Terrance clark presents
THE POCKET GUIDE TO INVESTING
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TOP 6 MISTAKES WHEN INVESTING Investing in real estate can be complicated and confusing don’t fall into common pitfalls for investors. Here are our top 6 investing mistakes so you can avoid making them & ensure your financial security.
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Not Knowing Your Market As an investor you need to put the time and effort into knowing what is Going on. The better you know and understand your market the better your return will be.
Be Pre-Approved
Real Estate investing is a competitive space to be in, make you are prepared by speaking with a mortgage broker to understand just what you can afford.
Not Having an Agent on Your Team
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Having an investor real estate agent on your side that actually invest throughout the process allows you to have multiple eyes looking at your deal with an investor like mind.
Not knowing/understanding your numbers There are several sets of numbers you will need to concern yourself with as an investor. All of the numbers put together will tell a story of whether or not the investment is a good or bad opportunity.
Not Understanding the Contract Do not look to cut corners by grabbing some okie-doke contract off the internet. You will want to have A contract with strong language that protects your interest
Not Carefully Keeping Track Of Income & Expenses Are you keeping good track of what’s coming in vs what’s going out? You may find that you have opportunity to cut expenses and make your investment more profitable. Do not overlook future expenses!
BUYING AN INVESTMENT PROPERTY
There's a lot to know & consider when it comes to investing in real estate, but my team and I at EXP Realty are here for you every step of the way Learn how to make investing in real estate as efficient, profitable, and rewarding as possible.
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3
5
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One
Choose an agent
Decide to buy
Three
4
Four
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Six
8
Eight
Get Pre-approved
Five Find the right home
Seven Property Inspection& attorney review
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Two
2
Nine Close on Property
Determine strategy & Establish criteria
Make an offer
Contract to Closing
1 0
Ten Prepare for next investment
A live look into the system that guides our action
Philosophy & Beliefs
A Broker built on high character excellent service
INTEGRITY
CREATIVITY
DO THE RIGHT THING
IDEAS BEFORE RESULTS
WIN-WIN
COMMUNICATION
OR NO DEAL
SEEK FIRST TO UNDERSTAND
COMMITMENT
TRUST
IN ALL THINGS
STARTS WITH HONESTY
WORK WITH 
 TERRANCE CLARK As a licensed agent in the State of North Carolina, Terrance's passion is for helping families change their family tree through real estate. He has assisted buyers with making critical life decisions purchasing investment property. His "out of the box" thinking has allowed his clients to take the most difficult real estate issues and see things through a different lens. He grew up in real estate as a third-generation investor helping his family's portfolio grow to over 200 units, which allowed him to brand himself as an investor focused agent. When it comes to real estate providing great customer service is key to every aspect of the business. The Team approach allows his real estate transactions to go through smoothly and seamlessly. Terrance is a part of EXP Realty, a founder of Limitless La Vie Corp a nonprofit organization geared to serve the underserved youth. He is also a life-time "Club Kid" and alumni of the Boys and Girls Club of America. Terrance is also a former automotive sales professional & enjoys helping people get great deals on cars and investment property as well as being a father to two children Nilae & Legend.
terrance.l.clark@exprealty.com terranceclarkre.com 302.300.6899
01 STEP ONE
THE DECISION TO INVEST IN REAL ESTATE
Real estate is a phenomenal way to build wealth! Especially when you buy it for that specific purpose. Think building generational wealth is only for those who come from it? Think again! Every one has to start somewhere and you could actually get into the game very easily. Buying investment real estate is a logical decision. • Grow wealth via equity buildup, debt pay down, and value appreciation • In the US, you can take advantage of tax-deductible benefits such as property and mortgage interest write-offs • A home isn’t an “accidental” investment, when done correctly it creates leverage opportunities • n a few years, you might consider using some of your properties equity to invest in other real estate opportunities
02 STEP TWO
Help find homes that fit your criteria Market is always changing, so you need a realtor that is active/educated
Coordinate the work of other involved professionals The realtor has to put all parties together and manage the process to ensure a timely and effective closing
HIRE THE RIGHT AGENT ADVANTAGES OF A REPRESENTATION AGREEMENT o o
Sets mutual expectations in writing between you and your agent Commits your agent to getting the home you want, while you commit to working exclusively with your agent.
YOUR AGENT’S PRIMARY ROLES & OBLIGATIONS
Negotiate on your behalf The agent reviews comparable homes and is experienced in negotiating
Review paperwork & deadliness This area is where a large portion of the realtors value comes from
Educate you about the market. Market is always changing, so you need a realtor that is active/educated Analyze your wants & needs Important to give your agent your complete search criteria
Solve any problems that may arise Unforeseen problems can arise, you’re agent will assist you through it.
03 STEP THREE
SECURE FINANCING
SIX STEPS TO FINANCING A HOME 1. 2. 3. 4. 5. 6.
Choose a loan officer (or mortgagee specialist) Make a loan application and get pre-approved Determine what you want to pay & select a loan option Submit to the lender an accepted purchase offer contract Get an appraisal and title commitment Obtain funding at closing
PREQUALIFICATION VS. PREAPPROVAL o Pre-qualification is a rough estimate of how much you can borrow • o Pre-approval involves a formal application process and provides you with a formal commitment from a lender stating how much you can borrow and at what rate
CREDIT SCORE 101 Your credit score is a measure of your financial standing. How does your score stack up.
300-579 You will unlikely be able to secure a loan for an investment, lenders See your profile as high risk
580-639 You maybe able to secure a loan for an investment, however be prepared for higher interest rates and higher fees
640-699 You should be able to secure a loan for an investment, rates may not be the best, but they won’t be the worst either
700-749 You will be able qualify for a loan for an investment with favorable terms
750-850 You can expect access to the most aggressive rates on your loans, as You are seen as low-risk.
DIFFERENCES YOU CAN EXPECT WHEN FINANCING INVESTMENT PROPERTY VS. PRIMARY RESIDENCE Lenders will expect you to have a higher score Down payment requirements are often greater Lender may want to see more in reserves Loan based off of cashflow and other metrics to measure it
WHO’S TO PAY WHAT? THE STEPS & STAGES OF CLOSING ON A PROPERTY CAN BE COMPLICATED. HERE, WE BREAK DOWN THE FEES & RESPONSIBILITIES OF EACH PARTY FOR YOU, IN DETAIL Estimated closing costs courtesy of guaranteed rate. Prices subject to change. Actual costs vary per lender, loan amount, property type, and other factors. *Property transfer taxes vary per local jurisdiction or township. Please consult your real estate attorney to obtain the best possible estimate for taxes and other closing costs.
Expense
Typical Cost
Who Pays
Commission
6% of Purchase Price
Seller
Appraisal
$250 - $500
Buyer
Credit Report
$30 - $75 Per Borrower
Buyer
Inspection Fee
$350+ / Visit
Buyer
Lender-Direct Underwriting Fee
$750 - $1,000
Buyer
Processing Fee
$150
Buyer
Flood Certificate
$50 - $100
Buyer
Tax Service
$85 - $200
Buyer
Attorney Fee
$600 - $1,000+
Both
Settlement Closing
$250 - $1,000
Buyer
Title Insurance (Buyer)
$250 - $1,000
Buyer
Title Insurance (Seller
$300 - $2,000
Seller
Recording Fee
$75 - $250
Both
State Transfer Tax
$1.50 per $1,000
Seller
County/City Transfer Tax
$3.00 per $1,000
Seller
Chicago City Transfer Tax
$7.50 per $1,000
Buyer
Survey
$500 - $1000
Seller
Interest / Day
Loan Amount x Rate / 365
Buyer
Escrow Taxes & Insurance
1-5 Months (If Applicable)
Buyer
Tax Proration
105-110% of last tax bill
Seller
6 CREATIVE FINANCING OPTIONS Rent to Own
Land Contracts
Owner Held Mortgages
Subject To Deals
Hard Money Lenders
Lease Options
Private Money Lenders
STRATEGY CRITERIA
FIX & FLIP
 VS. BUY & HOLD
In order to get to where you want to go, you will need a map. Knowing the end goal will help you decide whether TWO VERY DIFFERENT STRATEGIES THAT NEED TWO route you need to take. DIFFERENT SKILL SETS.
If the goal is to make transactional income and do so quickly fix and flip maybe the right strategy. Other people who may lean to fix and flip opportunities is someone who may have a competitive advantage with their network. Whether it be their access to contractor, funding, or inventory strengths in these areas make passing up fix and flip opportunities hard. Usually due to large quick returns it can be extremely competitive. The goal is to slow grind your way to generational wealth buy and hold maybe the strategy for you. People who have money that is sitting in traditional banks and other traditional investment vehicles like 401k or IRA may find this to be a great strategy. When looking at all of the metrics some of the total returns on buy and hold properties can be astronomical!
3 WAYS TO INVEST USING A PRIMARY RESIDENCE
1 BRRR- Buy, Rehab, Resell/refinance, Repeat
2 House Hacking
3 Early phase new construction
01 BRRR
Buy, Rehab, Resell or Refinance, Repeat
The idea here is to buy a property that is move in ready, one that has great bone no major structural or foundation issues but is likely has dated aesthetic and maybe lacks some of the every day conveniences most are accustom to. Due to the houses current conditioned this house should be purchased below market value and give you the home owner the opportunity to improve the house on your own for significantly less than it would cost you to buy the same features on a live market.
Once you purchase the house it you will need to make the improvements. Many people will attempt to use resources such youtube and home improvement courses from companies like Lowe’s and Home Depot to learn to make some improvements on their own. If you feel comfortable doing so this could really save you lots of money. Once the home is improved you should have it reappraised. With the updated value, you will be in position to decide whether you would like to refinance and pull cash out or list and resell. However no matter which decision you make it would be in your best interest to REPEAT! Example: Mark buys house 110000 house for 90,000. Mark spends 15,000 in rehab. After rehab the house reappraised for 180,000 Mark decides to refinance the house at 70% of its ARV making his new balance 126,000 while pulling out roughly $36,000 for his next investment.
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HOUSE HACKING House hacking is a great real estate investment strategy when owning multi-family rental properties. House hacking is when you live in one of the multiple units of your investment property as your primary residence, and have renters from the other units pay your mortgage and expenses. Renting out a bedroom, basement, or additional portion of your home can also be considered house hacking. This is a solid strategy for investors looking to buy an owner-occupied multi-family property, such as a duplex, triplex or quadplex.
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PHASE 1 NEW CONSTRUCTION
This strategy works best when you know you’re working with a spec home builder with great reputation. Usually those builders spend significant time money and effort into research and development to make sure that building in a particular area will attract buyers. Getting in early means some of the most aggressive pricing. While the area plans develop around the subdivision the property should increase in value as well along with prices appreciating in the subdivision due to less inventory being available. One of the keys here are negotiating value add and not vanity. Prioritize size, function over aesthetic. You can get more bang for your buck doing vanity upgrades on your own.
05 Step Five
MAKE AN OFFER IT IS A WONDERFUL THING WHEN YOU FIND THAT SPECIAL PLACE & DECIDE TO MAKE AN OFFER. THE BUYING PROCESS BECOMES MORE COMPLEX AT THIS STAGE, MAKING OUR EXPERTISE & ATTENTION TO DETAIL
Our team will • Prepare a market analysis • Research city, deed, & tax records • Verify that all information is provided & accurate before writing an offer • Prepare the contract and provide applicable property disclosures, addendum's, etc. • Conduct research on the reputation of the building & the builder
You will: • Provide an updated pre-approval letter that references the subject property • Submit an initial earnest money check • Provide attorney contact information
REAL ESTATE CALCULATIONS EVERY INVESTOR SHOULD KNOW GROSS OPERATING INCOME GROSS OPERATING INCOME= (GROSS SCHEDULED RENT LOST RENTAL INCOME FROM VACANCY) + OTHER INCOME
Example: Gross Rent: $43,500 Lost Rental Income from Vacancy: 2500 Other Income:$2,000 (43,500-2500)+2000= $43,000 This figure reflects the gross operating income in addition to all other sources of income from your rental property. This can include revenue from parking spaces, public vending machines, or others
NET OPERATING INCOME NET OPERATING INCOME = GROSS OPERATING INCOME – TOTAL OPERATING EXPENSES
Example: GOI: $43,000 Total Operating Expenses: $17,000 Net Operating Income = $43,000 -17,000 = 26,000 To use the net operating income formula, you first need to figure out your gross operating income. Once you have that figure, you subtract your operating expenses- things like insurance and maintenance costs. You should note, however, that things like investment property depreciation and interest payments do not factor into operating costs.
REAL ESTATE CALCULATIONS EVERY INVESTOR SHOULD KNOW CAP RATE NET OPERATING INCOME / TOTAL PRICE OF PROPERTY
Example: NOI: $12,275 Total Price (Purchase + Rehab): $135,000 $12,275 / $135,000 = 0.091 or an 9.1 Cap Rate This calculation is most often used for valuing larger commercial buildings along with apartment complexes . It can be used for houses and small multifamily too, but operating expenses are much more variable given are you don’t know how often and how bad your unit turns will be.
DEBT SERVICE RATIO NET OPERATING INCOME / DEBT SERVICE
Example: NOI: $25,000 Annual Debt Service: $20,000 Debt Service Ratio = $25,000 / $20,000 = 1.25 This is the most important number that banks look at and is critical for getting financing. Generally, a bank will look at both the property’s debt service ratio and your “global” debt service ratio (i.e. the debt service ratio of your entire company or portfolio). Anything under 1.0 means that you will lose money
REAL ESTATE CALCULATIONS EVERY INVESTOR SHOULD KNOW RENT TO COST MONTHLY RENT / TOTAL PRICE OF PROPERTY (PURCHASE PRICE + REHAB + ACQ COSTS)
Example: Rent= 1250/month Total Price (Purchase + Rehab): $125,000 $1250/ $125,000 = 0.01 or an 1% Rent to Cost This is a great calculation for houses and sometimes small multifamily apartments. That being said, it should only be used when comparing the rental value of like properties. Do not compare the rent/cost of a property in a war zone to that in a gated community. A roof costs the same, square foot for square foot, in both areas. And vacancy and delinquency will be higher in a bad area, so rent/cost won't tell you what your actual cash flow will be. The the old 2% rule can lead investors astray, and they shouldn’t use it. But when comparing like properties in similar areas, rent/cost is a very helpful tool
GROSS YIELD ANNUAL RENT / TOTAL PRICE OF PROPERTY
Example: Annual Rent: $9,000 Total Price (Purchase + Rehab): $100,000 Gross Yield = $9,000 / $100,000 = .09 or a 9% gross yield This is basically the same calculation as to the left but instead of monthly rent you use annual. It’s used more often when valuing large portfolios, but overall, it serves the same purpose as rent/cost.
REAL ESTATE CALCULATIONS EVERY INVESTOR SHOULD KNOW CASH ON CASH CASH FLOW/ CASH IN DEAL
Example: Cash Flow( Net Operating Income- Debt Service): $6000 Cash Into Deal: 50000 $6000/ $50,000 = 0.12 or 12% Cash on Cash return This is the most important number. It tells you what kind of return you are getting on your money. This is a critical calculation not only when it comes to valuing a property, but also when it comes to evaluating what kind of debt or equity structure to use when purchasing it.
THE 2 PERCENT RULE MONTHLY RENT / TOTAL PRICE OF PROPERTY
Example: Monthly Rent: $1500 Total Price (Purchase + Rehab): $100,000 $1,500 / $100,000 = .015 or 1.5% Maybe one of the most common rules of thumb used by rental property investors is known as the 2 percent rule—or the 2 percent test. This divides the monthly rent by the purchase price. Most investors want this number to hover around one to two percent, which indicates it will provide positive cash flow.
06 Step Six
PERFORM DUE DILIGENCE
WE WILL MAKE SURE THAT ALL DUE DILIGENCE IS PERFORMED, GIVING YOU PEACE OF MIND • Property inspection — exposes any structural or hidden issues • Home Owner’s Insurance Policy — protects against loss or damage IN YOUR INSPECTION, ITS THE BIG STUFF THAT REALLY MATTERS DURING THE TRANSACTION • Warrantied Systems • Unwarranted Systems • As-Is Warranties
START
06 Step Six
PERFORM DUE DILIGENCE
TO THE RIGHT WE’VE PROVIDED A STEP-BY-STEP WALK-THROUGH OF WHAT TO EXPECT DURING THE CLOSING PROCESS. EDUCATE YOURSELF
SIGNED CONTRACT SENT, EARNEST MONEY PAID, NEGOTIATION • CONTRACT ACCEPTED, INSPECTION SCHEDULED, ATTORNEY REVIEW • CONDO DOCUMENTS IF APPLICABLE • LOAN APPLICATION COMPLETED WITH MORTGAGE BROKER
5-7 DAYS ATTORNEY REVIEW ENDS
7-10 DAYS • ADDITIONAL EARNEST MONEY DUE • APPRAISAL SCHEDULED WITH LENDER
1-2 MONTHS • MORTGAGE CONTINGENCY DATE • FINAL WALK-THROUGH
1-2 MONTHS CLOSING AND KEY EXCHANGE
FULLY SIGNED CONTRACT SENT TO ALL PARTIES
07 Step Seven
CLOSE ON THE PROPERTY (CONT.)
WHAT TO EXPECT DURING THE CLOSING PROCESS Once we have negotiated the best price possible, your agent will be in touch to move the deal forward, ensuring a smooth transition from contract to closing. Below is a summary of steps that will occur after receipt of the fully executed contract.
BUYER / BUYER’S AGENT / BUYER’S ATTORNEY / LENDER SELLER / SELLER’S ATTORNEY / MANAGEMENT COMPANY
EARNEST MONEY CHECK RECEIVED & DEPOSITED • Typically, the buyer pays an initial deposit and an amount to be negotiated completion of the attorney review period • You will receive copies of each earnest money check, when and as we receive them
HOME INSPECTION SCHEDULED •
An inspection needs to take place within 5 to 7 days of signing the contract
•
Your agent will recommend one or more inspectors, and it is your responsibility to schedule the inspection as soon as possible • Once the inspection is scheduled, you will contact your agent to confirm
•
You, your agent, and the inspector will attend
• Please allow up to 2 hours for the inspection, depending on size of home • After the inspection, you will receive a report with the inspector’s findings • Your agent and attorney will receive a copy as well
CONDO DOCUMENTATION COLLECTED & PROVIDED (AS APPLICABLE
07 Step Seven
CLOSE ON THE PROPERTY (CONT.)
It is the seller’s responsibility to provide the following documentation to the buyer within 5 business days of acceptance date : • • • • •
Condo Declaration, By-Laws Current Budget Meeting Minutes (Past 12 months) Rules & Regulations (if any outside of By-Laws) Sales Packet (if any)
ATTORNEY REVIEW • Please be sure to contact your attorney after receiving the fully signed contract from your agent • During the attorney review period, you, along with your attorney and agent, will review all relevant information, including the inspection and condo documentation if relevant, to determine what, if any, modifications to propose. • Attorney review is typically 5-7 business days from acceptance date. The attorneys can extend this date should they need more time to complete the review
ADDITIONAL EARNEST MONEY IS DUE • If you owe additional earnest money, you typically will need to pay the balance within 2 business days of the completion of attorney review • Your agent will remind you of this deadline & provide instructions on how to make the payment •
A copy of the check will be sent to you for your file
STUMPED BY REAL ESTATE INVESTING TERMS 12 DEFINITIONS YOU SHOULD KNOW NOI
Appreciation
NOI stands for “Net Operating Income” and refers to the amount of profit an investor would make on a rental property if the mortgage was paid. An easy way to understand NOI is by calculating the overall expenses/vacancies minus the amount of rent paid. On its own, NOI isn’t entirely useful since it doesn’t tell the whole financial story, but it can be good to know if you’re ever looking to sell or compare other real estate opportunities.
Appreciation is an increase in the value of a real estate property over time. The increase in value may be due to a number of reasons such as inflation, increased demand, or weakening supply.
LTV LTV stands for “Loan to Value.” LTV comes up when a lender decides to provide funding based on a percentage of a property’s actual value. This value could refer to the property’s value before or after repairs, so it’s important to know the value your funding source is referring to.
Equity Equity refers to the difference between the present market value of a property and the amount the owner owes on the property’s mortgage. The value of equity builds up gradually over time as the mortgage balance reduces and the property’s market value appreciates.
Cash Flow Cash flow refers to the amount of money that an investor can pocket at the end of each month after payment of all operating expenses, including loan payments. Cash flow can be positive or negative. If you spend less money than you earn, you will have a positive cash flow. If the cash outflows are more than the cash inflows, you will have negative cash flow.
Cash on Cash Return Cash on cash return is the ratio of annual cash flow before tax to the total cash invested, expressed as a percentage. This financial metric allows investors to assess the cash flows from their incomegenerating assets
Cap Rate Capitalization rate or cap rate is the ratio of the net operating income produced by an investment property to its capital cost or current market value. This is one of a few real estate investing terms that refers to the rate of return expected from an investment property. Beginners should make sure to study each one and understand the major differences between them.
$/SF This abbreviation refers to “Dollars per Square Foot.” By breaking down the amount of money a property costs per square footage, it can be easier to determine if it’s the right investment property for you. Figuring out the dollars per square foot can also help investors compare different properties to decide which deal is the better one.
Escrow: A financial account that is funded by a homeowner’s mortgage payments, used to pay for homeowners insurance and property taxes.
TITLE Evidence of ownership, evidence of lawful possession
Due Diligence:
Zoning
The due diligence period is a time frame allowing a buyer to fully examine a property. This is often done by hiring specific experts to inspect and perform tests. Buyers who may want to renegotiate the contract based on the results.
Legal mechanism for local governments to regulate the use of privately owned real estate to prevent conflicting land uses and promote orderly development