Real Estate: Part A – Before You Start Investing

The Many Ways to Earn Money
AKA “Multiple Streams of Income”
The Mini-Series

Real Estate – A: Before You Start Investing

Real Estate:Wikipedia defines Real estate as a legal term (in some jurisdictions, such as the USA, United Kingdom, Canada, Australia and The Bahamas) that encompasses land along with improvements to the land, such as buildings, fences, wells and other site improvements that are fixed in location – immovable.  A more common term to be used in this discussion is Real property. This refers to land and the improvements made by human efforts—buildings, machinery, the acquisition of various property rights, and the like.

Real property is also termed realty, real estate, and immovable property.

Before you start investing and using your nest egg to create a Stream of Income by using the opportunities presented by the Real Estate Market, you will need to embed these basics into your conscious and your sub-conscious.

Down Payment or Equity Payment:

If you do not have the entire amount of the price of the real estate, you will need the help of a lender.  The lender will require a financial commitment from you – this is termed a “down payment” and can vary greatly, from 0% to 35%, normally in the 5% to 10% range.  This means that, for a house priced at $300,000, you will need to come up with a down payment or approximately $30,000 (10%) before the lender will determine if you “qualify” to receive a loan (mortgage) from them.  The other lender criterion is if you earn a monthly income large enough to pay your expenses along with the monthly PITI they will be charging you.  This is called adequate Cash Flow.

Cash Flow: In simple terms, Cash Flow is a term used to determine how much of your monthly income can be used to pay your monthly mortgage payment.  Lenders use percentages of your gross income to determine your buying power.  If your income is high and your expenses are low, then your cash flow would allow you to afford a higher monthly mortgage – a more expensive house.  If your income is low and your expenses are high – well, you get the picture!

Mortgage: Mortgage is a commonly used term.  It means “secured loan on real property”.  What is secured?  The real property you are purchasing.  The lender holds possession of the property’s title (a legal document defining property ownership) until the mortgage is fully paid off (this can be any number of years, but it is normally either a 15 or 30 year loan).  Once the mortgage is fully paid, the title is released by the lender and the property ownership transfers to you free and clear.  The paid off title is then recorded with the local officials and sent to you as paid off.

Monthly Payment (PITI):

Principal (P): Principal is the amount you want to borrow from the lender.  Using the $300,000 house example, the principal would be $300,000 less the down payment equaling close to $270,000.  There will also be closing costs such as: points, prorated taxes, appraisal fees, HOA fees, etc.  The principal can vary but the more you can put down in the form of a down payment the smaller the principal will be, thus reducing that portion of your monthly mortgage payments.

Interest (I)*: This is the amount that the lender is going to charge you to lend you the amount you want to borrow from them.  The interest rate is based upon the amount of your down payment, the quality of your credit rating and the current bond rates the lender is using to back the mortgage.  This can be either simple interest or compound interest, normally compound interest.  Shop around for the lowest interest.  The lower the interest rate or APR, the lower the interest portion of your monthly mortgage payments.

APR: Wikipedia states: The terms annual percentage of rate (APR), nominal APR, and effective APR (EAR) describe the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a mortgage.   It is a finance charge expressed as an annual rate.  Click on the Wikipedia link for an in-depth description of APR.

Taxes (T): These are set by your location to pay for school districts, county and city services, etc. and are based on the assessed value of your property and the local mill levy for the property in your locale.  They are usually collected by your lender from you on a monthly basis and then the lender pays the taxing authority.  Unfortunately, these rates are set and relatively unchangeable.  For your information, the property taxes are usually lower outside the city limits.

Insurance (I): Insurance is required by your lender.  You lender collects it monthly from you and then pays the insurance carrier.  Shop around for the best deal on home owners insurance.  The premiums vary greatly even with the same policy coverages.

*There is a great site to determine current APR rates:  Google Compare Mortgages.  On this site you can see the APR rates the major lenders are charging.  You can also, input your house price, down payment and life of loan and find out what your estimated PI will be.  BE AWARE that Taxes (T) and Insurance (I) are not included on this web site, thus your monthly payment will be greater than what this web site shows you.

The Next in the Series: Real Estate – Part B: Let’s Buy Some!

Previous Articles in this Series:

Gary

About Gary

I am retired, but not tired. I still want to be valuable to others. I know that others are valuable to me. After looking back on six decades, I have asked myself this question: “What do I believe?” My mind filled up. My heart started beating faster. My spirit soared. I post blogs to share what my mind is working on, what my heart believes would help others and, what my spirit is communicating to me. What do I believe, you ask? Decisions dictate your path In love, not hate In tolerance, not prejudice In health, not sickness In wealth, not poverty In kindness, rudeness In happiness, not sadness In encouragement, not discouragement In faith, not doubt In courage, not fear I have been and will be challenged in each one of these beliefs, but the biggest belief is to stay positive and not turn negative. This belief helps me maintain all of the others.

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