By Jason Price8 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited February 10, 2014.
As I pulled into the gas station over the weekend I was amazed at the price of gasoline. I know it’s been all over the news, but to see the price on the sign in excess of $3.30 is disheartening. While many people will experience a dent in their spending plan because of the rising prices, there are many who simply can’t afford to keep gasoline in their car. If you have a shortfall of cash everything month as it is, rising gasoline prices makes matters much worse.
How do you save money on gas when the prices are high and rising? There are a number of ways which I discuss below, but the one thing everyone should be doing is adjusting their spending plans. When you think about your spending for the month consider what the additional cost in gasoline is going to be. You’ve got to make a cut in your budget somewhere whether that be less entertainment, savings or some other area. Unfortunately, it’s a reality right now and we have to manage to it.
So, let’s look at some ways to minimize the cost of gas and the impacts on your budget.
Ride Share or Public Transportation
If you’re used to driving to work each day, consider other forms of transportation. This is a great time to look into taking the bus or ride sharing with others who live nearby. This tip is especially helpful if you have a long range commute.
Find The Cheapest Gas
This past week I downloaded the GasBuddy iPhone app. GasBuddy finds the cheapest gas near me. For example, I just looked on the app and it identified gas at $3.39 down the street versus the next highest price of $3.49 about a mile further. Go to GasBuddy.com to learn more.
Fill Up At Warehouse Clubs
Warehouse clubs such as a Sam’s and Costco almost always offer cheaper gasoline. There is less mark up on their gas prices since they are making money by people shopping for items in in the club.
Smart Driving Saves Gas
For those who drive fast and accelerate a lot, you’ll find you waste more gas. Rather, accelerate steady and don’t weave in and out of traffic. Follow the speed limit and you’ll also find you don’t have to stop at as many stoplights which requires you to accelerate more.
Take Advantage Of Coupons
According to CNNMoney.com there are a number of gas coupons you can find online and in newspapers. Make it a habit to start watching for them each week.
Some gas stations, for example, offer coupons for discounts on gas that can be found in newspapers, circulars and online. A quick web search will result in printable coupons for as much as 7 cents off per gallon, but they’re scattered across various stations around the country.
Take Advantage Of Cash Back Reward Cards
Finally, you might consider getting a gas credit card and take advantage of cash back rewards. A lot of gasoline companies offer credit cards which can also be an easy way to track your gasoline spending. Just remember to pay it off each month by budgeting your spending. A gasoline credit card isn’t a free ticket to spend without a plan!
How high are the gasoline prices in your area? Have you noticed an impact on your budget? If so, can you share some tips you’re using to minimize gas prices?
I have been an agent and investor for almost 20 years and I have seen many market cycles. A lot of people think we are due for another housing market crash because housing prices have skyrocketed, people cannot afford homes, and there could be economic problems. Besides these factors, there are many things that drive the housing market. What really drives market prices is supply and demand, which is impacted by these factors and many more. The last crash that occurred in the United States from 2006 to 2012 was the worst in the history of the country, it was worse for housing than the great depression. It took extraordinary circumstances to create that crash and it will not easily happen again. Could it happen? yes Will it happen? Maybe. When will it happen? No one really knows. Even with Covid-19 causing chaos, there is no guarantee a crash will happen.
What caused the last housing crash?
I started my real estate career in 2002 before the last housing crash. I could see something was off in the real estate market but I was young and did not know what all the signs were indicating. It was not uncommon to see:
Loans that were 120 percent of a house’s value
Investors buying multiple properties with nothing down
People with no income buying houses with a no money down loan
People simply stated what their income was to get a loan with no proof
6-month ARMs with the payments doubling soon after buying the house
Something seemed off to me but everyone seemed to be happy! Then the bottom dropped out of the market. The banks realized that many people could not pay back their loans and there were too many houses being built for the people who could actually buy a house.
Crazy lending guidelines caused overbuilding and when the party stopped, there was a crash. Prices dropped and more foreclosures occurred because many people had no equity. Banks panicked and tried to sell all their distressed properties at once.
It was the perfect storm and the worst crash in the history of the United States housing market. The big question is can that happen again? I personally do not think so and I will tell you why below.
Are there really too few houses?
Supply is affected by foreclosures, homeowners’ willingness to move, new construction, and many other factors. Demand is driven by the economy, lending guidelines, potential homeowners’ confidence, wages, and much more. I believe the supply and demand affecting today’s housing market is much different than what drove the last housing boom. While prices could level out or decrease in some areas, I do not think we are in for a nationwide crash.
In order to have a crash, we need an oversupply of homes or the demand for homes to disappear. I do not see either scenario happening, even if the economy loses steam or crashes. Some of the stats I show in this article will show you how different the supply side is right now than it was prior to the crash.
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How many housing crashes have there been?
Many people believe that because of the huge increases in prices, a crash is imminent.
“Just look at what happened in the mid to late 2000s. Prices are so crazy now that a crash has to come soon!”
The first thing you have to realize is that the last crash was the worst crash we have ever had. It was worse than the great depression. Those crashes do not happen over and over again. An increase in prices does not mean a crash is coming. Prices can increase or decrease, but that is what happens in a healthy market. A crash is much different from a down market. Other countries have seen increasing prices for decades without a crash. Just because prices go up does not mean they go down. In fact, due to inflation prices will continuously increase over time and they have increased over time.
There are also a lot of people trying to sell books, products, and coaching based on the impending doom that is coming. Be careful buying into what people say based on their motives. Look at the data!
The chart below shows the median sales price in the United States since 1959. As you can see, prices can fluctuate but in the long run, they have always gone up.
Won’t a recession cause a housing crash?
The last crash was the biggest in recent memory and if you look at the data further back it is the same with small adjustments. A lot of people will also tell you we have a housing crash or recession every 10 years. If you average them out we have recessions every 18 years, but not always true for the housing market. The dot com recession did not affect housing much at all. Sometimes we have a recession 5 years after the last one and sometimes we have it 25 years after the last one. Even if we did have a recession every 18 years we have a long time to wait since the last recession was ten years ago.
The chart below shows unemployment in the US, which is a great indicator of recessions. https://fred.stlouisfed.org/series/UNRATE
You can see from the chart that recessions are not every 18 years, but all over the place.
There are also a lot of people who have been predicting a crash for many years. There are people on YouTube promoting their gold and silver businesses by talking about how real estate will crash. One of the big marketing messages they use is that they predicted the last crash! Well, if you look at their predictions they have been predicting a real estate crash every year for the last three decades. They were bound to get it right one of those years! I was an REO (foreclosure) broker during and after the last crash and there were many people talking about how there was going to be a double-dip recession in 2012. We were going to have a tsunami of foreclosures and it would be much worse than the crash we just went through. Well, it never happened, in fact, the opposite happened.
No one knows for sure what will happen to the housing market. It could go up, it could go down, it could crash. But just because it crashed before when prices were high, does not mean it will crash again.
The video below goes over the possibility of a housing crash as well:
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Will Covid-19 cause a housing market crash?
Many people are now saying that coronavirus and its impacts will cause a housing market crash. The interesting thing is that since the coronavirus started, housing prices have increased in many areas! The supply of homes has decreased because many sellers took their homes off the market. This caused prices to increase because the demand for homes has stayed relatively stable. There are the same amount of buyers fighting for fewer homes.
It is true that many people let their mortgages go into forbearance or are behind on rent. The CDC halted most foreclosures for the rest of the year. There has to be a crash right! There will be so many foreclosures being dumped on the market and that will cause prices to drop.
Foreclosures do not cause a housing market crash. Every healthy market has foreclosures. The last crash was caused by millions of foreclosures coupled with too many houses being built. Foreclosures by themselves can cause a downturn but not a crash.
It is also important to remember that Covid-19 will not automatically cause a flood of foreclosures. The government will do everything they can to stop foreclosures and in some states, it takes years to foreclose. Many people also have equity in their homes which means they can sell them instead of letting them default back to the bank.
Home mortgages are harder to get than ever
One of the main reasons people say there will be another crash is that loans are easier to get again!
In 2005, subprime loans were rampant and as a result, the country over-leveraged itself. Subprime loans, the riskiest loan type given to borrowers with low credit scores, totaled more than $620 billion. Now, subprime originations are only 5 percent of the mortgage market and add up to $56 billion. Compare that to 2005 when subprime origination made up 20 percent of the market. This represents a 91 percent decline from the height of bad loans that set up the economic crash.
Source: Inside Mortgage Finance; Equifax
Not only has subprime lending seen a major decline, but mortgages have also become much harder to attain due to stringent lending standards. Loans are still very hard to get compared to before the last crash. This is greatly due to the type of borrowers able to qualify for loans. The current average credit score for borrowers being granted mortgages is 739. In October 2009, the average FICO score was 686, according to Fair Isaac. The lowest one percent of mortgages issued have credit scores averaging 622-624. Compared to the average range in 2001 of 490-510, the standard to get financing has risen substantially, and as a result, the likelihood of default has dropped. Lenders have done this to ensure the economy doesn’t again become propped on bad loans like it was leading up to the Great Recession.
The chart below shows that loans are even harder to get than right after the housing crash. https://www.urban.org/policy-centers/housing-finance-policy-center/projects/housing-credit-availability-index
As you can see, it is not easier to get a loan, in fact, it is harder!
Investors have even stricter lending guidelines and must put 20% down. There are stricter debt-to-income levels for investors and some banks even limit the number of loans investors can have. It is much tougher to get a loan now than almost any other period in the last century.
Is the United States housing market unaffordable?
Another reason people say the market will crash is that housing is not affordable for most people and it has to crash.
It is true that the affordability index continues to be stacked against potential home buyers. As housing and rental prices steadily increase, wages continue to stay relatively stagnant. Historically, the average income-to-housing cost ratio in the U.S. has hovered near 30 percent, but in some metro areas, that number is currently closer to 40 and even 50 percent! This strips away the opportunity to save money as a significant portion of a person’s monthly income is going to keep a roof over their head.
Source: U.S. Census Bureau
However, the United States is still much more affordable than in many other countries. Many of those countries have not seen a huge crash. People tend to find ways to buy homes, even when they are very expensive. Affordability in itself will not cause a crash. Although, it could cause a slowdown.
Some of these charts are a few years older, but it’s tough to find updated information. As you can see there are many other markets that have higher prices than the US (even after our last rise) and did not have a housing crash, or they recovered very quickly after a smaller crash. Simply having high prices does not mean a crash is coming.
Why is supply so low?
The biggest factor causing the housing market to increase today is low inventory. The last crash was caused by horrible lending guidelines and overbuilding. We will continue to have low inventory until building picks up, and it simply has not happened. I cannot see another crash occurring until we see more new starts.
The graph below shows new building starts in the United States and as you can see there was a record low building for many years after the crash. We just got back up to the average number of new builds when Covid-19 hit and it dropped again.
There simply are not enough houses for people.
This is why prices continue to increase in the United States. The population is growing and there are not enough houses to meet the demand for everyone who wants to buy a house.
We could absorb a lot of foreclosures and still have a healthy market, a more healthy market than we have now. Having an increase in foreclosures will not crash the market. We would also need an increase in new builds which is not happening at the pace of market demand.
Will migration and population cause a crash?
Another popular theory is that baby boomers will die off and there will be too many houses for those still alive. This idea was pushed back in the early 2000’s by Robert Kiyosaki. While there were a lot of baby boomers born, there are currently more millennials than baby boomers. The millennial generation is actually increasing thanks to immigration. There are fewer people being born now, but those people will not be of house buying age for decades. It is predicted the US population will keep increasing for decades. Other countries have had decreasing populations and have not seen decreasing prices.
This article goes into more detail on baby boomers and a housing crash.
Will interest rates cause a housing crash?
Another prediction is that interest rates could rise and cause a crash. This theory is based on nothing but a guess as rising rates have never caused a crash in the past. Interest rates were 18% in the early 1980s and there was not a crash. While it seems logical that prices decrease when rates increase because houses get less affordable it does not happen. The mortgage rates on a house are typically locked in for many years. If interest rates go up it will cause fewer people to move which will decrease inventory even more! The video below has more details on this.
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Why are others predicting a crash?
A lot of people are predicting a crash, but why? If the data shows that a crash is most likely not going to happen why would they predict one?
Here are some of the people who are predicting a crash:
Gold and silver sellers who want people to invest with them and not in real estate
Stockbrokers who want people to buy stocks and not real estate
Real estate investors who are selling coaching programs about how to survive a crash
Anyone who is trying to get their name in the news or create a catchy headline to sell something
People who want cheap housing prices so it is easier to invest.
Not everyone who is predicting a crash has an ulterior motive but many do. Some very smart people are predicting a crash who may not know exactly how real estate works either. You have to be very careful who you listen to when it comes to real estate and predictions.
What can we predict?
I buy a lot of house flips and rental properties. One of the most important rules of thumb I work by is to never base my purchases on what housing prices might do. If I am flipping houses or buying rentals, I never assume prices will go up. I base my investment strategies on today’s prices. I also have a plan in place if the market decreases. Yes, we have seen huge price increases, but that does not mean prices will keep going up or that they could not go down. One of the easiest ways to get yourself in trouble is to invest in real estate because you think prices will increase.
I do not try to predict the market and most economists will not predict it either. There are too many variables to know what will happen and predicting when it will happen is even harder. If someone says they know exactly when a crash or downturn will happen, they are probably trying to get attention or sell something!
The market could go up or it could go down. The great thing about real estate is you can make money in every market if you know what you are doing.
Conclusion
The factors that caused the last crash do not exist in today’s market.
There is not overbuilding, in fact, there is too little building.
There are not loser lending guidelines, in fact, there are more strict lending guidelines.
While foreclosures may increase, there are much fewer than before.
Rising prices and unaffordable housing do not cause a crash. They could cause a downturn or cause prices to level out, but a crash is much different than a downturn. If you are waiting for a crash to invest or buy, you may be waiting a very long time!
Many people want to buy investment properties because of the fantastic returns they can provide. However, many people do not have the 20 percent down payment (or more) that most banks require. There are ways to buy an investment property with little money down. The easiest way to buy an investment property with less than 20 percent down is to buy as an owner-occupant and later rent out the house, but there are many other options for investors as well. Using a line of credit, refinancing your home, house hacking, the BRRRR method, or even credit cards can provide ways to buy investment properties for less money. Seller financing is a great way to put less money down on a rental property if you can find sellers who are willing. A more advanced technique is to use hard-money financing that you can refinance into a conventional loan. Whatever way you choose to buy a rental property, research the method to make sure that it is legal in your state, your lender approves it, and that you are not stretching your finances too thin.
How much money down do most banks require?
An investor will have to put down at least 20 percent to buy a property from a typical bank. If you own more than four properties, that figure can increase to 25 percent down, providing that they are even willing to finance more than four properties. On top of the down payment, an investor will have to pay closing costs, which can range from two to four percent of the loan amount. It is very expensive to buy an investment property using financing from a typical bank. I have found a great portfolio lender who will finance as many properties as I want with 20 percent down, but they are not easy to find. Once you factor in repairs, carrying costs, down payment, and closing costs it can cost as much as $30,000 to buy a $100,000 rental property.
The video below goes over ways to buy with little money down as well:
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How to buy as an owner-occupant
The easiest way to buy an investment property with little money down is to buy as an owner-occupant, satisfy your loan requirements, rent out the property, and keep it as an investment. Most owner-occupant loans require the buyer to occupy the home for at least a year. Once that year is up, you can rent out the house and turn it into an investment property. There are many owner-occupied loans available, with down payments ranging from 0 to 5 percent down. You can put as much money down as you want if you want to put 20 percent down or even 50 percent down. USDA and VA have great no-money-down programs and little to no mortgage insurance, which will save an investor a lot of money each month. You will have more costs with little money down loans because mortgage insurance is required. Mortgage insurance can add hundreds of dollars to your house payment and eat away at your cash flow. The process of buying as an owner-occupant and then turning the house into an investment property is as follows:
1. Buy a house as an owner occupant, which will cash flow when you rent it out.
2. Move into the house and live there for at least a year.
After the year is up, find another house that will cash flow and purchase that home as an owner-occupant.
4. Move out of the first house and keep it as a rental. Move into the new house and repeat the process every year!
Eventually, you will be building up equity and extra cash flow, which will enable you to buy properties with a 20 percent down payment. Repeating this process 10 times would be an excellent way to get started, but no one wants to move ten times in ten years. It can also be tough to convince your family to live in a home that would be a great rental.
Low down payment owner occupant loans
For more tips on real estate, check out the InvestFourMore Instagram page.
If you are going the owner-occupant route there are many loans available that have from very little to nothing down required.
FHA loan
FHA loans are government-insured loans that can be obtained with as little as 3.5 percent down. You can only have one FHA loan at a time unless you have extenuating circumstances like a job relocation. You do have to pay mortgage insurance on FHA loans, which I will discuss later in this article. There are limits to the amount an FHA mortgage can be, which varies by state and even city.
USDA loan
USDA is a loan that can be used in rural areas and small towns. The loan can’t be used in medium-sized towns or large towns/metro areas. The loan is a fantastic loan for those that qualify and want to buy a home in the designated areas. USDA loans can be had with no money down, but do have mortgage insurance as well.
VA loans
VA loans are run through the United States Veterans Administration. You have to be a veteran to qualify for the loan, but they also can be had with no money down and no mortgage insurance! VA is a great option for those that qualify because the costs are so much less without mortgage insurance.
Down payment assistance programs
Many states have down payment assistance programs. In Colorado, we have a program called CHFA. The program helps buyers get into owner-occupied homes with very little money down. CHFA actually uses an FHA loan but allows for less than a 3.5 percent down payment. Check with lenders on your state to see if you have any programs that help with down payment assistance.
Conventional mortgages
Even conventional mortgages have low down payment loans available for owner-occupants. For owner-occupants, conventional loans have down payments as low as 3 percent. You will most certainly have to pay mortgage insurance with any conventional loan that has less than 20 percent down. Unlike some of the other loan options available, you can have as many conventional mortgages in your name as you want as an owner occupant.
FHA 203K Rehab loan
An FHA 203K rehab loan allows the borrower to finance the house they are buying and repairs they would like to complete after closing. This is a great loan for homes that need work, but the buyer has limited funds to repair a home. There are more costs associated with this loan upfront because two appraisals are needed and lenders have higher fees for 203K loans.
NACA Loans
NACA is a non-profit program with:
No down payment
No closing costs
No points or fees
No credit score consideration
Below market 30-year and 15-year fixed-rate loans
This sounds like it is too good to be true, and it is a great program. However, you do not simply apply for the loan and hope the lender approves you. You must take classes, and even host classes when in the loan program.
More details are on the NACA site.
What loan costs does a buyer need to consider besides the down payment?
On almost any loan you will have more costs than just the down payment. The lender will charge an origination fee, appraisal fee, prepaid interest, prepaid insurance and possibly prepaid mortgage insurance. Plus you may have more costs the title company charges like a closing fee, recording fees, and possibly title insurance. In most cases, the seller pays for title insurance, but with HUD and VA foreclosures the buyer has to pay for title insurance. These costs can add up to another 3.5 percent of the mortgage amount or sometimes more. When you talk to a lender they can give you an estimate of exactly how much these costs will be before you get your loan.
Can you ask the seller to pay closing costs?
Even though the lenders and title company will charge you more fees than just the down payment, that does not mean you have to pay that upfront. You can ask the seller to pay closing costs for you. If you can get the seller to pay your closing costs for you, loans like VA and USDA may be obtained with no out-of-pocket cash. You may still have to put down an earnest money deposit, but that can be refunded at closing in some cases. When you ask the seller to pay closing costs, it reduces the amount of money they are getting from the sale so you might actually be paying more for the home than if you didn’t ask for closing costs. But in my mind paying a little more for the house and financing those costs to save cash is better than paying more money out-of-pocket for a little cheaper home.
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House Hacking
House hacking is when you buy as an owner-occupant but you buy a multifamily property instead of a house. By purchasing a multifamily property you can live in one unit while you rent out the other units. This strategy allows you to rent the property faster, which may mean the bank will be more willing to give you a new loan as soon as you are ready to move out. You will also have help from the other tenants to pay your mortgage. In some cases, you may be able to live for free while you own the house because the other rent covers your costs.
Virtual real estate
Yes, you can now buy virtual real estate! This is land in the metaverse that only exists digitally. Some pieces of virtual real estate have sold for millions of dollars and others can be bought for almost nothing. Here is some more information on getting started!
BRRRR Method
BRRRR stands for buy, repair, rent, refinance, and repeat. It is a great way to get into rentals with less money down. You will need to get an awesome deal to make this strategy work, but you may be able to get all of your money back. You buy a house that is an amazing deal, fix it up, rent the property, and then refinance it. Once the refinance is done you repeat over and over! The key to making this strategy work is getting an awesome deal with plenty of equity. You also need to be prepared if things do not go perfectly. Appraisals can come in low, the banks may not want to finance you, you may not get the property rented or repaired as fast as hoped, etc.
Hard money loans
Using hard money can save you a ton of cash in the short-term, but it is more expensive in the end. Fannie Mae lending guidelines, allow you to refinance a home with no seasoning period, which means you do not have to wait six months or a year after you purchase a home, to refinance at a higher value than what you bought it for. Fannie Mae guidelines base the refinance amount on a new appraisal, and they will allow a 75 percent loan-to-value ratio. Fannie Mae guidelines do not allow a cash-out refinance, but they do allow the refinance to pay off any existing loans. Many hard money lenders will allow a buyer to borrow up to 100 percent of the purchase price and to finance repairs as well.
Since Fannie Mae guidelines allow a 75 percent loan-to-value refinance, theoretically an investor could buy a home for $100,000 and get a loan with a hard money lender for $100,000 plus $30,000 in repairs for a total loan amount of $130,000. The investor could refinance the home for as much as 75 percent of a new appraisal. If the appraisal came in at $180,000, then 75 percent loan-to-value would allow a refinance of $135,000. Fannie will not allow a cash-out refinance, but the investor could refinance the full $130,000 loan amount. This strategy can be costly due to hard money fees, but it allows the investor to refinance the entire purchase price and repairs!
This strategy can also be very risky because you are depending on a high appraisal to get your money out. Most hard money loans are only one year and you must pay off the loan after that year. Refinance appraisals are not always as high as we would like them to be. Make sure you have an exit strategy if the appraisal comes in lower than you expect.
Private money loans
One legitimate way to buy real estate with no money down is to use private money. Private money is from a private investor, friend, or family member. The private investor will give you money at a certain interest rate to buy a flip or rental property. Private money rates can vary from very cheap to very expensive depending on the relationship, investment, and terms of the loan. I use private money from my sister for my fix and flips. She charges me six percent interest. It is a great way to reduce the amount of cash I have into the properties.
I have used private money to buy commercial rentals and then refinance into a long-term loan with a local bank.
Can being a real estate agent help?
There are many advantages to having your real estate license, but the biggest benefit is you can keep your commission on almost every house you buy. On a $100,000 house, your commission could be $3,000 dollars or more. Here is an article that details why it is an advantage to become a real estate agent if you are an investor. Being a real estate agent also gives me an advantage in finding and purchasing great deals. I detail how hard it is to get your real estate license here. I saved more than $270,000 a year on commissions by being a real estate agent. That does not include the money I made on deals that I got because I was an agent.
Turnkey rentals
A new trend in the US is buying turnkey rental properties that are purchased, repaired, rented, and managed by a turnkey provider. Turnkey properties are a great opportunity for investors to buy rental properties out-of-state when homes are too expensive in their area. There are turnkey providers who offer as little as 5 percent down for investors, but they tend to have very high-interest rates. Here is a great article about turnkey providers or send me a request here for turnkey providers I know of. I bought a turnkey rental in Cleveland a few years ago.
Line of credit
I have had many lines of credit in my career. I have had lines of credit against my personal house (the house I live in) and my investment properties. It is much easier to get a line of credit against your personal house and some banks will not even offer lines of credit on investment properties. A line of credit is basically a loan against a home, but you do not have to use the money all the time. If you do not need the money you can pay it back to the bank and not be charged interest on it. When you need the money again, you can borrow it very quickly as long as the line is open.
Off-market properties
Off-market properties are purchased through direct marketing or by word of mouth. Buying off-market usually means less expensive properties and in some cases, owners with flexible terms such as owner financing. Many investors wholesale off-market properties, which you can purchase with no down payment. Wholesaling is a process of buying and selling properties very quickly. The properties must be very good deals and are usually found by direct marketing for properties. Many investors make a great living by only wholesaling properties to other investors.
Seller financing
Some sellers may be willing to finance the house they are selling or finance a second loan on a home that allows a buyer to put less than 20 percent down. If your bank is willing to offer 80 percent loan-to-value, the seller may offer to loan the other 20 percent, which would amount to no money down for the buyer. The seller may also offer a number of other loan-to-value percentages to help a buyer get into a home for less than 20 percent down.
Finding seller-financed properties is the tricky part. Most sellers are not looking to finance a loan when they sell. To find seller financed listings, look for homes that have no loans against them or an MLS listing description that say seller financing is available. The seller’s terms can vary greatly depending on how desperate they are to sell and what exactly they are looking to get out of the deal. Do not expect to pay four percent interest on a seller-financed loan; they will want a premium on any money they lend. It is also harder to find great deals with seller financing, which is key to my strategy.
There are many new restrictions on financing thanks to the recent Dodd-Frank Act.
Refinance
In most areas of the country, home values are rising and interest rates are at record lows. You may be able to refinance your home and get enough money to buy an investment property. Once you are able to buy an investment property, you can refinance it in one year (sometimes less with the right bank). With rates as low as they are, if you bought the home below market value, you should be able to take out as much as you put into the house and still cash flow. I use this refinance technique all the time. Getting lenders to do a refinance is tricky when you own multiple investment properties. I use a portfolio lender who has allowed me to use a cash-out refinance on as many properties as I want.
Below is a property I refinanced:
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Move in ready Houses
A move-in ready property means all the repairs are completed and it is ready to rent as soon as you buy the home. There can be many advantages to buying a nice home. The biggest advantage is you do not have to pay for repairs. You also do not have to spend time waiting for repairs to be done, which saves money on mortgage payments, utilities, and other carrying costs. The downside of a move-in ready property is that it is usually more expensive and provides less cash flow than a home that needs work.
Credit cards
A few other ways to get quick cash can be very expensive and are usually reserved for people looking to do a quick flip. If you have a killer deal you cannot pass up, you may want to consider these options, but I do not recommend using them unless it is necessary. The easiest way to get quick cash is with credit cards. You can get a cash advance or pay for repairs using your credit card. If you use a credit card to finance your down payment or repairs and cannot pay it off right away, do not pay the 17 percent interest rate. Do your best to get another card that will allow a balance transfer. Many times, you can transfer all of your balance and pay little to no interest for up to a year. That may give you enough time to pay off the card and not to be stuck with a high-interest rate eating all of your profits. I also suggest using a rewards card for repairs on your investment properties. If you pay the balance off every month, this is a great way to make a little extra money.
Self-directed IRA
If you have money invested in an IRA, you are not limited to investing in stocks or mutual funds. There are special self-directed IRAs that you can use to purchase an investment property. You can use your IRA for down payments and repairs and then collect rent in the IRA.
401K
Some 401ks allow an investor to take out a loan against them. You usually have to pay back the loan relatively quickly and pay interest on the loan. You have to be very careful when borrowing from a 401k because the money you borrow is no longer earning interest or growing in your retirement fund. If you lose your job, you also may be required to pay back the loan within 60 days or pay a 10 percent penalty and income tax on the loan.
Subject to loans
With a subject to loan, you buy a house without paying off the previous owner’s mortgage. This is another tricky situation; investors must be very careful with it. Most bank mortgages are not assumable; when the homeowner sells the house, they have to pay the loan in full. The bank most likely will have a due-on-sale clause that says the loans must be paid in full, once the property transfers ownership. With subject to loans the new investor buys a house subject to an old mortgage and does not pay off the loan. There is a chance that the bank will require the loan to be paid off if they find out that the home has been sold.
Investors buy homes subject to a mortgage so that they do not have to get a new loan. It may be hard for the investor to qualify for a mortgage or they may be maxed out on being able to get new loans. If you buy a home for $80,000 that has a $75,000 mortgage in place, the investor would only need $5,000 to buy the house instead of the normal 20 percent or more.
Fannie Mae Homepath program
The Fannie Mae Homepath program on their REO properties allows investors to put only 10 percent down and allows up to 20 financed loans in one person’s name, which is also a huge bonus. It is very difficult for many investors to get loans on more than four properties.
This program has been discontinued.
Conclusion
Rental properties can be expensive, but there are ways to purchase them with less than 20 percent down. If you are short on cash, buying properties with little money down can accelerate the purchasing schedule and increase your returns. However, you will most likely make less money on each property, because borrowing that last 20 percent can be much more expensive than the first 80 percent.
My book Build a Rental Property Empire, goes over how to buy investment properties with little money down. It also covers how to find deals, finance rentals, manage them, and much more! It is available as a paperback and ebook on Amazon or as an audiobook on Audible.
You can make a lot of money as a real estate agent but it takes some time to become on. You must take classes, pass a test, and hang your license with a broker. Having a real estate license can also help your real estate investing if you do a lot of deals. Real Estate Express is a real estate school that provides online classes in many states. Multiple agents in my office have taken online classes from Real Estate Express and have some great feedback on the program. I also took my real estate classes online back in 2001, but I did not use Real Estate Express. I used Vaned to get my license and that was so long ago, I barely remember anything about the classes except they were very boring!
Visit Real Estate Express
There are many other online companies that offer real estate licenses. You will find that many of those companies have very bad reviews and people tend to have bad experiences with them. Why is that? Because taking a real estate class online is one of the most boring things you can ever do. It is hours and hours of staring at a computer screen trying to comprehend information that you will most likely never need after you pass the test.
Many people think the courses are bad because of the material, but that is what the companies have to teach. They don’t decide what to teach, the real estate commissions for each state do that. You have your choice of taking classes online or in person in most states. I think you might learn more by taking classes in person, but the classes can be taken much faster online.
Why should you take real estate classes online?
Potential agents need to ask themselves if an online environment is right for them when getting their real estate license. If you are an investor who only wants to use your license on your own deals, online is a great choice. If you want to make a career out of being a real estate agent, and you have a lot of free time, you may want to think about getting your license in an actual classroom. Being in a classroom is a better learning environment because you have an actual teacher, guest speakers, and can network with other people in the business. The downside is that it takes a lot of hours to get your license in a classroom.
In Colorado, you need 168 hours of education before you can take the test to get your license. The amount of hours you need does not change whether you take the class online or in person, but some people can work faster online than others. You may be able to get through the material much faster online than you can in person. You are also able to work on the classes whenever you want when you take the online version. I have to take continuing education to keep my license every year. I prefer to take my classes online because I can get them done a little faster.
Some people also learn better with different teaching techniques. Reading is a great way for some to learn, while others need an instructor. The online classes have videos and different types of teaching, but there is still a lot of reading. There is a lot of reading when you take in-person classes as well, but the instructor can help supplement that more than an online course.
Is it hard to learn on a computer?
Before I get into the pros and cons of Real Estate Express, I want to talk about online classes in general. If you decide to take online classes, be prepared to be in front of a computer a lot! Most states have much fewer hours required than Colorado, but wherever you get your license it takes a lot of hours staring at a computer.
When you take classes online it can be very hard to motivate yourself and you have to set your own schedule. I know it was tough for me to go through the real estate material and I had been around real estate most of my life (my dad was an agent). The real estate classes are not meant to teach agents how to sell houses and make money, they are meant to teach you the laws and regulations. The laws and regulations are very important, but also very boring.
If you are taking real estate license classes to learn how to sell houses or how to invest in real estate, look somewhere else. You will need a supplemental training program to learn the ins and outs of investing or selling real estate.
I have seen a lot of complaints about Real Estate Express and most of those stem from the material. Real Estate Express does not choose the material they teach, the state licensing board does. It is important to remember the classes are meant to help you stay out of jail, not teach you how to sell houses.
What are the real estate licensing requirements in all 50 states?
What real estate school did my agents choose?
When I got my license in 2001 there were very few choices for real estate schools. I choose Vaned.com because it was one of the few choices I had and somewhat affordable. It was a decent course and they are still around today. There are many more online schools now and prices have dropped as competition has increased.
The primary reason my agents choose Real Estate Express was they were the most affordable choice and they have a very high success rate for agents passing the test. My agents also had schedules or jobs that did not allow them to take their classes in a classroom environment. I think that most people find it is tough to take 168 hours of classes in a classroom when you have a job or a family. If you have to work around that schedule it can take forever to get through the classes.
Reviews from my agents
From Justin:
“I earned my real estate license while at a full-time job, so knew I needed to do it online. I shopped all of the top options and did demos of each. The delivery was fairly similar across the board, so I chose Real Estate Express due to its better price point.
Doing hours and hours of online education is never easy, but I got through the material fairly quickly.
Out of everything, the biggest value was the test prep portion. Once your educational hours are complete, you still need to take state and national licensing exams at testing centers. Real Estate Express had modules specifically to prepare me for these. I really enjoyed these modules and most importantly…I passed the test on my first try. Many people I know had to take the exams 2 or 3 times before passing.
Based on all of this, I have recommended Real Estate Express to several people.”
From David
“I was able to get through the material rapidly while working a full-time job. I needed the flexibility online courses offer. Real Estate Express was inexpensive and has all the features I wanted.
As I shopped options, I saw that Real Estate Express had chat and phone support for people to reach. The money-back guarantee was good to see too.
During exam prep, when I went through the test questions the system gave immediate feedback on the question. This is called a coaching module. It lets you know why you got a question right or wrong as you test, which has helped my learning tremendously.”
From Michael
“I quit my job in order to get my real estate license as quickly as possible. After looking at various options, it seemed I could get through fastest by using an online option. Real Estate Express had what I needed and it was recommended to me by two people.
I did have some technical issues with my computer, so I had to use their support several times. They responded quickly and resolved my issues. It was good to have nice human support throughout the process.
I also had questions with the licensing process, which they helped me with as well.”
Real Estate Express advantages
When I got my license many years ago, I did not pass the test on my first try. Most of this was my fault because I thought I knew everything about real estate and did not need to study very much. The real estate test is not easy to pass. I passed the next try after studying more and taking my time prepping for the test. I had to take the test again on very short notice a few years later to become a broker for my sister’s company for a short period of time. I passed the test with three days of studying on my first try thanks to a test prep course.
Test Preparation
One of the toughest parts of passing the real estate licensing tests is understanding the questions. The real estate licensing boards tend to use double and triple negatives to trip you up. The wording is very confusing and it is easy to fail even if you know the material well. I think the test prep is one of the most important features of any school because you need to get used to how the questions are asked on the test.
I have heard people complain about the poor wording of quizzes and questions in the real estate classes. It is true that they are worded poorly, but that is to prepare you for the state test. Here are some other advantages that I have seen from Real Estate Express:
Live support
I have heard from numerous people about the life support Real Estate Express offers and how helpful it can be. They are very quick to respond to questions online or on the phone.
A+ BBB rating
They have a great rating with the BBB and respond to any complaints with logic ad solutions.
Affordable
Real Estate Express is Cheaper than most other real estate schools. They are the largest online real estate school in the country and that allows them to be able to charge less than the other schools. Their low prices are also why they have become the largest real estate school in the country.
Courses in most states
Real Estate Express offers courses in 27 states. They are continually adding more states as they are approved to offer courses for real estate licenses. Some states require in-person classes while others do not.
Real Estate Express disadvantages
There are some cons to Real Estate Express, but they will come with almost any online school.
The online structure is boring
When you take classes online it is really boring going through the material and hard to motivate yourself.
Fewer networking opportunities
When you take classes in person you meet the instructor, other classmates, and guest speakers. You miss that with online classes.
Less support with online classes
Even though most schools offer some type of support, you don’t have a live teacher you can ask questions to immediately.
No time table to complete the course
When you take classes in person you know exactly when the classes are and when they will be completed. When you take classes online it is all up to you to complete the work. There is no schedule and you must be self-motivated.
Conclusion
If you are thinking of getting your license I recommend Real Estate Express if you go the online route. you can make a lot of money as a real estate agent, but remember the real estate classes will not teach you how to make money. The classes teach you the laws and regulations of being a real estate agent. If you want to learn to make money as an agent I would suggest choosing a broker who offers training and support for new agents.
Whether you’re buying or selling your home, you have probably heard the term listing agent a few times. A listing agent is someone who helps a seller market their home. They communicate with a buyer’s agent so potential buyers can tour your home in person, and then once it comes time, they negotiate offers on your behalf. Here’s an easy way to remember the difference between a buyer’s agent and a listing agent:
A buyer’s agent represents the buyer.
A listing agent represents the seller.
The two agents will communicate with one another on behalf of each of their clients.
Is a Listing Agent Necessary?
The long story short is no. You can try to sell it on your own, often called for sale by owner (FSBO). Some people are successful in selling their home on their own, but most people still need assistance in pricing, marketing, and negotiating top dollar for the home
Enter Homie
Using a traditional listing agent can get pricey. Homie is the tech-enabled way to sell your home for a low fee. You still work directly with a Homie listing agent, but you’ll just save serious dough by not paying high commissions. When you sign up to sell your home with Homie, you get a local, experienced listing agent plus a whole team of home-selling pros. Homie even has a team of attorneys to assist you with all the legal stuff.
What Does a Listing Agent Do?
They have a few responsibilities:
Prices your home
A listing agent can help you analyze the market and price your home accordingly. Of course, it’s up to you as the seller to decide if the final price is right.
Markets your home
Listing agents help you market your home by putting them online. Only licensed agents can put homes on the MLS.
Coordinates with buying agents
Many buyers are represented by a buyer’s agent. Other agents will communicate directly with your listing agent to arrange showings of your casa.
Paperwork
When it comes time to review offers, the listing agent will go over all the paperwork with you and make sure the offer looks good.
Negotiations
Oftentimes, the listing agent will say that their main job is to protect you. They want to make sure you’re getting top dollar from your home. They’ll negotiate with the buyer’s side to ensure the right deal gets done quickly.
What Doesn’t a Listing Agent Do?
There are a few things out of their wheelhouse:
Show your home
A listing agent won’t meet potential buyers at your home to show off what you’ve got. That’s the responsibility of the buyer’s agent.
Write the offer
While they do understand how to negotiate offers, your listing agent will not write the offer on your home. That has to come from the buyer’s side. They will, however, assist in drafting counteroffers and any addenda you may need.
Do magic
The reality is, most sellers believe that their house is worth more than it actually is. A listing agent can’t do magic and make it sell for more than it’s worth or make it better than what you’re bringing to the table.
What Does a Homie Listing Agent Do?
Our listing agents do everything that a traditional listing agent does, but we charge a low fee to list, market, and negotiate on your behalf. There aren’t any outrageous commissions to be made here. There are no hidden fees either. (You may still want to pay the buyer’s agent a commission, which is typically 2.5-3% of the sale price but it’s your choice how much to offer.)
Will they help you get the best price for your home? You’re right. They will.
Will they assist in helping you with all the legal business? They live for it.
Will they help you have the best possible home buying experience? They wouldn’t be a Homie if they didn’t want to.
There’s No Place Like Homie, There’s No Place Like Homie
Really though, our licensed listing agents are ready to help you sell your home for a fraction of the cost of a traditional agent. Click here to learn more about how to sell your home with Homie, or click here to jump right into the process.
A new home may be one of the biggest purchases you’ll make in your life. Before you begin shopping for the right home to buy, you’ll need to explore mortgage options if you’re planning to finance the purchase.
Not all home loans are the same, though. So, doing your research before moving forward can help you select the most suitable option for your financial situation and possibly keep more money in your pocket. Plus, you’ll know what to expect, in terms of guidelines, when you apply.
Types of mortgages
Conventional loan – Best for borrowers with a good credit score
Jumbo loan – Best for borrowers with excellent credit looking to buy an expensive home
Government-insured loan – Best for borrowers who have lower credit scores and minimal cash for a down payment
Fixed-rate mortgage – Best for borrowers who’d prefer a predictable, set monthly payment for the duration of the loan
Adjustable-rate mortgage – Best for borrowers who aren’t planning to stay in the home for an extended period, would prefer lower payments in the short-term and are comfortable with possibly having to pay more in the future
1. Conventional loan
Conventional loans, which are not backed by the federal government, come in two forms: conforming and non-conforming.
Conforming loans – As the name implies, a conforming loan “conforms” to the set of standards put in place by the Federal Housing Finance Agency (FHFA), which includes credit, debt and loan size. For 2023, the conforming loan limits are $726,200 in most areas and $1,089,300 in high-cost areas.
Non-conforming loans – These loans do not meet FHFA standards. Instead, they cater to borrowers looking to purchase more-expensive homes or individuals with unusual credit profiles
Pros of conventional loans
Can be used for a primary home, second home or investment property
Overall borrowing costs tend to be lower than other types of mortgages, even if interest rates are slightly higher
Can ask your lender to cancel private mortgage insurance (PMI) once you’ve reached 20 percent equity, or refinance to remove it
Can pay as little as 3 percent down on loans backed by Fannie Mae or Freddie Mac
Sellers can contribute to closing costs
Cons of conventional loans
Minimum FICO score of 620 or higher is often required (the same applies for refinancing)
Higher down payment than some government loans
Must have a debt-to-income (DTI) ratio of no more than 43 percent (50 percent in some instances)
Likely need to pay PMI if your down payment is less than 20 percent of the sales price
Significant documentation required to verify income, assets, down payment and employment
Who are conventional loans best for?
If you have a strong credit score and can afford to make a sizable down payment, a conventional mortgage is probably your best pick. The 30-year, fixed-rate conventional mortgage is the most popular choice for homebuyers.
2. Jumbo loan
Jumbo mortgages are home loan products that fall outside FHFA borrowing limits. Jumbo loans are more common in higher-cost areas such as Los Angeles, San Francisco, New York City and the state of Hawaii, where home prices are often on the higher end.
Pros of jumbo loans
Cons of jumbo loans
Down payment of at least 10 percent to 20 percent required in many cases
A FICO score of 700 or higher usually required
Cannot have a DTI ratio above 45 percent
Must show you have significant assets in cash or savings accounts
Usually require more in-depth documentation to qualify
Who are jumbo loans best for?
If you’re looking to finance a home with a selling price exceeding the latest conforming loan limits a jumbo loan is likely your best route.
3. Government-insured loan
The U.S. government isn’t a mortgage lender, but it does play a role in making homeownership accessible to more Americans. Three government agencies back mortgages: the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA) and the U.S. Department of Veterans Affairs (VA).
FHA loans – Backed by the FHA, these home loans come with competitive interest rates, and help make homeownership possible for borrowers without a large down payment or pristine credit. You’ll need a minimum FICO score of 580 to get the FHA maximum of 96.5 percent financing with a 3.5 percent down payment. However, a score as low as 500 is allowed if you put at least 10 percent down. FHA loans require two mortgage insurance premiums, which can increase the overall cost of your mortgage. Lastly, with an FHA loan, the home seller is allowed to contribute to closing costs.
USDA loans – USDA loans help moderate- to low-income borrowers who meet certain income limits buy homes in rural, USDA-eligible areas. Some USDA loans do not require a down payment for eligible borrowers. There are extra fees, though, including an upfront fee of 1 percent of the loan amount (which can typically be financed with the loan) and an annual fee.
VA loans – VA loans provide flexible, low-interest mortgages for members of the U.S. military (active duty and veterans) and their families. There’s no minimum down payment, mortgage insurance or credit score requirement, and closing costs are generally capped and may be paid by the seller. VA loans charge a funding fee, a percentage of the loan amount, which can be paid upfront at closing or rolled into the cost of the loan along with other closing costs.
Pros of government-insured loans
Cons of government-insured loans
Mandatory mortgage insurance premiums on FHA loans that cannot be canceled unless refinancing into a conventional mortgage
Loan limits on FHA loans are lower than conventional mortgages in most areas, limiting potential inventory to choose from
Borrower must live in the property (although you may be able to finance a multi-unit building and rent out other units)
Could have higher overall borrowing costs
Expect to provide more documentation, depending on the loan type, to prove eligibility
Who are government-insured loans best for?
Are you having trouble qualifying for a conventional loan due to a lower credit score or minimal cash reserves for a down payment? FHA-backed and USDA-backed loans could be a viable option. For military service members, veterans and eligible spouses, VA-backed loans are often better than a conventional loan.
4. Fixed-rate mortgage
Fixed-rate mortgages maintain the same interest rate over the life of your loan, which means your monthly mortgage payment always stays the same. Fixed loans typically come in terms of 15 years or 30 years, although some lenders allow borrowers to pick any term between eight and 30 years.
Pros of fixed-rate mortgages
Monthly principal and interest payments stay the same throughout the life of the loan
Easier to budget housing expenses from month to month
Cons of fixed-rate mortgages
If interest rates fall, you’ll have to refinance to get that lower rate
Interest rates typically higher than rates on adjustable-rate mortgages (ARMs)
Who are fixed-rate mortgages best for?
If you are planning to stay in your home for at least five to seven years, and want to avoid the potential for changes to your monthly payments, a fixed-rate mortgage is right for you.
5. Adjustable-rate mortgage (ARM)
Unlike the stability of fixed-rate loans, adjustable-rate mortgages (ARMs) have interest rates that fluctuate with market conditions. Many ARM products have a fixed interest rate for a few years before the loan changes to a variable interest rate for the remainder of the term. For example, you might see a 7-year/6-month ARM, which means that your rate will remain the same for the first seven years and will adjust every six months after that initial period. If you consider an ARM, it’s essential to read the fine print to know how much your rate can increase and how much you could wind up paying after the introductory period expires.
Pros of ARMs
Lower fixed rate in the first few years of homeownership (although this isn’t a guarantee; as of late, 30-year fixed rates have actually been similar to those for 5/6 ARMs)
Can save a substantial amount of money on interest payments
Cons of ARMs
Monthly mortgage payments could become unaffordable, resulting in a loan default
Home values may fall in a few years, making it harder to refinance or sell before the loan resets
Who are adjustable-rate mortgages best for?
If you don’t plan to stay in your home beyond a few years, an ARM could help you save on interest payments. However, it’s important to be comfortable with a certain level of risk that your payments might increase if you’re still in the home.
Other types of home loans
In addition to these common kinds of mortgages, there are other types you may find when shopping around for a loan:
Construction loans
If you want to build a home, a construction loan can be a good choice. You can decide whether to get a separate construction loan for the project and a separate mortgage to pay it off. A construction-to-permanent loan, which merges construction costs and financing into a single loan product, is also an option.Both options typically require a higher down payment and proof that you can afford the monthly payments.
Interest-only mortgages
With an interest-only mortgage, the borrower makes interest-only payments for a set period – usually between five and seven years- followed by payments for both principal and interest You won’t build equity as quickly with an interest-only mortgage, though, since you’re initially only paying interest for a set period. Still, these loans are best for those who know they can sell or refinance, or for those who can reasonably expect to afford the higher monthly payment later.
Piggyback loans
A piggyback loan, also referred to as an 80/10/10 loan, actually involves two loans: one for 80 percent of the home price and another for 10 percent. You’ll make a down payment for the remaining 10 percent.These loan products are designed to help the borrower avoid paying for mortgage insurance. While eliminating those PMI payments might sound appealing, keep in mind that piggyback loans require two sets of closing costs, and you’ll also accrue interest on two loans. Crunch the numbers to find out if you’re really saving enough money to justify this unconventional arrangement.
Balloon mortgages
Another type of home loan you might come across is a balloon mortgage, which requires a large payment at the end of the loan term. Generally, you’ll make payments based on a 30-year term, but only for a short time, such as seven years. When the loan term ends, you’ll make a large payment on the outstanding balance, which can be unmanageable if you’re not prepared or your credit situation deteriorates. You can use Bankrate’s balloon mortgage calculator to see if this kind of loan makes sense for you.
Next steps to getting your mortgage
Now that you have an idea of the right kind of loan for your home purchase, it’s time to find the right mortgage lender to make it happen. Every lender is different, and it’s important to comparison shop to find the best terms that fit your finances. From the brick-and-mortar bank and credit unions in your neighborhood to online-only mortgage companies, there is a wide range of options to choose from. Read Bankrate’s lender reviews of some of the leading names in mortgages, and follow this guide to find the best lender.
Check out these resources for more information about types of mortgages and available lenders:
By Peter Anderson9 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited August 24, 2020.
The Roth IRA is probably my favorite investment vehicles, and it’s something I’ve written about pretty extensively here on this site. When I started hearing stories from folks recently about how a lot of people have never even heard of the Roth IRA, I was a little bit shocked. Maybe I shouldn’t have been.
Jeff Rose of GoodFinancialCents.com recently gave a talk to a group of graduating seniors at his alma-mater about investing and retirement. While he was there he took an informal poll and asked who knew what a Roth IRA is. Out of 50 people attending, not a single one knew what a Roth IRA was. For Jeff that moment was a bit of an ephiphany, and he decided to start the Roth IRA Movement. The Roth IRA Movement is a group of 140+ bloggers and personal finance journalists all coming together today to write about the Roth IRA, and to get others to start thinking about saving for retirement.
I decided to pitch in and give 10 reasons why the Roth IRA should be your retirement account of choice.
10 Reasons To Love The Roth IRA
There are probably a million and one reasons to love the Roth IRA, but for the sake of brevity, here are my top 10.
Tax free withdrawals at retirement: The IRA and the 401(k) allow you to add funds to your account before the money gets taxed. That’s great because it allows you to reduce your taxable income, and lowers your taxes now. The Roth IRA has a great benefit as well, however. You pay taxes on your income now and fund your Roth IRA, and then you get to take your contributions and earnings out without paying taxes at retirement. Who doesn’t love tax-free money at retirement?
Withdraw contributions at any time: When you contribute money to your Roth IRA, you can withdraw those contributions without penalty or taxes at any time (not so with earnings). While I wouldn’t suggest doing that as it can short-circuit your gains, it is nice to know that if an emergency arises and your emergency fund doesn’t cover it, this may be an option.
No age limit for a Roth IRA: There isn’t an age limit to have a Roth IRA, so even your children can have one! As long as you or your child have earned income, and you’re below certain income thresholds, most likely you will qualify to contribute to a Roth IRA.
Good way to diversify tax treatment: As mentioned earlier in this post Roth IRA withdrawals at retirement are tax free. By contributing to an IRA (pre-tax) and Roth IRA (post-tax) you can diversify your situation when it comes to taxes. That can be especially important if you’re unsure how your tax rates will compare – now versus at retirement. Hedge your bets and contribute some to each.
High income limits: The income limits for contributing to a Roth IRA are relatively high, so most people will be able to contribute. The limits are $193,000 if you’re married filing jointly, or $131,000 if you’re single, head of household, or married filing separately and did not live with your spouse for any part of the year.
Perfect for procrastinators like me: The Roth IRA account type allows people to contribute to their Roth IRA right up until tax day of the following year. So for example, if I wanted to start a Roth IRA and fund it for 2014, I could do that right up until April 15th, 2015, the day that taxes are due for 2014.
You can use it to save for college or a home without penalties: You can take contributions out of a Roth IRA to pay for college expenses, without incurring any penalties. While it isn’t always a good idea to short circuit gains in your account by taking money out, if you do run into the situation where you need to, you won’t be subject to the normal early withdrawal penalties and taxes. Withdrawing earnings would still be subject to taxes, but no penalties. For first time homebuyers, you can withdraw up to $10,000 tax free from your Roth IRA contributions and earnings, just be aware of all the fine print on withdrawing for a home purchase.
The Roth IRA can secure your golden years: If you want to be secure in retirement you need to start saving, and start now! The Roth IRA is a great way to get started because you can invest in smaller increments – which will add up to much larger dollar amounts by the time you retire.
A Roth IRA will usually have more investment options than your company 401k: One great thing about the Roth IRA is that they’re flexible. You can invest in what you want through the Roth IRA. Company 401ks aren’t always as flexible as you’re held hostage to whatever plan administrator your company chooses, and
Easy to open a Roth IRA: Opening a Roth IRA is really easy. Companies like Vanguard, Betterment, Wealthfront or Axos Invest have made the signup process to get started with a Roth extremely easy. In many instances it will only take a few minutes to open an account. Depending on your investment strategy choosing your investments may take a bit longer, but it isn’t as complicated as some people might think. Just choose where you’ll open the account, fund the account, and choose your investments.
Those are a few of the reasons why I love the Roth IRA, and why I think you should give the Roth a look as well.
Have you started your Roth IRA yet? If not, what’s holding you back? Tell us your thoughts in the comments.
Roth IRA Contribution Limits
Year
Age 49 and Below
Age 50 and Above
2002-2004
$3,000
$3,500
2005
$4,000
$4,500
2006-2007
$4,000
$5,000
2008-2012
$5,000
$6,000
2013-2018
$5,500
$6,500
2019-2022
$6,000
$7,000
2023
$6,500
$7,500
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Before you rush out to buy a home, consider the fact that inventory levels are beyond dismal at the moment, though there’s a good chance that could all change rather quickly.
If you’ve already begun your property search, you probably already know inventory is virtually non-existent in your desired neighborhood. If you haven’t, prepare to be shocked.
There’s even concern that the shortage of inventory could be further exacerbated by the recent surge in mortgage rates, as would-be buyers jump off the fence and rush to buy before affordability gets any worse.
But I don’t believe things will go that way – in fact, I think it’s going to be quite the opposite.
And there are already signs that housing inventory is rising. A recent report from Redfin revealed that active listings increased 6.4% between March and April, and 4.2% between April and May.
Compare that to last year, when inventory peaked in January and drifted lower much of the year.
Assuming more homes keep hitting the market, year-over-year levels of inventory may actually be positive at some point this year.
So why is inventory slated to rise? Well, allow me to highlight five reasons:
Homeowners Gaining Equity and Getting Out
Here’s an oldie but goodie. As home prices continue to increase, more and more homeowners will get back in the black.
We all know scores of homeowners are stuck with underwater mortgages, but many of those who held on are now finding themselves with some sliver of home equity thanks to recent hefty home price gains.
Additionally, a lot of the mortgages on these properties were taken out in 2005-2006 or earlier, so for those who didn’t go with an interest-only loan, a decent chunk of the mortgage is already paid off.
As time goes on, this trend should become even more prevalent, and many of these homeowners just want out. They aren’t necessarily looking to turn a profit; they just want to avoid a short sale or foreclosure.
Sure, some will argue that they’ll need “X” amount of home equity so they can purchase another home after they sell, but plenty of owners may decide to downsize, or simply rent instead.
Not everyone is so bullish on housing, and with interest rates rising, existing homeowners know today is a great time to sell, especially with bidding wars forcing prices up to future levels.
After all, it will be a lot easier to sell at a premium now, and with far less scrutiny, when inventory is still low.
More Foreclosures Coming to Market
Another interesting trend of late is the rise in foreclosure activity, which was steadily falling up until last month, according to RealtyTrac.
After hitting a six-year low in April, foreclosure activity increased two percent in May, thanks to an 11% rise in bank repossessions.
Foreclosure starts increased four percent from April, and rose substantially in judicial states, where the process takes a lot longer.
Still, it looks like lenders are beginning to cut through the red tape, with foreclosure starts up 229% in Maryland, 122% in Connecticut, 108% in Hawaii, 84% in Arkansas, and 82% in New Jersey from a month earlier.
Foreclosure activity increased to a 33-month high in Maryland and a 20-month high in hard-hit Nevada, and Florida saw a 20% monthly rise in foreclosure activity, meaning there will be much more distressed inventory making its way to market.
The takeaway here is that as home prices rise, banks and lenders will actively pursue foreclosure because they know the demand is finally there to offload the properties.
Banks Will Take Advantage of Rising Prices Too
This has been a concern for years, with many pondering when the banks will dump their massive distressed inventory, which continues to grow.
Though they’ve held on for quite a while, it could soon be time for them to ditch their stable of homes and get back to what they do best, banking.
And they could begin to do it a lot more quickly, seeing that home prices have chalked some massive gains of late, especially if the housing rally doesn’t have the legs many think it does.
Banks aren’t typically in the business of acquiring and selling residential real estate, so if they can get out at a decent price, they probably will.
Unfortunately, if they all get the same idea at once, it could spell disaster for the recent home price gains.
Speculators Starting to Lose Interest
At the same time, many of those who purchased properties on the cheap lately were Wall St. investors and hedge funds, such as Blackstone and Colony American Homes.
As home prices rise, they will probably do two things that will hurt the residential real estate market.
For one, they will stop buying houses, seeing that they’re in it strictly to make a certain return in a relatively short period of time.
If the price point isn’t there anymore, they’ll stop buying, point blank. At the same time, they’ll begin dumping their properties for tidy profits to mom and pops that missed the housing bottom.
This could get nasty, seeing that these hedge funds purchased a ton of single-family homes over the past few years.
And we all know how Wall Street works – pump and dump, with no concern for collateral damage.
Home Builders Getting Back to Work
While existing housing inventory increases, so too will the number of new homes built.
Yesterday, the Census Bureau revealed that single-family permits increased 1.3% to 622,000 units in May, the highest level in five years.
At the same time, builder confidence for newly-built single-family homes surged eight points to a reading of 52 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), the first time it has been over 50 since April 2006.
NAHB Chief Economist David Crowe said the report is in line with expectations for a 29% increase in total housing starts this year, which will see them top the one million mark for the first time since 2007.
In other words, home builders are gaining confidence and getting back to work. New developments will be sprouting up all over the place as demand for homes continues to increase.
Of course, it’s just a matter of time before they build too many homes and repeat history once again. But hopefully that’s a long way out.
By the way, mortgage rates are only expected to rise about a half a percentage point or so between now and the end of 2014, so why fight tooth and nail for a home today, especially with future home price gains already baked in?
Patience may be the play here if you want to land a property you actually like.
By Peter Anderson7 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited April 9, 2012.
My Lending Club account continues to show improvement month over month as my returns are now up to 11.61%. I’ve been extremely happy with my returns since starting with the site, and as my strategies evolve, my returns have continued increasing. I’d highly recommend adding Lending Club to any person’s diversified portfolio of investments.
This past week Lending Club announced on their blog that they were improving the downloadable file that is available for investors to prospect and view available notes in the system. They’ve added additional information to the file, as well as removing some that was no longer needed.
We strive to provide a comprehensive set of information to assist you in your investment analysis and be responsive to your feedback to continuously improve your experience with our platform. Recently, we’ve received requests to augment and improve our Browse Notes downloadable file, which led us to create the new version we have now made available.
The additional data includes loan details and status, third-party reported credit attributes, and information reported by the borrower. This detailed information can be downloaded by logged in users from any page of our Browse Notes section by clicking on the “Download All” link on the bottom right corner of the page.
So the downloadable “browse notes” file will now have even more details available for lenders to peruse. Most of the new additions have to do with the borrowers credit history including number of accounts opened in the past 24 months, months since most recent delinquency, number of mortgage accounts and more. Check out the blog post linked above for a more detailed look at what has been added.
Interested in my original Lending Club Review? check it out below.
Check out my original Lending Club review
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Returns Now At 11.61%
A week or two ago I started looking at my Lending Club account for 2011 tax purposes. Trying to figure out your taxes when it comes to Lending club can be extremely confusing as the reporting processes can vary depending on how much you’re investing in each loan, how your interest income will be reported, etc. If you’re as confused as i was when I started looking at it, check out my post on Lending Club and taxes.
A couple of months ago I had my first charged off loan. It was disappointing to see my perfect record of no charged off loans go down the tubes, but it wasn’t completely unexpected. With as long as I’ve been investing with Lending Club I would have expected at least 1 or 2 charged off loans a while ago. Here’s a look at my account to date:
Net Annualized Return of 11.61%: Up from 11.44% in February, 11.23% in December, 10.93% in September, 10.76% in August and 10.53% before that. It is showing steady progress over time.
Number of defaults.. one for now: A few months ago now I had my first charged off loan, a Grade B loan. It’s interesting that the loans I’ve had either go late or get charged off have been the higher grade loans. The lower grade ones have so far been on time for the most part. I did have another late loan earlier this month, but that borrower has gotten back on track. Let’s hope they stay that way.
Twenty four loans have been paid off early: Nine were A grade loans, seven were grade B loans, five were C grade, two grade E and one F. Looks like grade A and B loans are more likely to get paid back early, reducing returns. Another reason why I’ve started investing in more higher grade loans.
My account balance increasing, re-investing returns: I currently have $2,723.64 in my account, with $246.49 of that ready to invest. I’ll be looking to invest that dormant cash shortly here.
I’m still diversified by investing across a large number of loans: I’ve had 157 loans, with no more than $25 in each loan. In other words, I’m diversified across a large number of loans, lessening my risk from any one loan going into default or getting charged off.
NOTE: Did you know that 100% of investors who have invested in 800 notes or more had positive returns. Not too shabby, not everyone in the stock market can say that!
What’s Your Actual ROI?
When you’re looking at the numbers on the Lending Club and Prosper sites, it has been pointed out time and again that their numbers are overly rosy view of what your actual return on investment will be. The ways that they calculate the ROI isn’t really standardized, and they don’t take into account how old your loans are, possible future default rates, or other things that may become a factor. The numbers they show are just something you have to take or leave.
A site that I discovered a while ago that gives what I think is a better picture of the actual ROI you can expect is Nickel Steamroller’s Lending Club portfolio analyzer. Basically the analysis tool with give you an estimated ROI after you download all your notes from your Lending Club account and upload the .csv file. It will go through you notes and give sell recommendations, show duplicate notes and highlight notes that are below Lending Club’s average return (so you can sell them on the secondary platform). It will even give you a fun little map showing where your loans are (see mine above).
In looking at my returns on the analyzer, my actual return according to the site will be closer to 10.64%. Still nothing to sneeze at.
Evolving Lending Club Strategy
Here’s the basic strategy I’ve been using with Lending Club over the past couple of years. I’ve fudged on this a bit in the past few months due to the fact I’m buying more low grade loans, but it still holds mostly true.
Less than $10,000: I believe I’ll still be sticking with mostly loans below $10,000. Lower amounts mean higher likelihood of payback of the loan.
Zero delinquencies: Again, I may fudge slightly on this one, but I still want it to be very few or zero delinquencies.
Debt to income ratio below 20-25%: I like to invest in loans where the borrowers have a lower DTI ratio, and preferably have higher incomes. I’ll try to keep this as is.
Good employment history: I like loans with a decent employment history of at least 2 years, and a decent income.
So that’s what I’m doing with my Lending Club portfolio right now, and how I’m investing.
Not ready to invest, but looking to consolidate debt or pay off a high interest credit card? You might want to consider borrowing from Lending Club. Check out my post on borrowing from Lending Club.
Are you currently investing in Lending Club? How are your returns looking? Tell us in the comments!
Last week, Wells Fargo boasted about its homeowners collectively receiving $50 million in mortgage principal reduction via the Wells Fargo Home Rebate Card Rewards Program since its launch back in 2007.
While that sounds pretty nifty, is the program just another marketing gimmick, or does it actually deliver?
Let’s dig into the details to find out.
How the Wells Fargo Home Rebate Card Works
The Wells Fargo Home Rebate Card aims to pay down your mortgage faster
By applying the cash back you earn with the card to the principal balance
This reduces how much you need to pay in the way of interest
And results in a home loan that is paid off before maturity
First off, the program relies upon Wells Fargo mortgage holders opening a credit card, known as the “Wells Fargo Home Rebate Card.”
From there, each purchase made using the card earns a 1% rebate, which is credited to the principal balance on your Wells Fargo mortgage in $25 increments.
In other words, once you spend $2,500 with the credit card, you’ll earn a $25 rebate, which will be applied to your outstanding mortgage balance.
For example, if you have a 30-year fixed mortgage with a $200,000 loan amount, and you spend $2,500 per month on the card, Wells Fargo would apply $8,525 toward your principal balance over the life of the loan.
That would save you $7,833 in interest for a total savings of $16,358 (shorter amortization period).
It would also reduce your loan term from 30 years to 28 years and seven months, meaning you’d own your home free and clear just a little bit sooner.
And all of this would be accomplished automatically, with no fees or work required on your end to take part.
Additionally, Wells Fargo Home Rebate cardholders can earn 3% back on gas, grocery, and drugstore purchases during the first six months.
Note: Several types of mortgages are not eligible, including commercial first mortgages, certain second mortgages, farm loans, piggyback mortgages, and loans in process that are not yet funded.
The Good, Bad, and Ugly
While it might sound like a clear winner
You only get 1% cash back via this credit card
There are plenty of other credit cards that earn 2% cash back or more
And you can cash out those rewards to your bank then simply apply them to any mortgage on your own schedule
There are pros and cons to the Wells Fargo Home Rebate Card, like any other special offer out there.
The first negative is that it requires opening a credit card, which is essentially an invitation for more debt alongside your behemoth mortgage.
This is all good and well if you already use a credit card for most purchases, but it could land an irresponsible spender in even more debt.
Secondly, the rebate earned via this program is only 1% – many cash-back credit cards these days come with higher rebate levels, with some offering 5% in certain categories quarterly, or 2-3% year-round.
In other words, you could technically just take the cash back earned via your other credit cards and apply it to the principal of your Wells Fargo mortgage, or any other mortgage you happen to pay.
Or you could always just make extra payments to principal yourself or make biweekly mortgage payments instead.
Finally, deep in the terms and conditions of the program, Wells Fargo notes that your mortgage won’t be eligible if they sell your mortgage to another company. And worse, they can shelf the program at their discretion, at any time.
Now neither of those things may happen, but it’s still something to keep in mind when debating about going with the card.
On the flip side, the Home Rebate Card is automated, so you won’t have to worry about a lack of discipline in making extra payments to principal.
As long as you use the card enough, the extra principal payments will be made, and your mortgage will cost you less over time.
Is the incentive enough to go with a Wells Fargo mortgage? Probably not, but if all else is equal (e.g. same mortgage rate and fees), it could tip the deal in the bank’s favor.
And if you already have a Wells Fargo mortgage, which many Americans do, it’s something worth considering if you do most of your spending with a credit card.
Pros of the Wells Fargo Home Rebate Card
No annual fee
No limit to rebate amount
Principal paid down faster
Mortgage interest reduced
Loan term potentially shortened
Cons of the Wells Fargo Home Rebate Card
You need to open a credit card
Requires credit card spending to earn rewards
You can wind up in even more debt if you spend irresponsibly
Your mortgage may be sold by Wells Fargo (loss of eligibility)