Category: Real Estate (Page 1 of 4)

How to Get a VA Loan

What Exactly is the VA Loan?

The VA Loan is a mortgage that helps veterans finance the purchase of homes with good loan terms and interest rates that are typically better than what you would see on other types of mortgages.

VA home loans aren’t made by the VA itself, but by private lenders such as banks, savings and loans associations, and mortgage companies.  VA guarantees the loan if and when the applicant is approved. 

People often say the VA guarantees loans, but that’s not accurate.   Actually, the VA guarantees a portion of the loan.  This still gives lenders a lot more comfort in lending, because if you stop paying, there is a higher chance they won’t lose any money on the deal.

For loans over $144,000, the maximum guarantee amount is 25% of the 2019 VA county loan limit.  For most counties in the U.S., this amount is $484,350.  For high cost of living areas such as Honolulu or even certain parts of Denver, the amount is $726,525.

What’s the Most I Can Borrow?

There actually is no limit.  The issue is, are you trying to avoid a down payment?

In most cases, if you don’t exceed the county loan limit, then you can get that loan with no money down (Yay!).

Once you surpass the county loan limit, the lender will want a down payment from you because the VA will not provide a guarantee for that portion of the money.

Click here for a PDF linking to all the 2019 county loan limits

I want to be clear about this, because it’s confusing.

If you wanted to borrow $800,000 for a house in Honolulu, you might be required to put up a down payment on a VA loan, but it won’t be as big as you think. 

You wouldn’t be responsible for the down payment on the entire amount, just for a down payment on the amount exceeding the county loan limit.

$800,000         want to borrow

$726,525         county loan limit

$73,475           amount exceeded county loan limit

The lender may ask you to make a 20% down payment on $73,475, which works out to be about to be $14,695.

That’s way cheaper than paying 20% on $800,000 which is $160,000.  Ouch!

So buying a really expensive house (even a 4-plex) in Honolulu or a similar HCOL area with a VA loan may not be possible with no money down, but you might be able to do it with a small down payment. 

You CAN, but that doesn’t necessarily mean you SHOULD.  There are many factors to consider.  Often, expensive rental properties in HCOL areas do not make great rentals, and I recommend against them for military members.

Read my article Real Estate Mistakes Military Members Should Avoid

So bottom line, there is no VA limit to how much you can borrow.

You have to put a down payment on the amount over the county loan limit you want to borrow.

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What My Grandmother Taught Me About Real Estate

I have a deep love for real estate that I can’t fully put into words.

I’ve done several podcasts and interviews and been asked on many occasions why I got into real estate.

It took me a while to figure out the real answer.

It’s a deep respect for what real estate meant in my Grandmother’s life.

She’s the first househacker I ever met, although when I heard about her real estate story as a child, I didn’t know that was called househacking.

I just knew it was smart.

As you’ll see, however, her story is so much more than just househacking.

My Grandma grew up poor.  Really poor.

She was raised in Los Angeles in a neighborhood known as Watts.

In case you haven’t heard of Watts, it has a reputation for being a low-income, high crime area.

It’s well-known for gang problems and the Watts riots of 1965.  Since the 50’s, it’s been a rough neighborhood.  It’s still rough today, although improving.

My grandma eventually moved to Glendale, California and married when she was very young.

She had three children with my blood grandfather and adopted a child as well.  I’ve never met my Grandfather.  Apparently, he wasn’t much of a family man.  He wasn’t cut out for family life, and left when my mother was about 8.

So my Grandma was left to raise four children on her own without any help from the father.

Grandma was frugal.  She had to be.

She worked at an insurance company in L.A. making about $500 a month.  She owned a house that was worth $36,000 and eventually paid it off. (Smart move Grandma!)

Her car was paid off as well.

She ran into a dilemma at work where they wanted to move the insurance offices from Glendale to Costa Mesa, a more expensive area near the beach.  (This is all in the vicinity of L.A.)

She got some great advice from her mother-in-law, ironically enough, that she should buy a four-plex close to the new office, live in it, and rent out the other three units.

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military millionaire

Seven Steps to Being a Military Millionaire (Video)

It is possible to retire a military millionaire?

It is.

I did it before retirement.

No rich parents, no help, wife didn’t work.

Can the average military member go from being in debt to military millionaire?

We all see websites and books from people who were deep in debt and somehow quickly made millions.

Maybe we should read their books or infomercials and try their methods…

A lot of that stuff is shady.

These gurus get rich off people looking for shortcuts.  Most that try the guru route fail miserably.

It often involves going into lots of debt or paying a lot upfront for a product or a course.

military millionaire

It also requires no common sense

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Secrets to Finding a Mentor in Real Estate Investing (Video)

Finding a mentor to further your real estate investing goals is an important step.

This advice is written in most books and blogs on the subject.

There isn’t, however, usually a very good explanation of how one should go about finding a mentor.

This would probably explain why most people screw this step up so badly.

I’ll tell you what I’ve seen since having my blog.

WHAT NOT TO DO

I’m not even a very popular blogger or real estate investor (yet), but I’ve received hundreds of unsolicited emails that roughly read the same:

Hey, I love your blog. I loved your podcast, it really spoke to me. You might be surprised to hear this, but I’ve been thinking about investing in Alabama! Isn’t that where your houses are? What are the chances?

Will you be my mentor? Can I use your management company? Who’s your realtor? Thank you so much for your time.

Freeloader Bob

No, that’s not his actual name.

I will tell you that the success rate so far of this approach, and this may surprise you, is 0%.

What a greedy bastard! He doesn’t give back at all!

To be fair, a couple of my blog posts, including my Complete Guide to Real Estate Investing, talk about how important it is to find a mentor to guide you on your journey.

Also, on my blog, I tell the story of how I found my mentor and I just kind of casually asked him if he would show me how to do what he’s doing. I probably made it look pretty easy.

That is what I will illustrate in today’s post. The proper way to go about getting a mentor. I’ll also talk about the wrong way. The email above is a good example of that.

DON’T USE THE “M” WORD

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turnkey property

Should I Buy a Turnkey Property? (Video)

There are lots of turnkey property companies out there, and some are more reputable than others.  This question deserves a fair shake.  I’ll try to give it one, but I have some strong opinions about this.

WHAT IS A TURNKEY PROPERTY – DEFINITION

A turnkey property is a fully renovated home that is purchased by an investor.  It can either be rented out immediately by the investor, or more commonly, comes already rented out with a property management company in place.

In essence, it’s answering one of the most common real estate needs out there:

I live in an expensive area, and I can’t invest here, but I want to invest somewhere, what should I do?

Use a turnkey property company!!!

turnkey property

Actual Turnkey Property Salesman

It’s a potential solution to long distance investing.  Turnkey property providers usually buy distressed properties in good rental markets (not high cost of living areas).  They buy at a discounted price, and then rehab the property so it’s move-in ready.

At this point, they can either sell it to an investor, or go a step further.  They’ll find a local management company, get a tenant placed, and sell the property to investors with tenants and property management in place.

It’s supposed to be a win-win.  The turnkey property company flips the property to the investor for a mark-up, but there is still supposed to be enough “meat on the bone” for a decent return on investment (ROI) for the investor as well.

Typically, these companies will estimate an ROI of 7-12%, although that’s if nothing ever goes wrong (stuff always goes wrong).

Let’s show the numbers on what a turnkey property might do:

TURNKEY PROPERTY NUMBERS

They buy a house for $35,000 that needs lots of work.

They fix it up for $15,000

They sell it to you for $100,000

It rents out for $1000 a month.

As you can see, they profited $50,000 on the flip to you, but you still got a house that rents for $1000 a month.  Doing some very simple math, you could estimate this ROI to be about 6%.

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5 Best Places to Save Your Down Payment (Video)

Where should you save your down payment for a house?

There are tons of articles and blogs trying to answer this question.  I’m not happy with any of them.

I’ll try to answer this my way.

The Rich on Money way.

There are two main factors that will influence where you should invest your downpayment for a house.

The first is how certain you are in what timeframe you will need that money.  Are you for sure using it within the next year?  Not much of a reason to put it at risk.

Are you unsure if you will purchase something in the next several years, but want the option?

Maybe you should consider putting some of that money at risk instead of just letting it sit there not working for you.

The next factor is your risk tolerance.

Some people understand that by putting their down payment in the stock market or a mutual fund, they run the risk of either having it grow quickly, or the opposite, losing half or more of its value quickly.

Could you live with that tradeoff?

If not, go with the less risky options, even if you are not sure when you will purchase a house.

Also, there’s what I ended up doing in my life.

I’ll explain which one of these methods I ended up using for my money.

It’s one that could have backfired on me big-time, but luckily didn’t.

Let’s look at the least risky options first.

TREASURY BILLS

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appreciation rel estate

What is a Cap Rate and How to Calculate It

The terms return on investment and capitalization rate get thrown around a lot in fancy-shmancy real estate circles.  We’re going to demystify them.

Return on Investment (ROI) is a performance measure used to measure the efficiency of an investment.  In other words;

How much money is this house making me?

It is used in many forms of business, but we will focus on how it applies to real estate.

ROI measures the return on an investment compared to the investment’s cost.  To calculate this, the return on an investment is divided by its cost.  The result is expressed as a percentage.

For real estate, it’s the income from a property minus costs.

There are many things to keep in mind when you see an ROI from a property, such as whether you are paying cash or financing, will you include closing costs, interest, and loan paydown.  The ROI can look higher than it is when certain costs are being ignored.

When you see someone bragging about their ROI, take it with a grain of salt.  They may not be accounting for all their costs.

Today, we are going to focus on a specific type or measure of ROI called a capitalization rate.

Capitalization Rate (Cap Rate)

If you are calculating the ROI on a real estate deal as if it was being done in cash, you are calculating the capitalization rate, often abbreviated as cap rate.

The reason cap rate is one of the most popular measures used in real estate is it allows you to compare investment opportunities to each other.

Sometimes ROI’s are calculated by using the down payment as part of the formula.  This means the ROI can change based on the size of the down payment.  This isn’t the case with cap rates.  The formula for a cap rate has nothing to do with down payments or mortgages.

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va loan investing no money down

The Complete Guide to Investing with VA Loans

Welcome to the Rich on Money Complete Guide to VA Loan Investing!

There are many things you can do with the VA loan benefit.

But can you invest with it?

Kind of, sort of.

The VA doesn’t say you can, but if you understand the rules, and buy properties as you move from assignment to assignment in the military, it is possible.

You can’t just buy a home and make it a rental property without living in it first.  There is an occupancy rule I’ll be discussing.

You can, however, buy a house at your current assignment using your VA benefit, live in it for a short period of time, turn it into a rental property when you leave, and buy a house at your next assignment with a VA loan repeating the entire process.

Another possibility for investing is buying a 2, 3, or 4-plex using your VA benefit and living in one of the units  for a short period of time.  When you move on to your next assignment, you’ll be able to turn the entire property into an investment legally.

Let’s start digging into the details!

The first thing we need to understand is the occupancy rule.

Occupancy Rule

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Real Estate Mistakes Military Members Should Avoid

real estate military members mistakes

Being in the military presents unique challenges.  We are burdened with moving every one to three years throughout our careers.  While moving that often can be exciting, it can wreak havoc on our finances.

While I think most people make mistakes with real estate, those mistakes are magnified in the military because of frequent moves, especially when sent overseas.

Today I address the two biggest mistakes I see military members make with real estate.  First, buying in high cost of living areas.  Next, buying a home at each duty station.  Both bad ideas.

Let’s take them one at a time.

Buying in a High Cost of Living Area

I just ran into this issue a few days ago.  Somebody told me they were moving to Hawaii and everybody told them they have to buy because the prices of houses just keep going up!   They usually say things like, “you can’t lose!”

I told them, don’t buy!  Whatever you do, don’t buy in Hawaii!!

Why would I say that?  Don’t I want everyone to be Rich on Money?

They sighed and remarked that I was the first person to tell them they shouldn’t buy in Hawaii.

Clearly, I don’t know what I’m talking about.

There are two problems with buying in high cost of living (HCOL) areas.  One is the appreciation myth, and the next is cash flow.

The Appreciation Myth

There is a wide-spread belief if you buy in a HCOL area, you can’t lose because you’ll get massive appreciation, and even if your rent doesn’t cover the mortgage, (which is likely) you’ll still come out ahead.

Here’s the problem with that thinking.  Appreciation is a fickle thing.  In HCOL areas, it sometimes comes in spectacular fashion for a few years, and then disappears for several years.  Those spectacular years are what get people’s attention, but you never know what years that will happen, where it will happen, and how long it will last.

In the end, appreciation in HCOL cities usually ends up being only slightly better the appreciation in any other city in the U.S.  For instance, Honolulu may see a 4% appreciation per year on average over the long term compared to 3% for most cities.

I’ll give an example of the appreciation myth from my life.  I bought a townhouse in Washington D.C. for $280,000 in 2003.  Two years later it was worth $400,000.  I was ecstatic!  I could only imagine what it would be worth in ten more years!

I sold that house in 2016.  How much did I get for it?

$400,000.  All my growth (appreciation) happened the first two years, and then a net of no growth over the next eleven years.  This works out to less than 3% appreciation per year.

Not impressive.

You can’t count on appreciation when you buy in a HCOL area, especially in the military.  During the one to three years you are there, it could easily stay flat or even go down in value.  That would not be a good thing on a million dollar home!

Read my full article on The Appreciation Myth

Cash Flow

If you buy a property at an assignment and realize it didn’t appreciate much, you made need to rent it out instead of selling it.  Maybe your plan was keeping it as a rental anyway.

Rental properties in HCOL areas almost never work out!

Why?

Well, we know the first reason is because of the appreciation myth.  It’s also because the numbers don’t work!

Let’s talk about the 1% rule.  It’s the most basic and important rule in real estate investing.

The 1% Rule – A house should be able to rent for at least 1% of the acquisition price.  This is purchase price plus fixing it up.

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appreciation pink house real estate

What You Didn’t Know About Appreciation in Real Estate

There are four ways to make money in real estate.  Cash flow, taxes, mortgage principle paydown, and appreciation.

Three of these four are often misunderstood in how effective they are.  Appreciation is one of those, and I’m focusing on that today.

Before I bash appreciation too much, here’s what the leverage lovers want me to explain first.

If you buy a house for $100,000 cash, and that house goes up by 4% in a year, the house is now worth $104,000 and you’ve made 4% on your money.  Not amazing.

However, if you buy a house with $20,000 down on a $100,000 house and it goes up 4% in a year, it is now worth $104,000.  You’ve made $4,000 on a $20,000 investment.  You’ve made 20% on your $20,000 investment. The mortgage magnifies the benefits of the appreciation.

That’s a benefit of appreciation with a mortgage.

Of course, if you mortgage a property and it goes down in value, remember, you still owe that monthly amount to the bank no matter how low the price of the house goes.  If the market crashes, you still got to pay that mortgage back at whatever price you originally borrowed for.

This was the big problem with the last real estate crash.  It’s called being upside down on a mortgage.

Borrower beware!

Here is something I hear people say a lot about appreciation that makes me cringe.

It goes something like this:

“Well, I know I’m not making any cash flow on this house, maybe even losing some money, but that’s ok, because I’m in this for the appreciation.”

WHOA!!!!

This attitude is especially common in high cost of living (HCOL) cities.  Why?

It’s really hard to get good cash flow in a HCOL city.  The price to rent ratios are way off.  There is also this belief that these cities are great for appreciation, and you can’t go wrong buying because they will go up enough in value to make it worth it, even without the cash flow.

I’m here to tell you, this is not always the case.

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