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Apache is functioning normally

Last Updated on October 21, 2022 by Mark Ferguson

Flipping houses can be a very lucrative business, but in most cases, you have to pay a lot of taxes. There are ways to pay fewer taxes flipping, but it takes some sacrifices from the investor and a lot of time. Most flips are taxed at the ordinary income tax rate, but in some cases, you may be able to pay only the long-term capital gain tax rate. I flip many houses a year and to me, it is not worth the time it would take to pay fewer taxes on flips, but for others, it may be worthwhile. I am not an accountant and for specific legal or tax questions please consult an attorney.

What are the tax rates on house flips?

Flipping houses is considered a business by the IRS, not an investment. Rental properties are considered an investment and have much more favorable treatment from the IRS. Rental income itself is considered ordinary income, but you can depreciate rentals, which is a huge tax advantage.

When you sell rental properties, the profit is often considered long-term capital gain and taxed at a much lower rate than ordinary income. If you make $30,000 on a rental property sale you may only pay 15 percent taxes instead of twice that if you are in one of the higher tax brackets. It is possible to flip a house and pay that lower tax rate, but there are many things you have to do to qualify your property.

Can a flip be considered a rental property?

The IRS tax codes are not the clearest things in the world. They tend to be very vague when giving instructions on how to figure taxes. The IRS says a rental property has to be held for a certain amount of time for it to qualify for long-term capital gains. However, they do not specify what that time frame is. Many people assume it is one year, but there are no guarantees with the IRS. Some even argue a property has to be rented, not just held for one year to qualify.

It is argued that you can buy a house you intend to flip, fix it up, rent it for one year, and then only pay long-term capital gains taxes. However, the IRS has many intricacies and you should always consult an accountant when trying to figure out the tax code. The IRS created this code because they felt dealers or professional house flippers should have to pay ordinary income tax on their earnings because it is their profession. Just like a doctor, real estate agent or most anyone has to pay ordinary taxes on their wages. If you are flipping ten houses a year, holding them all for over a year, and then trying to pay only long-term capital gains on the taxes, the IRS may say you are a dealer and you owe ordinary income taxes

Is it worth it to pay fewer taxes on flips?

For me, it is not worth holding properties for over a year to save money on taxes. If I have to rent them for a year it would really not be worth it. I try to sell my flips in six months or less, although that does not always happen. Here are the concerns I would have holding on to a flip longer than I have to.

  • I have a limited amount of money I can spend on flips. It takes almost $50,000 of my own cash to flip a house and I have from four to ten going at one time. If I had to hold them for one year I would not be able to flip as many houses, because I would not have the cash to keep buying them.
  • I have to pay interest and carrying costs when I hold flips. Every month I hold a flip I would have costs piling up that would eat into my profits. My carrying costs can be as much as $1,000 a month and I have cheap financing.
  • My loans are only one year long on my flips. If I held them longer I would have to pay off those loans or refinance them, which would greatly increase my costs.
  • The longer you hold a property the more risks there are the market could change. I buy rentals for cash flow and I am not as concerned about market changes, because I will make money with rent. You make money on flips from buying low and selling high. If you hold a property for over a year, the market could decrease and you could lose money.

All of these factors are assuming I hold a flip for one year, but what if I rented the flip to make up for the costs?

Does it make sense to rent a flip for one year to pay long-term capital gains taxes?

If I were to rent my flips after I fixed them up, I might be able to get away with paying long-term capital gains tax. Again, there are no guarantees because I am a professional flipper. Here are the problems I see with renting a flip.

  • I make a lot of repairs on my flips and I want them to look great when they are listed. If I rented the property I risk the tenants messing up all the new fixtures, paint, flooring, and more. I can’t wait to make repairs, because most of my flips need a lot of work and cannot be rented in the state I buy them in.
  • I would have to refinance the property or pay off my loans if I rented the houses as well.
  • After I repair the house I would have to take time finding tenants, checking references, advertising, and signing leases. Most tenants want a long-term lease, which means I would have to rent the house for a year. It takes time to repair the property and I would want to sell the property after the tenants moved out. I would have to hold the properties well over one year, probably close to 18 months to make renting work.

How much money would I save by holding these properties?

If I go to all this trouble and time to pay fewer taxes, what would I actually save? Assuming the long-term rate stays at 15 percent, I would save about 20 percent on taxes. However, there is a push to increase the long-term capital gain tax rate. I average about $30,000 in profit on each flip, which would equate to $6,000 in tax savings on each flip. That is a lot of money to save, but I am actually getting more money overall?

If I held my properties longer I would have to flip half the houses I do now. If I flip ten houses a year I would make $300,000. If I could only flip 5 houses a year, I would make $150,000 a year, but pay fewer taxes. If I made $300,000 paying 35 percent in taxes I would pay $105,000 to the IRS. If I made $150,000 paying 15 percent in taxes I would pay $22,500 to the IRS. I pay a lot less in taxes, but I don’t care how much I am paying, I care how much I am keeping. In one scenario I keep $195,000 and in the other scenario, I keep $127,500.

Not only would I make much less money holding the properties, but I would also risk the IRS saying sorry you don’t qualify since you are a dealer and I would have to pay the full taxes. I also risk the market changing and I didn’t even consider the refinancing costs or carrying costs, although rent may make up for some of that.

Can corporations lower the tax rate on flips?

New tax laws are constantly being enacted and using a corporation to flip houses may save you money. My accountant suggested I use an S corp and that is what I do. With the deductions corporations get I save money but those tax laws could always change.

Can you use a 1031 exchange on flips?

Some people say you can use a 1031 exchange to flip houses but that is a tricky situation. A 1031 exchange is meant for rental properties and investments, not fips. You most likely have to hold the property a year and rent it out but again please talk to a professional!

Conclusion

I make more money by paying more taxes on my flips because I can flip more houses. There is also less risk with the market and tenants. For some people who only flip one house a year, maybe it makes sense to turn it into a rental before you sell. Always talk to an accountant to make sure you are following the rules in these matters.

Build a Rental Property Empire

Categories Fix and Flips

Source: investfourmore.com

Apache is functioning normally

By the age of 14, Michael Templeman was already smitten with mid-century modern furniture. He loved the sleek elegance. The sensuous biomorphic shapes. Eames, Nelson, Noguchi, and Saarinen were more than furniture makers to him. They were designers—turning post-war materials and technologies into furniture that stacked, flexed, and folded in ways never before possible. The organic-shaped, low-slung furniture seemed to encourage conversation and relaxation and made possible the dream that every American could furnish their home beautifully.

After years of personal collecting, Templeman began to help buyers select pieces that would suit their personalities and enhance their living spaces. He opened Tomorrow’s House, a retro/vintage furnishings store located in the heart of the 9th & 9th neighborhood. Tomorrow’s House features mid-century modern originals while also bringing in fresh, relevant “now” pieces.

Tomorrow’s House 937 East 900 South

But the retail store was just the beginning. Joining forces with Johnny Duncan, operations and marketing specialist, Michael began using the store’s inventory to stage homes. The store allowed for a constant influx of new furnishings, which meant each home could be staged to make the most of its potential and improve its value.

Templeman and Duncan named the staging business “Case Study Staging” after the Case Study Houses built in the 1940s and 50s. The company stages entire homes or just a room or two, always with an eye to how they can customize the treatment to highlight the home’s unique features. Their full-service offerings include:

  • Free initial walk-through and assessment
  • Weekend open house stage
  • Partial stage (living room, dining and kitchen)
  • Full stage (living room, dining, kitchen, master bedroom, master bath and hall bath)

Homie first became aware of Case Study Staging when the team staged a condo in downtown Salt Lake. On the initial walk-through, Templeman and Duncan pointed out a few pre-staging projects to the owner. These projects were the kinds of things an owner stops seeing after living in a house for awhile, but that feel like a poke in the eye to potential buyers. The owner liked the suggestions and readied the house by painting, cleaning, and making a few repairs. Then it was time for staging.

This condo had a gorgeous view of downtown Salt Lake City. Templeman and Duncan knew they needed to draw potential buyers through the home and invite them to slide open those patio doors and step out to enjoy the view. So, they staged the patio for free.

At Homie, we always keep an eye open for professionals who can take extra good care of our customers and were impressed with Case Study Staging. Each home they staged was not simply a process of moving the same furnishings around from house to house. Rather, they constantly accentuated individual home features with new quality pieces, making each house feel unique and fresh.

If you’re considering selling your house on Homie, we encourage you to have Case Study Staging come out for an initial walk-through. These guys will see your home from the inside-out, recognize its strengths and weaknesses, and show you how to bring out its best shining self.

And for Homie customers, Case Study Staging offers a 20% discount, making their services more than affordable for any size home. Find them on Homie’s Provider Marketplace today.

Source: homie.com

Apache is functioning normally

You dutifully filed your taxes by April 15th, and now you’re waiting for Uncle Sam to deposit that extra cash into your account. While it may seem like a license to splurge on that new pair of shoes or a trip to your city’s hottest new restaurant, do yourself a favor and think smart when it comes to your tax return refund.

How Many Americans Are Getting a Tax Refund?

According to The Motley Fool website, about half of all Americans will receive a refund in 2017. The highest percentage of those lucky guys and gals fall into the Millennial category, with 66% of those who filed seeing some cash coming back their way. Approximately half (49%) of the Generation X category of taxpayers will get a refund. Unsurprisingly, as your age category goes up, you’re less likely to see money back from the government: only 34% of Baby Boomers will get a refund.

How Do Most Americans Spend Their Refund?

While you might think a windfall from your return is a cause for most people to splurge, today’s economy says different. Bankrate.com, who’s been studying the tax return spending habits of Americans since 2010, says their research shows only 6% of U.S. adults who are getting some money back from the IRS are planning a vacation or shopping spree. Instead, the highest rate of Americans since the study began are planning on spending it on things they need, such as bills or food. Additionally, 34% plan to save or invest it, while 27% will use it to pay off some of their debt.

What Should I Do With My Tax Refund?

Here’s some unique ideas of what you can do with that tax refund, other than reworking your wardrobe:

  • Start an Emergency Fund. Unexpected car repairs, getting laid off from your job or even medical bills can jump out at any time. Having a cushion can be crucial.
  • Invest in Your Retirement. OK, we know it’s not the sexiest thing you can do with your money, but you’ll appreciate it in the long run.
  • Increase Your Education. Learn more about a hobby you love or more skills for the job you want to move into. Knowledge is power.
  • Donate to a Charity. Give some money to a cause you love. Even a small amount helps.
  • Upgrade Your Apartment. Need more space? How about just giving your current apartment a new look? That return can make that possible.
  • Change the Way You Eat. If you have a pantry full of ramen noodles and stale tortilla chips, now’s your chance to invest in the good stuff. Maybe even take a cooking class?
  • Pay Off Those Credit Cards. Start with the high interest ones and work your way down. Your monthly budget will appreciate it.
  • Take Some Time Off. Take unused vacation days and go somewhere you’ve always wanted to. You’ll be more rested and more productive upon your return.

What are you planning on doing with your tax return? Did you even get one this year? Get chatting below!

Apache is functioning normally

After living in our first home for almost five years, we were ready to upgrade. With a second child on the way (and at least a third in the not too distant future) we needed more space, so we knew it was time for a larger house. We took a bit of a different approach in that instead of buying a bigger home, we opted to build our dream home. Are you considering an upgrade to a bigger home? If so, I’ve asked Miranda to offer her take on whether an upgrading to a bigger house makes good financial cents for your situation.

Today’s low home prices and low interest rates are making home ownership more attractive to many. And, while first time home buyers are getting in on the act, they aren’t the only would-be buyers interested in making a home purchase. Plenty of current home owners are considering upgrading to a larger home.

In many markets, home owners are looking at homes in the next price range up as good buys, since foreclosures and a slow market are resulting in good deals. But, as tempting as it is to upgrade to a larger home, is it really a good idea? Here are some things to consider before upgrading to a larger home:

Why Do You Want to Make the Move to a Larger House?

Consider your situation. Sure, a bigger, nicer house is a plus, but is your decision based on some sort of notion of status? If your main motivation is to impress others with your bigger home, it may not be the best reason. However, if your family is starting to outgrow your current home, or if you believe that you would enjoy a better quality of life in a nicer home, then it might worth considering making the move.

What’s the Situation with Your Current Home?

The biggest issue with upgrading to a larger house is that you still have to sell your current home. Consider the market in your area. How long is the home likely to be on the market? Are you getting a good enough deal on the larger home to make up for any price cuts you will have to make to sell your current home in a timely manner? Another concern is that your current home may not yield enough of a down payment, due to its own home value issues. If your current home is underwater, or if getting approved for the newer home depends on selling your current house, you may not even have the option of upgrading to a larger house.

Are You Prepared for the Costs of Moving Up?

Before you decide to upgrade to a larger home, consider the additional costs. Not only do you have to think about an increased mortgage payment, but your home insurance and property taxes will increase your costs as well. On top of that, there are costs associated with moving, and you may need to buy more furniture, or make changes to the home. Utilities in larger homes are more expensive, as is yard care and home maintenance. If the home has been foreclosed on, there may be some home repairs necessary. You may not be prepared for the additional costs associated with a bigger home.

Can You Handle the Home if it Doesn’t Appreciate?

Taking on extra debt is always something to be approached with caution — especially if you are planning on upgrading to a larger home. Many people feel that a larger home would get more bang for the leveraged buck, since the appreciation would make up for it. But, even if you buy at the bottom of the market, there is no guaranty that your home will appreciate in value at the rate you expect. As we saw not too long ago, the real estate market crashes, just like everything else. If you are banking too much on a larger home as an investment, you might be disappointed. Consider upgrading as a purchase, rather than an investment likely to yield big returns.

Bottom line

If you can handle the costs, and you think that moving into a larger home will improve your quality of life, it might be a good time to upgrade. However, make sure you are prepared for what comes with a larger home, and understand that you might end up with a big purchase, rather than a good investment.

This is a guest post by Miranda Marquit. Miranda is a journalistically trained freelance writer and professional blogger working from home. She is a contributor for Mainstreet.com, Personal Dividends and several other sites. Miranda is not affiliated or endorsed by LPL Financial. The opinions voiced in this material are for general information and are not intended to provide specific advice and/or recommendations for any individual.

Source: goodfinancialcents.com

Apache is functioning normally

By Peter Anderson 9 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 October 30, 2008.

Time to take the plunge and get a new car

The transmission on my old car decided that it no longer wants to continue shifting as it should. After getting several repair estimates, we found that to fix the car would cost us over $2500 in repairs, along with another $1000 or more in other needed repairs in the near future.  We decided that we just didn’t want to pump that much money into a car that wasn’t worth much more than $2500.

So now we’re looking around to find a good, reliable used car that will last us another 5 years and around 100,000 miles.   I haven’t bought a car in about 5 years, so I had forgotten what an ordeal it can be, and how many things you need to remember.  Here’s a list of some things that are important to remember when looking for a used car.


credit: Ben Grogan

Things To Remember When Shopping For A Used Car

  • Use the power of the internet: With the advent of the internet the consumer has a whole new sense of empowerment when it comes to car shopping.  Using the internet you can shop around for a good price and play dealers against each other. Doing this is a whole lot easier than it used to be.  Use online automotive websites like carsoup.com, autotrader.com or cars.com to narrow the field of possible cars, and then get price quotes from dealers that you can compare.  Let the dealers know when you’ve found a better deal, they may match it, or even beat it!  (Dealers hate Internet customers because they usually are well informed, and end up getting a better deal).  Also, use the internet to research your next vehicle through information sites like Edmunds.com where they have exhaustive reviews, customer feedback and true cost to own stats for all makes and models.
  • Used cars have a history:  Make sure that you always check a vehicle’s history report before even doing a test drive.  For a fee you can do unlimited vehicle history reports through services like Carfax.com or Autocheck.com.  All used cars have a history, and for some cars their history is more colorful than others.  For example, when I was searching for a car this time I found what I thought was an extraordinary deal on a used car with low miles and a great price. After doing a history report on the vehicle I discovered that the vehicle had a salvage title and had been in an accident. Big time red flags!   Some of the things you can tell on a history report include accident history, odometer readings (to make sure there hasn’t been an odometer rollback), whether or not the vehicle has a clear title, ownership history (including whether it was a rental car or a taxi) and a variety of other things.   Vehicle history reports are a must have for any used car shopper!
  • Check for signs of tell-tale vehicle damage: Even some vehicles that have a clean history report may have some hidden damage that was never reported, and thus doesn’t appear on the vehicle’s history.  Because of that you will want to make sure that you  inspect the car carefully to make sure it is sound.  Carmax has an article about how to find some tell-tale signs that the car has been repaired.  Signs include: vehicle has been repainted, clamp marks on the frame, welding marks and body filler, engine noise, misalignment of hood, doors or trunk, checking bolts to see if they’ve been removed.  Check the article for more ways to determine if the car has been repaired.
  • Make sure to take a vehicle for a test drive: In the internet age, you’d be surprised at how many people are now buying vehicles before even taking them for a test drive.   (Ebay anyone?) A test drive can be invaluable because it allows you to see the car in action, hear any noises the car may make, and feel how the car performs under normal road conditions.I just test-drove what I thought was a great steal of a car last night, and the brakes turned out to be bad, there were stains on the seats and the car’s shocks were shot.  All of these things I found out on the test drive.    Some things to check when you do a test drive include the interior of the car (check for excessive wear), the tires and brakes, the shocks (press down on the car and see if it bounces back quickly without too much bouncing), steering and acceleration without too much noise, and just listen for foreign sounds.  If your gut tells you something isn’t right with a car, pass on it.
  • Pay for a vehicle inspection by your mechanic: If you really want to make sure that a car is mechanically sound before you buy, take it to a trusted local mechanic who can tell you if the car is in good working order or not. Our local mechanic does a thorough inspection for about $30, but it is well worth the cost. I would especially suggest doing this if you are buying a car from a private party or buying a car without any kind of warranty (which most used cars don’t have).
  • Don’t play the “monthly payment game”: When you’re at the dealer don’t fall prey to the “monthly payment game”.  This happens when the dealer asks at what price range you’d like to keep your monthly payments.   When you respond with “under $400” or the like, that gives the dealer free reign to put you in a more expensive car or give you a longer finance deal – all in the name of reaching that magical monthly payment number.  Instead of playing that game, decide on how much you’re willing to pay, and stick to that number no matter what.  Tell them something like: “I want to keep the purchase price under $9,000” and don’t respond to their talks of monthly payments.  That way you can ensure you don’t end up paying more than you thought you would, just because you wanted a certain payment.  Figure it out on your own beforehand – and stick to your guns.
  • Bring your own financing to the dealer: One of the biggest ways car dealerships can make a good deal turn sour is by padding the deal for your car with back-end fees in the finance office.  All of that can be avoided if you just get your financing ahead of time through your local bank or credit union.  Or even better, save up for your used car purchase as suggested by Dave Ramsey in Financial Peace University – and pay cash!  That’s what we’ll be doing!  Read my previous article about driving free cars and retiring rich – where I talk about just that – saving for your next used car.
  • Make sure the car is insured:  Make sure to call your insurance company and check rates for the cars you’re looking at, and inform them once you do buy a new car.  Don’t let the insurance lapse!  Check insurance rates with other companies when you buy a new car, it may be as good a time as any to save some money on your insurance rates.

Other Used Car Shopping Resources

Here are a few other good articles with tips on buying a used car, in no particular order:

So what is your used car buying tip?  Have a good or a bad experience buying a used car?  Leave us a comment here and tell us about it!

Related Posts

Source: biblemoneymatters.com

Apache is functioning normally

Last Updated on March 29, 2023 by Mark Ferguson

It takes a lot of hard work to save $100,000 or you have to be very lucky for $100,000 to fall into your lap. Once you have $100,000 it can be even harder to commit to investing it and not blowing it on material goods. If I had an extra $100,000 to invest I know exactly what I would do with it; invest it in real estate. In fact I invest all of my money into real estate. Whether I invested in fix and flips or rental properties would depend on my current situation.

For others there are a number of factors that determine how and when you should invest $100,000. My specialty is investing in real estate because of the awesome returns rentals and flipping can produce. I am a real estate agent and I have a big advantage over many new real estate investors. This article will describe why I think real estate is such a great investment for me and if it would be for you as well.

Why is real estate my top choice for investing $100,000?

There are many ways to invest money into real estate and that is one reason why I love to buy houses. The main reason I love real estate is the great returns you can get if you are willing to do some work. I own 13 rental properties and fix and flip about 10 houses a year. On my rentals I tend to get 20 percent cash on cash returns or more. On my flips I average over a $30,000 profit on each one.

It is not easy to get those returns on rentals and make that much money on each flip. It helps that I am a real estate agent and I have been investing for many years. That doesn’t mean a novice or beginning investor cannot make great money with real estate if they do their homework, work hard and are patient. When investing money in the stock market it is very hard to get the returns I get and there are even more advantages to investing in real estate that blow the stock market away.

What is the best way to invest $100,000 in real estate?

There are many ways to invest in real estate. Besides flipping and rental properties, there is private money investing, REITs, notes and more. Choosing the best option is not easy, because everyone has different goals and everyone is willing to spend varying amounts of time to learn to invest and complete the investments. Here is a quick break down of the most popular ways to invest in real estate.

  • Flipping: flipping houses takes a lot of work and a lot of experience to make money. A flip is buying a house very cheap, fixing it up and selling it for a profit. Flipping is more of a job than investing and it usually takes a lot of capital to get started.
  • Rental properties: rental property investing can be very involved or very hands off. I like to buy properties below market value and then make repairs, which takes time and money. The cheaper I buy properties the more cash flow I am able to create. If you are looking for an easier way to buy rental properties; turn key rentals take very little time and are mostly hands off.
  • Private money: private money is when one investor lends money to another investor for the purpose of investing in real estate. Private money can be very hands off once you find a great investor. Finding the great investor can take time and if the investor does not follow trough on their promises, private money investing can turn into a nightmare.
  • Notes: buying notes is also mostly hands off, because you are not buying a property. Buying notes involves buying a mortgage and becoming the bank. However if the borrower stops making their payments you may have to foreclose on the home which becomes very hands on.
  • REITs: REITs are more like investing in the stock market than investing in real estate. You buy shares of a REIT, which give you a piece of a real estate trust. With a REIT the management is taken care of by a large company and don’t have to worry about taking responsibly for a property. However, you give up all control of the investment and have to hope you picked a good manager.

Even though there are many ways to invest in real estate, this article is going to focus on investing $100,000 into rental properties and fix and flips, because I think they provide the best returns. They also take the most work which I think is a good thing. If you are investing for your future retirement and livelihood I think it should take some work!

Why are rental properties how I would invest $100,000?

Figuring out the best investment for you depends on how much time you have to learn and implement. The more time you have, usually the more money you can make and the better returns you will get. I think rental properties are the best investment if you have the money and time to learn the correct way to invest in them. Once you buy your rentals and get them set up with great renters or property managers, they take very little work.

I spend about $30,000 to $35,000 in cash on each rental I buy. I finance my rentals with 20 percent down and make repairs to add value. Rentals in my area produce about $500 a month in cash flow which equals $6,000 a year. I buy my properties from $80,000 to $135,000 and rent them from $1,200 to $1,500 a month. A 20 percent cash on cash return is pretty awesome, but it is getting harder and harder to find these types of deals in my area. However, even with much lower returns rentals properties have many advantages besides the cash on cash return.

  • Rentals have great tax advantages.
  • Properties will most likely appreciate over time.
  • I am paying off loans and gaining equity every month.
  • Rents will most likely go up over time.
  • Rentals can be bought below market value giving you instant equity.

To see all the advantages of rental properties I will show you the numbers on rental property 7, which I bought two years ago. I bought this house as a short sale and it was a smoking deal.

  • Purchase price                       $113,000
  • Repairs                                    $8,000
  • Closing costs out of pocket $500      (seller paid $2,000)
  • Down payment                      $22,600
  • Commission I made             -$3,000
  • Total cash spent                    $28,100

I rented this house for $1,400 a month shortly after the repairs were made and it has been rented to the same tenants for almost two years.

Not only am I making over 20 percent on the cash I invested from rent, but I bought the home below market and added value with repairs. The home recently appraised for $195,000 and I was able to take out $52,000 in a cash out refinance. Even after the refinance the house cash flows every month (it does make less than $500 a month now).

Many circumstances came together to make this a great rental. These deals are not easy to find and not readily available in every market. However, getting half the return I did would still be a great deal for most people. Here is a look at the total return I have seen in two years on this property.

Returns from buying the home below market

Value of home when purchased and after repairs: $155,000.

Repairs and purchase price plus closing costs: $121,500

Value gained $33,500 which equals 59.6 percent return per year.

Returns from appreciation

Current value of home based on appraisal: $195,000

Appreciation of house over two years: $40,000.

That is a 71 percent return per year over two years.

Returns from rental income received

Rent income per year: $16,800.

Expenses per year: $8,440 (mortgage, taxes, insurance, property management and maintenance)

Profit from the renal property income: $8,360, which equates to a 29.7 percent return.

This number is misleading, because I have been very lucky with these tenants and had no out-of-pocket maintenance, except for the deductible on an insurance claim. We had a major hail storm that damaged the roof, some siding and windows, but my expense was only $500. When I figure cash flow for the future I include much higher expenses for vacancies and maintenance.

What are the total returns of this rental property?

Those returns equal a 160.3 percent return on the initial money I invested each of the first two years. But to be honest, the returns are not that high because you would have selling costs if you sold the house. There are costs to refinance as well when you take cash out. If I sold the house I would have to pay about 6 percent of the selling price in real estate commissions and closing costs (10 percent if I was not a real estate agent). The returns would also go down over time, because the initial benefit of buying below market value would be spread out over more years and we can’t count on 20 percent appreciation each year. A word of warning, I never invest strictly for appreciation.

If you never sell or refinance the property, you will not see those returns from appreciation or buying below market. They would be paper returns which would make your net worth look awesome, but the actual gains would be just the cash on cash returns. Even if you don’t sell or refinance having a lot of equity in homes looks great to banks if you want to get more loans.

When I refinanced the property I had to pay closing costs, which were about $5,000. I will get some of that money back, because the bank collected escrow amounts for taxes and insurance. I already had money in my escrow accounts for my previous loan which I will get back. I also skip one payment with the new loan, which will save me $800. I spent $28,100 buying this property and took out over $52,000 when I refinanced. I still have 25 percent equity since the maximum I can refinance with my lender is 75% of the appraisal. As you can see buying below market coupled with appreciation can make for some great returns when you refinance.

Having said all of that, let’s get back to the entire point of this article. How would I invest $100,000 into real estate? I would buy rental properties, but I would not spend all the money on rentals.

Why do you need to have money in reserves for rental properties?

I may not have had any vacancies or maintenance needed on rental property number 7, but that doesn’t mean I never will or I haven’t had those costs on other rentals. If you are going to buy rentals, you will have to fix things, you will have vacant properties and you will have tenants who don’t pay rent. If you have no money to handle these situations, you will run into some very tough times.

A good rule of thumb is to have at least six months of mortgage payments, taxes and insurance per property in savings. Banks will require this amount as well when you try to get a new loan on a property.

If you bought two rentals using $35,000 cash for each property, you would have $30,000 in cash left. You might be tempted to buy another property with that cash, but you would have no money left for reserves. If you had two rentals and a personal residence, you would need at least $16,000 in reserves assuming you had two $600 payments and a personal house payment of $1,500.

With $100,000 to invest, you could buy two rental properties which would give you great returns on $70,000 of your money. Some may argue the stock market is a better investment because you could invest all $100,000, but no matter what you invest in you should have an emergency fund or safety net. It is more important to have a safety net with rentals because you may have to put more money into then for repairs or to make mortgage payments. Where the stock market you would not need more money, unless you are buying on margin (one of the few advantages of the stock market).

How your goals and personal situation will affect investing the $100,000

There is more to consider then just the $100,000 investment you have. How did you get the money? How much do you save? How old are you? Are you investing from an IRA?

If you make $500,000 a year and it is not difficult to save $100,000, then maybe you are okay taking more risk and buying three rentals. If you make $50,000 a year and it took ten years to save $100,000 maybe you only want two or even one rental. If you are retiring in five years maybe one rental paid with all cash would make you more comfortable. Personally I think leverage is the way to with rental properties as long as they cash flow and I explain why here. If you are in a market with more expensive houses it will also affect how you invest and how much money you need.

If you happened to inherit $100,000 and have no prospect for saving more money, be very careful when investing in anything! It is vitally important you have reserves in savings if you buy rentals.

How much time you have to invest will also play a big role in how you spend the money. If you have no extra time to learn about rentals and buy properties, my strategy will not work well. You have to know your market well, be patient to find great deals, and take time to hire great managers and contractors. Turn-key rentals are a better option for those with no time, but will not provide nearly the same results.

If you have a lot of time to invest, you might even consider flipping to boost your rental property purchasing! If you want help with learning how to invest in rentals, I offer a great program to get you jump started.

How can fix and flipping increase the returns on $100,000?

Fix and flipping can provide a great income, but will take a lot of direct involvement. It is more of a job, because once you sell the property it will no longer make you any money. It takes a lot of money to get started flipping unless you use hard money or have a partner. Having $100,000 to start a flipping business would be a great start,but you are taking on a lot of risk. I love to use flipping to make more money to invest in my rentals.

This article is already way too long to start going into the details of flipping, but here is a great article that describes the process and how much money you can make.

Conclusion

I have invested much more than $100,000 into rental properties and fix and flips. My investments have built up over time and I was not able to put a large chunk of money into the investments in the beginning. If you have $100,000 or $50,000 or one million to invest, don’t dump it all into the business at once. Make sure you know what you are doing, have done the proper research and have a safety net. The returns I show in this article are not typical, but show the incredible power rentals can have. If you have questions or comments for me, be sure to check out the discussion forums!

Build a Rental Property Empire

Categories Real Estate

Source: investfourmore.com

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After the mortgage crisis, government mortgage financier Fannie Mae wound up with a lot of bank-owned homes.  They said it themselves; they couldn’t prevent every foreclosure out there.

This was especially true after scores of borrowers took out low down payment mortgages, only to watch home values sink and deplete them of all their home equity, destroying the housing market in the process.

Fannie Mae Homes for Sale

  • Fannie Mae HomePath
  • Is the program that was created to unload the many homes
  • That are now owned by Fannie Mae due to foreclosure
  • As a result of the massive housing crisis that took place

However, Fannie Mae is not in the business of owning single-family homes or condos, so they’re trying to unload them as quickly as possible by offering all types of incentives to prospective home buyers.

They have thousands of properties nationwide, including single-family homes, condos, and townhouses, including homes geared toward first-time buyers and those for move-up buyers.

Some of the properties have received repairs and improvements, but all are sold as-is, meaning you still need to do your diligence and inspect the property before purchase.

There is no specific HomePath loan, but Fannie Mae offers special home loan financing on these properties via its “HomeReady Mortgage” loan program.

The HomeReady program offers lower mortgage insurance and pricing adjustments to borrowers who complete homeownership education, which will equate to lower monthly mortgage costs. And you don’t have to be a first-time home buyer.

Let’s take a closer look at the HomePath program and the corresponding lending guidelines to see if this home buying avenue might be right for you.

What Is a Fannie Mae HomePath Property?

  • It’s a foreclosed home or condo
  • That is now owned by Fannie Mae
  • And available for sale by the company
  • To both first-time home buyers and investors

In short, a HomePath property allows prospective home buyers to get their hands on a Fannie Mae property (prior borrower lost it via foreclosure, deed-in-lieu, or forfeiture) with as little as three percent down payment.

Anyone can purchase a HomePath property, including first-time homebuyers, investors, and those looking for a vacation home, but special priority is given to owner-occupants via a First Look buying period.

A real estate agent is assigned to each property available, as they would be with a traditional home purchase. You may use your own buyer’s agent, or contact the HomePath listing agent directly. But you can’t buy the homes directly from Fannie Mae.

In any case, the home buying and mortgage process will be pretty similar to the usual experience, though hopefully more streamlined and with less competition from other prospective buyers.

Aside from the favorable financing options, you might be able to get a deal on a property that you otherwise wouldn’t realize when buying a home through traditional channels.

For those who like the idea of getting a bargain by purchasing a previously foreclosed home, but don’t like the risk and/or uncertainty, HomePath might be the winning ticket. Many of the HomePath homes are even move-in ready!

By the way, similar programs are available for Freddie Mac homes via HomeSteps and HUD-owned properties via HUD Homes, so be sure to check those as well to expand your search.

HomePath Mortgage Financing

  • Financing with as little as 3% down payment
  • 3% closing cost credit if you complete a home buyer education course
  • Only need a 620 credit score to qualify
  • Up to 6% seller concessions for owner-occupied properties
  • Lower mortgage insurance coverage compared to standard requirements
  • Non-occupant borrowers permitted
  • $0 borrower contribution from own funds
  • Multiple financed properties (investors can finance up to 10 properties!)

As noted, you only need 3% down if it’s a owner-occupied property. And that down payment can be in the form of a gift, a grant, or a loan from a nonprofit organization, state or local government, or an employer, not just from the borrower’s own savings.

This compares to the minimum 3.5% down payment required with an FHA loan, and the typical 5-10% required on conventional loans. There is no required borrower contribution, which is handy for those short on funds.

Additionally, borrowers who need help qualifying for a larger mortgage payment can use a non-occupant co-borrower, as well as boarder income or rental unit income.

Another advantage is that the private mortgage insurance can be canceled, unlike the FHA’s in most cases.

At the same time, HomePath mortgage rates are competitive relative to traditional mortgage rates, despite the flexible underwriting guidelines and low down payment (and credit score) required.

Also understand that most large mortgage lenders, such as Citi or Wells Fargo, are “HomePath Mortgage Lenders,” meaning they can offer you financing via the loan program.

Additionally, some of these lenders work with mortgage brokers, so you can go that route as well if you want to shop around for a low rate.

HomePath Ready Buyer Program Incentive

  • The HomePath Ready Buyer Program
  • Provides up to 3% in closing cost assistance
  • To buyers who complete an online homeownership education course
  • As long as you’re a first-time home buyer and occupy property within 60 days

Fannie Mae is also currently offering up to 3% in closing cost assistance to HomePath buyers who take an online homeownership education course. This is basically a no-brainer if you’re considering making an offer on a HomePath property.

For example, if the purchase price is $300,000, that’s $9,000 toward closing costs that you’d otherwise have to pay out of pocket or absorb via a lender credit. And the $75 course fee is also recouped via the credit!

It takes most individuals just four to six hours to complete, so if your time is worth that (it better be!), it can certainly sweeten the deal and make the dream of homeownership more of a reality.

It’s also easy to claim the credit. Once you complete the course, you simply attach a copy of the completion certificate to the initial offer. But make sure you take the course early on so there’s no delay in making your offer if you happen to find a home quickly.

Additionally, note that you must be a first-time home buyer, meaning no ownership in the past three years. And you must reside in the property as your primary residence within 60 days of closing.

If your closing costs are less than 3% of the purchase price, you won’t receive the difference.

Those who plan to use the property as their second home, or as investment properties are excluded from the credit.

HomePath First Look Period

  • The First Look period
  • Allows owner-occupants to make an offer on a HomePath home
  • Before investors are able to
  • Typically the first 20 days of property being listed (30 days in Nevada)

Another snazzy feature to HomePath is the “First Look” marketing period, which gives individuals who plan to occupy the homes first dibs at making an offer.

This can be very beneficial, seeing that investors are typically the first to come along and scoop up foreclosed properties before everyday Joes even know what happened.

The First Look period is the first 20 days (30 days in Nevada) the property is listed on HomePath.com, which gives owner-occupants a nice little head start in front of investors.

When conducting a property search for homes owned by Fannie Mae, you’ll see a little “countdown clock” on the page that details how many days remain to make an offer during this period.

Some non-profits and public entities are also able to take advantage of the First Look period.

Oh, and all offers for HomePath properties are made online, which makes the home buying process quick and easy.

HomePath Short Sale Portal

If you’re a real estate agent (or a homeowner), Fannie Mae has made it a lot easier to list and sell short sale properties as well.  Assuming Fannie Mae is the first lien holder on the mortgage tied to the property, you can receive list price guidance online.

Once the agent submits a request via the portal, Fannie Mae will order a Broker Price Opinion (BPO) and an appraisal to determine an appropriate listing price.

It will then take Fannie up to three weeks to complete the list price guidance request, after which agents will be able to market the property with a realistic list price that they know will be accepted.

Instead of coming up with a list price they hope will fly, agents (and homeowners) can save a lot of time by going direct to the source and obtaining a definitive answer. This should greatly speed up the short sale process, and best of all, it can all be done from a computer.

Update: This feature appears to be no longer available.

Final Word on HomePath

  • If you’re looking for a home or condo
  • And having a hard time finding an affordable property
  • Consider HomePath alongside your regular home search
  • To expand your reach and potentially find a property outside the box

In summary, Fannie Mae HomePath might be a good alternative to purchasing a foreclosure in the open market, with a little more peace of mind knowing a big name like Fannie Mae is involved.

And with low down payment requirements, plenty of mortgage options, and flexible underwriting guidelines, you could save some serious cash and increase your chances of loan approval, especially with the huge closing cost credit.

So HomePath properties and the corresponding easy financing should certainly be considered alongside other options.

But similar to other foreclosures, these homes are sold as-is, meaning repairs may be needed, which you could be responsible for. So tread cautiously and hire a home inspector!

I did a few searches on the HomePath website and found that many of the properties were located in hard-hit areas, and not necessarily highly-sought after regions of the country.

It makes perfect sense – these are previously foreclosed properties, so there’s a good chance they’re going to be located in areas ravaged by the mortgage crisis.

Source: thetruthaboutmortgage.com

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Mortgages are complicated and confusing, and second mortgages are doubly complicated and confusing.

A second mortgage can be an extremely useful tool for your wealth, or it can become a financial trap.
Before you head into the world of second mortgages, there are a couple of different things you should think about.
Read on for an overview of second mortgages and advice to help you determine whether or not you should consider a second mortgage.

What Is a Second Mortgage?

A second mortgage can be a valuable borrowing vehicle in certain circumstances. Here’s how you can benefit from a second mortgage.

How a Second Mortgage Works

A second mortgage is basically a loan using your home equity as collateral. If you own your home, whether you have a mortgage attached to the property or not, you may be able to secure a second loan by liberating your equity that has built up over the years.
Generally speaking, real estate increases in value, so while a typical mortgage can stretch out for up to 30 years, the principal owed on the house steadily falls while the value of the house appreciates.
To find out how much you can possibly qualify to borrow on your home you need to find out how much equity is in your home. This is calculated by estimating the market value of the property and subtracting the payments made towards your first loan so far.
For example, if your home is currently worth $250,000 but you have a first mortgage of $160,000 outstanding on the property, you have managed to amass $90,000 in equity.
Lenders may be willing to allow you to borrow anywhere from 60% to 80% of your equity, which works out to roughly $54,000 to $72,000.
One unique kind of second mortgage is a cash-out refinance. This replaces your old mortgage with a new mortgage. With the new mortgage, it’s slightly larger than the original amount. The larger mortgage will give you a one-time cash payment.

What are Second Mortgages Used For?

As you can see a second mortgage can really represent a sizable chunk of cash, but what are they used for? Well, you can use a second mortgage for anything from funding a child’s education to making repairs on your home.
If you are going to take on additional debt, it should be for something worthwhile. A vacation, however deserved, might be better to save for slowly, than to take on the cost of a home equity loan.
Another option can be to avoid Private Mortgage Insurance.  

While Private Mortgage Insurance may not seem like a big deal, it can cost you thousands of dollars over the course of your loan.

It’s almost always worth avoiding PMI if you can,

Getting a Second Mortgage

Now that you understand how a second mortgage mortgage works, we can continue with the process. If you’ve decided that you want to take out a second mortgage on your house, we can help you with the route you should take.

Use a Good Lender

It is an unfortunate truth that there are unscrupulous people and businesses in the world. One of the best options for making sure you are getting a good rate with your mortgage company is to shop around different mortgage lenders.
This is why, we recommend using LendingTree for your second mortgage. LendingTree will shop several different lenders for home equity loan rates and allow you to screen who you apply with. 
They are also able to work with you whether you choose a separate home equity loan or decide to do a cash out refinance mortgage. You can learn more in our LendingTree review.

  • Our Rating
  • BBB Rating A-
  • Best ForMultiple Lenders
  • Loans Available Home Equity, Refi, HELOC

Steps you Can Take to Get the Best Loan

If it’s been some years since you’ve taken out a mortgage, you might want to brush up on some of the lingo that you’ve going to see.

  1. Go to the bank: The obvious first place to start is with your bank or mortgage company that holds the FIRST mortgage. More than likely they will be happy to give you a second mortgage (assuming you have a decent credit score and history with the organization). It will almost make the payments on the second mortgage easier because you already write one check to the bank for your mortgage, so you won’t forget to write a second one (hopefully).
  2. Shop around: After you’ve talked with your current bank or mortgage company, you can continue to look around with other banks and lenders. More than likely you didn’t go with the first lender you quoted with the original mortgage, so why would you go with the first on your second mortgage? Once you’ve met with several different loan offers at various established, you can sit down and decide which one works best for you. There are a few things you should consider, aside from interest rates (although it’s the most important factor), before picking out a second mortgage.
  3. Look at the loan types: Are they fixed rate or adjustable? This is going to have a huge impact on the amount of interest that you pay over the course of your loan.
  4. Look at the fine print: Are there any balloon payments attached to the loan? Be sure to look at every aspect of the mortgage before you sign any paperwork. Otherwise, you could pay thousands of dollars that you didn’t expect to pay.

Pros and Cons of a Second Mortgage

Pros of a Second Mortgage

  • Deductible: The good news about a second mortgage is that mortgage interest of up to $100,000 of the principal for married couples and $50,000 for singles is deductible on your tax return as well. Although this is meant to be a combined mortgage interest on both your mortgage loans it is still a great deduction, especially if your first mortgage is closer to the end of its life and so has a relatively small portion of interest payments left.
  • Liquidation: Another (possible) pro of taking out a second mortgage is the ability to liquidate the equity in your home. If you are on the verge of bankruptcy and you need to get access to cash to pay off high-interest loans and back taxes, taking a home equity loan might not be a bad trade.

  • Low interest: The interest payable on a home equity loan is usually lower than other types of debt because it offers the lender the security of your house. Depending on your situation, this could be an excellent way to lower the amount of debt you have and save you money on monthly interests.

Cons of a Second Mortgage

Taking out a second mortgage is not without its drawbacks.

  • Your home is collateral: For instance, you need to remember that even though the loan does provide you with the cash you want it comes at the cost of putting your house up for grabs in the event you cannot make good on the loan. While we hope it never happens to anyone, it’s not uncommon for some financial tragedy to strike and for a person to lose their house because of a second mortgage.
  • Expense: A second mortgage is also not without its costs. You have to pay for an appraisal on your house, loan origination and other legal fees associated with an ordinary loan, so although there is a lower rate of interest, there are other costs to consider. If you don’t remember from when you first got a mortgage, the house appraisal and legal fees can add up to be quite a hefty bill. While this probably isn’t going to completely change your decision on a second mortgage, you should at least calculate it into the costs beforehand.

If you’re one that has a rough relationship managing debt, I would strongly have you reconsider taking out a second mortgage to pay off debt.
You first have to fix the root of the problem which is most likely – you. A second mortgage is not the answer for everyone so think about all the factors before making your final decision.
I hear a lot of stories of people who took out a second mortgage to pay off some debts. Sure, the lower interest rate can be very attractive. Why wouldn’t you want to pay lower rates?
Getting a second mortgage to pay off credit card debt or some other consumer debt is only a temporary band-aid.

Alternatives to a Second Mortgage

Figure

For those looking for extra capital to use for things such as home improvements or debt consolidation, a Home Equity Line of Credit (HELOC) is another option.
A HELOC allows you to borrow money against the equity you have accrued in your home. For example, if you bought your home for $300,000 but it is now worth $330,000, you could borrow $30,000 to use for things such as kitchen or bathroom improvements.
Borrowing funds is always a big decision and should only be taken with great consideration. But, a HELOC can be a great alternative to a second mortgage.
For those who are interested in learning more about a HELOC, Figure ncould be a good place to start. This new company is innovating the HELOC game with AI-based approval that streamlines the application and appraisal process.

Other Alternatives

Think of the second mortgage as an emergency lifeboat in this situation. Hopefully, you never need it, but you’ll be grateful for it if you do.
If you are staring at bankruptcy but don’t want to go with a second mortgage, but still looking for a good way to lower your interest amounts, you can always go with a personal loan.
If you prefer to go the way of a personal loan rather than a second mortgage here are some ideas on where to get a personal loan that is best for you, according to Good Financial Cents.
While this might seem like a smart strategy, one thing you never do is borrow against your home to pay off credit cards. I cringe every time I hear of someone pondering that.
That is a major no-no in my book. You are much better off getting a credit card with 0% APR on balance transfers to pay off the old cards. You save tons of money and honestly, it’s normally a lot easier.

Our Experience With a Second Mortgage

We recently took the plunge and built our dream home. Along the way, we learned a lot in the building process, especially when it comes to the mortgage loan process.
Our first home was bought while I was in Iraq, so I cashed in on my veteran status used the VA home loan. With our dream home, we were short the 20% down payment that we needed to avoid PMI (Private Mortgage Insurance).
While we could have used the VA loan again (for refinancing not for first time home purchases), it was actually cheaper to do the traditional loan process and take out a second mortgage.

Second Mortgages, Friend or Foe?

Because of all the risk associated with a second mortgage, they have gained an awful reputation among homeowners, but if done carefully, they can be an excellent tool.
Just like with every other part of your finances, a second mortgage isn’t something that should be done lightly.
Spend some time looking at your financial situation and weigh your options.

Source: goodfinancialcents.com

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Last Updated on February 25, 2022 by Mark Ferguson

Finding a great rental property can be tough. In many markets, prices are increasing and being able to make money on a single-family house or multifamily building is difficult. One option is to buy the cheapest homes you can in your area and make them a rental. You can also buy a townhouse or condo and turn into a rental property since they are typically less expensive than a single-family detached home.

I think a townhouse or condo can be great investments, but you must look at the numbers closely. There are many costs associated with condos like HOA fees. The appreciation also may not be as much on condos and there are some very scary issues that can cause a great condo or townhouse investment to become a nightmare.

Why are condos and townhouses so much cheaper than houses?

Before I get into the pros and cons of condo and townhouse investments, I want to be clear on what a townhouse or condo is. A condo is a unit within a large complex of apartments or other condos. There may be units beside you, above or below you. You rarely have any yard except a shared space with other units.

A townhouse might have a small yard and may have neighbors beside the unit, but not above or below. Townhouses are typically worth more than condos because they have less connected neighbors and some land.

Both condos and townhouses are worth less than a single-family home that is otherwise similar.

How does an HOA work on a townhouse or condo?

Almost every townhouse and condo will have an HOA. The HOA takes care of the shared land in the complex and most HOAs take care of the exterior maintenance and landscaping. Many HOAs also pay for the water on a condo or townhouse and they may provide common amenities like a swimming pool, clubhouse or tennis courts. Some single-family neighborhoods have detached homes that are in an HOA as well. The HOA fees are usually much higher on a condo or townhouse because the HOA takes care of many more things. Here is a list of many things an HOA takes care of on a single-family detached home, patio home, and a condo or townhouse.

——————-Condo/Townhouse                 Patio Home               Single-Family

Common Amen.            Yes                                   Yes                           Yes

Landscaping                  Yes                                   Yes                            No

Water                              Yes                                   No                             No

Exterior maintenance  Yes                                   No                             No

Exterior Insurance        Yes                                  No                             No

Clubhouse/pool             Yes                                  Maybe                      Maybe

Trash/snow removal     Yes                                 Maybe                      No

If you are wondering what a patio home is, that is usually a single-family detached home that has an HOA that maintains the lawn. The condo and townhouses have much more involved HOAs, which makes them much more expensive.

In my area in Northern Colorado, I see HOA fees for most single-family detached homes $400 or less a year (if they have an HOA). HOAs on condos or townhouses can are usually at least $100 a month and in some cases $400 a month. HOA fees can be even higher in larger cities with complexes that have security and many more amenities. Only one of my rental properties has an HOA and it is $300 a year.

Is it a bad thing to have an HOA on a rental property?

I have no problem with having an HOA on one of my rentals. The HOA takes care of the common amenities in the neighborhood and I have never had a problem with them. The only other job of this HOA is to make sure all the homes in the neighborhood are in compliance with the rules and regulations of the HOA. Many HOAs don’t allow work trucks to be parked outside, or excessive junk to be stored in the yard. For many people, this is a good thing and for others a bad thing. As a landlord, I think of it as another set of eyes on the property and I think it is a good thing to know if the tenants have junk everywhere or are not mowing the yard.

I don’t think having a small HOA with few responsibilities is a bad thing. A larger HOA will provide many benefits as well. Even though a larger HOA will be more expensive, it will lower many costs for a landlord. The HOA will pay for exterior insurance and maintenance, which will reduce the landlord’s expenses. The HOA will handle yard maintenance and snow removal, which can lower the landlord’s expenses as well. In my case, I invest in single-family homes and I have the tenants take care of the lawn and pay all utilities themselves so that does not save me much money.

HOA special assessments

The problem with a large HOA is they can create special assessments if they need more money for any major repairs or financial problems. I know of a couple of landlords who had their HOA fees increase greatly in a one-year span because the HOA had to repaint the exterior of the entire complex. The HOA fees went from just over $100 a month to $200 a month for every condo in the complex. Another HOA imposed a $30,000 special assessment on every single condo in a complex to pay for improvements. This particular landlord was planning on flipping the condo and all his profit disappeared with this assessment.

The HOA cannot impose a special assessment or raise the HOA fees without agreement from the HOA members, but in many cases, the members don’t show up to HOA meetings to oppose the changes. If you are buying a condo or a townhouse that has a fixed HOA fee, that does not mean it cannot be raised or a special assessment is levied upon the property.

Will the HOA allow rental properties?

Another problem that can come up with HOAs and rental properties is that some HOAs may not allow rental properties! My office recently had a home listed that was in an HOA and the HOA decided they would no longer allow rentals. The property was used as a rental property so the owners decided to sell it. Then the tenants decided to stop paying due to covid and it was a nightmare for the owners.

Be aware that HOAs can decide to ban rentals although it is rare.

Will condos or townhouses appreciate as much as detached homes?

Another factor to consider when buying a condo or a townhouse is the value of the property. Condos and townhouses are cheaper than detached homes because they are cheaper to build and demand is higher for single-family homes. You also own more land and have lower HOA fees with a single-family house. When you have an HOA fee that also reduces how much a borrower can qualify for when they get a loan. Usually, the condos and townhouses with the highest HOA fees will be worth less than similar condos or townhouses with lower HOA fees, because more buyers can afford them. A $100/month HOA fee could reduce the amount a buyer can qualify for by as much as $20,000.

I don’t invest for appreciation, I invest for cash flow when I buy rental properties. That does not mean I do not consider possible appreciation or depreciation on the properties I buy. There are some people who prefer a condo to a detached home, but most people want a detached house. In my area condos are the first to start losing value in a down market and the last to increase in value in an appreciating market. While condos and townhouses can appreciate and often do, single-family detached homes tend to appreciate more. It is the land that is causing the appreciation and detached homes have much more valuable land.

How can FHA rules affect condo prices?

FHA will loan on condos and townhouses, but they have very strict rules. FHA will not allow a buyer to use an FHA loan to purchase a condo in a complex if there are too many investors in that complex. If there are more than 50 percent investors in a particular complex FHA won’t lend to anyone in that complex. FHA is a very popular loan and it can greatly decrease values in a complex if the units cannot be sold using FHA. Here are some more requirements for FHA loans being used on condos. Even though conventional loans do not have to abide by FHA rules, some banks will also have guidelines similar to FHA to lend on a condo.

Is it smart to buy a condo or townhouse for a rental property?

As you can see there are many factors you must consider when investing in a condo or a townhouse. The number one factor should be cash flow and how much money you will make. You have to remember to factor in the HOA fees and the possibility that they may increase in the future. If you buy a condo in a complex that is older and will need work soon, you may see a huge increase in HOA fees or a special assessment. If many investors decide to buy units in a complex it could greatly lower the value of every unit due to FHA rules and don’t expect as much appreciation.

I think you can make money with condos, but given similar returns between a condo or townhouse and a single-family detached home, I will take the detached home every time.

My book, Build a Rental Property Empire, goes over my personal rental property strategy in depth. It 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.

Build a Rental Property Empire

Categories Rental Properties

Source: investfourmore.com

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Maybe you just graduated college, or you scored your first “grown-up” job, and now you’re looking for a car that suits your transportation needs. Whatever your situation is, there are a lot of factors to think about before purchasing your first car — the most important one being your budget. Be sure to consider these five things to help you decide whether you can fit the cost of a car into your new monthly budget.

1. Your income

The most important factor that affects your bottom line when it comes to purchasing your first car is your monthly income — especially if you’re buying a brand-new ride. Car payments can be pretty hefty, and if you’re not sure about what you can foot out of pocket each month, it can spell trouble down the line.

It’s a good idea to pay as large a down payment as you can comfortably afford so that you can score lower monthly payments. Experts recommend a down payment of at least 20 percent of the vehicle’s total cost.

Before you head to the dealership, think hard about how much you can realistically budget for your car payment each month, in addition to how much you can set aside for routine maintenance and repairs. Even if you’re buying an older, inexpensive car without a monthly payment, it’s still imperative to have some savings in case issues crop up.

2. Your credit score

If you’re new to this whole “being an adult” thing, you might not have much credit. But establishing a solid credit score is crucial to your car budget, since it directly affects your interest rates when financing your first vehicle. Scoring a good interest rate can save you hundreds — if not thousands — of dollars.

If you don’t have any credit, or you have a credit score that needs some improvement, be wary of dealership salespeople who may try to talk you into a longer financing term. You’ll end up paying significantly more interest over the course of the term, which can negatively impact your future finances.

3. Your financing options

If you’re not purchasing your first car outright, you’ll have to finance it in some way. It might seem strange to shop for loans before you go car shopping, but it’ll give you a better idea of what kind of interest rate and loan amount you can expect once the time comes to secure a financing option.

Compare rates from your bank or credit union to other lenders to see who offers the best option for you. If possible, it’s smart to get pre-approved for financing before you walk into the dealership — that way, you know the cards are stacked in your favor.

If you have little or no credit, you may find that it’s best to wait on your car purchase until you’ve improved your score so that you can get a better interest rate. You’ll be able to better afford your vehicle in the long-term.

4. Your research

While researching cars that you’d like to take a look at and test drive, it’s wise to focus on practicality versus the latest sports car. In other words, prioritize what you absolutely need out of a vehicle rather than what you want. This keeps your car payments lower and helps reduce other ownership costs, such as routine maintenance, repairs and fuel expenses.

Look for vehicles that have a solid track record of safety, reliability and inexpensive maintenance. Reference trustworthy sources, such as Edmunds.com, Kelley Blue Book, J.D. Power and Consumer Reports, to find honest reviews and helpful information.

Make sure you also compare prices across multiple dealerships for each vehicle you’ve got your eye on to ensure you get the most bang for your buck.

5. Insurance rates

Once you’ve narrowed down a list of vehicles to shop around for, call around or go online to compare car insurance quotes for each one. It’s key to incorporate your monthly insurance cost into your budget. Not only is liability insurance required in the vast majority of states, but most lenders also require that you carry comprehensive and collision coverages (a.k.a. “full coverage”) for the life of the loan.

To get the most accurate auto insurance quotes, there are a few pieces of information you should have handy:

  • Year, make and model of each vehicle you’re getting quotes for
  • Your social security number, which allows insurers to pull your credit-based insurance score
  • Your driving record and insurance history (if you have one)
  • Your coverage and deductible needs, plus any optional coverages you’d like to carry
  • Purpose of the purchase — whether you’ll be using the car for business, commuting or pleasure
  • Safety and security features on each vehicle, which can score you discounts
  • Vehicle identification numbers (VINs), if possible
  • Address where you’ll be garaging the car (usually your home address)

Though this may seem like a lot to consider when deciding how to include your new car purchase in your monthly budget, it’s best to think about these things ahead of time. You’ll be sound in your purchasing decision and sound with your finances — a win-win!

Haden Kirkpatrick is the director of marketing strategy and innovation at Esurance, where he is responsible for all initiatives related to product and service innovation. He manages the annual planning processes for the marketing and service business units. Haden is an innovator who is constantly thinking about how IoT, blockchain and machine learning will impact the insurance industry. He is also a mobile guru, aspiring yogi and mixed martial artist.

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