General Lending Archives - HardMoneyHome.com Private Lending Blog

Category: General Lending

November 18, 2022

Before entering into a new relationship with someone, it is not uncommon to ask yourself a series of questions first. Does this person’s values align with mine? Etc. It is no different when making a serious financial commitment like borrowing money from a potential new lender. There are some important questions you should always ask yourself and questions to ask the potential future lender before agreeing to anything in writing.  Below we will discuss several questions you should ask yourself before acquiring a new loan.

How Is Your Credit?

Make sure you have reviewed and understand your credit history as well as your credit score. The better your credit score, the lower the interest rate you will likely qualify for. Interest rate matters. If, for example, you were to borrow $25,000 for 60 months, the difference between how much you could pay with an excellent credit score and how much you might pay with a fair score, could be night and day. While a 100-point difference in credit score may not seem huge, it can be costly. With a fair score, your monthly payment could be hundreds of dollars higher, and you might end up paying thousands more for the loan over five years. Before taking out a loan, try to increase your credit score if you feel it is not where it needs to be. While it will take some time and effort, it is likely to pay off in a big way.

What’s Your Actual Budget?

The fact that you’re approved for a loan doesn’t mean you can actually afford it, particularly if you have lots of financial obligations that don’t show up on your credit report. For example, if you’re paying for your children’s education, monthly memberships, vacations, and several different hobbies, you may have trouble repaying the loan as agreed.  Even if you’ve been approved for a personal loan, take a hard look at your budget, including how much you spend on the things you enjoy each month. That way, you can make sure you can easily afford the monthly payments. In doing so, you may find you need to cut certain expenses in order to make way for a new financial obligation.

Is A Loan The Best Long Term Option?

We often spend money on things which provide great experiences and memories but no financial return. A great meal at a fancy new restaurant may be worth the price in terms of experience, but in terms of finances, you won’t likely see a return on this type of investment.  On the other hand, If you’re considering taking out a loan to remodel your bathroom or to install some new landscaping features, you could recoup your entire investment and then some. Before contacting a loan lender, determine whether or not you will likely see a return on your investment.  Now that you have a better idea of what you’re looking for in a loan, here are some more questions to inquire about with potential lenders:

What’s The Best Interest Rate Offered?

As the above scenario shows, monthly interest payments matter. A difference of 1%-2% can save you a lot of money long term. This is why it’s important to get comparative quotes from several lenders before settling on one.  The great thing about most loan lenders is that they will typically only run a “soft” credit check before letting you know if you qualify for a loan, and if so, what your interest rate will be. A soft check does not impact your credit score. It’s only when you decide to proceed with a loan that the lender runs a “hard” credit check that may ding your credit score a bit. Don’t worry, though. As long as you make regular payments on the loan, your credit score should rebound relatively quickly.

Is A Secured Loan Better?

Say you are interested in making several upgrades to your home to add to its overall value. If you’re trying to get the lowest possible interest rate, it pays to determine how much that rate would be if you opted for a secured loan rather than an unsecured loan. Most personal loans are unsecured, meaning you don’t put anything of value up as collateral.  On the other hand, a secured loan requires you to put up some form of collateral like a home or car in return for a lower interest rate. As long as its value is enough to pay off the loan if you fail to make the required payments, a lender may be interested.  Although a secured loan is likely to save you money, it’s worth remembering that If you don’t make payments as agreed, the lender has the legal right to repossess the collateral, sell it, and recoup their losses.

Are There Extra Charges?

With an excellent credit score there is no reason to pay for extras like an origination fee or an early payoff penalty. If your credit score makes you appealing to potential lenders, make sure to ask about fees. The difference between making a financial decision that works for you and one you may grow to regret is in asking questions before signing your name to a contract. Use the above guide to help make the right decision before you move forward on your next loan.

November 11, 2022

If you are considering to invest in property, you may be like so many others and asking yourself whether it is better to buy an existing property or build a new one in today’s current real estate market. Both scenarios have pros and cons, and the best decision for your will ultimately come down to your individual circumstances. To help you decide, here are some pros and cons to keep in mind when deciding whether it is best to build or buy your next investment property.

More and more people are choosing to buy existing properties as an investment, and there are several reasons why this can be a wise decision. Here are some of the key benefits:

Buying Advantages

You will know what you are getting. When you buy an existing property, you can inspect it thoroughly before deciding. It means there will hopefully not be any nasty surprises down the line.  It is usually cheaper.  Not only will you save money, but existing properties come with established finishes and landscaping. Therefore, it saves you money on landscaping costs.  It is easier to finance. Banks are often more willing to lend money for an existing property than for a new build, as they can use the property as collateral if you default on the loan.

As you start looking at existing properties, keep the following tips in mind:

Find a good real estate agent. An excellent real estate agent will deeply understand the local market. They help to find properties that match your investment criteria. Do your due diligence.  When you have found a property, you are interested in, be sure to do your research. Check out the surrounding area, speak to the neighbors, and get a feel for the community. You should also hire someone to conduct an in-depth home inspection to check for structural issues.  Have realistic expectations.  It is important to remember that property investment is a long-term play. Do not expect to make a quick profit. Rather, focus on building equity and generating rental income long term.

Building Advantages

Many people are put off by the idea of building an investment property, but there are several advantages to this approach. Here are some things to keep in mind.  When you build a new property, you can design it specifically for your needs. You also want to ensure you get the right mix of bedrooms and bathrooms. Also, enough living space to make your tenants comfortable.  A brand-new property will likely have fewer maintenance issues than an older one. It means you will save money on repairs down the line. Plus, it should come with a builder’s warranty to help with your peace of mind. Because new properties are in high demand, they often appreciate value more quickly. This means your investment could grow faster if you choose to sell in the future.

Now that we have looked at the advantages of building a new property, let us look at a few tips to help you get started:

When you are planning to build a new property, it is important to get expert help. A builder broker can connect you with the right builder for your project and help you get the best possible price.  The location of your property is one of the most critical factors in its success. So, make sure to choose an area that is growing in popularity and has good infrastructure.  It is important to remember that quality counts when you are building a new property. Do not cut corners on materials or construction as it will only come back to bite you down the line.

There is no easy answer when deciding whether to buy or build investment property. It ultimately comes down to your circumstances and what is important to you as an investor. Buying an existing property is probably your best bet if you are looking for a low hassle investment.  However, if you are looking for an investment that you can customize and that has the potential to appreciate, then building new might be the way to go. Whichever approach you choose, be sure to research and seek professional advice before making any decisions-because regardless of what you ultimately decide is best for you, investing in property is a big commitment.

November 2, 2022

Purchasing a property is likely the largest purchase you have or will ever make financially.  Owning your own place feels great, but you may not always be sure if your property is worth the monthly payments.  Given the current housing market, many people are considering whether or not to put their homes on the market. As nice as making a quick buck sounds, you should not base your decision to sell on that alone. There are several factors that should help guide your decision to either stay where you are or put your house up for on the market.  Here are a few tips to help you conclude whether or not you’re property is worth the monthly payments.

Rent Would Be Greater Than The Monthly Expenses

Diving deeper into the numbers can help you more clearly understand if the monthly payments  on a property ultimately make good financial sense. Look at whether or not the rent (after expenses) divided by the current market value is greater than the interest rate on the monthly payments. If the home can bring in more money than the cost of the monthly payments then it may be a worthwhile investment for you.  Anyone can use this formula regardless of whether or not they are actually planning to rent out a property.  Regardless of where you are in the decision making process, these findings can be very insightful on guiding you towards making a more educated decision whenever the time comes.

You Intend To Keep The Property Long Term

Even if your monthly payments are a little higher than you may ideally like, it does not necessarily mean your property is a bad investment.  Over time, with the more payments you make, less money will go to the interest and more goes to paying down principal.  This means the longer you hang onto a property, the more the monthly payments may become worth it in the long run.  One of the best questions you can ask yourself is ‘How long do I plan to keep this property?’ in determining if the monthly payments are worth it.

Property Taxes Aren’t Too Crazy

Regardless of where the property is located or who you are, ultimately, all property owners have to pay property taxes.   Property taxes in some areas are relatively reasonable but in other areas they make up a substantial part of a persons monthly mortgage, which could be a huge red flag.  Property taxes are known as a sunk cost, meaning it is money that cannot ever be recovered.  It’s important to be thorough and closely evaluate how much of your monthly payments are going to property taxes, how much to interest, and finally, how much is going to paying down your mortgage principal.

Great Location

It is not uncommon for many folks to purchase a home with the automatic assumption that the property value will always increase over time. However, this is only the case if the house is in an area people actually want to be in.  Some buy properties in the middle of nowhere hoping the value will increase but fail to consider that many may not wish to live in the middle of nowhere. More remote locations often make it harder to travel for work as well as provide fewer opportunities nearby to socialize.  These are just a couple of the reasons that could cause property values to climb much more slowly than in more densely populated areas.

You Can Afford It

No matter how much you love your home, it’s bound to be stressful if you can barely afford the monthly payments. Being house poor can make it hard to keep up with other essential expenses as well as enjoy even minor indulgences such as dining out or traveling periodically.  Perhaps your income has decreased since you bought the property or your expenses have increased. It could be that your budget is the same, but you’ve simply realized the monthly payment you signed up for are much too high.  No matter what the case, if a large monthly payment is causing a lot of stress in your life, it may not be sustainable long term.  On the other hand,  if the payments are within your monthly budget and not creating any financial strain than it could be worth the equity you will build to hang on to the property.

It’s Not the Most Expensive In The Neighborhood

There’s much more to life besides owning the one house on a street with the highest price tag. It can be tempting to envy the neighbor’s larger, more extravagant house, but the reality is, it’s probably not worth it.  Real estate agents use comparable local properties to gauge a home’s value. A house with a sale price notably higher than everyone else’s on the block was most likely valued too high.  Hopefully you’re not the neighbor with the overpriced house, but if you are, there’s likely a reason everyone else paid less to live in the area.

It may sound a little cheesy but home really is where the heart is. If you can easily afford your monthly payments and are truly happy with your property, then the monthly payments are probably worth it.  Whether the location is convenient to most everything in your life or it provides you peace from an otherwise hectic world, it’s not always so simple to put a price on your overall happiness.  If moving to save money on your mortgage payment would likely decrease your quality of life, it’s probably wise to simply stay put for the time being.

October 26, 2022

So, interests rates are rising and you need some money for a quick fix and flip? Many people looking to break into this business do and often struggle to determine what place is the right place to secure the financing that they need. The good news is, hard money lenders can help.  However, there are some people who have trepidation’s regarding hard money lenders. Perhaps they have heard a horror story in the past, perhaps it is the name “hard money” or perhaps it is the fact that they just don’t really understand what a hard money lender is.  The good news is, hard money lenders aren’t as scary as you think. In fact, they, in general, tend to make getting loans quite easy. Here’s what you need to know about hard money lenders and what they offer.

Why You Should Turn to Hard Money Lenders

Hard money lenders are private investors that are dedicated to helping people get short-term loans secured by real estate. These lenders specialize in short-term real estate investment opportunities such as fix and flips.  They typically give out loans for about 12 months, but they may lend longer, and they will ask you to provide monthly payments of interest or interest and some principal and at the end of the loan (when you sell your fix and flip) you will make a balloon payment for the remainder of the loan.  These lenders are going to work with you one-on-one and base their decisions on the deal they are presented with. They aren’t going to comb through your financial records. Instead, they are going to look at the potential for your fix and flip to earn money and base their loan terms on that.

What are the Pros of Hard Money Loans?

There are many pros of the hard money loans you can get from these lenders, this includes:

  • Speed of Approval—you can typically get these loans secured very quickly compared to other mortgages, typically because the lender is mostly focused on collateral not all of the other financial documents that mortgage companies need from you.
  • Flexibility—one of the biggest benefits of working with hard money lenders is that they can be more flexible than traditional loan officers. These lenders will evaluate each deal individually and are often more flexible with individuals than large companies are.
  • More Approval Rates-with hard money loans, you can avoid issues with getting your loan approved. Credit issues, or bankruptcies aren’t going to prevent you from getting a loan approved in the way they would with other mortgages—hard money lenders are more focused on the deal.

So, if you have been apprehensive about hard money lenders in the past—now you know about just how helpful they can be when you need cash for your upcoming fix and flip. Keep this information in mind before you find the right financing for your investment property, as a hard money lender may be just the ticket to you getting the money you need to make your fix and flip dreams a reality.

October 20, 2022

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!

October 14, 2022

Deciding to start flipping houses can be a solid option for generating extra revenue, particularly if you are talented in home design or are handy with doing repairs without hiring someone. That said, it’s typically not as cheap as many people believe. You’re not just purchasing land and a structure; you’re also buying appliances and any repairs and remodels you can’t do by yourself. You’re also often left with a situation where you may be waiting on the sale before you can collect any profits. This process can sometimes take months or even years to complete. Luckily, there are several financing options out there for house flippers to research and decide what options may work best for their specific needs. Below we will look at a few loan options to get you from start to finish until you can start collecting revenue on your new flipping investment.

Commercial Loans

Commercial loans are loans secured by liens on a commercial property. If the borrower does not have a well-established financial track record or high enough credit rating, lenders may require the borrower to guarantee the loan. If a loan guaranty is not required, and the property is the only means of recovery in the event of default, it is a non-recourse loan. Lenders have no recourse against anyone or anything beyond the property. Generally, the longer the loan repayment schedule, the higher the interest rate will typically be. Commercial loan Interest rates tend to be higher than on residential loans.

Home Equity Loans

A home equity line of credit is secured by utilizing your primary residences equity when you own a home. You can often get financing at a low interest rate. Home equity loans are, as the name indicates, based on home equity.  Equity is calculated by taking the value of your home minus what you owe on the mortgage.

Investment Line of Credit

With a line of credit loan, you borrow against your investment property’s equity. The property serves as collateral to repay the loan in the event something goes wrong during the repayment process. To qualify for a line of credit loan, you will most likely need good to excellent credit, and a history of successful real estate investments. In general, you must own the property at least one year to be considered eligible for a line of credit loan. As a result, lines of credit loans are usually not the best option for first time house flippers as they have not established a successful track record of real estate investment yet.

Bridge Loans

Bridge loans are intended to cover the “gap” between when you want to buy a property, and when you can secure long-term financing.  As a result, these loans are sometimes referred to as “gap” loans. They can be utilized to help cover the down payments expenses on your next flip so you can focus on finding another financing option to cover the rest of the purchase amount. Bridge loans are generally secured using some form of collateral in order to qualify for a loan with a lower interest rate compared to other loan options out there. Bridge loans are often easier to qualify for than other types of loans which make them appealing to flippers who are just starting out.

Cash Out Refi

Cash out refinance loans make it possible for you to use an existing properties equity to fund your next house flipping project or to make any necessary repairs or remodels needed. Borrowers can use their own home’s equity to take out a new loan and pay off the existing mortgage, and then use any remainder to finance their flipping project. Typically, in order be cost effective, you will generally need to have accumulated at least 30-40% equity in your home in order for as cash out refi to be an effective solution for you.

Traditional Bank Loans

Traditional bank loans are mortgages with fixed interest rates. Bank loans are usually best for those buying a home to stay in for at least 5 years while renovating it to sell for a profit. With a traditional bank loan, you will generally pay a lower interest than with other financing options and have up to 30 years to pay back the loan which makes them ideal for primary residences.  In order to qualify for a traditional loan, however, you will need enough for a down payment, a solid credit score, and a stable income.  The fed has recently raised the rates on these loans in order to curb inflation which is making most real estate markets grind to a snail’s pace as they transition from a seller to a buyers’ market.

Hard Money Loan

With a hard money loan, you work with non-bank lenders, individuals or lending companies like the 1,000’s of companies in our free online nationwide directory at hardmoneyhome.com. Hard money lenders often have less stringent eligibility requirements and you can often qualify even with little to no credit. These loans tend to have significantly higher interest rates, often with shorter repayment terms so it is critical to fully do your research before agreeing to the terms of any of these types of loans. That said, these loans are a great option for many investors and when used correctly can generate enormous gains in real estate revenue.

Whether you have been fixing up and flipping houses for decades or are interested in just getting started in house flipping to generate some extra revenue, try the above financing solutions to hopefully lay out less of your own hard-earned money to start flipping your next home investment project.

October 7, 2022

Property investment has often been considered by financial advisors to be a pretty sure bet. That said, there are some additional costs you’ll want to be prepared to encounter along the way which some new investors do not always consider ahead of time. Unfortunately, many new investors often don’t understand the total cost of purchasing and maintaining a property.  Ongoing costs are often largely underestimated when new investors are doing their first few cashflow analysis.  Generally speaking, it is wise to allocate 25-30% of the total rental income you expect to receive for regular ongoing costs and maintenance. The largest costs to keep in mind when doing a cashflow analysis is the interest rates being charged for property loans which have recently been raised due to inflation issues.  These higher rates are already causing a slowdown in lending across the board and are expected to continue through the end of the year.  Since rates can rise quickly and unpredictably, it is a good idea to factor in a buffer contingency in all of your cashflow analysis to account for any potential rate increases.

Down Payment

A sizeable down payment will be needed to get into the market on any new investment property project you plan on pursuing, especially considering that borrowers have recently tightened their lending requirements on new loans.  Lenders prefer borrowers who have at least 20% of the full value of a house saved up in advance for a down payment.  It is still possible to get a loan if you have a smaller deposit saved, but you may have to take out additional insurance and the property will also likely take longer to pay off the total balance with interest.

Lender fees 

The bank or lender you use will often charge a few different fees, which can average around a thousand dollars or more.  These fees typically cover the loan application process as well as other documentation fees.  It is also not uncommon for lenders to charge an additional monthly loan service fee, depending on your lenders terms of agreement which you should read carefully before signing and agreeing to any contractual obligations. Some other common fees include redraw fees on your loan balance, so understanding the upfront, ongoing, and hidden loan fees ahead of time is paramount to being successful in any investment project you plan to execute.

Home Inspection Reports

A home inspection is one of the most important steps when purchasing a property but is too often overlooked or passed over in an effort to save some quick money.   It is critical that you hire a licensed professional home inspector to visit the property and provide a full written report outlining all of their findings of potential issues with the property.  Many inspection companies, additionally, are now including video presentations along with their detailed written reports so consumers can quickly and easily see what issues the inspectors are calling out in their reporting. Home inspection costs will vary state to state, as well as charging different amounts depending on the properties size, building structure, and any other additional inspections you want to be done such as thermal scanning or foundation elevation reports.  An inspection for an average-sized property will generally cost around $500 to complete if you do not have any additional services you need to include.  A professional pest-control report will also be needed, which will roughly add another $200 to the inspection cost total.  Though the temptation to save a couple bucks in the beginning of an investment project may seem alluring to some, you should never ever skip out on hiring a qualified home inspector and receiving a detailed written home and pest inspection report.

Property Management Costs

Having a property management company manage your new investment property can be a smart decision and take a lot of the headaches of managing a property off your plate but the cost to do so can add up quickly.  The average property management fees currently range between 5-15% of your weekly rent, depending on which company you decide to use.  That is why it’s critical to ask any property management company you decide to utilize to call you for approval before organizing/performing any maintenance on the property.  Depending on your skill level, there are often many smaller maintenance projects you can take care of yourself, which can help you save a ton of money in the long run.

The overall and ongoing maintenance costs of any new investment property should always be budgeted for from the very beginning whenever possible.  Luckily, some of these costs can be offset through depreciation at the end of the financial year, which can provide you with a tax refund in some instances.  That said, the tax breaks should not ever be used as a measure for your cash flow analysis on a project, as depreciation decreases over time.  Planning for the above costs ahead of purchasing any new investment property can make all of the difference in whether or not the investment ends up being a worthwhile endeavor or loosing you hard earned time and money.

September 29, 2022

Vegas odds would suggest that if you’ve invested in real estate, it was likely to make money. Knowing when the right time to sell can be challenging. If you are unsure if now is the best time to sell and make a decent profit, the below advice may help you determine if now is the right time to sell.  You could have hundreds of reasons to sell a rental property, but here are the most common reasons people sell:

You’re Done With Real Estate Investment

Whether you’ve been investing in real estate for a few months or years, there often comes a time when you’re just over it. Maybe it wasn’t what you expected, it takes too much time and energy, or things have just naturally run its course.  There’s nothing wrong with throwing in the towel and calling it quits, as long as you do things strategically.

The Appreciation Grew Significantly

If properties in the area are selling for much more than you bought for, you may consider if you should sell. Appreciation naturally occurs, but you can expedite it by making enhancements to the home and stay on top of needed repairs.  Deciding when it’s the right time to sell when the property appreciates depends on your goals. Are you needing to save for retirement or for a shorter-term return? If you invested for retirement, you might want to hold onto the home longer so you’re certain the capital gains will be worthwhile.  It all boils down to timing the sale right, which we will discuss below. If you sell during a year you have a high income, you may increase your tax liability significantly and walk away with less money in your pocket than you thought.

Tenant Retention Challenges

You have to keep the home occupied with tenants if you own a rental property. It’s not always a simple task, and some areas that were once great markets may die out over time.  If you’re having a hard time keeping the home occupied, you may want to cut your losses and try selling for a profit so you can invest your money elsewhere.

You Found A More Lucrative Investment

If another investment appears more lucrative, you may want to pull money from your real estate investment and invest in something with potentially higher returns. If all goes well, you may want to sell your property to use the money to enhance your new investment.  If you invest the funds in more real estate investments, you may get away with a Like-Kind Exchange, which means you don’t get hit for taxes on the property since you use the money to invest in another home. However, if you’ve invested in anything else, you’ll likely pay the taxes on your capital gains, which requires proper timing.

Too Much Upkeep

Let’s face it, handling a rental property can be hard work. You are the landlord, aka the person responsible for every little thing that goes wrong with the home. You’re also must handle payments, defaults, and lease contracts.  The work load can add up quickly. You can hire a property management company, but unfortunately that will eat up a lot of your profits. If you can’t keep up with all that’s involved, you may decide to sell and invest your proceeds elsewhere. Whenever you decide to sell, you have a few considerations to make.

Tax Obligations

When you sell your rental property, you’ll owe taxes on the capital gains. Unlike primary residences, you won’t likely receive the capital gains exclusions for living in the property. You’ll most likely pay taxes on every dollar you gain.  You should try your best to time the sale to minimize your tax liability. Unless you are just over real estate investment, you may want to consider a Like-Kind Exchange or at least see if you’re eligible instead. It’s worth the money to consult with a licensed tax professional or accountant to determine your eligibility.  If you are done with real estate investing, its critical to understand the tax implications ahead of time. If you’ve owned the home for less than one year, you’ll probably pay a short-term capital gains tax. This means you’ll need to pay taxes at the current rate. If the capital gains bump you up to the next tax bracket, you’ll end up paying even more.  If you owned the home for a year or more, you’ll likely pay a long-term capital gains tax, with the average investor paying 10% of their capital gains in taxes.

Tenants

If you have tenants in your rental property when you decide to sell, you’ll need to choose how you’ll sell. Here are a few options to consider.

Wait for the lease to expire – If you have a current tenant lease, you can wait until it expires, fix up the home and list it. If you choose this option, you can market the home to any buyer, not just investors. The downside is you have to wait to sell until the lease expires. If you have a lot of time remaining on the lease, you may not make as large of a profit as you hoped if the market changes.

Pay the tenant to vacate – If you want to sell now, you may be able to convince your tenant by paying them to vacate early. How much you should offer depends on the circumstances. You may go back and forth with the tenant a few times before you can reach an agreement. You’ll likely need to pay to help them move, cover the difference between the new rent and your rent for the remainder of the lease, or come up with another compromise.

Sell with a current lease – A final option is to sell with an active lease on the property. Also known as a turnkey property, you sell the home to another investor who takes over the landlord duties and earns cash flow from day one.

Answering the above questions, will be a critical first step in deciding whether or not now is the best time to sell your rental property or if you should wait until the cards are stacked more in your favor.

September 22. 2022

Most new investors do not have a bunch of excess capital lying around to purchase a loan without some type of mortgage loan.  While there are many valid mortgage terms out there to meet the unique needs of the borrowing community, there are some loan types that should be avoided at all cost. Below we will discuss some of the worst home loan types you should avoid as well as provide you with a few reasons why these are not as good as they sometimes sound.

Balloon Mortgages

Balloon mortgages may be structured in slightly different ways, but at their core they are all basically the same. After a small period of time passes, a large lump sum payment comes do.  With a balloon mortgage, you’ll normally make payments for around a 5-7 year term. After that you’ll owe the entire remaining balance of your mortgage loan, which can often mean a payment of several hundred thousand dollars.  Some balloon mortgages don’t charge monthly payments. Other times, the monthly payment is based on what you’d owe if you were paying your loan off over a longer period of time. Regardless, whatever terms these balloon mortgage offers, there will always be a large lump-sum payment.

A lot of borrowers sometimes will take out balloon mortgages because they offer lower interest rates or reduced monthly payments.  Generally, they hope to refinance their loan before the lump-sum payment is due.  Refinancing isn’t always possible, however, and if you can’t pay off your entire loan, the property could go into foreclosure and you could lose the property. This risk with these loans far outweigh the pro’s and this is why you should avoid balloon mortgages at all costs.

Interest-only mortgages

Interest-only mortgages are structured so that you only pay for the interest on the loan and no principal. This means a lower monthly payment, however, the problem with these loans is that you don’t make any progress with paying off the property. You send interest payments every month without gaining any equity in your home.  Eventually, you’ll be required to start paying off your loan, or you’d be in debt forever. Here are a few ways this could happen:

Interest only loans are often structured as balloon loans. As discussed above, this means you pay interest only for several years and then owe a huge lump sum. Some terms may have a short interest-only period, afterwards, you’ll start to pay both principal and interest. These payments will be much higher than if you’d simply been paying principal and interest from the start. These loans carry a lot of risk. You could struggle to afford the higher monthly payments or balloon payments down the road. Since you aren’t building any equity in the property, you could be in trouble if property values decline. You could even end up owing more on the loan than the overall value of the home.

A 40-year fixed-rate loan

40-year fixed-rate loans are very similar to 20- or 30-year fixed loans. The difference, obviously, is that the loan repayment timeline is 10 years longer.  While these terms will lower your monthly payments, they also add a lot to your total interest owed. An extra decade is a very long time when someone is trying to be debt free. There’s a high probability you will carry your loan into your retirement years. This would also mean you will need to save additional funds for later. These loans may also reduce your ability to accomplish other financial goals because your interest costs would be much higher and you’d have to make that mortgage payment for an extra decade.

Instead of going with any of the above risky loan types, it’s best practice to stay with a traditional 15-year, 20-year, or 30-year fixed-rate loan. These loans have stood the test of time and remain the right options for most borrowers.  The above loan types often sound like good opportunities to potentially save on your mortgage. Chances are; however, interest rates won’t stay put for much longer and avoiding the above mortgage loan types will help keep you financial fit long term.

September 16, 2022

The pandemic changed the ways people interact with homes in a variety of ways.  Now that the worse of the pandemic is hopefully behind us, real estate investors should shift their objectives from reactive to proactive solutions that will keep unoccupied units down and profits up. One of the best places to focus your attention is on adding green features to your property that will hopefully provide significant cost savings while appealing to younger renters with a newer interest on climate issues.

Adding smart devices to your property is a smart solution to instantly make your rental properties more environmentally friendly. What’s more, there is strong indications that millennials are willing to pay more for rental properties equipped with smart technology.  By upgrading certain systems, real estate investors can make some positive impacts on the environment while attracting more renters. Additionally, they can likely boost their ROI by investing in properties with the following energy and money saving features:

Keyless Resident Locks

Keys are expensive and replacing them can cost a few hundred dollars and result in more time, energy, and physical waste.  They’re also not as secure as most people would like to believe. You may initially give your tenants two keys, but there’s really no way of telling how many copies renters will end up making on their own.  When a new tenant moves in, it’s a good idea to rekey the locks, but that expense is easily avoided with keyless smart locks which allow you to give renters unique codes to gain access. Keyless entry also allows prospective tenants to look at your properties on their own, saving valuable time when you are seeking new tenants.

Smart Thermostats

HVAC units are one of the largest consumers of electricity in a typical home. Smart thermostats have shown themselves to be an effective way to lower the overall electrical pull, providing energy savings upwards of over 30% monthly.  Additionally, adding sensors that shut off the HVAC when a door or window is left open, can further increase the potential energy savings.  Smart thermostats are valuable for your property when it is left unoccupied because they make it easier to manage HVAC costs and humidity levels in vacant properties. They also reduce vacancies by making properties more attractive to potential renters who are interested in lower heating and cooling bills.

Water Leak Sensors

The typical household will leak as much as 10,000 gallons of water each year, amounting to almost 1 trillion gallons wasted nationwide. Water leak detectors, flow valves, and shut-off valves reduce this waste, but they also help protect major property investments. Water damage emergencies can cost tens of thousands of dollars, and they impact thousands of Americans every day. A few inexpensive smart devices are money well-spent when it comes to protecting both your properties and the environment.

Solar Power

The IRS currently offers a 26 percent residential solar tax credit that applies to both the purchase and installation costs of solar power solutions, and some utilities will buy back unused electricity generated by solar power. As consumers prioritize measures designed to protect the environment, solar panels are an attractive proposition.  They’ll likely become even more important as electric vehicles grow in popularity and increase household energy consumption.

It should come as no surprise that waste hurts wallets in addition to the environment but that makes an even stronger case for real estate investors to go green. The categories above highlight smart rental property investments, both because they’ll save money and energy and because they attract a growing group of environmentally conscious renters.