Transcription
Spine: .576 inBusiness/Real Estateg Easier!Making EverythinYour practical guide toscoring cash to fuel yourreal estate investments A crash course in real estate financing —understand standard terms and concepts, learn thevarious sources of investment capital, and gatherall essential facts and figuresOpen the book and find: Real-world advice on financingwithout tying up all your capital How to get prequalified orpreapproved for a loan Questions to ask your lenderupfront Ways to avoid common beginnerblunders How to protect your personalassets from investment risks Weigh your options — decide which type offinancing is best for your circumstances andincorporate it into your real estate investing plan Bargain-hunting hints forlow-cost loans Finance residential properties — evaluateresidential loan programs, navigate the loanapplication and processing, and handle the closing Strategies for surviving a creditcrunch Invest in commercial properties — know thedifferent property types, choose the one that meetsyour investment goals, and discover unique sourcesfor financing Ten pre-closing steps you musttake Tap into unconventional sources — discover thepros and cons of “hard money,” capitalize on sellerfinancing, partner to share risk and equity, andinvest on the cheap with no-money-down dealsFinancing Real Estate InvestmentsWant to be a smart, successful real estate investor?This no-nonsense guide contains everythingyou must know to make the right choices aboutfinancing your investments — from the variousoptions available and the impact on cash flow tothe tax implications and risk factors involved. Youalso get tried-and-true tips for surviving a downmarket and using current investments to financefuture ones.etatsElaeRgFinancinstnemtseInvLearn to:Go to dummies.com for more! Evaluate potential lenders Maximize your cash flow Finance through private lenders Tap into government programs 21.99 US / 25.99 CN / 15.99 UKRalph R. Roberts is an internationally acclaimed realestate agent, speaker, investor, and consultant. ChipCummings is a real estate lending expert, a CertifiedMortgage Consultant with more than 25 years ofexperience, and a seasoned real estate investor. Robertsand Cummings coauthored Mortgage Myths: 77 SecretsThat Will Save You Thousands on Home Financing.ISBN 978-0-470-42233-5Ralph R. RobertsReal estate professional and coauthor ofForeclosure Investing For DummiesRobertsCummings Chip CummingsReal estate financing expert and author
02 422335-ftoc.qxp3/11/0911:50 AMPage viii
01 422335-ffirs.qxp3/11/0911:49 AMPage iFinancing Real EstateInvestmentsFORDUMmIES‰by Ralph R. Roberts andChip Cummings with Joe Kraynak
01 422335-ffirs.qxp3/11/0911:49 AMPage iiFinancing Real Estate Investments For Dummies Published byWiley Publishing, Inc.111 River St.Hoboken, NJ 07030-5774www.wiley.comCopyright 2009 by Wiley Publishing, Inc., Indianapolis, IndianaPublished by Wiley Publishing, Inc., Indianapolis, IndianaPublished simultaneously in CanadaNo part of this publication may be reproduced, stored in a retrieval system or transmitted in any form orby any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to theCopyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600.Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley& Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online athttp://www.wiley.com/go/permissions.Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for theRest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com, Making EverythingEasier, and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/orits affiliates in the United States and other countries, and may not be used without written permission. Allother trademarks are the property of their respective owners. Wiley Publishing, Inc., is not associated withany product or vendor mentioned in this book.LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: THE PUBLISHER AND THE AUTHOR MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THECONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUTLIMITATION WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES OR PROMOTIONAL MATERIALS. THE ADVICE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR EVERY SITUATION. THIS WORK IS SOLD WITH THEUNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OROTHER PROFESSIONAL SERVICES. IF PROFESSIONAL ASSISTANCE IS REQUIRED, THE SERVICES OF ACOMPETENT PROFESSIONAL PERSON SHOULD BE SOUGHT. NEITHER THE PUBLISHER NOR THEAUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM. THE FACT THAT AN ORGANIZATIONOR WEBSITE IS REFERRED TO IN THIS WORK AS A CITATION AND/OR A POTENTIAL SOURCE OF FURTHER INFORMATION DOES NOT MEAN THAT THE AUTHOR OR THE PUBLISHER ENDORSES THEINFORMATION THE ORGANIZATION OR WEBSITE MAY PROVIDE OR RECOMMENDATIONS IT MAYMAKE. FURTHER, READERS SHOULD BE AWARE THAT INTERNET WEBSITES LISTED IN THIS WORKMAY HAVE CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN ITIS READ.For general information on our other products and services, please contact our Customer Care Departmentwithin the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002.For technical support, please visit www.wiley.com/techsupport.Wiley also publishes its books in a variety of electronic formats. Some content that appears in print maynot be available in electronic books.Library of Congress Control Number: 2009921030ISBN: 978-0-470-42233-5Manufactured in the United States of America10 9 8 7 6 5 4 3 2 1
01 422335-ffirs.qxp3/11/0911:49 AMPage iiiAbout the AuthorsRalph R. Roberts, CRS, GRI, is a seasoned professional in all areasof real estate, including buying and selling homes, investing in realestate, and building and managing real estate agent teams. He hasbeen profiled by the Associated Press, CNN, and Time magazine,and has done hundreds of radio interviews. He has authored andcoauthored several successful titles, including Flipping Houses ForDummies, Foreclosure Investing For Dummies, Foreclosure Self-DefenseFor Dummies, Mortgage Myths: 77 Secrets That Will Save You Thousandson Home Financing, and Foreclosure Myths: 77 Secrets to SavingThousands on Distressed Properties! (John Wiley & Sons); ProtectYourself Against Real Estate and Mortgage Fraud: Preserving theAmerican Dream of Homeownership (Kaplan); and REAL WEALTH byInvesting in REAL ESTATE (Prentice Hall).To find out more about Ralph Roberts and what he can offer youand your organization as a speaker and coach, visit AboutRalph.com.For details on how to protect yourself and your home from realestate and mortgage fraud, check out Ralph’s blog at FlippingFrenzy.com. And don’t miss the latest addition to Ralph’s family ofWeb sites and blogs, GetFlipping.com, where Ralph offers additional information and tips on the art of flipping houses and investing in foreclosures and pre-foreclosures. You can contact Ralph byemailing him at RalphRoberts@RalphRoberts.com or calling586-751-0000.Chip Cummings, CMC, is a recognized expert in the areas of realestate lending and e-Marketing, and is a Certified MortgageConsultant with more than 25 years in the mortgage industry andmore than a billion dollars in sales volume.Chip has written hundreds of articles and appeared numerous timeson radio, television, and in various magazines including Entrepreneur,Mortgage Originator, Real Estate Banker/Broker, and The MortgagePress. He is an experienced professional in all areas of real estatefinancing, including residential and commercial mortgages, government lending, regulatory and compliance issues. He is past presidentof the MMBA (Michigan Mortgage Brokers Association), and is alicensed mortgage broker and lender in Michigan.As an international speaker, he has addressed groups and organizations of all types, and trains thousands of mortgage professionalsfrom around the country every year. Chip is a certified nationaltrainer for continuing education in more than 40 states, and hasserved as an expert witness in state and federal courts. He is alsothe author of ABC’s of FHA Lending and Stop Selling and StartListening! – Marketing Strategies That Create Top Producers(Northwind), Mortgage Myths: 77 Secrets That Will Save YouThousands on Home Financing, Foreclosure Myths: 77 Secrets toSaving Thousands on Distressed Properties! and Cashing In on Preforeclosures and Short Sales (John Wiley & Sons).
01 422335-ffirs.qxp3/11/0911:49 AMPage ivChip lives in Rockford, Michigan with his wife Lisa and three children, Katelyn, CJ, and Joe.To learn more about Chip Cummings, his many successful productsor how he can help your organization as a speaker or business consultant, visit www.ChipCummings.com. To receive a complimentary subscription to his multimedia e-newsletter and online events,check out www.eCoachingClub.com. You can also reach Chip byemailing him at info@ChipCummings.com or by calling616-977-7900.Joe Kraynak (joekraynak.com) is a freelance author who haswritten and coauthored numerous books on topics ranging fromslam poetry to computer basics. Joe teamed up with Dr. CandidaFink to write his first book in the For Dummies series, BipolarDisorder For Dummies, where he showcased his talent for translating the complexities of a topic into plain-spoken practical advice.He then teamed up with Roberts to write the ultimate guide to flipping houses — Flipping Houses For Dummies and delivered encoreperformances in Foreclosure Investing For Dummies, AdvancedSelling For Dummies, and Foreclosure Self-Defense For Dummies. InFinancing Real Estate Investments For Dummies, Joe assists Chip andRalph in delivering the ultimate guide to scoring some cash to fuelyour investments in real estate.
01 422335-ffirs.qxp3/11/0911:49 AMPage vDedicationFrom Ralph: To real estate investors and professionals who arededicated to supporting and promoting the American dream ofhomeownership.From Chip: To my assistant Debbie Forth who has managed to keepme organized for the last 14 years, and to my wife Lisa who puts upwith all the crazy hours and remains my #1 fan.Authors’ AcknowledgmentsThanks to acquisitions editor Lindsay Lefevere, who chose us toauthor this book and guided us through the tough part of gettingstarted and to our agent, Neil Salkind of StudioB (www.StudioB.com),who ironed out all the preliminary details to make this book possible.Chad Sievers, our project editor, deserves a loud cheer for acting as avery patient collaborator and gifted editor — shuffling chapters backand forth, shepherding the text through production, making sure anytechnical issues were properly resolved, and serving as the unofficialquality control manager. Megan Knoll, our copy editor, earns an editorof the year award for ferreting out our typos, misspellings, grammaticalerrors, and other language faux pas-es, in addition to assisting Chad asreader advocate — asking the questions we should have asked ourselves. And, we tip our hats to the production crew for doing such anoutstanding job of transforming a loose collection of text and illustrations into such an attractive bound book.We also wish to express our appreciation to the National Associationof Mortgage Brokers, National Association of Realtors , the MortgageBankers Association of America, and the Michigan Mortgage BrokersAssociation for their support and assistance.We owe special thanks to our technical editor, Patrick Lecomte, forflagging technical errors in the manuscript, helping guide its content, and offering his own tips, tricks, and insights from the world ofreal estate financing.
01 422335-ffirs.qxp3/11/0911:49 AMPage viPublisher’s AcknowledgmentsWe’re proud of this book; please send us your comments through our Dummies online registration form located at http://dummies.custhelp.com. For other comments, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at317-572-3993, or fax 317-572-4002.Some of the people who helped bring this book to market include the following:Acquisitions, Editorial, andMedia DevelopmentProject Editor: Chad R. SieversAcquisitions Editor: Lindsay LefevereCopy Editor: Megan KnollAssistant Editor: Erin Calligan MooneyEditorial Program Coordinator: Joe NiesenTechnical Editor: Patrick Lecomte, MA, MBAEditorial Manager: Michelle HackerEditorial Assistant: Jennette ElNaggarCover Photos: Comstock ImagesCartoons: Rich Tennant(www.the5thwave.com)Composition ServicesProject Coordinator: Patrick RedmondLayout and Graphics: Melanee Habig,Melissa K. Jester, Christine WilliamsProofreader: ConText EditorialServices, Inc.Indexer: Potomac Indexing, LLCPublishing and Editorial for Consumer DummiesDiane Graves Steele, Vice President and Publisher, Consumer DummiesKristin Ferguson-Wagstaffe, Product Development Director, Consumer DummiesEnsley Eikenburg, Associate Publisher, TravelKelly Regan, Editorial Director, TravelPublishing for Technology DummiesAndy Cummings, Vice President and Publisher, Dummies Technology/General UserComposition ServicesGerry Fahey, Vice President of Production ServicesDebbie Stailey, Director of Composition Services
02 422335-ftoc.qxp3/11/0911:50 AMPage viiContents at a GlanceIntroduction.1Part I: Gearing Up for FinancingYour Real Estate Investments.7Chapter 1: Taking a Crash Course in RealEstate Investment Financing .9Chapter 2: Shielding Your Personal Assets from Investment Risks .25Chapter 3: Gathering Essential Documents, Facts, and Figures.43Chapter 4: Scoping Out Prospective Lenders.61Part II: Financing the Purchaseof Residential Properties.77Chapter 5: Finding the Residential Loan ProgramThat’s Right for You .79Chapter 6: Bargain Hunting for Low-Cost Loans .93Chapter 7: Navigating the Loan Application and Processing .105Part III: Financing the Purchaseof Commercial Properties .127Chapter 8: Picking the Right Commercial Property Type for You.129Chapter 9: Exploring Sources of Financingfor Commercial Properties .149Chapter 10: Securing a Loan to FinanceYour Commercial Venture .163Part IV: Sampling More CreativeFinancing Strategies .173Chapter 11: Financing in a Pinch with Hard Moneyand Other Tough Options .175Chapter 12: Capitalizing on Seller Financing .193Chapter 13: Partnering to Share the Risk and the Equity .207Chapter 14: Profiting from No-Money-Downand Other Creative Deals .219Part V: The Part of Tens.231Chapter 15: Ten Ways to Avoid Common Beginner Blunders.233Chapter 16: Ten Steps to Take before Closing .239Chapter 17: Ten Tips for Surviving a Credit Crunch.245Glossary .251Index.261
02 422335-ftoc.qxp3/11/0911:50 AMPage viii
02 422335-ftoc.qxp3/11/0911:50 AMPage ixTable of ContentsIntroduction .1About This Book .1Conventions Used in This Book .2What You’re Not to Read.3Foolish Assumptions .3How This Book Is Organized.3Part I: Gearing Up for FinancingYour Real Estate Investments.4Part II: Financing the Purchaseof Residential Properties .4Part III: Financing the Purchaseof Commercial Properties.4Part IV: Sampling More CreativeFinancing Strategies .4Part V: The Part of Tens.5Icons Used in This Book.5Where to Go From Here.5Part I: Gearing Up for FinancingYour Real Estate Investments.7Chapter 1: Taking a Crash Course in Real EstateInvestment Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Pumping Up Your Purchasing Power with Borrowed Money .10Minimizing your potential by owningproperty free and clear .10Maximizing your potential withother people’s money.10Paying cash with borrowed money .11Brushing Up on Basic Real Estate Financing Lingo .12Identifying types of lenders.12Grasping different loan types.13Brushing up on important legal lingo .14Pointing out mortgage concepts .16Examining equity .16Looking at loan-to-value (LTV).17Distinguishing Investment and Home Financing.17Paying a premium for riskier investment loans.17Using quick cash to snag bargain prices .18Accounting for taxes on your capital gains(or losses).18Protecting your personal assets .19
02 422335-ftoc.qxpx3/11/0911:50 AMPage xFinancing Real Estate Investments For DummiesExploring Common Sources of Investment Capital .19Tapping your own cash reserves.20Borrowing from commercial lenders .21Obtaining a hard money loan.22Financing your purchase through the seller .22Taking on a partner .22Prepping to Meet with a Lender.23Gathering paperwork and other info .23Crafting a business plan.24Chapter 2: Shielding Your PersonalAssets from Investment Risks . . . . . . . . . . . . . . . . . . . 25Understanding Why You Need toProtect Your Personal Assets .26Limiting Your Personal Liability by Forming an LLC.26Understanding the pros and cons .27Setting up an LLC.28Taking and securing title to real estate.28Eyeing Sub-S corporations and partnerships .29Transferring Personal Assets via Trusts.30Weighing the pros and cons of owning propertyin another’s name .31Gaining asset and tax protectionwith an irrevocable trust .32Considering real estate investment trusts (REITs) .33Staying Away from Promissory Noteswith Recourse Clauses .33Opting for a nonrecourse loan .34Negotiating the recourse clause .34Avoiding cross-collateralization .35Steering Clear of Real Estate and Mortgage Fraud .36Telling the truth on your application.37Dodging predatory lenders .38Saying “no” to inflated appraisals .39Turning your back on cash-back-at-closingschemes .40Avoiding illegal flipping.40Defending yourself against chunking schemes.41Refusing a builder bailout.41Acting with integrity: The golden rule .42Chapter 3: Gathering Essential Documents,Facts, and Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Examining Your Credit Reports.43Obtaining free copies of your reports.44Checking your credit score .45Inspecting your report for problems .46
02 422335-ftoc.qxp3/11/0911:50 AMPage xiTable of ContentsxiRepairing your credit and boosting your score.47Avoiding mistakes that can sabotageyour loan approval.48Chasing Down Vital Paperwork.49Delving into your personal financial information.49Accounting for business income .53Documenting the property you plan to purchase .54Show Me the Money: Identifying Sources of Ready Cash .59Sources of cash for down payments,closing costs, and prepaid items .59Rainy day funds: Cash reserves.60Getting Prequalified or Preapproved.60Chapter 4: Scoping Out Prospective Lenders . . . . . . . . 61Borrowing Directly from Banks .61Weighing the pros and cons .62Conventional loans.64Subprime (nonconforming) loans .65Dealing with a Middleman (or Woman): Mortgage Brokers .66Weighing the pros and cons .67Shaking the branches for a broker .68Checking a broker’s credentials.68Taking the Hard-Money Route through Private Lenders .70Borrowing from Uncle Sam: Government Loan Programs .72Financing through the Seller .73Lease options .73Land contracts .74Teaming Up with a Cash-Heavy Partner.74Opting for a limited partnership.75Going the corporation route .76Part II: Financing the Purchaseof Residential Properties .77Chapter 5: Finding the Residential LoanProgram That’s Right for You . . . . . . . . . . . . . . . . . . . . 79Understanding Why Finding the RightResidential Loan Is Key .79Choosing a Loan Type to Maximize Your Cash Flow.80The power of OPM (other people’s money).81Interest-only mortgages .82Grabbing a hold of ARMs.83Hybrids.85Hard-money loans: Private investors .85Taking Advantage of Government-Secured Loans .86Tapping the FHA for a loan.86Viewing Veterans Affairs (VA) loans .89
02 422335-ftoc.qxpxii3/11/0911:50 AMPage xiiFinancing Real Estate Investments For DummiesConsidering REO loans .89Tapping into state and local grants and loans.90Digging up USDA Rural Development loans .92Avoiding the Prepayment Penalty Trap .92Chapter 6: Bargain Hunting for Low-Cost Loans. . . . . . 93Understanding How This Interest Thing Works.93Keeping simple with simple interest .94Grasping the concept of amortization .94Telling the difference between theinterest rate and APR .96Exploring how adjustable rate mortgages work.97Paying interest upfront with points .98Considering the Mortgage Term .99Accounting for Closing Costs .100Getting socked with origination fees .100Forking over other fees.100Examining the Good Faith Estimate .102Calculating a Loan’s Total Cost .103Chapter 7: Navigating the Loan Applicationand Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105Completing Your Loan Application.105Walking through the parts of the loan application.106Reviewing the lender’s disclosures .108Supplying the requested documentation .111Signing a release of information .112Following the Loan Processing Trail .112Getting up to speed on the underwriting process .113Obtaining an appraisal or AVM .113Having the property inspected .114Obtaining a survey .119Navigating the Closing.120Keeping your attorney in the loop .120Dealing with the preliminaries .120Signing the documents.122Knowing your right of rescission . . . or lack thereof .122Dealing with surprises .123Financing Other Types of Residential Properties .124Digging up money for vacation properties.124Financing investment properties.125Purchasing vacant land.126
02 422335-ftoc.qxp3/11/0911:50 AMPage xiiiTable of ContentsxiiiPart III: Financing the Purchaseof Commercial Properties.127Chapter 8: Picking the Right CommercialProperty Type for You. . . . . . . . . . . . . . . . . . . . . . . . . . 129Estimating the Income Potentialof a Commercial Property .130Calculating effective gross income (EGI).130Calculating Net Operating Income (NOI).131Estimating the property’s true value .132Projecting future profits with a pro forma .133Dwelling On the Thought of Multifamily Homes.134Two- to four-family homes.135Garden apartments.136Large multifamily properties.136Crunching the numbers .138Buying and Renting Out Office Space:The A-to-D Grading Scale .139Investing in Retail Real Estate .140Collecting your cut of gross sales.141Comparing strip malls and convenience stores .142Running Your Own Hotel or Motel.142Distinguishing between flaggedand unflagged properties.143Encountering income challenges.144Checking Out Industrial or Warehouse Properties.145Calculating income and costs .145Considering storage facilities.146Exploring Mixed-Use Properties .146Sampling Some Special Use Properties.146Restaurants and bars .147Gas stations .148Adult foster care .148Chapter 9: Exploring Sources of Financingfor Commercial Properties . . . . . . . . . . . . . . . . . . . . . 149Sizing Up Various Commercial Loan Programs .150Exploring the middle market (localand national banks) .150Hitting up the private sector:Hard-money lenders .151Financing Main Street propertywith Wall Street money .152
02 422335-f
written and coauthored numerous books on topics ranging from slam poetry to computer basics. Joe teamed up with Dr. Candida Fink to write his first book in the For Dummies series, Bipolar Disorder For Dummies, where he showcased his talent for translat-ing the co
