Jeff, Now What Do We Do?
Yesterday Jeff Brown, real estate investment advisor, explained the two myths that prevent most people from enjoying a work-free retirement. Once folks understand that they might actually be better off with a mortgage and investments. They get interested in the process. That’s where our conversation went next.
Jeff, how do you answer when someone says “Okay, I’m ready to invest. What is the process?”
Liz, LetÃ¢â¬â¢s assume we know exactly where you are now financially. LetÃ¢â¬â¢s further assume you have about $125K in cash to invest.
The first thing we do is decide how much should be allotted to cash reserves, or what IÃ¢â¬â¢ve already referred to as your Sominex account. In this case IÃ¢â¬â¢ll feel very comfortable if you retain around $40K. This will result in excellent sleep even though you had to buy that $700 refrigerator for unit #2. J
Before we get all excited and start making offers, weÃ¢â¬â¢ll head over to the lender to get you pre-qualified for the loans youÃ¢â¬â¢ll be getting. This will result in a letter from the lender saying youÃ¢â¬â¢re a solid citizen, and that yes, theyÃ¢â¬â¢ll loan you the money for the property on which youÃ¢â¬â¢ve made an offer. This allows you to look very strong as a buyer from the sellerÃ¢â¬â¢s viewpoint.
WeÃ¢â¬â¢ve decided that since you need to grow your capital, Boise is a very good fit. You can find homes in great areas in the price range of $175-240K. The area is a job magnet, unemployment is below the nationÃ¢â¬â¢s average, and people are moving there in droves. In short, we like the region very much. Now all we have to do is start our search for appropriate properties.
While weÃ¢â¬â¢re doing that you have the option of flying to Boise or not. Most investors either never go to the far away city in which they invest, or wait until theyÃ¢â¬â¢ve closed all their purchases. We recommend the latter. Since as professionals we already know the area well, plus have the valuable backup of the local pros, a trip to Boise before buying will only serve to make you feel better, not really accomplish much. WeÃ¢â¬â¢ll arrange for our team to give you a very comprehensive tour of the region, take you to lunch for a one on one question & answer session, then take you wherever you need to go. WeÃ¢â¬â¢ve even had clients land in the late morning and leave at night to go back home.
Whether you go there or not, youÃ¢â¬â¢ll be introduced to everybody on our team — agents, inspectors, and most importantly the property manager. YouÃ¢â¬â¢ll know them by first name before the process is finished.
WeÃ¢â¬â¢ve arrived at the good part now. WeÃ¢â¬â¢ve found three homes priced to fit your budget. The offers are structured to your financing requirements, and plainly spell out who pays for what, when certain things must be done, (deadlines) says how much youÃ¢â¬â¢re putting down, and the rest of the details involved in buying real estate. One thing we insist on is a home warranty, which comes in very handy when a heater breaks down. Most of the time weÃ¢â¬â¢re able to get the seller to pay for the first year.
So now weÃ¢â¬â¢re in escrow on three Boise houses. WeÃ¢â¬â¢ve done the numbers backwards and forwards, and it appears it will cost you a total of about $82.5K to close them. Since theyÃ¢â¬â¢re set up to close in 30 days, we quickly order the appraisals and the professional property inspections. We have our managers also attend the inspections with an eye towards potential tenant objections. The inspector might not care about the neon orange shag carpeting, but the manager doesnÃ¢â¬â¢t want to try to explain to a potential tenant why orange shag is in these days. J
When we get the inspection report back we go over it with a fine tooth comb, then list the repairs we want the seller to make at their expense, before escrow closes. The seller then agrees. But we donÃ¢â¬â¢t just accept that. Before the closing date we send the same inspector to the properties to ensure all the repairs were made, and made professionally. (This second inspection is also attended by our manager.)
The only thing left is loan approval, loan document signing, and closing. Sounds simple doesnÃ¢â¬â¢t it? Actually those three things should be very simple. In real life Murphy sometimes finds a way to entertain himself at your expense. LetÃ¢â¬â¢s say your escrows are smooth as silk, as most are. The loan approval comes in, which triggers the drawing of the loan docs. Once drawn, theyÃ¢â¬â¢re usually sent to the title company/escrow who then packs it off to wherever you are going to physically sign them. (For instance, in San Diego my mom would take them to your house so you wouldnÃ¢â¬â¢t be inconvenienced.) J
The signed loan docs are then shipped back to escrow. Escrow then crafts a HUD-1 statement, better known as a closing statement. This will detail where every last penny went for both the buyer and the seller. Some things like rent, interest, and HOA fees will be prorated between the buyer and seller as of the closing date.
The next day your escrow closes. The escrow sends the deed to the title company for recording at the county recorderÃ¢â¬â¢s office. You now own three well-located Boise homes. YouÃ¢â¬â¢ll receive an envelop from the escrow company by mail containing all the documents for your records. Since their estimated closing amount is usually over-stated, you may also receive a check for unused funds.
All you have to do now is find a nice family who wants to rent your new places, and help make your retirement what youÃ¢â¬â¢ve always wanted it to be.
Thanks Jeff. You make it sound seamless.
Understanding and tracking investments can be a full-time job. It’s not something that will take care of itself. That’s why we have investment advisors to help us out. Find advisors you decide are intelligent and have integrity. Never feel like you’re being asked to take an off-the-rack plan. Have your planners justify why their choices are individually suited for you.
Even when your investment is small, your advisors should believe that you are with them because they are going to make your investment grow. So it’s to their benefit to pay attention to you. If they don’t have time, do what you do on the Internet, move on to one who knows how valuable you are.
–ME “Liz” Strauss
Jeff offers a free case study in the sidebar at his own blog BawldGuy Talking. Jeff also writes as a contributor at the Bloodhound Realty blog. Jeff will be attending SOBCon 07 in Chicago on May 11-12.