The five costly mistakes that a real estate investor can make is not:
Protecting the assets in his or her portfolio, researching the town or community the investor is buying in, knowing the fair market rents knowing what type of property is most profitable for the investor, and knowing the cost of rehabbing and maintaining a property
Protecting your assets is important because the real estate market is not yielding many opportunities for flips. A flip is when an investor purchases a property and rehab it and then sells it to another buyer. Sometimes this happens before the property has been owned by the investor for six months. The longevity of ownership is important because FHA requires that the owner owns the property for at least six months before he or she can sell it to a FHA buyer.
The investor, on the other hand, desires to sell a property as quickly as possible to prevent paying holding cost. Holding cost can be mortgage, maintenance, taxes, insurance, etc.
In today’s market, the investor is able to buy at a low price, but may not be able to sell for the desired profit margin that have been enjoyed by other investors in the recent past. Therefore, it is important to protect your asset because the investor will be holding the property until such time that he or she can sell it for the desire profit margin. The investor protects his or her asset with insurance. It is also recommended that you form a business entity to protect your personal assets.
The insurance needed depends on whether the property is ready for occupancy at the time of purchase or not. If the property needs rehab, you will need a builder’s risk policy. A builder’s risk policy covers the building, the items needed and purchased during rehab from theft, vandalism, or from other disaster.
If the property is habitable then you will need a landlord policy. The landlord policy covers the building and all items that you provide to the occupant. Be sure to explain to the occupant and have it as part of your lease that the occupant will need to have rental insurance policy to cover his or her personal items.
For added protection, the investor may consider additional liability coverage. The liability coverage is used in case someone injuries his or her self on your property.
The investor needs to treat his portfolio of properties as a business; therefore, it is recommended that he or she consider having the properties under a land trust and/or business entity.
Recently though, Freddie Mac announced a changed to financing and/or refinancing properties under the entity of a limited liability corporation (LLC).
Freddie Mac backs many of the conforming loans on the secondary market, so any changes in the rules is very important and should be headline news.
The changes are as follows:
Freddie Mac will no longer approve refinance for any properties that has been under a limited liability corporation for the previous six months. Freddie Mac is limiting the number of properties the investor can have financed to four not ten as in years passed. Recently, Fredddie Mac changed back to allowing ten financed properties, but the lender have not followed suit on this change yet.
Therefore, with these recent changes to the mortgage arena, the investor will need to have the properties in a land trust and the beneficiary of the land trust can be the business entity. The land trust has several advantages to include ease of control, transfer privacy of ownership, and flexibility in asset protection probate.
Consult an attorney and/or an accountant when forming your business entity and/or trust.