Real Estate Investing Questions?
I’ve been looking into real estate investing for about a year now. I’m still in High School but am wanting to learn as much as I can about it, so that after college I can begin investing. I never owned a home of mine so please bear with me if my questions seem dumb. Basically I’m looking into rehabs, and my questions relate to the loans and out of pocket expenses.
When you take a loan out(bank loan or private mortgage loan) what exactly does that cover? Does it also cover any holding costs, selling costs(agent commission and closing costs), purchase costs(like points up front, interest), repair costs, or does it just cover the sale of the home? Are the holding costs, selling costs, etc expenses that come out of my pocket?
Also, is there anyway payments on the loan can be withheld until the actual sale of the home? My plan would be to buy a home, fix it, and then sell it all within a 2-6 month time period. So I wasn’t sure if lenders would just wait until the house is sold to collect their money
I know down payments are usually around 10-20% of the value, would I be able to borrow the money from a private lender to use as a down payment?
Thanks in advance for any advice that comes my way, and thank you for understanding.
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3 comments
BayAreaRealtor on June 19, 2009 at 5:50 pm
A home loan covers only the actual appraised value (minus downpament) of the home.
No lender will wait for the payment until you sell the house. If one did, they would be called an investor and would want a percentage of the profit. They are relying on your ability to flip and be successful at it.
Flipping is the word. When a bank loans money to purchase a home, they assume you are going to live in it, so it’s called a residential loan. If you are not living in it, it’s an investment loan or a construction loan, which usually requires you to have a 30%+ down payment.
They will only loan you the appraised value of the house in it’s present condition! If it needs repairs, it will be reflected in the max loan amount they are willing to give you because of the appraisal. If the house is not habitable, you cannot get a residential loan and must get a construction loan. Appraisers consider a fully operational kitchen and bathrooms as minimun needed to be a residential loan. If the kitchen is missing plumbing, no running water, etc. it’s not habitable. If the bathroom has no toilet, same.
You have to consider it as a pure business, and all the expenses associated with running a business.
The cost of entry is high:
1. Down payment
2. 2-6 months holding costs, which include property taxes, insurance, mortgage payments, utilities (need deposit for new accounts).
3. Contractor payments, most want a deposit before job starts.
4. Aquisition costs which includes closing costs (average of 1%- 1.5% of sale price) which includes points on loans, pre-paid loan interest, pro-ration of property tax already paid by the seller, title insurance, home insurance, etc.
5. Selling costs which includes escrow fees, 5%-6% (seller and buyer) agents cost, advertising, staging, and if you are not careful loan pre-payment penalties, etc.
6. a 10% reserve for emergencies.
There are a few cable/sattelite shows on TV regarding flipping houses. Find one and watch it.
kemperk on June 19, 2009 at 5:50 pm
you are talking about flipping. I suggest the opposite;
buy junk, fix it up, keep it and pull cash out and lease it out.
do that 1,000 times and buy profitable biz’s with the cash out.
liberal48 on June 19, 2009 at 5:50 pm
Sorry, but if it was that easy everyone would do it, and they did for awhile. The result was a lot of poor decisions by all involved and a collapse of the market.
So right now you are not likely to get a legitimate loan for more than 80% of the purchase price; and to in order to qualify for that loan you will be required to have a job, have a credit history, and be able to make the payments. Also you are going to be required to have the other 20% in cash plus money for other expenses available in cash, not from another loan.