May 7, 2021

Any smart real estate investor’s main goal when investing is to maximize profits. That said, the market often experiences changes rapidly, and competition can cause restrictive returns. Rental investments generally have higher occupancy rates but economic fluctuations can cause increase devaluation of these long-term assets. These factors can have significant effects on your property’s future potential profitability. To avoid this scenario, you may have to strategize on ways to increase the value of your investment property for future revenues. If you’re a first-time investor, here are a view of the best ways to increase your rental properties value long term.

Energy-Efficiency

Energy-efficient upgrades are a leading way to push down electricity bills. Investing in these environmentally conscious renovations could help you cut down on expenses down the road. Once invested in, you can use your freed up funds on other repairs to help develop your property.  Energy-efficient lighting and appliances help enhance the physical and social value of a property. There are a lot of potential renters who seek green living lifestyles and are willing to pay a little bit extra for rent if they find a suitable place with environmental upgrades that align with their values.  These upgrades often times don’t need not be high end to accomplish the goal of saving money and catering to green living lifestyles. Here are some simple ways you can make your rental properties more energy-efficient:

Upgrade the windows and install blinds that block direct sunlight in order to keep the house cooler. A lot of money can be saved this way by keeping the electricity bills more energy efficient. Installing solar panels, smart thermostats, low-flow toilets and showerheads in the bathroom are all great potential energy savers worth looking into upgrading.

Curb Appeal

Curb appeal is another critical part of a properties overall value. Making the necessary enhancements to your property’s first impression is important to attract the right clients. It’s important to have a well-maintained lawn, a kept garden when applicable, and an overall clean exterior.  Attending to the curb appeal of your property, especially landscaping, can often times get expensive quickly. That said, having clean flower beds and properly trimmed trees could increase the appeal of the yard significantly. It’s important to consider ways for noise reduction and privacy as well. Adding, for example, a small fountain or planting tall hedges to your front yard could block out traffic noises and make it drastically quieter. It’s important to consider the long-term benefit of a great investment over just saving as much money as possible and doing a cheap job. Putting in the time and money upfront could put more money in your pocket down the road. The right curb appeal enhancements will make your property attractive to more prospective buyers or renters. Curb appeal enhancements could be just the thing you need to have your house stand out amongst others and bring in long term financial security.

Maintenance, Maintenance, Maintenance

The best way to ensure your property will continue to provide an increasing profit is to stay on top of all the proper maintenance. Between tenants, it’s wise to invest in professional cleaning and small maintenance jobs where needed, whether that be electrical work, plumbing, roof repairs, or pest control. These problems won’t just go away on their own, and you will certainly lose money if your property isn’t desirable to the right kind of buyer.

Modern Kitchens

The kitchen is the heart of any good home. If a home’s kitchen is clean, modern, and is ready-to-use, most serious renters will jump on securing these properties right away. When it comes time to sell, most buyers look at the kitchen before any other room in the house. Therefore, it’s so important to make sure it’s always the best room in the house.  If your investment property needs an upgrade, here are some things you can do to renovate the kitchen:

Upgrade appliances: Consider replacing old stoves and oven. It’s important to look for appliances that blend the style of your kitchen to increase your properties overall value. Update outdated electricity systems to avoid safety concerns as well. This way, you can guarantee safety to any interested tenant or buyer with confidence.

New countertops: Freshen up the kitchen with new countertops. From granite to laminate or even wooden countertops, there are plenty of options to upgrade your kitchen. Don’t forget to look for options that are easy to care for but have elements of style as well. These are two aspects both buyers and renters will be looking for when deciding on whether or not they like a kitchen.

Painting: If the cupboards are looking a little old but you don’t have the time or money to put in new ones, a simple paint job could turn a kitchen completely around. Many people are stunned by what a fresh coat of paint can do to enhance a kitchen.

New handles: After painting, you should also consider upgrading to modern handles for the doors and drawers. Like painting, this is a simple and easy method to breathing new life inside a house.

Conclusion

Above are just a few ways you can make an investment property more profitable. One of the most important considerations is to keep your property looking desirable and functional for possible tenants or buyers. You need to consider where to spend money and where to put your time and effort regarding improvements and repairs. You might have to spend a bit here and there to get more back down the road but these improvements are well worth it long term. The things discussed above, such as energy-efficient appliances, fixtures, curb appeal, maintenance, and upgrading the safety and style of your kitchen, are just some ways you can ensure the value of your property will increase with the market.

April 30, 2020

When seeking a loan for an investment, it’s common to focus on interest rates, fees, and repayment terms. While all of these are important areas to consider, dealing with a legitimate company should out way all of these other considerations when deciding who to have fund your next investment project. Scammers often pose as personal loan providers to trick those seeking loans into giving up their hard-earned money.  Scammers can be tough to spot because many of them sound convincing. By understanding the most common types of scams and their warning signs, you can hopefully avoid becoming their next victim. Below we will look at some of the most common personal loan scams.

Loans Without Credit Checks

Getting a loan without the company requiring a credit check is appealing to borrowers with poor credit who may struggle to secure loans with legitimate companies. Often times, loan seekers are so relieved to find a company willing to work with them that they don’t do their due diligence before agreeing to the terms of the loan agreement. It is only after they hand over their personal information and possibly some fees to the scammer and the funds promised never appear that they realize their mistake. All reputable lenders assess credit when someone applies for a loan. Some legitimate lenders do occasionally offer loans to borrowers with poor credit, but they will still run a credit check and use it to offer a higher interest rate.  Instead of falling for this common scam, you should opt to apply for a secured credit card instead.  If you come across a lender offering a personal loan with no credit check, run.

Loans With Fees Or Collateral Upfront

Legitimate loan providers commonly charge origination fees, which are typically a small percentage of the approved loan balance requested. That said, these fees are almost always paid out of the loan amount, meaning, they deduct the fees from the full amount you borrowed. Investors don’t typically require an applicant to write the lender a check in order to receive funds.  Some scammers take advantage of the fact that not everyone is aware of this by requesting victims send in origination, application, or processing fee money prior to releasing funds to the applicant. The scammer take the loan victims money and simply disappear.

Unsolicited Loan Offers

Legitimate loan companies do send offers via mail, phone or email, but scammers often throw their letters into the mix, hoping you’ll mistake them for a legitimate company. Bold scammers may even show up at your front door to bully you into a deal that is often too good to be true.  No real loan company contacts prospects in these ways, so these methods are good indicator of a potential scam. Be careful of companies sending you links to fake websites, requests personal or financial information, high-pressure sales tactics, and grammatical and spelling errors in any documents you receive.

What To Do If You Discover A Potential Loan Scam

If a loan offer sounds too good to be true, it probably is. Never hand over funds or personal or financial information to the company until you’ve ensured the company’s reputation. You can check if the company is registered to do business in your state through your state attorney general’s office. The Federal Trade Commission requires legitimate lenders to be licensed in each state they conduct business in, so if it’s unlicensed in your state, that’s a good indicator you’re dealing with a scam. Additionally, all websites requesting financial information should be secured to prevent hackers from stealing it. You can tell if a site is legitimate by looking for “https” at the start of its URL. If the “s” is missing, that’s a sign the company isn’t taking steps to protect your financial information, and you should avoid them at all costs.  Perform a search of the company online and look for any negative reviews from other consumers. A missing address is another red flag. Some scammers pretend they work with a legitimate company, so compare the emails, websites, and phone numbers the scammer gives you with the ones that come up during your internet search.

If you confirm a scammer, you should report the company to your state attorney general’s office, the police in your area and the FTC. Try to provide as much information as you can about the scammer to help them track down the scammer and prevent future consumers from getting hurt.  If it is too late and you are already the victim of a scammer, you should pull your credit reports and look for any unusual accounts or activity you don’t recognize. If you see any, notify your financial institution and put a fraud alert on your account so lenders know to take extra steps to verify your identity before opening a new credit account in your name.

April 23, 2021

Much like any other investment, investing in real estate isn’t something you can perfect from the start. In reality, the lines between success and failure are paper thin. The investment decisions you make, from financing to managing tenants, can have serious impacts in the long run. This is not to discourage anyone or imply that real estate investing isn’t for everybody, but knowing your way around when it comes to seeking out the best deals and maintaining a healthy cash flow is critical. If you are looking to enter the competitive world of real estate investing, be sure to keep the following tips in mind:

Be proactive

It’s easy to lose yourself in the excitement of generating passive wealth as a new investor. While it’s possible to build a profitable portfolio with little effort, successful investment methods take time and a   lot of hard work. Having goals are great since they serve as the basis for the decisions you will be making, but focusing too much on the results can only distract from the real work involved. It’s great to think about the benefits of being a successful real estate investor, but your desires should be paired up with appropriate action.

Pick an asset class and location

Not all real estate investments can fit your means and needs as a first-time investor. When you are just starting out and learning the ins and outs of the real estate market, you should lean towards properties that are best suited for your current investment level. Investing in a single-family home is often a wise place to start, but as your portfolio grows, you may want to pursue bigger assets such as duplexes or apartment complexes. Picking the right location to invest in your first property is also critical to your success when starting out. For example, Atlanta and Orlando, are currently two areas that stand out due to their affordability and high job growth, so these investment hot spots are easy to maintain a stable cash flow if you acquire rental properties in these areas.

Create a financing strategy

Once you have determined the types of properties you want to purchase for your first investment, strategy becomes key on determining whether or not you will be financially successful right out of the gate. It’s important to find enough capital to finance your purchases. Unless you are lucky to have enough excess cash to afford a large down payment, you may need to look into utilizing your 401K or IRA’s, which may be necessary to fund your first investment. Another option is to pool together multiple family and friend members money in order to get the momentum you need to get started if you don’t want to use a traditional bank loan. There are a number of hard money lenders in the U.S. who have more flexible loan terms than traditional loans and will give you the funds you need upfront without having to invest a lot of upfront cost.

Research property management companies

Property management is a critical and often times overlooked area of successful real estate investing. You may attain financial freedom, but it’s worth noting that investment properties deteriorate over time. It’s important to make improvements to your assets if you want to maximize cash flow. Apart from screening tenants and utility expenses, you should find property management companies who focus on additional amenities, repairs, and building a comfortable community that fits the lifestyle of your residents. It’s super important to hire the right property management company to help you out in all of these aspects.

Real estate investing can be a lucrative market as long as you know how to play the game, as you learn as a new investor. It’s important to do your research so you can avoid making mistakes and successfully gain a passive wealth stream off your first real estate investment.

April 13, 2021

If you are looking for ways to expand your business, or are having cash flow issues, it is common for many folks to have a love/hate relationship with banks when it comes to securing a loan. Many people often feel like banks are most eager to lend to those businesses that least need to borrow.  Regardless of your past experiences or why you are seeking funding for your next project, below are some of the smartest ways to borrow money in the current market.

Line of credit

It is very common for investors to experience uneven cash flow from time to time. A line of credit allows you to get money quickly, with the understanding that you will pay the line of credit down once your deal has been closed or for a fixed amount of months depending on the terms of the agreement. Line of credit interest rates are variable and usually competitive and therefore, could be a positive short-term solution.

Review options with your bank

Obviously, banks are in the business of making money through loans. If you have a history with a particular bank and have a good payment history, they may be willing to get creative to come up with a solution for financing your next project.  Be aware, however, your bank will likely want to see a business plan. Many banks will not lend to startups because the risks are too great, so limiting the risks of your deal prior to presenting them with an option, could make the difference on whether or not they are willing to work with you. Here are just a couple ways to win your bank over to your side:

• Offer a personal guarantee. Banks are often cautious to lend money to a business they have not dealt with much or if the deal is riskier because if the deal falls through or you declare bankruptcy, the bank can lose big time. Offering to personally guaranteeing the loan may give you the bargaining power you need to secure funding.
• Secured loan. The most secured loans that appeal to a lender are deals with collateral involved. Securing the loan with the property you are trying to purchase or even another property you may own will give a bank or lender a lot more confidence when deciding to lend you the money you need or not.

Consider borrowing from family and friends

Instead of applying to the bank for a loan, ask extended family members to put up the money. These deal terms may include shared ownership of the business or a direct loan with often times more reasonable terms that a bank will offer. Regardless of who lends you funds or what the agreed terms are, you should always document the terms in writing. The most common need for documentation is a death or other instances when the loan is disrupted before it is repaid. Regardless the reason, it could be challenging to collect and resolve issues with family members down the road, so its always best to have proof in writing.

Government programs

The most obvious are the Paycheck Protection Program (PPP) loans the government has been making during the pandemic. This program included forgiveness provisions; loan similar to traditional grants. The government has also lent money through its “Economic Injury Disaster Loan program”. Additionally, some states and cities have also created lending programs to attract and retain small businesses.

Easiest isn’t always best:

Credit card debt

The rate of interest on cash advances is far higher than on purchases. The average rate on credit card purchases is 15 percent and higher, and the cash advance rate may be over 20 percent. Using credit card debt as a way to invest or borrow money for a loan project should be avoided at all cost.

Marketing emails

We’ve all gotten those marketing emails promising unreal deals only to read the fine print and discover they are a complete scam. You should always be highly suspicious of unsolicited emails offering you pre-approved guarantees. The golden rule for these types of offers remains, “If it sounds too good to be true, it probably is!”  Regardless of which route is best for you to fund your next project, use the above options as a road map for creative solutions next time you need to secure a loan.

April 9, 2020

Real estate investments are one of the safest and most effective ways to build wealth. The real estate market fluctuates but people will always need homes. Perhaps you’re just now getting your feet wet in real estate investment, or maybe you’ve already begun developing your portfolio. Either way, acquiring real estate is a valuable and proven strategy to earning passive income and becoming your own boss.

There is no “one-size-fits-all” approach to investing in real estate. Variables include access to capital, the shape of the local economy, and intensity of competition. While remaining open to adaptation for your local market. In this article, we will look at some of the best tips for starting or growing your real estate investment portfolio.

Buying your first property

It’s never too late to take the first step in building your real estate investment portfolio. Don’t rush when choosing your first property but it’s important to not over analyze either. Most likely, your first property purchase is going to be a learning experience no matter how good your decision. For your first purchase, consider acquiring a property where potential improvements are easy to spot. It’s smart to start with a less expensive property if possible to become more knowledgeable about how real estate investment works. Once you’ve had your first successful experience, you can more comfortably move on to larger deals.

Leverage your equity

After you’ve acquired your first property, speed up growth by leveraging the equity of your portfolio. For example, if you purchase a property for $250,000 and, after making improvements, the appraisal value comes back at $350,000. You now have $100,000 in equity. You can access this equity by selling the property and reinvesting the cash profit, or you can borrow money against the equity. Be aware that borrowing power is often capped at 80% of property value so be careful not to take on too much debt. You’ll need to maintain a positive cash flow to repay your equity loans.

Find off-market properties

“Off-market” is a real estate term referring to properties that are for sale but not advertised on the Multiple Listing Service (MLS) or other public resources. Brokers will occasionally try to create interest in a property through word of mouth or by listing it privately on their network. These homes can sometimes be undervalued with motivated sellers. Investors often find off-market properties by networking directly with real estate agents or attending real estate auctions.

Invest in rental properties

There are several ways to make money with a real estate portfolio. Buying, upgrading, and flipping homes relies on the time-tested truth that property values increase over time and with improvements. But what about a rental property? Monthly rental income can provide an additional passive income stream that you can reinvest into your real estate purchases. Passive monthly income also boosts your cash flow, enabling you to make improvements on properties in preparation for selling them later on.

Hire a property management team so you can keep closing new deals

As your real estate investment portfolio grows, so will the amount of time it takes to manage your properties. You may successfully manage your first property by yourself, but any ability to scale your business will be limited by hours in the day. At some point, it might be helpful to outsource some of your management labor.  Many real estate investors hire a team of property managers, attorneys, and/or accountants. These teams typically handle daily operations, which frees the investor up to conduct research, network, and close additional deals. Be sure to study up on the differences between in-house management staff and a commercial team before you make your outsourcing decisions.

Don’t hesitate to cut your losses

Sometimes, the single most important skill for growing your real estate investment portfolio is knowing when to walk away. If you acquired an investment that isn’t profitable or takes up too much of your time, it’s probably not worth keeping. Don’t hold onto investments to save face. Accept a disappointing outcome and spend your energy on opportunities that have a better chance of success.

If you’ve held back on investing in real estate or had a bad experience years ago, take another look at the opportunities available today. Advances in technology have removed many previous barriers to entering this market, greatly reduced research time chief among them. Investing still requires property management, but nowadays most of the legwork can be done right from your home.

April 2, 2021

For many, a rental property is the first major investment they make which they must also manage diligently. Many new real estate owners don’t move past a couple of properties, while others successfully grow their real estate portfolios into multiple individual properties. Each person has their own unique goals, and like all investments, rental property management is not for everyone. For investors who do prefer real estate as a way to build their wealth, below are some helpful tips for managing real estate accounting.

Typically, if you only have one rental property you can handle most of your accounting at year-end when you or your accountant are doing taxes. That said, as your portfolio of rental properties expands, there will be increasingly complex tax issues to consider, as well as more hands-on accounting for each unique property. While it may seem easier to group all rental costs into one bank account, this will likely create headaches down the line.

It’s worth noting that regular business expenses, tax liabilities and accounting for rental properties often span multiple years. From the time you buy the property to the time you sell it; you need to take advantage of all of the available real estate tax codes to reduce your liabilities. To accomplish this, it’s very important to keep clear records of the total money spent on each rental property separately.  Follow the steps below to keep track of each property, and you will eliminate many potential headaches for you and your tax professionals down the road.

Keep separate bank account for deposits/expenses for each property

Use a separate bank account to collect rent payments. It is unwise to let all of your tenants know your bank account number. A separate account will also let you easily track who has paid rent each month and who may still owe you money. As a general rule, you shouldn’t accept cash; but if someone needs to pay in cash, have them purchase a money order instead. As a general rule, cash is hard to track and easy to lose.

Independently track expenses for each rental property so you can properly disclose them on your tax returns. Ideally, you should maintain a separate bank account for each rental. If that’s too complicated to manage, group some properties into the same account. It’s important to keep in mind that at the end of each year, you’ll need to separate all the expenses by each property regardless of how many accounts you have set up, so it’s best to do it on the front end instead of waiting until the end of the year to divide out all of your property’s expenses.

Track improvements separately from repairs

It’s important to understand the difference between repairs versus capital improvements. This is very important because repairs are deductible when you pay for them, but improvements have to be depreciated over time. Typically, repairs won’t improve the value of your property, but rather simply bring it back to being useful. Capital improvements, on the other hand, will often increase the property value or prolong its useful life.

Don’t track depreciation

Although depreciation can be easy to calculate, don’t try to do so on your own; let your tax preparer calculate it. This is not a cash expense, so it won’t affect your bank account. The current tax code makes it simple, but if you have older properties or have made significant capital improvements, there may be other implications to consider. It’s likely best to leave depreciation calculations to a hired tax professional to handle it for you.

Simplify your accounting

Have a system for tracking income and expenses for each property. Don’t overcomplicate things.  Often times, jotting things down on a piece of paper can be just as effective as a spreadsheet or other more complicated accounting system. You are likely not tracking many transactions, so use whichever method you feel most comfortable with. The key take away here is to ensure you are tracking monthly, and don’t wait until year-end to do everything.

As you grow your rental income, you’ll likely have to expand your accounting system and it is critical to keep solid records. Accounting for your rental properties does not have to be a headache during tax season. Follow the instructions above to ensure you don’t miss any deductions and have detailed records when you eventually sell the property. No matter what system you decide to use, the main accounting objective for successful property ownership is to keep the best records possible and to keep everything organized!

House flipping still represents a solid investment strategy for people who know a thing or two about home remodeling. Sometimes, the trickiest thing about it is arranging financing. Hard money is one option. But is it a good option? Should you fund a fix-and-flip with hard money? There is no right or wrong answer. It really depends on your circumstances and goals. It might also depend on your ability to find a cooperative hard money lender. Some lenders are more than happy to work with house flippers. It all boils down to finding the lender that is right for your needs. Below we will look at some traditional types of hard money loans, so you can decide if a hard money loan is the right approach for your next deal.

Lending Based on Collateral

Some hard money lenders tend to shy away from house flipping deals. They do not have anything against house flipping, it is just that they prefer to put their money into larger projects. Nonetheless, some may be willing to offer you a hard money loan but the deal will likely be largely based on collateral. The collateral you have to offer influences nearly every aspect of any loan you might obtain.  As a house flipper, you are most likely going to offer the property being acquired. The lender must look at how much you want to borrow weighed against two things:

• the current property value
• the property’s future value after renovations.

Remember that the lender has to consider the possibility that you will default, forcing them to assume ownership of the property and find a way to sale it in order to recoup their investment. That means the lender has to consider any additional investment that might be necessary to fully recover the amount you borrowed.

What Does A Typical Hard Money Loan Look Like?

There are no hard and fast rules dictating how a hard money loan must be structured. This is one of the reasons hard money lenders can be more flexible than banks and credit unions. They have a lot more room to structure loans in ways that make everybody happy. That notwithstanding, a typical fix-and-flip loan follows a basic pattern. The investor finds a property to add to their portfolio. They then look to acquire that property for as little as possible. Going to a hard money lender, they will usually offer that property as collateral on a loan that will fund both acquisition and remodeling costs. Then they have one of two options as an exit strategy:

• Sales Proceeds – The first option is to rely on sales proceeds to repay the lender. This assumes that the investor will be able to complete renovations and sell the home within the loan’s stipulated terms.
• Traditional Financing – A second option is to secure traditional financing as soon as renovations are complete. The traditional financing pays off the original loan and gives the investor a bit more time to decide what to do next. They may still decide to sell the property, but may also decide to rent it out instead, depending on the market.

Be aware that smart lenders look long and hard at exit strategies. In fact, a borrower’s exit strategy is second only to his collateral in terms of importance. Lenders want to see a solid exit strategy before they are willing to lend.  One of the primary benefits of hard money to house flippers is the ease at which loans can be obtained. Hard money lenders do not care all that much about a borrower’s credit history or credit score. They do not look at the borrower’s income and assets. As long as the collateral and exit strategy are there, loans can be made. That’s why hard money is such an appealing way to get into house flipping as a new investor.

March 12, 2021

Buying your first investment property can be a strange experience. Most people approach their own home with the attitude that whatever maintenance is required should be done as quickly as possible even if it is more expensive. Whereas, once you purchase a rental property, you suddenly have to think about things like your return on the investment and your overhead cost. If you spend too much maintaining the property, you could end up losing money. Below, we will look at a few ways you can better maintain your rental property, avoid major issues, and put a cap on your total maintenance costs.

Understand The Properties Unique Needs

One of the reasons why property owners dislike maintenance and repair costs is that they often come up unexpectedly. It’s hard to budget for improvements or set rent when you’re never sure when a major repair might pop up out of nowhere. To move past this, it’s best to get to know your property inside and out.  For instance, if the house has a known history for termite damage, that’s something you’ll want to have checked out shortly after closing. You should never assume the prior owners took care of the issue. Termite damage, in particular, can compromise your property’s structure and lower its value. Even if you don’t currently have an infestation, you’ll need to remain vigilant in the years to come.

This same principle applies to the entire property including the outside. If the home inspection indicated possible long term issues with the roof, or informed you that the water heater is getting old, you may save a lot of money down the road by fixing those known issues prior to them becoming an emergency.

Stay Ahead On Routine Maintenance

Preventative maintenance keeps the property in good condition and can reduce a lot of potentially expensive problems. It can also help you save money throughout the year. Getting the A/C serviced annually, for instance. A yearly tune-up usually costs between $75 and $150. If that tune-up, however, helps prevent a single major breakdown or repair, it has easily paid for itself many times over. The same thing is true for sewer line inspections, pest control, and other prudent maintenance.

To keep your maintenance costs down, divide your property’s maintenance needs into two categories: projects you can complete yourself versus projects you’ll need an expert to help you with. Some of the maintenance projects in the first group should include items such as repainting interior walls, deep-cleaning carpets between renters, or fence repairs. Is the second group, you’ll want to bring in a pro to help with items such as HVAC, plumbing, roofing, pest control, or electrical issues, unless you are very handy and have solid experience in those areas.

Resolve Problems Quickly

No matter how much time, money, and effort you put into preventative maintenance, you’ll inevitably have to deal with one or two major issues every few years. While you can’t predict exactly what you’ll have to face, you can control your response. You should always respond as quickly as possible and communicate clearly with your rental tenants. When your renters do call with a legitimate issue, you should try your best to make resolving the problem a top priority. Don’t hesitate to call in a professional as soon as possible. It’s a great idea to call several service experts in your area before you have a problem and establish a working relationship so that you have their contact information easily accessible when situations arise.  By being decisive in a crisis, you’ll help limit the damage to your property, saving you money and making future maintenance easier and less expensive.

March 5, 2021

If you’ve ever thought about investing in rental property, now may be a good time. Mortgage rates remain historically low, and rental income could offer valuable protection against ongoing economic uncertainty. Many economists are predicting a wave of foreclosures in 2021, which may lead to more people looking for available rentals. So, how do you finance a rental property? The answer, for most people, is the same way you finance the purchase of your own home: with a mortgage. Whether you plan to live in the property or not, a mortgage is the most secure method of financing a rental purchase because it’s secured by the home.

How are rental mortgages different?

Mortgage lending is all about risk levels. A typical mortgage for an investment property carries a higher level of risk than a mortgage for a primary home, simply because the mortgage holder isn’t living in the home.  To discuss in more detail, below are three ways a rental property mortgage differs from a mortgage for your primary residence.

1. You May Have to Make a Larger Down Payment

In most cases, the minimum down payment required for investment property is roughly 15% to 20%. Comparatively, you can make a down payment on your own home of as little as 3% in some cases. However, for a down payment lower than 20% on your own home, a borrower is required to pay for private mortgage insurance, which can cost between .25% and 2% of the loan balance per year. It is worth noting that private mortgage insurance does not cover investment properties, so investors may have to make a larger down payment as a result.

2. Your Mortgage Rate Will Likely Be Higher

In a low interest rate environment, the interest rate on a mortgage for a rental property is still relatively low. For most borrowers, the rate will be about three-quarters of a percentage point higher for an investment property than it would be for a primary home, or about the mid-3% range currently.

3. You May Have to Pay Off the Mortgage Sooner

In some cases, the loan may have a shorter term than the typical 30-year term offered on the purchase of a primary home. Like with other types of mortgages, a rental property loan can either be fixed or variable, depending on the loan and the borrower’s relationship with the lender. So, what are the different types of rental mortgages?

Is now a good time?

Even if it requires extra paperwork and documentation, getting a mortgage for an income-producing rental property may be a good idea, especially at the moment.  Low mortgage rates help make purchasing real estate more affordable, while economic uncertainty may make it appealing to have a passive income stream available through a rental property. Low rates are driving interest from a wide variety of real estate investors, but rental properties are one of the safer bets.  Investing in a real estate property for a short-term purpose, such as a fix and flip, would likely be far riskier in the current real estate environment. There is likely to be an influx of real estate supply through foreclosures which could depress prices and have a negative impact on real estate speculation in 2021. This may be offset by the large demand seen in the past several months for real estate, but nevertheless remains a risk.

Bottom Line

If the coming months result in a wave of foreclosures—particularly after the government’s Covid related foreclosure moratorium ends—that will likely result in an increase of new applicants for rental properties, which will be a boom for rental property owners. For investors who are able to qualify for a rental property mortgage and are willing to handle or outsource property management tasks, now could be the right time to make an investment that will pay off for many years to come.

February 25, 2021

Investment properties are properties in which the owner plans to make a return on investment through either rental, resale, or both. With the right planning and management, they can be a nice way to earn additional income. But sometimes, they can be a slippery slope into financial distress. If you’re planning to invest in real estate, here are a few hard truths about what could potentially await you.

Initial Costs Can Be Steep

Buying property is a costly affair in general, let alone when you’re venturing down the investment avenue. Financing the purchase of your investment property could well be your first hurdle, especially if you already have a mortgage. One way you can do this is through a cash-out refinance, however you will need to have sufficient equity in your home, as well as pass your lender’s assessments. Investment property mortgages are another option, but they can be very costly, and you can expect down payments of at least 25%, as well as stricter credit score requirements and higher interest rates.

Upkeep Can Be Costly

Once you bought an investment property, there’s a very good chance you will need to perform some maintenance on it. Depending on the building’s age and condition, this can be anything from a fresh coat of paint, to plumbing repairs or installing new flooring.

Upkeep, however, is something you will need to keep on top of for as long as the property is in your possession. Rental properties in particular can be very high maintenance, and could require costly upkeep, depending on the tenants who have lived there previously.

At the same time, it’s important to check on and maintain properties that you intend to sell, especially if nobody lives there. For example, a vacant property that’s been on the market for several months can suffer unexpected damage, such as a pipe freezing in winter, and causing water damage when it bursts. Not only will you have to contend with the financial losses that come with a property that isn’t selling, but now you also have an expensive repair on your hands.

Finding the Right Tenant Can Be Tricky

If you’re buying an investment property that you intend to rent out, it’s important that you find the right tenants to live there. Ideally, you should draw up a contract that clearly stipulates rules such as no smoking or no pets, as well as ask for a security deposit. Yet even so, you should prepare for cases in which rent is paid late, tenants are disruptive, your property is damaged, items get stolen, or tenants simply abandon the property without any notice.

In the best-case scenario, the security deposit will cover any damages and items that need replacing. But even so, you run the risk of taking your property off the market for a few weeks, while repairs are being performed, which can set you back financially.

It’s worth noting that evicting a troublesome tenant takes time, and needs to be done in accordance with the law and the local renter’s rights. Also, as a landlord, you will need to wait a standard 30 days before you can use the security deposit, assuming that your tenant doesn’t qualify for a return.

The Property Value Could Decrease

Depending on market fluctuations, the value of your property can either rise or fall. This can cause issues if you’re buying investment properties with the intention of selling them later on. The most common scenario is neighborhood decline, which will result in a depreciation of your property’s value. Regardless of whether you’re dealing in commercial or residential investment properties, pay close attention to the signs of a declining neighborhood prior to buying, such as an increased lack of stores or public transport.

Selling an Investment Property Can Take Time

Unlike other types of investments, properties are not a liquid asset. If you’re flipping properties or just planning a resale later on, prepare for any financial drawbacks that could arise while the property is on the market. And as any investor knows, the older the listing is, the bigger the risk of not closing on a sale.

Lots of Hidden Costs to Watch

On top of the initial cost, upkeep and maintenance, investment properties pack hidden expenses that might not be obvious at first sight. The best example is long periods of vacancy for rental properties, especially when there’s little demand. Not only that, but if you’re a landlord dealing with several rentals, you will find yourself in need of hiring a property manager, which adds to your monthly costs. Don’t forget to take property insurance into account, and also keep an eye out for an increase in local taxes.