Topics:Homeowner Tips Downpayment Home Improvement First-Time Homebuying Working With An Agent Successful Selling House Hacking Best Mortgage Rates Companies real estate investing Closing Costs Home Loan Research
Guest Post by G. Brian Davis One of the huge advantages of rental properties over stock trading or other paper assets through an investment brokerage is the ability to predict returns accurately. With stocks, you buy and hope the price goes up. With rental properties, you know the precise cash flow you can expect each year. Before you invest, however, make sure you understand exactly how to forecast rental cash flow. Cash flow and cash-on-cash return Far too many novice real estate investors think their cash flow equals “rent minus the mortgage payment.” It's a good way to lose your shirt in real estate. In fact, non-mortgage expenses generally add up to around half the monthly rent. Most of these expenses don’t hit you every month, so novice investors ignore them. But they add up, when averaged over time — rental investors refer to this as the “50% Rule.” To calculate the monthly cash flow of a rental property, you need to first add up all expenses, many of which must be calculated as a long-term average. Subtract the total average monthly expenses from the market rent to calculate the average monthly cash flow. Note that cash flow is not the same as your cash-on-cash return for a property. To calculate cash-on-return, divide your annual net cash flow by the total cash you personally invested to acquire the property. That includes both your down payment and closing costs, plus any renovations you paid for out of pocket. For example, if you paid $30,000 in closing costs and the down payment, and the property nets you $3,000 per year in cash flow, then it’s earning you a 10 percent cash-on-cash return. Use a free rental cash flow calculator to run the numbers quickly for both monthly cash flow and cash-on-cash return for any given property. But remember, your results will only be as accurate as your expense estimates. Forecasting rental property expenses To accurately forecast cash flow on a property before buying, you need to get the expense estimates right. Here’s how to forecast every expense accurately — before shelling out money for a rental property or even an ADU. Mortgage payment Being able to leverage other people’s money to build your own portfolio of income-generating assets is one of the great advantages of investing in rental properties. Real estate investors can borrow a mortgage, typically at 70 to 80 percent LTV (loan-to-value ratio). While they don’t have as many options as homeowners, they can borrow from a conventional mortgage lender, take out a rental property loan from a portfolio lender (many of whom are crowdfunded in today’s world), or even borrow money from friends and family once they’ve established a track record of success. As a final thought, the monthly mortgage payment is the only expense that will stay fixed even as your rents rise. The other payments below typically go up over time, as your rents and property values rise. Vacancy rate No rental property is occupied every single day of every year, forever. You will have vacancies as a landlord, as you make repairs, advertise the unit for rent, screen tenants, and sign new leases. So, you need to learn the vacancy rate for the neighborhood, to estimate how long you can expect future vacancies to last for your unit. It’s a question you should ask your Realtor, as you run the cash flow numbers before making an offer. Which means you need a knowledgeable real estate agent, intimately familiar with the neighborhood and accustomed to working with investors. Repairs and maintenance Real estate is, well, real. Buildings are physical assets, unlike stocks or bonds, and they need ongoing repairs and maintenance. These costs vary based on many factors: the age and size of the building, how well the tenants treat it, and even its geography, as home maintenance costs vary across the United States. As a general rule, maintenance and repair costs typically fall between 10 to 15 percent of the rent, when averaged over time. Property management costs It takes time and effort to manage a rental property. You can incur those labor costs yourself, or you can outsource them to someone else, but either way they’re still labor costs. Most property managers charge 7 to 10 percent of the rent collected, plus one month’s rent for each vacancy filled. Some nickel and dime you for other fees as well. Set aside at least 10 percent of the rent for total property management costs, even if you plan to manage the property yourself in the beginning. It’s a labor cost for you, and eventually you’ll likely outsource it to a pro when you get sick of tenants calling you to complain that a light bulb went out. Insurance At the very least, property owners need landlords insurance. Landlords insurance works similarly to homeowners insurance, although it doesn’t cover the belongings inside the home. It only covers the building itself. Like homeowners insurance, your lender will require it, if you finance your rental property. You can optionally also purchase rent default insurance. These policies kick in if the tenant stops paying the rent: the insurance pays you the rent until you replace the tenant with someone more responsible. Property taxes The government always gets their due. Landlords pay property taxes, just like homeowners do. But when you calculate cash flow, don’t use the current property tax bill. Instead, calculate the updated property tax bill based on the purchase price. The current assessment may be significantly lower than the purchase price, and the local government will bump up the assessment after you record the change in ownership and sales price. Of course, landlords and homeowners alike should be prepared to appeal property tax assessments if they feel they’re too high. Which they often are, as local governments want to squeeze every tax dollar they can by estimating property values on the high side and putting the onus on property owners to contest them. Utilities Most landlords don’t include utilities like water, gas and electric in the rent, and require tenants to pay for their own utility bills. But that doesn’t mean landlords never get stuck with utility bills. Landlords pay for utilities while the property is vacant of course, and also sometimes get slapped with delinquent tenants’ utility bills. After all, it’s much easier for utility companies to collect from landlords than tenants, since they can simply attach a lien to the property. Accounting, travel, legal, and miscellaneous expenses Then there are all the other expenses that landlords incur. Their tax preparation gets more complicated, which means higher accounting bills. They frequently have to visit their properties, which means gas and travel expenses. They incur legal expenses from evictions to lease agreement costs. It all adds up, typically to an extra 2 to 4 percent of the rent. Sample cash flow calculation Laura Landlord is thinking about buying a property for $100,000, that rents for $1,200. She gets preapproved for a loan of $80,000 at 5 percent interest for 30 years. After doing her due diligence, she forecasts the monthly expenses as follows: Mortgage Payment — $429 Vacancy Rate — $72 (6%) Repairs & Maintenance — $144 (12% of the rent) Property Management Costs — $144 (12% of the rent) Insurance — $50 Property Taxes — $150 Utilities — $20 Accounting, Travel, Legal, Misc. — $24 Total Expenses — $1,033 Laura’s average monthly cash flow is therefore $167 per month ($2,004 per year). If she paid $5,000 in closing costs in addition to the $20,000 down payment, then her cash-on-cash return would be 8 percent ($2,004/$25,000 = 8%). Final thoughts In this example above, as often happens in real life, her non-mortgage expenses totaled around half the rent (in this case $604 per month). Laura won’t get hit with vacancy expenses or repairs every month, but when they occasionally hit, they’ll be expensive. Over the long term, they’ll average out to equal these monthly costs. Don’t ignore these expenses simply because they don’t hit you every month. Account for them before buying, and you’ll be able to accurately forecast your cash flow and returns for every rental property you buy. Which means you’ll never make a bad investment again. G. Brian Davis is a real estate investor and founder at SparkRental.com, which helps middle-class people replace their day job with rental income. They offer a wealth of free courses and tools, along with online landlord software that’s (mostly) free for landlords. He spends 10 months out of the year traveling overseas with his family and has an insatiable appetite for reading, hiking, and perfectly paired wine and food.
Are you considering buying a foreclosed home? Perhaps the ROI potential and success stories have enticed you to entertain the idea of fixing and flipping a house in foreclosure. Buying a foreclosed home to fix up for profit is a common strategy that many seasoned real estate investors have. However, a novice investor may overlook some of the complexities and red tape that make foreclosures risky. By understanding the risk, you’ll be more equipped to understand if a foreclosure has potential cash rewards or if it's a financial trap that you should avoid. To help you understand the ins and outs of buying a foreclosed home, we’ve put together this comprehensive guide that answers some of the most basic foreclosure questions: What is the difference between pre-foreclosure and foreclosure? Do banks negotiate foreclosures? Can you get a loan to buy a foreclosed home? Is it a good idea to buy a house in foreclosure? Bonus foreclosure tips What is the difference between pre-foreclosure and foreclosure? It is typical to lump the foreclosure process together, but it is wise to know how different points in the buying process could affect your purchase. Let’s breakdown a foreclosure into three main phases: Pre-foreclosure Foreclosure Post-foreclosure Pre-foreclosure is the phase when you can potentially buy the house directly from the homeowner. It is typical for a homeowner to have 90 days notice before the bank seizes the property. During this time many homeowners are trying to get out of their house quickly and recoup any sort of money that they will potentially lose. This short timeline mixed with a need to pay back the bank encourages homeowners to sell their home for a low price in hopes that the home will be purchased quickly. This type of sale is often referred to as a short-sale. Foreclosure is the stage where the home actually goes to a foreclosure auction. Real estate investor and co-founder of SparkRental, Brian Davis, shares his insight on why this stage of the foreclosure process is often the riskiest and most expensive. “You can buy properties at an actual foreclosure auction, but this rarely happens in practice, for two reasons. First, you can’t inspect the interior of the property, because at that time it’s still legally owned by the homeowner. Second, lenders usually set the starting bid around the total balance they’re owed, which is often higher than the market value given the accumulated late fees, legal fees, etc.” Post-foreclosure is when the ownership of the house transitions from the homeowners to the bank. This is the most common phase that buyers purchase a foreclosed property. At this phase in the process the bank work with local real estate agents to list the house on the public market, making it easily visible for an everyday buyer to purchase. During post-foreclosure you're able to approach the buying process like a normal house — agents can give you tours of the house, and you can receive an inspection before you pull the trigger. Do banks negotiate foreclosures? Banks take on a lot of time, risk, and stress when dealing with a foreclosed home and so they are motivated to sell quickly. Negotiating with the banks over a post-foreclosed home may require a few extra hoopes to jump through, but overall the process is relatively similar to negotiating for any kind of home. Banks don’t love sitting on a property for too long, so they are motivated to negotiate with a potential buyer on the price. If a buyer extends an all cash offer they may be even more inclined to take it. Real estate professional, Luke Smith, adds that, “the banks often get flooded with inventory so they are willing to negotiate. They are less likely to allow a short sale then they are to negotiate during post-foreclosure so that they can make a little profit.” Plus, if a foreclosed home has been sitting on the market for a while your odds of scoring a great deal with the bank are even better. Can you get a loan to buy a foreclosed home? Yes, you can get a loan to buy a foreclosed home. There are several different types of loans that you could use to pay for a foreclosed home such as a 203K loan, FHA loan, VA loan, conventional loan, HELOC and more. Kenny Dahill, realtor, landlord, and founder of Burbz comments on what the loan selection may look like for your investment property. “Buying a foreclosed home is similar to a non-foreclosed home. Due to the nature of foreclosures being under market value, there are loan options that will allow you to finance the remodeling costs as well. Loans will typically be based off the habitability of the property — a foreclosed home in major disrepair will have challenges getting a loan compared to a foreclosed home that is move-in ready which can easily get a loan.” If you are worried about fronting the cash for a loan and are wondering how you can buy a foreclosed home with no money down, then don’t stress — there are options. Melissa Zavala, real estate broker and owner of BroadPoint Properties, lays out what you should do if you are wanting to put no money down or as little down as possible. “Check with your local lender to see whether no money down programs are currently available. There are many FHA programs available that only require 3.5 percent down and VA loans require no money down. There may be other programs available, so it is good to check with your local lender.” There are no money down and some barely money down options, you just have to find the right lender. To help you compare possible lenders and find the right lending solution for you, you can easily compare mortgage lenders at BestCompany.com. (Bonus: LoanDepot is one of the few lenders that offers a 203k loan, which is great for financing foreclosures. Check them out.) Is it a good idea to buy a house in foreclosure? The honest answer — it depends. It depends on your experience and the homes available. To help you get started on making your pros and cons list for purchasing a foreclosure, you need to look at the good, the bad, and the alternatives. Why is it a good idea? Buying a foreclosed home can unlock the potential for major cash flow. Foreclosed homes often sell for below their market value making them a great investment for buyers that are able to buy low, fix repairs, and sell high. A pre-foreclosed home often sells for below market value when the current homeowner is not able to afford their house. Before the bank seizes the home, the house is sometimes available for a discounted price by the homeowner — known as a short-sale. Additionally, if the bank does seize a home it will often be listed on the market for a reasonable price. The banks are motivated to sell the house quickly, alleviating the risk and and cost of hanging onto it. Potential buyers can benefit from either situation if the home is in good shape and on the market for below its value. Why is it risky? First you need to realize that foreclosed homes play by a different set of rules. For one, if the house does not sell in a short sale the ownership shifts from the personal homeowner to the bank. Real estate professional and owner of CapstoneHomeBuyers Colby Hager, walks through what a bank-owned home may entail: “There is a certain amount of risk because most banks are unaware of the actual condition of the house when they seize it. The bank typically does not allow for a home inspection nor are they usually willing to negotiate for repairs in an auction. Depending on the overall condition of the foreclosed home, financing through traditional sources such as an FHA or VA loan may be difficult.” In addition to the condition of the home posing a risk to your investment, legal red tape and the overall timeline can complicate the process as well. Unexpected time and legal issues can be costly and stressful. What’s an alternative? If you are wanting to buy a foreclosed home but are a little nervous to work through its complexities and risk, try investing in a different kind of property at the start. Get your feet wet by choosing an older home with good bones. You’ll have the luxury of shopping around for the right home and getting an inspection, while lowering your odds of major financial surprises. Real estate agent and founder of Quadwalls, Chuck Stelt, puts it best by advising buyers to avoid foreclosures and instead invest in what is called a grandma’s house. “Grandma's house is usually in really good condition and most everything is in working order, but it is often dated. These are the best homes to look for if you are buying a home to live in and want quick equity.” Bonus foreclosure tips: Get Homeowners Insurance: “Lenders will almost always require that you have homeowners insurance lined up, make sure you compare quotes and settle on a policy ahead of time to prove to your lender that you are able to purchase insurance for the foreclosure." — Melanie Musson, home insurance expert for USInsuranceAgents.com. Consider an Eviction Attorney: “If you are buying a foreclosure on the courthouse steps make sure to get a good eviction attorney. Oftentimes when you buy foreclosures at the courthouse steps, the previous owner is still living there. If the occupant doesn't leave on their own or doesn't take your ‘cash for keys,’ then you have to go through the eviction process.” — Rick Albert, Broker Associate with LAMERICA Real Estate, and investor/house hacker. Get a Second Opinion: "With every home, you want to do your due diligence—this rings especially true for foreclosed properties. If you are not allowed a formal inspection, then you want to find a local General Contractor to accompany you on your walkthrough. This way you'll have an idea of what costs could be needed.” — Brad, MBA, founder of 401HomeBuyers, a reputable house-buying firm.
Guest Post by G. Brian Davis If you've never bought a rental property before, it feels incredibly overwhelming. Between choosing a town and neighborhood, learning how to score good deals, analyzing cash flow, finding financing, advertising vacant units, screening tenants, signing lease agreements and beyond, there are a lot of moving parts. Rental investing comes with a steep learning curve, and new investors inevitably make mistakes. But in the beginning, focus on the fundamentals: the core investing skills that prevent you from losing money. That starts with knowing what to look for in a good rental property, both at the neighborhood level and the property level. Not all cities or neighborhoods make for profitable places to invest. Before buying properties in your local area by default, evaluate your local market carefully, and consider investing elsewhere if you don’t like what you find. 1. Low vacancy rates Vacancies are expensive for landlords. It sounds obvious, but you should look for cities and neighborhoods with strong demand for rental housing, so you don’t have trouble filling vacancies. In fact, the quality of your tenants largely determines the quality of your returns. The more rental applications you get for a vacant property, the better your odds of choosing a high-quality renter who will treat your property well, pay the rent on time, and stay long-term. You can check vacancy rates through the Census Bureau, but for the most up-to-date information, ask around among other landlords and property managers who operate in that city and neighborhood. Ask a professional real estate agent or property managers who operate in that city and neighborhood for rental reports. Ask them for data on vacancy rates, tenant turnover rates, days on market, and the quality and quantity of rental applications It helps if the area already sees strong demand, but you can also keep an eye on future demand. 2. Population growth Areas with healthy population growth indicate not only good demand right now, but growing demand moving forward. Again, you can check the Census Bureau, but also check other local resources for indications of population growth. Also keep an eye on job growth. Because where local economies thrive and generate new jobs, they draw workers from elsewhere, driving population growth and therefore demand for housing. You can find job growth data at the BLS. 3. Diverse job market with low unemployment With vibrant job growth comes low unemployment and reduced odds of rent defaults. Where residents are earning money, they can and do generally pay their rents. But beyond local unemployment rates, also look at the diversity of the local job market. If most of the town depends on one employer or industry, the entire economy of the town could collapse alongside them. Look no further than old steel mill towns in the rust belt, after steel largely moved overseas. Check resources like City Data or Area Vibes to read up on local cities’ economic diversity. Also consider investing in towns with military bases, as they tend to provide extremely stable employment and demand for housing. Resources like AHRN.com can help you specifically rent to military families. Here’s an interactive map showing unemployment rates by county for Spring 2020. Speaking as a landlord who spent years hassling with rental properties in high-crime areas, let me offer some simple advice: don’t do it. Sure, the rental cash flow numbers can look more attractive in these areas (more on cash flow calculation shortly). But those numbers exclude hidden costs like high crime rates. Crime affects landlords in multiple ways. Sometimes directly, in the form of vandalism or theft of your appliances or fixtures. But crime also drives away good tenants, leaving you with high vacancy rates and high turnover rates. And remember: the quality of your renters determines the quality of your returns! You can check local crime rates through City Data and Area Vibes as well. 4. Landlord-friendly regulations The local landlord-tenant laws play a greater role in your returns than you realize. I’ve had “professional tenants” draw out the eviction process to nearly a year, in one tenant-friendly jurisdiction. After a year without rents, I was left with a nearly-destroyed property. Invest in areas with laws that make it easy for you to remove tenants who damage your property, harass the neighbors, or break the law. The last place you want to find yourself is paying for your tenants to live for free for an entire year because the local landlord-tenant laws favor tenants so heavily that you can’t evict bad tenants. 5. Cash flow While you can stress endlessly about choosing properties with the most popular amenities at any given moment, keep it simple and look for properties that clearly meet local renters’ expectations. But physical amenities make up only one piece of the puzzle. Most important of all is learning how to calculate rental cash flow — a skill too many new investors gloss over. New investors tend to ignore infrequent-but-inevitable expenses like vacancy rate, repairs, maintenance, accounting costs, and so forth. But when you run cash flow numbers, you need to calculate the long-term average of all expenses, not just regular monthly expenses like the mortgage payment. Use a rental cash flow calculator to run the numbers, and be sure to include all expenses including: Repairs and maintenance Vacancy rate Property management fees (not just the monthly fee, but the new tenant placement fee too) Property taxes Property insurance Mortgage principal and interest Accounting, bookkeeping, legal, and other miscellaneous expenses For any given property, calculate both the monthly cash flow and the annual yield, in the form of cash-on-cash return. That refers to your net annual income divided by your personal investment, to calculate your personal return on investment. It is also recommended you create a line item expense called reserves. This allows you to save up funds on a monthly basis to be used at a later date for a big project, like replacing the roof, buying new appliances, or paying the mortgage when the property is vacant. Think of it like a rainy day fund for your rental property. To use simple numbers, imagine you put down $10,000 in a down payment and closing costs, and you earn $1,000 in net annual income from the property. That would leave you with a cash-on-cash return of 10 percent. When you know how to accurately calculate rental cash flow, you never make a bad investment again in your life, because you know the return before shelling out a cent. A good general rule of thumb is that if the monthly rental amount is equal to or greater than 1% of the purchase price, the property should provide a decent positive cash flow. 6. Manageable repairs Many real estate investors opt to buy fixer-uppers, in order to “force equity” by renovating them. It works great — for investors who know what they’re doing. But new investors don’t typically know what they’re doing, and often get themselves in over their heads with renovation projects. If you’ve never managed a renovation before, and want to buy a fixer-upper rather than a turnkey property in rent-ready condition, start with a property that needs only cosmetic repairs. You can work your way up to more complex mechanical repairs like replacing HVAC systems, or structural repairs like fire damage restoration, which usually require you to pull permits. But start with cosmetic repairs only. That lets you build experience hiring, screening, and managing contractors, which proves one of the most difficult tasks that real estate investors undertake. Start with smaller-scale projects to limit costly mistakes. As you develop confidence and trust with certain contractors, you can then gradually start tackling larger renovation projects. But keep it simple in the beginning, while you learn the ropes of real estate investing. Begin your rental investing career focusing on the fundamentals, and you’ll avoid the costly mistakes that so many new investors make! G. Brian Davis is a real estate investor and co-founder of SparkRental.com, which helps everyday people build passive income from rental properties on the side of their full-time jobs. Brian’s goal is simple: to help as many people as he can reach financial independence, so they can cover their living expense entirely with rental income. Connect with him through SparkRental at any time.
Guest Post by Brodie Gay, VP of Research at Unison Homeownership gives us a permanent place to call home, a roof under which we raise our families, and the potential for financial gain over time. But Americans are woefully over-indexing on their homes, and it's more than just "house rich and cash poor". Homes aren't nearly as stable a financial asset as many assume. Housing market volatility American homes are in fact as volatile in value as the stock market, as shown in the benchmark Unison Home Volatility Index. The index, which explored data pertaining to single-family, owner-occupied homes, found that homeowners entering very low down payment, high-leverage mortgages has led to increased risk when it comes to home price volatility. So, for the many Americans whose homes are the key anchor of their financial portfolios and retirement plans, there needs to be a new understanding of the reality of housing risk. The index shows that the average annualized volatility of home price appreciation has been around 15 percent per year since 2000 — only a single percentage point higher than U.S. equities index (14 percent), followed by U.S. high yield index (8 percent), and U.S. treasuries index (4 percent). Home volatility spiked to more than 35 percent per year in the midst of the 2008 financial crisis, suggesting that, similarly to equities and fixed-income securities, the financial risk of residential real estate is amplified during financial crises. The impact of housing volatility is important to understand, especially when it comes to matters of liquidity.; For example, a typical homeowner (net worth: $156,400) with most of their wealth ($95,800) tied up in home equity can’t access that capital for household expenses. A downturn in the housing market could cause a $200,000 home to drop in value to $100,000, meaning not only does the homeowner not see the increase in value generally assumed for homes, but they could be left upside down on a home they can no longer afford with only $60,600 in liquid assets — assuming those assets aren’t tied up in stocks, bonds or annuities. Perception vs. reality What’s especially troubling is the contrast between homeowners’ perceptions of home volatility and the reality of risk. Typical homeowners believe their household portfolio volatility to be around 9 percent, but due to a large amount of leverage that’s typically taken, in reality, it’s more than double (21 percent). Homeowners are betting big on their homes, but they don’t realize the actual risk. New homeowners are particularly vulnerable to housing market risk, the index found. This cohort traditionally has to take out a larger mortgage to purchase, and they haven’t had as much time to build equity in their home, and they’re also contending with mountains of student loans. They also often cash out their entire liquid portfolios for a downpayment, leaving little wiggle room for unexpected expenses like booking a last-minute flight or having an emergency medical procedure. To address this misalignment, it’s important for homeowners to understand how to fit their homes into overall financial planning. While diversifying your financial portfolio (between commodities, bonds, stocks, 401k, etc) is tried and true advice, homeowners need to factor their homes into their financial plans keeping the actual levels of volatility in mind. It is also important to note that a homeowner should never extend themselves too much when it comes to leveraging their home. While a homeowner might be able to afford a $400,000 house, a much safer bet would be to purchase a $350,000 using a larger down payment. Larger down payments mean more equity into the house. More equity into the house means less volatility risk. With new models like home co-investing, homeowners have the opportunity to re-allocate some of their investment into large, diversified institutional portfolios. With the average household holding 60 percent of their total financial portfolio in their home equity, the index shows that diversifying equity in this way can eliminate trillions of dollars in risk. The bottom line As our CEO Thomas Sponholtz has said: The home should be the place where you are most financially secure and conservative, so if you’re challenged with a life event or income shock, you can weather the storm and still have a place to call home. Today, your home is more of a roof over your head than an investment strategy. Yes, there are certainly significant financial benefits to owning a home. But these benefits are only available over the long term and to those who invest wisely in the home to begin with. If you’re the risk-seeking type, you are better off taking risk in your non-home investments. Brodie Gay is the Vice President of Research at Unison, a San Francisco-based company that is pioneering a smarter, better way to buy and own your home. We are a team of financial and real estate professionals who are committed to helping home buyers get the home they want, and homeowners finance their life needs without adding debt. For additional information, visit www.unison.com or follow us on Facebook, Instagram, LinkedIn, Twitter, and YouTube.
Guest Post by Lilly Miller Regardless if renting properties is your primary source of income or a side one, your rental is an important financial asset. This means that keeping it secure is no trivial task but an undertaking that should be taken seriously and approached strategically. Otherwise, it’s not just your belongings and your tenants that could be in jeopardy, it is your reputation as well since the word that you are not taking your tenants’ safety seriously could get around easily. This could result in reputable tenants avoiding your rental and you having to lower your rent in order to attract any tenants. Having in mind the importance of your rental’s safety, here are a couple of recommendations for you to consider: 1. Get an insurance policy When an accident happens, although we couldn’t have predicted it, we are usually left wondering whether we could have done more to prepare ourselves. Instead of dreading an accident, it is better to think in advance and take out an insurance policy to have peace of mind. However, you need to read the small print to know exactly what is covered by the policy or you can be unpleasantly surprised in case something suddenly happens. When it comes to causes of property destruction, a typical policy usually covers fire, tornado or hurricane, hail or theft, while floor damage and earthquake are separate policies. 2. Install a home security system A home security system is an addition which will also delight your tenants since they would feel their belongings are more protected when they are not at home. These systems don’t only provide protection against theft but can also include carbon monoxide detectors and remote surveillance. Based on your budget and needs, you can opt for basic packages offering single-service theft monitoring, mid-range packages which allow mobile access and include notifications or complete packages which also encompass 24/7 monitoring by a person. Providing that your rental isn’t a luxury apartment, perhaps one of the first two options should suit your needs best but both will greatly contribute to your safety measures. 3. Improve door and window security If your rental has doors which could be opened with just a slight push of the shoulder, then you need to work on improving that as soon as possible. Thieves rarely barge into random houses, but instead, they observe the tenants’ habits as well as the state of the points of entry. First and foremost, you should remove any tree branches that might reach the window to make sure no thief can climb them. The next step is to install sturdy entry doors which will increase the overall feeling of safety, and also improve insulation. Burglars’ activities depend on quick and silent entries and exits but with these improved doors, they will not manage any of these things. 4. Add external lighting If the neighborhood is not illuminated enough, you yourself can improve the situation around your rental to prevent your tenants from having to walk and park in the dark. Ample outdoor lighting will deter any unwanted visitors as well. Even if a house is empty, burglars won’t be so enthusiastic about approaching a well-lit house for fear of being noticed by neighbors. Additionally, if you install motion-sensor lights, you will ensure that no unexpected visitor comes near the rental because if they get caught lurking around the house, they will have some serious explaining to do. Your tenants don't have to worry about their safety because if they hear anything rustling outside, they would also be able to see what is going on and react in time if need be. 5. Screen prospective tenants Property owners most often worry about burglars, fire, and earthquakes but they often forget to look closer to home — at the tenants. No matter how good a judge of the character you might be, some people have spent years perfecting their skills as con artists, so you might find yourself wondering how such a nice couple could have eloped with your valuables. Screen your tenants before you decide to rent them your property to ensure they are reliable and that they had no prior issues with paying their dues. Through different software, you can learn about their credit reports and whether they have any criminal background. Also, if you rent more than one property, it would be useful to create a database of applicants, just so you know you covered everything about everybody. Play it safe for peace of mind Since your rental is an important item of your financial interest, its safety cannot be disregarded. Your strategy and approach will depend on your budget and wishes but taking care of it is obligatory both in terms of your tenants’ and your own benefit. Adding external lighting and installing strong doors will make any burglar change their mind while a security system will bring peace of mind to you and your tenants alike. However, don’t forget that not all tenants are reliable so thorough research unto their history is necessary to make sure you are not dealing with a criminal. It is also advisable to be prepared for any sudden accidents which means that an insurance policy is a prudent addition. Lilly Miller is a Sydney-based graphic designer and a passionate writer. She loves everything about home decor, art history, and baking, and she shares a home with two loving dogs and a gecko named Rodney. You can find her hanging out on Twitter.
Part 2 of 2 Choosing a lender for your personal residence or rental property is an important decision and so is deciding on the property itself. In Part 1, real estate experts described circumstances in which purchasing an additional home and renting one of them makes financial sense. In Part 2, our contributors discuss the nitty-gritty of renting a property, including choosing a home type and how to best manage a property. If you or someone you know is pursuing the course of additional-home ownership, consider this advice about renting various property types and the demands required of landlords. Choosing a property type “There are ways to mitigate your risks when owning a rental property, such as buying multi-family properties. If you are renting a single family home and your tenant moves out, then you are stuck paying for the turnover costs and the vacancy while you try to fill that vacancy. However, if you have a 4-unit property and one tenant moves out, you still have three units producing income. The income from the three other units will still pay for the mortgage, turnover costs, and marketing costs. Purchasing a multi-family property will not negate that you're still going to run into bad tenants, repairs, and vacancies, but it will allow you to use cash flow from other units to pay for the unit needing attention.” Shawn Breyer, Owner of Breyer Home Buyers of Atlanta ---“Single family homes and duplexes are always a safer investment bet than condos since you have more control over your expenses. If you run into tough times, you can decide to turn off the water or electricity, skip the landscaping, drain the pool, etc. In a condo, those things stay maintained, and your condo fees don't change just because you are having financial challenges.On the other hand, condos are just so much easier to maintain, especially if you are an out-of-state investor. The association does most of the heavy lifting.” Sep Niakan, Founder and Broker at Condo Blackbook and HB Roswell Realty ---“Renting condos is a completely different ball game than single or multi-unit residences. Prospective home buyers (without expertise in real estate investment) should proceed with caution before purchasing a condo as an investment. Condos are subject to a Homeowners’ Association (HOA) and the associated HOA fees. HOA fees, used for upkeep of the community’s common areas, cost hundreds of dollars per month. HOA fees often cause rental property to be a net loss every month. Unfortunately for homeowners, the HOA fee is beyond their control and thus even a smart landlord can’t mitigate it. I often work with sellers who are desperate to get rid of their condo because the HOA fees are slowly draining their finances.Prospective condo buyers must also be wary of the dreaded “special assessment.” This occurs when the HOA makes a one-time expense, repair, or improvement, and charges community members for that expense. To guard against unexpected special assessments, condo buyers should request financial statements from the HOA to ensure it has enough reserves to cover unanticipated expenses.” Earl White, Co-founder of House Heroes Juggling demands as a landlord “You or a property manager need to respond to the plumbing leaks, appliance failures, and complaints that the grass is too high or that there are bugs. In some instances, roommates don’t get along, the renter and other owners or tenants don’t get along, or the HOA wants something done. You may have collection and default issues to deal with. For that reason, having a professional management company is well worth the expense.” Bruce Ailion, Realtor and Attorney at RE/MAX Town and Country of Atlanta --- “A big part of the challenge that people face when getting a rental property is staying on top of all the things they need to do manage, maintain, protect, and possibly improve their rental property. Here is a quick list of things that people need to be prepared to manage for their rental property: A preventative maintenance schedule: The rental will need to have the gutters cleaned, the air filters replaced, the hot water heater drained, the dryer vent duct cleaned out, trees pruned, etc. Having a digital property maintenance calendar that reminds you of when these things needs to be done is important to avoiding expensive repair costs. Many people buy a rental property and spend money remodeling it to fix it up. It is important to plan out a budget, track costs, and keep photos, receipts, warranties, etc. for all the new material installed on the project. This will keep on you budget, but you also need to save this info for tax time and to make sure the home is properly insured after the new remodel. If you ever sell the rental, it is helpful to use this information to market the home. A home inventory is important to make sure the house is insured properly. Taking and keeping photos of the condition of the house and all the equipment and appliances ensures you are prepared in case disaster strikes your rental. Stay on top the estimated value and your equity in the rental property. Home values are always changing based on the local neighborhood market conditions and your mortgage balance is always changing based on mortgage payments.Keeping track of the difference is your home equity, which keeps you informed and ready for the right time to re-sell.” John Bodrozic, Co-founder of HomeZada Final thoughts: benefits of renting your home “I had a nice home in a suburban neighborhood and decided to move into a downtown atmosphere, so I rented out my home to move into a rental. In order to make this decision I had to consider the current rental market and weigh that against my own financial goals. In my case, I could have sold the home for a small profit, or rent out the property and have a small deficit at the end of each month. I made the decision to rent because I felt that my original neighborhood was still rebounding from the drop in 2008 and equity was still building. Would I put $200 a month into a savings account or keep building that equity? This was the question I considered. I am a big proponent of keeping real estate whenever possible. The cost to sell a property can be significant and eat into your profits if you move too often. These should be considered and as long as you are working on paying down the mortgage and comfortable being a landlord — why sell it? Especially when many of your other options are low-interest savings accounts.” Teris Pantazes, CEO and Co-founder of EFynch --- “I spent the last 19 months writing about my experience as a homeowner turned accidental landlord due to the housing crisis. I had to move but couldn't sell at the time, so I decided to become a landlord and I have had absolutely no regrets! It's a been a great learning experience, and I have since expanded my portfolio. My advice to people considering this strategy is to first run the numbers and see if it makes sense. Not every property can be a rental. Second, take stock of your abilities. Do you have the skills and mindset to treat it like a business? Because that's what it will be. It is no longer your home. It is a business.” Domenick Tiziano, Blogger at AccidentalRental
Part 1 of 2 Real estate is often considered a wise investment: it diversifies your investment portfolio and can provide a steady stream of passive income. But when does it actually make sense to rent out your current home to fund a second one or to buy a property specifically to rent? Experts in the real estate industry weigh in on questions prospective additional-home-buyers should ask when considering such a weighty purchase. Will my income cover more than enough for both homes? “If the new purchase produces enough rental income to cover its own expenses, a debt payment, and a healthy stream of cash flow, then it's a good deal. That said, if the new loan does not have a fixed interest rate, the purchaser should start seeking a long-term loan on the property with a fixed rate soon after purchase to avoid rates going up and eating up cash flow. The new investor needs to have a plan to take the property to profitability and a team in place to implement the plan. That team should consist of a property manager, maintenance staff, accountant, and an attorney.” Matt Faircloth, author of Raising Private Capital: Building Your Real Estate Empire Using Other People's Money and Co-founder/Owner of the DeRosa Group “Before you jump into buying an investment property to rent out, conduct careful comparative market analysis and investment property analysis to make sure exactly how much rent you can expect to charge for this property and how much your expenses associated with owning and running this rental property will be. If you think you might end up with negative cash flow, don't take a second mortgage to buy a house to rent out.”Daniela Andreevska, Content Marketing Director at Mashvisor, a real estate data analytics company Could I stay afloat in a worst-case scenario? “What drives a lot of people away from the rental business is tenants and repairs, and rightfully so. If you don't buy a property that cash flows significantly, then you can get hammered financially. The income from rentals should cover your expenses, such as mortgage, property taxes, repairs, upgrades, property management, and vacancies.” Shawn Breyer, Owner of Breyer Home Buyers of Atlanta “The first rule of real estate investing is to make sure you always can cover your expenses in the worst of times. If your renter decides not to pay, and it takes six months to evict him, will you default on your mortgage? If so, then maybe you are not ready yet. Single family homes and duplexes are always a safer investment bet than condos, since you have more control over your expenses. If you run into tough times, you can decide to turn off the water, electricity, skip the landscaping, drain the pool, etc. In a condo, those things stay maintained, and your condo fees don't change just because you are having financial challenges.”Sep Niakan, Founder and Broker at Condo Black Book and HB Roswell Realty “To avoid taking out additional financing, I suggest that each buyer have ample reserves in place to cover the expenses associated with being a landlord. Expenses include repairs, maintenance and leasing costs if the property becomes vacant. The size of a buyer’s reserves depends on the price of their home and their initial down payment. As an example, for a two-bedroom/two-bath single-family rental in Kansas City on the market for $138,000, we recommend that a buyer save at least $3,245 for expenses, assuming a down payment of 25 percent. But that number is only an estimate, and I recommend consulting with a lender for more guidance.” Zach Evanish, Director of Retail Sales at Roofstock, where single-family home investors can buy properties remotely How will this benefit me in the future? “It makes sense to keep your first or second home as a rental when the rent you’d earn would pay the cost of your mortgage, taxes, insurance, and other property-related expenses. When that happens, the renters are paying off an asset you own. You can fund a college account for your kids by getting a 15-year mortgage, and if the child you’re saving the college fund for is three years old or younger, it will pay off by the time they head to college at age 18. You can then either use the rental income or sell the house to help pay tuition. If you time a mortgage to pay off before you retire, rent can also be a source of income in your golden years.” Henry Brandt, Branch Manager of Planet Home Lending “I have represented many people who have either leased their home as an investment when they moved or taken out a home equity loan to fund an investment. Real estate over the long term has been an excellent inflation hedge, offers significant tax advantages through depreciation, when sold the taxes can be deferred in a like-kind exchange, and unlike other assets, you can leverage the investment, borrowing 80-95% of the investment. I have been investing since I was 21 and I am 61 now. My son has been investing since he was 20 and he is 30 now. Both of my daughters bought property while in college, and both properties are now leased and paying for their current home.”Bruce Ailion, Realtor and Attorney at RE/MAX Town and Country of Atlanta If you think renting out a property will pay off for you in light of what the experts have to say, it might be time to consult with a home loan company to weigh your purchasing options. In Part 2 of this series, the experts will discuss the benefits and challenges of purchasing and renting out different home types (single-family, apartment, duplex, and condo) as well as tips for being a successful landlord.
There is no shortage of entertaining home buying, home improvement, and property investment series on TV. If you imagine your typical show, it may follow a familiar format: The would-be homebuyers are chauffeured around by a realtor, visiting various listings, walking inside, arguing, and visualizing the ideal scenario. In some cases, the home in question would make a great fixer-upper, flip project, or income property. The buyers discuss nuts-and-bolts costs, estimated renovation project time frame, and sometimes negotiate with the seller. The realtor spends about 15 seconds saying something like, "Let's just double-check with the bank," and then, an hour and some time-lapsed renovations later, the happy couple has a home! Easy peasy, right? Expectations vs. Reality Anyone who's actually traversed the complex and often lengthy home-buying process understands that these shows tend to oversimplify just how much goes into buying a home. To be fair, HGTV's priority is not to highlight the boring loan approval and offer acceptance waiting games that accompany the home-buying process (nobody wants to watch that!). Nevertheless, this and other aspects are vitally important to be aware of. House flipping and other home renovations — as popularly portrayed in Fixer Upper and Good Bones — are common considerations among first-time homebuyers and veteran homeowners alike. According to a Houzz survey of over 130,000 homeowners, over 50 percent of them had completed renovations or planned to in both 2017 and 2018. In an Open Listings survey, over 500 homeowners were asked what they would most likely do if they had $10,000 to allocate towards housing. 73 percent said they would use it toward current home renovations while only 27 percent said they would put it towards a down payment on their next home. Whether you’re looking for a move-in ready home, a place requiring some renovations, or a true fixer-upper, here are 10 important details about home buying that TV doesn’t always show. 1. Buying a home (usually) takes time Lots of us are suckers for before and after pictures without regard to the time it took in between, whether it’s a dramatic fitness transformation or a home makeover that’s turned grungy into gorgeous. On average, the home buying process takes about four and a half months from shopping to closing but can range anywhere from 30 days to the greater part of a year. Debra Carpenter of Sandpoint, Idaho’s Nathan Oulman Realty has noticed that many first-time buyers are unaware of the time it can take to make offers and finalize an accepted offer. “Reality shows don’t portray how long it takes to close on a house once you’ve made the decision to buy,” Carpenter explains, but she admits that while the process definitely takes longer than it appears on TV, “the feeling of being in your new home is completely worth it.” When faced with TV-inspired unrealistic expectations from clients, top agent Lisa Larson of Warburg Realty in Manhattan wisely poses the question, “Would you take relationship advice from The Bachelor?” Chew on that food for thought! Larson continues, “If you watch reality shows, be aware that they are scripted and edited versions of reality. The irony, of course, is that the popular and entertaining shows on HGTV set up unrealistic expectations when it comes to renovation, its expense budgets, time constraints, and obstacles — as well as real estate in general.” Quickly flipping a home and expecting a huge return profit is not feasible in every market, especially for the inexperienced. Larson cautions agents against promising multiple offers over the asking price of a home and finding a deal good enough to flip soon after. This process requires patience — sometimes years of searching for an opportunity where all stars align. 2. Your credit score is a crucial factor Two words never really mentioned on House Hunters are "credit" and "score." Your credit score is among the most influential determinants in the home-buying process, especially if you need to take out a home loan (and most first-time buyers do). Your credit score is measured by a number of factors, including your credit history, the number of lines of credit under your name, and how prompt you are in making your monthly payments. Banks and other lenders pay close attention to your credit score to help them quantify your trustworthiness in paying back a home loan on time. Generally, if your credit score is above 700, you are considered a low-risk borrower, and lenders have confidence they will get their money back. If your credit score is too low (below 600), you will be considered high-risk and likely won't even qualify for a home loan. Most lenders won't even make you an offer if your credit score is below 620. Even if your credit score is good enough to place you in the market as a buyer, the lower your credit score, the higher your mortgage interest rates and monthly payments are likely to be. Sometimes a greater down payment is also required. And, of course, higher rates and payments can in turn affect how much home you can afford. Take a look at these data projections (courtesy of myFICO.com) to see how your FICO score can influence your annual percentage rate (APR), monthly payment amount, and total interest paid — assuming you live in Colorado and are requesting a principal amount of $100,000: FICO Score APR Monthly Payment Total Interest Paid 760-850 4.469 % $505 $81,744 700-759 4.691 % $518 $86,515 680-699 4.867 % $529 $90,340 660-679 5.081 % $542 $95,042 640-659 5.51 % $568 $104,630 620-639 6.055 % $603 $117,113 As you can see, a bad credit score will not only lock you into a higher rate but also force you to pay more each month, resulting in an additional $35,369 in total interest paid! 3. Luxe features require a larger budget In the Open Listings survey mentioned previously, respondents were asked which amenity or feature they didn’t have in their current home that was a “must” in their next (or, presumably, a renovation requirement). Top responses included hardwood floors (18 percent) and quartz or granite countertops (15 percent). Additionally, Doug Smith, president of Miller & Smith, a Washington, D.C.-based home builder and real estate developer, has seen "a seismic shift in buyer expectations” over the last few years. “Today’s consumers bypass anything mass produced in exchange for ‘artisan’ products, fixtures, and features,” Smith says. “Thanks to the HGTV phenomenon and saturation of home improvement shows, many buyers expect luxe features, such as hardwoods on every floor and granite or quartz countertops, to come standard at all price levels.” Of course, that’s simply not the case. The price tag of such specialized features is above standard levels, and the customization homeowners crave may not always be feasible for the average budget. That doesn’t mean homebuyers, flippers, and builders need to be millionaires to make their homes into something that suits some of their preferences. But be prepared to pay more for luxe renovations or to buy a move-in ready home with them. Smith explains that his company finds the balance in offering customization and providing simplified options through a selection process where homebuyers can capitalize on what is most important to them. 4. Your debt-to-income ratio matters What you might not realize while you're binge-watching Property Brothers is that homebuyers almost always go into debt when financing a home. However, if lenders predict that you're about to take on more debt than you can handle, they will not make you a loan offer. Right behind your credit score in order of importance is something called your "debt-to-income" ratio, or DTI. Simply put, your DTI measures your housing, monthly, and other debt expenses against how much you earn. This number shows creditors how well you can manage your debt payments and, unlike your credit score, you want to keep this number as low as possible. Usually, lenders won't even give you the time of day if your DTI is above 43 percent, meaning 43 percent of your income goes directly to managing your debt. The ideal DTI ratio is at or below 36 percent. Lenders pay particularly close attention to two types of DTI ratios: Front-End DTI: Also known as the housing ratio, the front-end DTI shows the percentage of your income that goes exclusively to housing expenses, such as mortgage payments, mortgage insurance, etc. Usually, your front-end DTI needs to be around 28 percent or lower in order to qualify for a mortgage. The higher your front-end DTI, the more likely you are to default on your mortgage. Back-End DTI: The back-end DTI measures what percentage of your income goes to paying off other debts, like credit card payments or car payments. In simple terms, you can only improve your DTI ratio in two ways: either increase your income or decrease your debt. Unfortunately, these methods tend to be easier said than done. While there's no magic bullet answer for increasing your income, some smart strategies can help you cut down debts and improve your personal finance management. 5. Managing renovations can get messy In Fixer Upper, Chip and Joanna Gaines never shy away from the physically messy aspects of flipping a home, whether it’s removing an abandoned refrigerator with rotting food or discovering a termite infestation in a crawl space. But if you’re not a contractor yourself, you need to be on top of your game managing the various parties renovating your home. John Bodrozic, co-founder of HomeZada, says that home improvement shows completely underestimate how you, the homeowner, need to manage your contractor on the remodel projects. HomeZada helps customers negotiate pricing, build budgets for projects, and track documents and photos to manage your contractor. Bodrozic explains, “You need to review a contractor’s quotes, make sure they are licensed and insured, check their references, and agree to a contract with payment terms that protect you.” Otherwise, you can end up paying more than you bargained for with unsatisfactory results at best — and damaged property at worst. Bodrozic also advises homeowners to take pictures during the remodel to document in case things go wrong “so you can hold your contractor accountable to finish the project to your satisfaction.” Keep in mind that before renovations or even a purchase, a proper inspection that goes more than skin deep is key to determining if a house is worthy of an offer. And, like hiring a contractor, that depends on someone else (in this case, the home inspector) doing a job right. Ben Mizes, founder and CEO of St. Louis-based Clever Real Estate explains that “the walkthrough process isn’t like as seen on TV. There’s much more meticulous inspection of the core systems of the property and looking for major red flags than it is talking about dream floor plans and designs.” A good home inspector won’t let emotions interfere with what should be a thorough and unbiased inventory of the condition of the home. 6. Mortgage rates change every day Occasionally, while you're watching your favorite home-buying program, you might wonder why either the homebuyers or the realtor is particularly anxious to close the deal on a certain day or at a certain time. While this urgency can be attributed to excitement at starting a new life (the homebuyers) or getting paid (the agent), it might also be due to the fact that they've happened upon a particularly good mortgage rate and want to strike a deal before that rate goes up. The fact of the matter is that mortgage rates operate very similar to stock prices: they fluctuate frequently, even several times a day. This is why it can be almost impossible to get a stable rate quote ahead of time. Take a look at this chart (courtesy of Zillow.com) to see just how much a mortgage rate can dip and spike in just one day: Mortgage rates change so often for a variety of reasons, many of which revolve around the current state of the economy and economic forecasts. Thankfully, mortgage rate aggregators like Zillow can clue you into the best mortgage rates at any given time, and many top mortgage companies will update their mortgage rate estimators according to market conditions. 7. Soft costs are involved Jonathan Faccone, managing member and founder of New Jersey-based Halo Homebuyers, says that whether it’s from the house-flipping show phenomenon or the first-time home buyer shows, everyone thinks they know what it entails to purchase and renovate the perfect home. However, a key element missing from the media portrayal is cost. Faccone explains that “the flipping shows never show you what the ‘soft costs’ are when purchasing a fixer-upper.” These soft costs include all the costs other than the actual construction-related expenses that will be incurred and include, but are not limited to, the following: Title insurance Attorney fees (in certain states) Home inspection Home insurance (impacted by vacancy and need for a builder’s risk policy) Closing costs Carrying costs When planning your home purchase with renovations in mind, plan for the expected soft costs as well as for the inevitable unexpected. Faccone suggests that the amount of money a typical buyer thinks a home needs for a renovation budget should be doubled. “I am always going over budget in my own projects because of the unknown fixes that I didn’t expect lurking behind the walls.” Alberto Marinas, CEO and co-founder of PadBlock, reminds buyers about the impact of the appraisal on the home sale. The price, the value of upgrades, and the reliability of current appliances may not be appraised to the agreed purchase price. Not to mention the cost of new furnishings for the home once the renovation is complete. “This can derail even the most cooperative seller,” he explains. “Unless the buyer has additional cash to cover the difference, the asking price will have to drop to the appraisal price. More often than not, in today’s market, the buyer has just enough cash for downpayment and closing fees — and not a penny more.” Finally, adequate insurance for a house requiring major renovations can be steep. Scott Johnson, founder of Marindependent Insurance Services in the Bay Area, California, explains that “consumers often fail to disclose to the agent their intentions [to flip] and often go mis-insured.” He describes two issues regarding property insurance during a house flip: If you are not planning on living in your new purchase in the first 30 or 60 days, then the home will be considered vacant and you are not eligible for typical home insurance. If your home undergoes significant construction, you should secure a builder’s risk policy protecting contractors and workers on your property. So how much does proper coverage cost under such circumstances? Johnson says it’s impossible to say without knowing all of the details of a situation, but a builder’s risk policy can easily cost $3,000 per year, while a regular home insurance policy might only cost $900. 8. There are different types of mortgages Wait, what? Whenever agents on TV tell clients something like, "Alright, now we just have to fill out some paperwork," they are most likely referring to the loan application. And somewhere on that application, the future homeowners will have to indicate which type of mortgage loan they are shopping for. The sheer number of mortgage loans is the many-headed monster of the home-buying process and includes FHA loans, VA loans, Jumbo loans, USDA loans, Conventional loans, and ARMs. Each type of loan has unique eligibility requirements, advantages, and disadvantages, but for the purposes of this article we’ll touch on two types: Fixed-Rate Mortgages: The main benefit of choosing a conventional or fixed-rate mortgage is you know exactly how much you'll be paying each month for the term of the loan. The one main drawback, however, is that fixed-rate mortgages tend to initially sport higher rates than do adjustable-rate mortgages. The most popular term lengths of fixed-rate mortgages are the 30-year and the 15-year. Each term length has strengths of its own. Mortgage Type Advantages Disadvantages 30-Year Fixed-Rate Monthly payments tend to be lower You will end up paying more interest over time, and at a higher interest rate 15-Year Fixed-Rate/strong> You pay less total interest over time, and at a lower interest rate Your monthly payments will be much higher Buyers who want lower monthly payments will often go with the 30-year fixed-rate mortgage, but a 15-year mortgage gets you on track to pay off your home loan in half the time, avoiding a bulk of the interest payment. Adjustable-Rate Mortgages (ARMs): Adjustable-rate mortgages are just as they sound: over the course of your loan, the rates and monthly amount you pay are subject to change. This can either be a good or a bad thing depending on your future plans (e.g., how long you plan on staying in the home, how comfortable you are with changing your rates, etc.). Just remember, while you might initially pay a lower interest rate than you would with a fixed-rate mortgage, that can easily change in as little as a year. Below is a list of some of the most common ARMs available: Mortgage Type Description Advantages Disadvantages 1-Year ARM Interest Rate Changes year-to-year Qualifies for a higher loan amount; good for flipping Considered risky, as payment can change significantly each year 10/1 ARM Rates fixed for first 10 years; fluctuates for next 20 Lower rates than 30-year fixed rate (at least for first 10 years) Bad for those wanting to stay in the same house for more than 10 years 2-Step Rates are fixed for first part of mortgage, and adjustable for the second Borrowers can choose when to pay fixed vs. adjustable Rates could adjust upward following fixed period 5/5 and 5/1 ARM Rates are stable for 5 years, then adjust every year or five years until loan is paid off Good for borrowers who can accept periodic changes Bad for short-term homeowners 5/25 ARM Rates stable for 5 years, then adjusted at year 6. Rate only changes once in 30 years Rate could adjust upward for a 25-year period 3/3 and 3/1 ARM Rates are stable for 3 years, adjust every year or three years until loan is paid off Good for borrowers wanting a new rate after 3 years Bad for long-term borrowers Keep in mind that if you’re considering buying a fixer-upper, ideally you should be ready with a cash offer with minimal contingencies so that you can land a great deal. “The better deal you can get,” explains Jonathan Faccone of Halo Homebuyers, “the more margin you can build in for unexpected costs, along with being able to put in your desired finishes and renovation requirements.” Faccone says the problem is that most home buyers don’t have enough cash to fund both the purchase and renovation. In that case, there are conventional and FHA 203(k) rehabilitation loans that can cover the difference, “but the amount of paperwork that you have to do and the red-tape of the process can put a damper on your first flip experience.” It’s clear that funding a flip is not for the faint of heart! 9. Knowledge and grit don't guarantee success Successfully renovating a home or even purchasing the perfect move-in ready home can’t be guaranteed on a certain timeline or with certain financial limits, even for the most persistent buyers. Grit, talent, or strong emotions alone won’t carry a sale or renovation to fruition. An evolving market and other factors outside your control are at play. John Bodrozic, co-Founder of HomeZada, laments that real estate TV shows “tend to focus on the lifestyle and emotional aspects of buying a home and fixing it up while glossing over financial details” such as negotiating strategies on how much to offer based on list price and other market comparisons. In addition to knowing how much of a down payment you can make and the loan amount you qualify for, “it is wise to get a comparative marketing analysis (CMA) to help you determine your approach” when it’s time to make an offer and negotiate. Remodeling costs, too, can vary dramatically based on your product and brand selections and the market conditions with local contractors. In regards to a complete remodel, even the most experienced flippers find that things unexpectedly go wrong throughout the process. Many of the experts we consulted for this piece shared their own not-made-for-TV stories. Ben Mizes, founder and CEO of Clever Real Estate, says, “I wish these shows would share that investing and flipping isn’t as glamorous as it sounds. When I first started investing in real estate, I did all my own work, and there was a lot more of hauling old cabinets and 2:00AM sewer clogs than there were brand new houses and excited buyers.” 10. A good lender is crucial Brad Pauly, owner of Pauly Presley Realty based in Austin, Texas, thinks HGTV makes buying real estate look easy. And, surprisingly, he says it can be — “as long as you have the right people working for you!” An agent with years of experience is important because “the seasoned agent has already experienced all the potential pitfalls of the home purchase.” Pauly explains that a good lender is crucial because once a buyer puts a property under contract, the lender is responsible for getting the buyer’s loan approved — and on time. So how do you choose a good mortgage lender? Obviously, some mortgage lenders are going to be better than others. The home loans industry can seem difficult to navigate, especially if you're a first-time homebuyer. So here are some guiding questions to keep in mind before you sign any paperwork: What do mortgage reviews say? Read real, verified customer reviews to determine if a lending company provides good customer service and follows contractual agreements. How transparent is the lender? One of the most important qualities of a trustworthy mortgage lender is how honest the company is about what you, as the borrower can expect throughout the process and what the company generally charges for lender fees. Which loan type are you seeking? The type of loan you seek for your purchase and/or remodel is important because not all lenders offer every loan product available. Is a fixed-rate or adjustable-rate mortgage best for your long-term plan? For a remodel, will you purchase with a 203(k) renovation loan, or finance with a conventional loan, then fund your renovation with a personal loan, credit card, or another method? Who can give you the lowest rate according to your credit score? As we discussed, interest rates vary, but get an interest rate estimate from multiple lenders to see how each lender’s rates compare to the national daily average. If you’re disappointed we've ruined the picture-perfect world of your HGTV binge-a-thon, take heart in knowing you can still embrace the entertainment value of these shows while also being armed with the knowledge of important details often left out of these portrayals. And when the time comes for you to play the lead in your own, real-life house-hunting drama, you’ll have realistic expectations to guide you and keep you grounded through the excitement!