MReport January 2018

TheMReport — News and strategies for the evolving mortgage marketplace.

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26 | TH E M R EP O RT FEATURE 26 | TH E M R EP O RT 05 Availability of Financing D ebt can have a negative con- notation and can intimidate potential investors. However, using debt to finance the acquisitions of residential investment properties is a great tool. Being able to leverage acquisitions dramatically increases the investor's purchasing power, and allows the investor to expand their portfolio with ease. Another great option is the ability to refi - nance. Refinancing an asset or a portfolio's debt enables the investor to realize any appreciation, and thus, use their additional proceeds to purchase more assets and expand their portfolio. Specialty lenders offer a large range of long- term and short-term loan products for residential real estate investors to refinance, acquire, fix and flip, or buy and hold. Learning From The Pros: 5 Common Pitfalls to Avoid While there are clear benefits as illustrated above, investors in the SFR market, as in any market, should take caution and build a clear offensive and defensive strategy. Make sure your inves - tor clients are aware of these five common pitfalls in owning single- family real estate and their fixes: 01 Overimproving a Rental Property I t's tempting for investors who buy their first investment property to let their inner Martha Stewart out in every aspect—new floors here, new cabinets and granite over there. However, it's important for them to be careful not to overspend when renovating their properties. Whether it's the client's first house or their hun - dredth, it's important for them to look at the market comps to see what improvements are needed, and more importantly, not needed in order to compete for tenants. Keep in mind that rental inves - tors are not looking to resell their property, and the things that buyers look for (new appliances, expensive flooring, nice fixtures) may not be the things that lure potential tenants. Investors should learn to salvage what they can while still bringing in light and using inconspicuous colors that appeal to the masses. Having said that, underimproving a property can also cause big headaches down the road. Investors should be careful not to confuse addi - tional improvements with much needed capital expenditures— items that if not repaired now could cost significantly more in the future overall. 02 Not Doing Their Insurance Homework S ure, the affordable home in Tampa, Florida, looks like an easy investment. It's got solid rent potential and a price point that seems too good to be true. But have your clients done their research on the property insur - ance that is recommended for the home? Some investors pay cash or obtain private/hard money financ- ing to acquire homes. These sce- narios often have relaxed require- ments on insurance coverage, but also come with its risks. While the temptation to "self-insure" seems like a lock to generate even more yield on investment, inves - tors should be careful in consider- ing the downsides of not having proper coverage. Flood zones exist for a reason—because their house could succumb to a flood. Hurri - canes are a real threat. The cost of proper coverage is something that needs to be factored into every purchase they make. Investors should not cut corners and ignore these important safeguards for their property. 03 Insufficient Title Searches M ost investors know and work with title companies that help them diagnose a prop- erty's legal health. While most title companies do basic searches, not all of them go above and beyond to find all the issues that could arise within the ownership of the home. Investors should ask the title company to run city and municipal lien searches in addition to their normal searches. There can often be unrecorded items outstanding that don't show up on your initial owner's policy. Typical title policies often exclude these from their coverage, leaving the potential damages on the shoulder of investors. Remind them to look for a national title company and an experienced SFR rental title insurer to provide them with deeper and more com - prehensive searches. 04 Apprehension to Invest in New Markets I t's understandable that as real estate investors, your clients may look for opportunities only in their hometown. It makes sense, right? They know the neighborhoods, they can do their own repairs, they can meet with and filter all their tenants. While these are all positive things, they shouldn't get trapped into think - ing their local market is the only place where good investments exist. In fact, they may find out that the city just down the road generates even higher yields than their hometown. With technol - ogy and the internet, the inven- tory of potential investments is at their fingertips 24/7. Property management companies have also become experts at manag - ing disparate assets spread across different neighborhoods. Remind your clients of the options. Don't let them leave the blinders on; help them expand their target markets and see how owning homes in different locations than they are used to can prove to be excellent investments as well. 05 Not Understanding Financing Options R eal estate investing is a game of scale. The more proper- ties investors own, the more they mitigate potential challenges such as vacancy and bad tenants. But in order to scale properly, it's important for them to consider using leverage. With the right lender and terms, financing can boost their returns and elevate their businesses to the next level. However, they shouldn't trust just any bank or hard-money lender. Remind them to do their home - work and find a private lender that excels and specializes in SFR rentals. Banks can be difficult (or impossible at times) to work with, and hard-money lenders can be very expensive. By knowing and understanding both the benefits and challenges to investing in real estate before diving in, your clients will save time, money, and headaches down the road. As Zillow recently reported, the number of single-family homes that are rented grew by 5 million between 2006 and early 2017, so expect more clients to get into this in - vestment space. DENNIS SPIVEY is VP at CoreVest, the leading lender to residential real estate investors nationwide. He has more than 13 years' experience in loan origination and finance, both in the retail and wholesale mortgage channels. Spivey began his career at Countrywide where he rose to become a Top 5 Account Executive. Later at Prospect Mortgage, he earned President's Club status within a year. His collective experience has helped him gain extensive knowledge in appraisals, valuation, underwriting, capital markets, and mortgage origination management. Spivey graduated cum laude from Pepperdine University in 2003 with a degree in business administration. To reach Spivey, visit

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