ADPI_032: Key Real Estate Gouge Pt. 2

Oct 08, 2018

Episode Transcription:

Hey hey what's going on guys welcome to the activity passive income podcast. Today we're going to talk about more real estate jargon and in the last one we spoke about ten different topics. Broke them down and made them super simple to understand. Here are ten more.

Hey hey freedom fighters, welcome to the active duty passive income podcast. The only place where military members, veterans and their families learn how to build wealth through real estate investing. I'm your host Mike Foster and I'm here to show you how to stop wasting your benefits. Now get off your ass, step up to the firing line and make ready for today's lesson. Shooter stand by. 

What's going on guys, how you doing out there. Mike foster here and I am excited to you share with you a few more terms for a real estate jargon or real estate gouge. just want to clarify all the different things that you might hear out there when you're conversation with folks when you go to those real estate meatus and you know just so you can understand what's going on and everyone kind of feels included in the picture.

So in our last session we spoke about ten different topics and here are ten more. I think ten is a good bite-sized number to toss out and we'll do this a couple more times as I'll break down more things that you guys will need to understand out there and we'll get slightly more and more advanced. But here are our next 10 okay.

So I want to start out with IRRL or your interest rate reduction loan. now if you have taken your home, I'm sorry if you've purchased your home with a VA loan; then you are eligible for what is called an interest rate reduction loan or otherwise known as IRRL and you'll see a lot of info marketers that you know send you stuff in the mail and you know and you'll get this little like home symbol with IRRL under it and it's like oh what is that you know and what are these people trying to do. Essentially they're trying to solicit you to refinance your VA loan. Because that's exactly what this is essentially.

So your interest rate reduction loan is just a way for a mortgage company to give you a lower interest rate on your VA loan and through some programs you could be able to refinance your house 100% of its cash value which is great and if it's a lower interest rate, it makes sense. a lot of times it doesn't make sense because you know the interest rate may be lower, but your payment's may be higher because if your house has gone up in value and they give you that full amount for your loan, you're going to end up paying more in payments. Also right may not make sense because what if the interest rates have gone up right.

So don't just grab one of those little things in the mail and say that okay well I'm you know eligible for this refinance, I'm just going to go ahead and do it. Now make sure you calculate out the numbers and it's got all make sense okay. Now it's important to understand that with these types of refinances, you're not able to pull out any cash, equity that you have in that property. This is simply just for the bank to refinance your loan and for you to hold a longer note.

There may be some companies out there that try and do it. Typically it's not standard practice. However if you know a lender that does it, you know banks sometimes especially local banks can you know be a little flexible with their terms. I have not seen one. But you know there may exist, I don't know. 

So I guess just kind of you know get to know those lenders out there that do offer special things like that. Because you know that could be another great way to pull equity from your home and with that I'm going to talk about another term which is called a cash out refinance. 

Okay now any time that you pull cash out, understand that you are now assuming that amount in a loan of some sort okay. now if you let's say we're breaking this down you have a home that you purchased for $100,000 and you have since paid back fifty thousand dollars in equity, you could pull out maybe you know thirty thousand dollars of that equity in what's called a cash out refinance and now you have reassumed a $70,000, I'm sorry an $80,000 loan I can't math today what's wrong with me. You’ve now assumed an $80,000 loan on that home and you now have thirty thousand in your pocket to go spend and do whatever you want.

So in that cash out right again you take the cash out and equity and they usually require you to maintain some sort of principal in that property. Because banks don't want to just give you one hundred percent of a loan and give you all your cash back.  They either want to have some sort of a shared equity interest in that property, because they don't want to assume all the risk that you won't pay it back. Does that make sense? So in a cash out refinance you can pull cash out from your property and go use it.

I would recommend use it to invest in another property or you know if you want to do some kind of rehab to your property to force equity and force appreciation in your home, you can do that too. But I always recommend using that to go invest in other properties right. Into cash flowing assets that'll put money back into your pocket. Not only just to pay back the loan, but also to in add more cash flow to your financial freedom cool. 

All right let's go into the next one, which is FHA okay. FHA stands for Federal Housing Administration and if you've ever heard the term FHA loan, all right this is a special loan that was created by the national house Act of 1934 actually and what it does is they establish standards on construction and they also insure loans that are given by banks to allow first-time homebuyers or folks who are looking to you know build a home or rehab a home rather.

So the government ensures their loans to have lenders, I'm sorry have borrowers borrow money with three and a half percent down. It is a very awesome tool in your belt if you can get one of these and it's honestly not that hard to get.

I mean you know for three-and-a-half percent down as a purchase price, I'm sorry three and a half down off the purchase price you only need a credit score of five eighty right. So if you have you know not so good credit and you're looking to get started in real estate and you don't have your VA loan as an option, the FHA can be a great alternative to that. it's not as expensive as you know a standard loan where you're required to put down 10% and if you don't put down 10%, usually you'll have to pay what's called PMI or private mortgage insurance and that's essentially you going to an insurance company and them in assuring the purchase of that home through the bank.

That way if you default the insurance company will pay the bank the difference of what you owe and it's usually an extra monthly payment that you have to pay on top of your mortgage right. So with the FHA, the Federal Housing Administration they do that for you. So the government will insure your loan through the bank and they'll guarantee a certain percentage of that loan paid back to the bank, should you default or foreclose on your property okay.

So that right there is a ninja way to really build some equity and in your home too if you buy like so for instance right for FHA loans you'll usually find it when someone is trying to buy a foreclosure or someone's trying to buy a bank owned property, where there is a lot of work that needs to be done to it right and so over the course of three months, they will have contractors go in and fix the home and the bank will lend you the money not only to purchase the property, but also to fix it up.

Because the government doesn't want to have all of these dilapidated homes all around. They want to have some sort of incentive to have investors or you know first-time homebuyers fix up these homes that have fallen apart in communities and you know use them. Use the space and yeah so it's a great tool to use if you want to get started or if you are you know just looking to add another property to your portfolio at a lower barrier of entry okay. 

So with that one I want to talk about what's called BRRR. Okay you might have heard this term before if you've been listening to bigger pockets. You might have heard this term before. But BRRR right, it stands for buy, rehab, rent, refinance and repeat okay and this right here is another killer strategy for those who are looking to get started. As a matter of fact, our Eric Upchurch right he did something similar to this. Where he would buy homes with his VA loan and he would build equity in them right.

Just by fixing it up and rehabbing it. Now with this strategy you know you're doing it a little different where you're buying the property, you're you know rehabbing it up. whether it's through a contract or whether it's you know DIY, but you're forcing equity into it by building you know start updating the kitchens, maybe updating the bathrooms, throwing some energy-efficient upgrades to it changing out windows, maybe fixing the roof, you name it right. there are a bunch of different things that you can do to force appreciation and raise value in the property and especially when you buy that property with a low price point or with a little money down, you can now go and you know leave the property put a renter in the property.

So now you're starting to build some cash flow and of course your mortgage has to make sense right. The numbers have to make sense. but you're building cash flow from the property and then you take the money out of that property once you get the tenant in there, right so you refinance now that you have cash flow coming in to sustain that loan and you pull out all the money that you put into it and you go and you do it again right. That’s where the repeat comes in. so you take that money out, you go buy another house maybe with an FHA loan right with three and a half percent down.

You force appreciation with the contractor and you know build that house back up and then you put a renter in there and you do it again right.  Sorry you refinance you pull that money back out and then you do it again right. So another great way to get started guys and that is definitely a strategy that you should take a look at and this brings me to my next point, which house is hacking okay. 

My next term house hacking if you have heard this term before, you've probably been listening to us talk about it a lot. Because we are big proponents on house hacking and that is essentially using the empty space in your home to build equity in that home for you to refinance your loan, put a tenant in there right. Well essentially just like burrow right. You can put a tent in there, you refinance or you can refinance put a tenant in there however you decide to do it and then go find another house and do it again okay.

Now we teach many ways of house hacking. I can go over them a couple of them. But you know either finding another service member or a friend or whoever right to rent an empty bedroom out from you. You can do that. You can Airbnb right, vacation rentals. You can do that. You can hook your home up with solar power right and you can use solar power to sell back to your electric company and you can do that. You know I mean there are so many ways you can start a business from home. So many ways that you can house hack your home and put extra payments towards your mortgage in order to build equity and refinance your VA loan just so you can go out and use your VA loan on another house and put tenants in the old house.

So you've built equity, you have cash flow and you take that equity you go out and you do the same thing again. You know I mean there are so many ways to house hack and house hacking is another great way of getting started and building more wealth for your future ok. 

All right now I want to start talking about ways to acquire properties that are a little more creative ok and I've got two ways for that. The first one is called owner financing right. You may hear it as owner financing, you may hear it as seller financing. But essentially the house you're purchasing or the property you're purchasing is being financed by the seller, not the bank okay. I did a podcast about this earlier and it was the biggest myth in real estate investing is that you have to go to a bank to purchase a home. You do not okay.

You can negotiate with the seller directly and figure out what it is that they are looking for. What it is that they need? Whether it's a certain amount down to go you know buy another house. Maybe that's what they're looking to do or maybe it's you know you're buying it from an older person and they are looking for their retirement right. Looking out for their retirement. May be the house is the only thing that they have. But you essentially find out what the seller needs and you work out a deal between you and that person.

That way it's way more flexible. You don't necessarily need to go to a bank if you don't have perfect credit yet right. you can use a transaction like this to really you know you know jumpstart your life and have an asset that'll kind of help you boost your credit and you just by maintaining an asset and it doesn't report to your credit at all right, it doesn't. so by the time you pay this thing off, you have a home outright that you'll be able to borrow from and you'll get a little cash flow hopefully if you're just you know using it as an investment. In order to pay off debt all right again help you boost your credit.

I mean this could be a great way to jumpstart your life right or you know it could be an even better way to buy a home. You know you can be your own personal home if you really wanted to. Because of the seller finance deal everything is more fluid right.

So you're not held by the restrictions that banks will place on your type of loan. Where you can't live in an or you can't do this with it or you know whatever right and you can't transfer title back and forth to an entity or someone else right.  It’s easier for you to do that kind of stuff. So keep in mind that creative financing or sorry seller financing and owner financing are you know great ways to really get creative when it comes to acquiring different properties. 

Another one I want to talk about is what's called subject to okay. Subject to a mortgage is typically what you'll see it. But subject to is what you'll hear investors say and what they talk about is you know acquiring a property when you're assuming the loan for a particular seller. Not necessarily assuming it right and whereas the loan is now in your name right from the bank. But you are making the payments if that makes any sense. So let's just go ahead and give an example. You know you live at one to three Main Street and you want to buy one to four Main Street right. So put right next to you.

You know that the seller is having a hard time with their mortgage, you know they're your neighbor. You’ve heard them you know talk about wanting to sell their home. They can't having a hard time keeping up with the payments. Maybe they lost a job, maybe they had a huge medical expense that they had to take care of and now they're running into a tight situation. So if you know want to come in and help them out right and you say hey listen you know Joe alright whatever his name. Listen Joe I want to help you out here.

Let me help you make your mortgage payments and you know I can help you move out to something a little smaller, more affordable for you and then we can put a renter in your property and you know we can help you out that way, that's great.

You know and that's an awesome way to I don't like to help that person out with a tough situation. But it's also a way to acquire property without putting any money down. You know I mean maybe you do right. Maybe that's what you negotiate and in that situation you know it might be beneficial or might not. You know maybe the person just really motivated to sell.

Another situation that you can run into is let's say a couple that is divorcing right and they are just looking to get rid of the home. They don't really care about where it goes, what people do with it. They just want to get the expense off their bags and they want to get something out of it.

So you can negotiate a deal where it's subject to paying their mortgage payments and then you find someone who is looking to rent to own and they go in that property, they put it down payment on or whatever and they make the monthly payments until they're able to buy it from you and then you can cash out the seller and now you've made you know a quick 10, 20 or 30 grand or whatever right and you only made the mortgage payments to the property.

You didn't put anything down. all right so another great way to acquire property creatively and really this just kind of goes into you know the whole win-win scenario of real estate you know where you want to find situations that will win for both parties when you're doing a deal and those kind of deals can be the most lucrative for sure. So keep that in mind okay. Those were those two. 

Next I want to talk about wholesaling okay. This is a topic that's not often mentioned. But it is definitely done way more than I think you know and you would really think and really wholesaling is finding a deal and selling the contract to someone else and the deals that you'll find are you know really good right. we're talking you know 30 percent sometimes right under market value and you'll be able to sell that deal off to an investor or a home buyer or whoever right.

So let's say you find a three-bedroom two-bath house that's 1,800 square feet and market value for this home is maybe 75,000$, but you find it forty five thousand right or you find it for fifty thousand and you negotiate with the seller to come down to forty five thousand.

You know that is an amazing deal the wholesale of someone, you could even resell it to someone for 60 thousand and that person still gets you know fifteen thousand dollars in equity and the property when they buy and you know the difference from 45 to 65 you collect twenty, I'm sorry you collect fifteen thousand dollars yourself and all you did was just go out and find that property. You see what I mean. like there are so many properties out there that you can wholesale especially in areas where the markets hot and a lot of flippers are coming you know into the area and trying to you know flip some homes.

You can find some pretty good deals and you know give them to investors. because investors love to look for deals like that and they love to find wholesalers who are selling them good deals that they wouldn't otherwise find on Zillow on or going through the MLS right. So yeah I mean wholesaling can be a great way to build some capital. You know you won't always get home runs when it comes to wholesaling.

Sometimes you'll you know get five grand or you'll get ten grand. but you know a little bit is a whole lot better than what you had when you went into it right and really all you had to do was find the home, maybe put an earnest money deposit on it which can be a hundred bucks if you know depending on where you're at. So yeah you know I mean that's another good way to build capital in order to invest later on down the road okay. 

All right so I want to talk about REIA. But I don't want to go too much into it. Because I've already done a big podcast on it. But REIA, essentially all right REIA, Romeo echo India alpha is a real estate investing Association and a lot of times these bigger associations have meatus. They have seminars, they have all these different cool little things that bring in the community to share you know other topics about real estate investing and whatnot and these things are great.

Great places to go and just learn awesome things that you otherwise wouldn't be able to find through text books to podcasts or whatever. because you're getting actual live experience from individuals in your community who are going out there and investing in real estate okay. for instance if you are in the Hampton Roads area, one of the biggest real estate investing associations here is TRIG right or Tidewater real estate investment group, definitely check them out.

But you know they are a huge Association I mean hundreds of people that are involved in it and every I believe it's like third Tuesday of the month they come together and they have a meeting. Where you know people can come in and learn.

Sometimes they do a little round-robin off a guest speaker come in. they have a whole bunch of a whole bunch of stuff. Sometimes they have you know events at the end of the year like holiday parties and whatnot. I went to one last year that was pretty cool. But these are great places to go and network and also a great place to go and you know find deals or pitch your deals.

So if you're getting into wholesaling and you create what's called a one-sheet which I'll talk about in a minute, but you know you can go and you can take that and go find your deals okay and so you'll definitely find a lot of investors here and you can pick their brains about you know certain topics that you don't understand or you can even you know find partners that may want to go in on deals with you.

So definitely make sure you check these things out okay. But going back to a one-sheet this is probably one of the most underutilized tool in an investor's belt okay. Now a one-sheet is simply that. Its one page of a deal that you are potentially looking at. Okay now the one sheet can have you know specifics on the property itself, specifics in the area numbers right and essentially what your deal is, what you're looking for. It might also have a little bit about you. All right how you got started investing, what your experience is or maybe you and a partner right if you're just getting started. Highly recommend you work with a partner.

Just so that you have both you and your partner's credibility right. But yeah you know it's exactly it's a one page document. because I mean think about it right, if you were to bring a whole business plan which is you know like 7-12 pages of you know what you're going to do in the area or what you're going to do to a property, no one's going to have time to read that. No’s going to want to read it all right let's be honest. they would so much rather have something in a bite size you know clear-cut information tool just to kind of outline the project, what is required of them, what you're expecting and who you are right.

Because they don't want to just toss their money out to someone they don't really know and obviously the more you go to these meetings right, the more you'll get to know you know some of the same people because they attend all the time and that's good. you know to build your credibility as well to show how serious you are and investing and they will be able to you know, because they'll be able to gauge your interest, maybe they'll be a partner with you and you know you'll find something good there. But a one-sheet okay. That is definitely a tool that's underutilized and the more you practice it the more you will get good at it. So definitely do that okay awesome. 

All right cool. So that's going to do it. Thanks so much for tuning in learning more real estate jargon. We’ve got a huge list of things to put out. So don't worry about it. There’s plenty more to learn. You’ll never stop learning.  Alright thanks for tuning in. make sure you are catching up with us at ADPI,

You are looking for help and getting started. Check out our course and check out our start the SPARC program where we have a whole network developed for connecting real estate military real estate investors like to you ok. Also make sure you tune in for our house hacking book that's coming up November 2nd. We’re launching it at $0.99 and it will only be available for 48 hours all right. November 2nd, make sure you catch it early because you don't want to miss that awesome deal ok. Thanks for listening. I'm out of here. 


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