- Have a goal and a plan. This can be as simple as “buy one house a year”.
- Buy houses for appreciation. Buy Multi-units for cash flow.
- Buy Real Estate and wait – as opposed to “I could have bought that for…”
- Never Sell – as opposed to “I shouldn’t have sold that for only…” Do 1031 Exchanges instead.
- Have a team assembled: 1-4 unit lender , 5+ unit lender, CPA, Attorney, Insurance agent, Exchange Company, Title Company, Property Manager, Service contacts for fix up
- Don’t pay off loans early
- Hire a property manager
- Educate yourself. Be able to evaluate opportunities quickly. Think outside of Boulder or your local community. Stick to what you know
- Leverage your investment.
- DO IT!!!!!!!!
Being from a college town, I have many clients coming to me who are considering purchasing a home for their college age child to live in while attending school. By purchasing housing for your college age child you can make a worthwhile investment financially, as well as create an excellent learning experience for the student.
In Boulder, Colorado, if a parent bought a condo in the 1980s and held on to it for 4 years, they most likely would have sold it for about what they paid for it. If a parent bought a condo in the 1990s and sold it in 4 years they most likely would have made enough profit to pay for their child’s education at the University of Colorado.
Owning the property the student lives in while they attend college can be beneficial in several ways.
- The student will have a greater sense of stability in that they won’t need to look for a different apartment to live in each year. In addition, you can pick the lifestyle that will help your student succeed in school by choosing the location and the quality of housing that best fits their needs.
- In the past, apartment rents in college towns typically increase on an annual basis. By purchasing a property with a fixed rate mortgage the student’s housing expense will be fixed. In addition, you won’t have to deal with paying security deposits or going through the hassle of getting the deposit back.
- Having a single place to live in that you own means your student will not have to worry about storing furniture over the summer break.
- By purchasing a home for the student, you will be providing him/her with an excellent learning experience. The student will learn not only about the process of investing in real estate, but will also learn ab out the responsibilities that go along with property ownership.
In my own personal situation, I have two sons who attended the University of Colorado. I bought them each a condo using owner occupied FHA financing. Each lived in the unit and had a roommate paying rent to help pay the monthly mortgage. At the end of their college careers, they had built up some significant real estate equity to utilize in the next phase of their lives.
I have had some clients buy a piece of real estate in which they have had two, three or more of their children live in while attending college. In some cases this spanned a 10 year time frame. Rather than throwing money down the “rent drain” they built equity in a real estate investment over this period of time.
Helping the student establish Credit
If you decide to have your child on the mortgage and deed, you can help the student establish credit prior to making a mortgage loan application by obtaining a credit card in the student’s name, preferably a year prior to your purchase. In addition, if the student has a car it is a good idea to have a small loan on the car in the student’s name which can also help their credit rating.
Method of Ownership for the “Student Property”
It is necessary to have your clients talk to your accountant and attorney to determine the ownership method that works best for them. Some parents will buy as a second home, or as an owner occupied property with the student on the deed and loan. Others will treat it 100% as a rental property, for additional tax benefits. There are many ways of holding title, including creating a Family Limited Liability Company (LLC)
Roommate Rental Income
One option is to buy a 1 bedroom condo for the student to live in by themselves. However, a 2 bedroom unit will allow for a roommate and the rent from the roommate can supplement the mortgage payment. If a 3 bedroom unit or home can be found, the rental income from 2 roommates can help the monthly cash flow even more.
Be aware that there are occupancy limits imposed in some communities. In other words, check the local ordinances before deciding if it is okay to have 5 students living in one property. In Boulder, zoning rules allow only 3 unrelated people in a low density residential zone and 4 unrelated people in a medium density residential zone.
Roommate Lease or Rental Agreement
Even though the potential roommates are typically close friends, it is a good idea to have a written rental agreement with roommates. The roommate rental agreement should cover all the items typically found in a residential lease such as:
- Utility payment agreement
- Rental rate and due date
- Maximum occupancy
- Security Deposit
- Notice to Vacate
Financing for the “Student Property”
If you are purchasing a condo, the type of financing and down payment options available can be determined by the owner occupancy ratio of the condo complex, and what particular approvals (FHA, Fannie Mae, etc) the complex has. It is good to have your lender check to see if the complex has the approvals for the type of financing you are considering.
Is it Better to Purchase a Single Family House or a Condo/Townhome?
This decision depends on whether or not the student will be up for doing homeownership items such as exterior maintenance, snow removal, lawn care, etc. Often a condo or townhme suits the student life the best since most college students won’t be interested in mowing the lawn in their free time. You will be paying a Homeowner’s Association fee at a condo or townhome in order to cover these maintenance items. This will increase the monthly cost but will insure that these maintenance items are done.
Advantages of a condo/townhome for a student
No lawn care, snow shoveling, or exterior maintenance. Easier to “just leave” for the summer
Disadvantages of a condo/townhome for a student
Owner occupancy ratio of the complex could affect the ability to purchase, sell, or refinance. Homeowner’s Association fee may be high and out of your control. Higher density living can create “noise” issues
Advantages of the single family home
No concern over occupancy ratios for financing options. A single family home might be easier to resell than a condo/townhome since you tend to have more competing properties when selling a condo or townhome. Typically there is no Homeowner Association fee.
Disadvantages of the single family home
The student needs to mow & water the lawn & shovel snow. Neighborhood may be less friendly to a group of students living there, depending on their lifestyle.
Disposing of your Rental Property When the Student is Ready to Move On
When the student is ready to move on, and has hopefully graduated, you can keep the property as an investment rental, the former student may keep it as their first home, or you can exchange it for a piece of investment real estate somewhere else.
As an example, I have one family I worked with who purchased a property for their first child who attended and graduated from CU. They then sold the property in Boulder and did an Exchange into a new property in a different college town where their next child was going to attend school.
Potential financial benefits include:
- Possible appreciation in value
- Possible tax benefits
- Debt reduction on an amortized loan which increases equity build up
(to help you determine the monthly cash flow)
|Monthly Principal and Interest Payment||___________|
|Mortgage Insurance (if any)||___________|
|Homeowner’s fee (if any)||___________|
|Total Monthly Payment||___________|
|Roommate rental income (+)||___________|
|Net Monthly expense before utilities||___________|
|Tax benefit (if any)||___________|
When a homeowner gets behind in their payments, they usually don’t know what to do, so they do nothing. In fact, over 70% of homeowners do just that, absolutely nothing, and walk away from their homes. In reality, there are several options, with foreclosure being the last one. A quick summary of all the different options follow:
- Repayment plan (also known as Forbearance)
- Sell the Property
- Rent the Property
- Modification of the Mortgage
- Short Refinance
- Deed in Lieu of Foreclosure
- FHA and VA options
- Service members Civil Relief Act (SCRA)
- Short Sale
Often, the reason the homeowner got behind on payments was only temporary. The homeowner has to pay all the missed payments, any late fees and attorney fees in a lump sum payment. After the homeowner is caught up the loan continues as it was.
Sometimes the lender will take the missed payments, any late fees and attorney fees and divide them up over a payment plan or add the payments on to the end of the loan. The homeowner will usually need to show the lender why they would now be able to handle the repayment plan suggested by the lender.
The more equity a buyer has in their home, the more likely they will be able to sell the property and payoff the mortgage, and maybe even have something left over.
Some lenders may postpone foreclosure if they know the property is on the market or a contract is pending.
The homeowner has to live somewhere. However, if the homeowner can rent a different place for less, then rent the old home, close to the total mortgage Principal, interest, taxes and insurance payment, this could be a viable alternative.
Usually when a homeowner is behind on the payments and don’t have a job, it is tough to get a new loan. However, if there is enough equity, the credit has not been damaged too badly, and the problem that caused the late payments has gone away, then there is a chance a new lender will make a loan.
A lender may agree to a variety of modifications. Those modifications might include lowering the interest rate, extending the term of the loan, or adding the missed payments to the end of the loan.
A short refinance can involve a reduction of the principal amount and possibly even a lower interest rate. Usually the borrower still needs to show a hardship, but also the ability to pay the mortgage at the new payment structure.
This usually works best when the value is about the same as the mortgage amount. It is often called the “friendly foreclosure” since the borrower simply deeds the property back to the lender. Generally, this only works if there is just one mortgage and no other liens. In the settlement, sometimes the lender will forego any rights to a deficiency judgment.
Sometimes a bankruptcy will stop a foreclosure and allow the borrower to reorganize their debt and keep their property. By entering bankruptcy, it can make the property more difficult to sale or to negotiate a short sale. Personal bankruptcy is generally considered a last resort.
When a home owner is called to military service, and can show that call to duty has an affect on their ability to pay, and the mortgage was placed before the active service, there can be relief.
A short sale occurs when the loan on the property is greater than the value of the property. When an offer comes in on the property, the lender must approve the amount of the short fall. Often times there are so many investors involved in making the decision on the short fall, it can take an extraordinary amount of time to get the final approval.
Foreclosure finally comes about when the lender has filed the necessary paperwork and has served the Notice of Election and Demand. A sale date is then set 110 to 125 days from the NED recording date. After the sale date, there is no redemption period, and the homeowner no longer has any rights to the property.
What’s an REO?
“REO” is Real Estate Owned. These are houses which have been through foreclosure that the bank or mortgage company presently holds. This is unlike real estate up for foreclosure auction.
If you buy a property during a foreclosure sale, you must pay at least the loan balance plus any interest and other fees accrued during the foreclosure process. You must also be prepared to pay with cash in hand. And on top of all that, you’ll accept the property 100% as is. That might include existing liens and even current residents that may require removal.
A bank-owned property, on the contrary, is a much cleaner and attractive deal. The REO property did not find a buyer during foreclosure auction. The lender now owns it. The lender will take care of the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing.
Take notice that REOs may be exempt from typical disclosure requirements. For example, in California, banks are not required to give a Transfer Disclosure Statement, a document that typically requires sellers to disclose any defects of which they are informed. By hiring Duane Duggan, Re/Max of Boulder, Inc., you can rest assured knowing all parties are fulfilling Colorado state disclosure requirements.
Am I guaranteed a bargain when buying an REO property in Boulder?
It’s sometimes believed that any REO must be a good buy and an opportunity for easy money. This isn’t necessarily true. You have to be prudent about buying a REO if your intent is profit from the sale. Even though the bank is often eager to sell it soon, they are also motivated to get as much as they can for it.
Look carefully at the listing and sales prices of similar homes in the neighborhood when considering the purchase of an REO. And factor in any repairs or remodeling necessary to prepare the house for resale or moving in. It is possible to find REOs with money-making potential, and many people do very well buying foreclosures. However there are also many REOs that are not good buys and may lose money.
Prepared to make an offer?
Most lenders have staff dedicated to REO that you’ll work with while buying REO property from them. To get their properties advertised on the local MLS, the lender will usually use a listing agent.
Before making your offer, you’ll want to contact either the listing agent or REO department at the bank and learn as much as you can about their knowledge regarding the condition of the property and what their process is for accepting offers. Since banks almost always sell REO properties “as is”, it may be in your best interest to include an inspection contingency in your offer that gives you time to check for unknown damage and retract the offer if you find it. If, as a buyer, you can provide documentation showing your ability to pay, such as a pre-approval letter from a lender, your offer will be more attractive and likely be accepted. (This is generally true for any type of real estate offer.)
After you’ve presented your offer, you can expect the bank to make a counter offer. Then it will be up to you to decide whether to accept their counter, or submit another counter offer. Be aware, you’ll be working with a process that probably involves several people at the bank, and they don’t work evenings or weekends. It’s not uncommon for there to be days or even weeks of going back and forth. Duane Duggan, Tammy Milano and Timmy Duggan with the Boulder Property Network at Re/Max of Boulder, Inc. are accustomed to these situations and will work to ensure there are no undue delays.
The latest hot button topic in the national media headlines is the “Sub-Prime Lending Market Meltdown”. The media loves doom and gloom and this is yet another opportunity for them to predict financial ruin for our housing market and national economy. While this is overblown there are ramifications for which you should prepare yourself. A “Sub-prime” home loan is available to those with little down payment or significant credit issues; borrowers who usually cannot qualify for standard “conventional” financing. While this represents a very small portion of home loans overall, they are experiencing heavy rates of default and foreclosure thus causing significant losses in the sub-prime lending market.
Sub-prime mortgages have been available for years in one form or another. Recently, however, lenders generously relaxed underwriting standards to a point which almost anyone could obtain a loan, regardless of their credit history or ability to pay. Because of the adjustable rate feature in most sub-prime lo ans, borrowers’ payments may grow to a point where they cannot afford to pay them. As lenders continue to tighten their approval and credit requirements, it becomes even m ore difficult for those on the credit fringe to refinance existing mortgages and get out of trouble.
What does it mean to you? In the short term probably nothing. However, you can expect lending requirements to tighten meaning your credit score and ability to pay will have a more significant impact on your ability to borrow money. While most lenders believe long term interest rates won’t be affected by the sub-prime market problems they do believe sub-prime borrowers are in for a shock.
A Word of Advice About the Foreclosure Process!
You buy a property, take out a mortgage, and promise to pay it back on a schedule of payments. When you don’t pay as agreed, you are considered “delinquent” and “in default” on the mortgage. The mortgage lender star ts a process called “foreclosure” to force you – the borrower – to either catch up with all money owed OR force the sale of the property (which is the collateral for the mortgage).
If you – or someone you know – find yourself in this place DO NOT STICK YOUR HEAD IN THE SAND AND DO NOTHING!! Many mortgage holders are willing to work with the borrower and will negotiate a “Forebearance” or “Short Pay” agreement. This postpones the foreclosure process and allows the struggling homeowner some breathing room. This is a great time to call me – your trusted real estate advisor! I can help you explore your options.
There are FREE local foreclosure hotlines which give valuable guidance and assistance. Note: Over 50% of homeowners who call a hotline ar e able to avoid foreclosure!
877.601.HOPE Colorado Foreclosure Prevention Hotline
888.995.HOPE Homeownership Preservation Foundation Hotline