive energy), and some free time, and I'll make the most of it. I no longer sweat the small stuff and minor details that don't amount to anything.

Life is beautiful! Just having the opportunity to chase early FI already puts me in a most enviable position. When you really stop and think about it, how many people out there in this world even have the luxury to pursue their dreams? If your earned income allows for more than just your basic necessities, you're well, well ahead of the curve. I'm learning to stop desiring so much, and trying to appreciate everything I've got for a change!

Back to REI

So, with all that being said, you'll understand why I approach REI the way that I do. I'm not all about the Benjamins… In fact, if my real estate "business" ever did decide to IPO, and you were a shareholder, I assure you that you would not be pleased with my results. Being CEO, CFO, and in charge of all important decisions, you would demand that I be terminated effective immediately and replaced with someone with even a little bit of competence in what they were doing.

I don't really look at my rental properties as being a part of a business. Yes, of course each property is designed to earn money and not lose money… How else would early FI be possible? But I really couldn't care less about maximizing ROI, or trying to squeeze out every last drop that I can get.

I am relying on my real estate investments to buy me my freedom. I want to be financially free so that I can pursue life with reckless abandon. That's my main objective, and I always make sure to keep my endgame in mind.

All the money grubbing that can follow and consume other investors… It's not worth my time. It's not worth my efforts. And that's not what I want out of my life.

Besides, if you really do believe in treating REI as a business, then where exactly do you draw the line? Does EVERY single REI decision you make have to be in the best interest of your cash flow? Seriously? We all know greed knows no bounds, so when would enough ever even be ENOUGH?

If we venture down that path, I don't know that we would ever feel like we have enough… And that's kind of sad… For instance, what if you found yourself involved in the following hypothetical scenarios and you were already a big-time, successful investor?

Husband and wife are getting a divorce. They've decided to divide up their assets and sell the house. The eldest son desperately wants to buy the house so that it can remain in the family. You are the winning bid by a hair. Do you concede a property you don't even really need, or are you still all about the ROI (the home has tremendous upside potential both as a flip and buy-and-hold!)?

Your fabulous tenant of five years is going through some hardships and missed rent payment this month. You know that market rents have risen significantly since she signed her lease, and you are certain you can easily find a qualified tenant to take her spot. Do you give her the benefit of the doubt to straighten up her situation, or do you give her the boot knowing your ROI will thank you for it?

You are selling one of your rentals to capture some massive appreciation gains. The highest offer is from a young punk who is paying all cash (mommy and daddy's cash). You don't know him well, but from the time you met him, you got a pretty bad vibe. The second highest offer is from a family who desperately wants to move in to this neighborhood so that their kids can attend the nationally ranked high school. The youngest has aspirations to go to med school. However, their credit situation isn't the greatest, and although they have been pre-approved by the lender, it is not a slam dunk that they will be able to close escrow. Do you take the all cash offer that is basically guaranteed, or do you go with the higher risk, lower return option?

Why I Invest…

Why do I invest in rental properties then? Well, I also invest in stocks, but with owning stocks, I'll never have any direct control or power over the decisions being made. Being a shareholder is great because I don't have to do anything and I still earn passive income (dividends). However, as a small shareholder, I play a most passive role, and other people direct the company. But hey, if it's all about business, then there's absolutely nothing wrong with that. I invest in stocks for this reason… I'm glad they don't allow me the chance to make a stupid decision.

But I do also want to have something a little more than that with my investments. As an owner of rental properties, I'm the landlord (boss). I call the shots and I get to steer the ship, so to speak. That means I'm allowed to make "dumb" financial decisions… Even with a PM in place, they still work for me and have to do as I say. For what I'm chasing after with rental properties, this is exactly the type of arrangement I'm looking for.

Here's why I'm playing the REI game, outside of just earning semi-passive income for early FI:

Provide quality housing. I take great pride in my properties and each one has been rehabbed to be turnkey ready prior to renting out. I want to provide a nice place to live at an affordable price for all of my tenants. I'm no slumlord here… I feel great joy in seeing families move into one of my properties and turning it into their own "home".

Have a direct influence on other people's lives (hopefully a positive one). This goes beyond the first point of simply providing a quality home to live in. Again, I'm not all about the ROI. If I have a tenant who is experiencing some hardships, but usually pays rent on time and is taking great care of the place, I will cut them some slack. A late payment every now and then is fine. I'm not so cutthroat… I don't even like to raise rents. Further, I like to reward great tenants. At the end of the year, I've made it a custom to hand out gift cards… Usually one for dining out with the family, and the other for Christmas gifts for the kids. I've received some warm responses so far, so I want to continue to do this. It feels good! And it'll be even more fun this year since I have more tenants now… I get to make an even bigger impact. Imagine if I owned 100 units? When I really stop to think about it, a lot of my tenants have it rough… In some cases, they deposit over 1/2 of their monthly paycheck to me! These folks are helping me to buy my financial freedom… If nothing more, I want to be the best landlord they've ever had… I've had plenty of terrible landlords in my day, so I know what that's like. Be the change that you want to see in this world… even if it ends up costing you 1% or 2% on your ROI.

Help others on the journey to early FI. As a byproduct of REI, I'm able to network and connect with other investors and early FI enthusiasts. Since I own five properties and seven units now, I'm no longer a complete novice to REI. In fact, many other readers, bloggers, and meet-up investors have wanted to network with me. Many to learn about out-of-state turnkey investing. Others to get some ideas on how to invest locally in the Bay Area. Whatever the reason, I'm always glad to connect and lend a helping hand. Going back to my philosophy on life, I want to MAXIMIZE my time and experiences on this earth. A large portion of that involves the human experience. Making friends and enjoying a good laugh is way more rewarding (and memorable) than being one of those "If I teach you, I screw myself over" type of people. Life is too short for such nonsense! Karma is very real. From my own experience, any good you do in this world, you will be rewarded 1000x over. Whether it's returned to you, your spouse, your kid, your grandkid, etc., the world has a way of balancing things out.

Summary

I'm a lousy businessman, and frankly I don't care. I invest in real estate primarily to help me reach early FI (hopefully sometime next year!). Beyond that, there are many other good reasons why I invest in rental properties: I want to provide quality housing to tenants, make a positive difference in this world, and help others become financially free.

So what if my ROI suffers a little bit? It can't always be about: money, money, money and more money. You hear so many people talking about wanting to make the world a better place… Or to leave the world a little better than you found it. Well, actions speak louder than words. And I'm going to do my best to step up to that challenge. So, what is the most important thing I've learned through my years of REI? No matter how far you get, or however high you climb, NEVER forget who you are and what you really want out of your life.

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Real Estate Investing

Sunday, 18 May 2014