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Reasons Rental Homes Rank Highest

3/20/2019

Reasons Rental Homes Rank Highest

Single family homes offer the investor an opportunity to borrow large loan-to-value loans at fixed interest rates for long terms.  Lenders will loan 75-80% of the purchase price at 5.5% to 6.5% interest rate for thirty years.  Compare that with other popular investment alternatives like precious metals, commodities, stocks, and mutual funds and it will be hard to find financing available at all. 

There may be some short term, one-year, loans at a floating rate tied to prime plus with no guarantee that it will be renewed.  Some of those loans require you to have a 50% margin of equity and if the value goes down, you'll have to put up additional cash or be forced to sell.

The advantage of having long-term mortgages is that an investor could find the optimal time to sell the property instead of needing to sell it because the term is due, and no other financing is available.   Supply and demand cause the real estate market to be higher and lower and a long-term mortgage provides options to sell when the price is optimal.

Single family homes enjoy distinct tax advantages.  If the rental or investment property is held for more than 12 months, the gain is taxed at lower, long-term capital gains rates rather than ordinary income rates.

Another advantage of rental homes is that the improvements can be depreciated over a 27.5-year life.  This is a non-cash deduction that reduces income and shelters income.  The accumulated depreciation taken over the life of the property is recaptured when the property is sold.

Since rental homes provide income that other investments may not, tax would have to be recognized on the annual income.  IRS allows normal operating expenses like interest, property taxes, insurance, repairs, and management to be deducted including the annual depreciation.

Rental and investment property are eligible for tax-deferred exchanges to avoid paying tax at the time of disposition.  Real estate also enjoys stepped-up basis which means that when an heir inherits a property, instead of having a potential gain from the value the decedent had purchased it for less depreciation taken, the heir's basis becomes the fair market value at time of death.  All potential gain may be permanently avoided.

Appreciation is a much-anticipated benefit of real estate because value tends to go up over time.

Another big benefit is the control that an investor has with rentals that is not available with other investments like stocks, bonds, or commercial real estate.  It takes a relatively small amount of cash to control the entire investment in a home that wouldn't be available in other investments without partners or publicly traded companies.

Single family homes are an investment that homeowners understand because they are essentially the same as the home they live in.  They're used for rental purposes but the maintenance is the same, the service providers are the same, and the neighborhood are the same.  Most homeowners understand rentals far better than alternative investments.

Contact me at (269) 488-9292 if you'd like to know more about rental property.

More Than Just an Address

3/4/2019

More Than Just an Address

For a short time after the housing crisis a decade ago, some homeowners thought the value of home is a place to live rather than an investment.  A home certainly has an appeal as a place to call your own, raise your family, share with your friends and feel safe and secure.  It can be more than an address; it can also be one of the largest investments homeowners have.

Most mortgages apply a portion of the payment toward the principal amount owed in order to pay off the loan by the end of the term.  This acts like a forced savings for the homeowner because as the loan is reduced, the equity grows which increases their net worth.

The other contributor to equity is appreciation.  Most homeowners don't realize the increase in value until they sell the home or do a cash-out refinance, but the increase is real and part of their equity.  If the expected appreciation is averaged over the anticipated time for the home to be owned, the value of the equity increase can be proportioned annually or monthly.

Combining appreciation and principal reduction with leverage, it's possible to build a case that a home is definitely an investment.  Leverage is the ability to control a larger asset with a smaller amount of cash using borrowed funds.  It has been described as using other people's money to increase your yield and it applies to homeowners and investors alike.

The table on the picture above shows that even a modest amount of appreciation combined with the amortization of a loan can cause a substantial rate of return on the down payment and closing costs.

This example assumes a 3% acquisition costs on the home with a 4.5% mortgage rate and the resulting equity at the end of five years.  The larger down payments lower the yield because it decreases the amount of borrowed funds.

If a borrower buys a home that appreciates at 2% a year with a 3.5% down payment on a FHA loan for 30 years, the down payment and acquisition cost factored by the equity will produce a 28% return on investment each year during the five year period.

A home can be many things including an investment.  You can use this Rent vs. Own calculator to see the effect that appreciation and principal reduction can have on a home purchase in your price range.  If you have any questions, I'm a phone call away at (269) 488-9292.

When Its Important...Find the Facts

2/11/2019

When It's Important...Find the Facts

Most parents don't put a lot of credence in the statements "Everyone is doing it" and "No one does that anymore."  They'll dig a little deeper and get the facts of the situation.  Interestingly, when it comes to buying a home, similar common myths continue to prevail surrounding what it takes to buy a home.

One of the most common myths is that it takes 20% down payment to get into a home.  Certainly, an 80% mortgage might have the most favorable interest rate. It won't require mortgage insurance and qualifying requirements might be a little less but there are alternatives.

"88% of all buyers financed their homes last year and consistent with previous years, younger buyers were more likely to finance their home purchase.  In 2018, the median down payment was 13% for all buyers, 7% for first-time buyers and 16% for repeat buyers." Stated by the 2018 NAR Profile of Buyers and Sellers.

  • Qualified Veterans are eligible for zero down payment, 100% mortgage loans without mortgage insurance.
  • Conventional loans are available with as little as 3-5% down payments.
  • FHA mortgages have a 3.5% down payment.
  • USDA mortgages for rural housing have two major products: one does not require a down payment and the other has a 3% down payment.  Maps, based on population numbers, are available to determine if the area you're interested in purchasing in is eligible for a USDA mortgage.

We've come to believe that facts can be instantly verified by searching on the Internet.  Unfortunately, there are a lot of things on the Internet that are questionable and certainly, that includes some information on mortgages.  Specifically, some loans are not available in certain areas and to a particular persons based on their income and credit history.

The best approach, when it comes to buying a home, is to get the facts from a knowledgeable and trusted loan professional before you begin the home search process.  Contact me at (269) 488-9292 for a recommendation.

 A website may not provide relevant information for your individual situation.  Purchasing a home is a large investment and taking the time to find out the facts is worth the effort.

Your Real Estate Resource

2/6/2019

Your Real Estate Resource

Being a better homeowner is a full-time job.  It takes good information to make good decisions not only when you buy and sell but all the years you own a home.

Think of times when you need advice on financing, taxes, insurance, maintenance, finding reasonable and reliable contractors and lots of other things.  Imagine how nice it would be to have a real estate information line you could call whenever you have a question.

 

Our objective is to move from a one-time sale to customers for life; a select group of friends and past customers who consider us their lifelong real estate professional.  We believe that if we help you and your friends with all your real estate needs, we can earn the privilege to be your real estate professional.

Throughout the year, we'll send reminders and suggestions by email and social media that enhance your homeowner experience.  When we find good articles to help you be a better homeowner, we'll pass them along.  You'll discover new ways to maintain your property, minimize expenses and manage debt and risk. 

We want to be your "Go-To" person for everything to do with real estate.  We're here for you and your friends...now and in the future.  Please let us know how we can help you.

44 Times More Than a Renter

12/28/2018

44 Times More Than a Renter

The Federal Reserve Board's Triennial Survey of Consumer Finances recently revealed the net worth of a homeowner was $231,400 compared to $5,200 for a renter.  The net worth of homeowners increased 15% from 2013 to 2016 while renters' decreased by 5%.

Appreciation and principal reduction are the two dynamics that affect a homeowner's equity.  Each payment is applied to the interest for the previous month and the principal reduction to retire the mortgage.

A $300,000 home purchased with a $294,566 FHA mortgage at 5% for 30 years has an average monthly principal reduction $362 in the first year. Two percent appreciation would benefit the buyer by $500 a month.  In this example, the equity grows by $860 a month for the homeowner.  A tenant would have to invest $660 a month over and above the rent they're paying.

Based on the assumptions listed above, the $10,500 down payment would become approximately $85,000 of equity in seven years. Leverage and forced savings contribute to the difference in addition to the appreciation and principal reduction.

The rent paid by tenants help the landlord recoup their investment in the home and a return on their investment.  Some people say, regardless if a person rents or buys, they pay for the house they occupy.  The choice is whether to buy it for themselves or their landlord.

Check out some of the benefits using your own numbers with this fill-in-the blank Rent vs. Own.

More Comfortable, Convenient and Secure

12/28/2018

More Comfortable, Convenient and Secure

Smart home technology promises to make your home more comfortable, convenient and secure.  It may not be the home from the Jetson's but artificial intelligence is the hope to make it the home of the future which is available now and controlled from anywhere you have an Internet connection.

When Alexa appeared at Christmas-time two years ago, most people thought it was a novelty to ask what the weather will be or to play a song.  Few people understood the vision of Amazon would be verbally purchasing everything imaginable and that your calendar, contacts, lights, and appliances would all be connected.

There are plenty of players in the market including Amazon Alexa, Google Assistant, Samsung Smart Things, Apple and others.  It starts with a hub that acts like a brain for your system to connect the different home automation devices.  You'll establish an online account with the hub manufacturer so that you can adjust settings and controls.

You could start simple with switch and plug receptacles that would allow you to control lights either vocally through your hub or from your Smartphone or tablet anywhere in the world where you have an Internet connection.

Programmable thermostats can lower your monthly utility costs while conveniently regulating your comfort by adjusting temperatures on your heating and cooling systems.  These can be particularly effective in homes with zoned systems where you might live in one area during the day but sleep in a different zone.

Door bells might be one of the next additions to your automation.  Not only can you communicate with the person at your door, you don't have to go to the door to do it.  The device cameras are motion activated so you'll see who is there regardless of whether they rang the doorbell or not.

Door locks can be convenient because instead of giving someone a key, you can issue a temporary code to let them enter.  You can give them permanent access and rescind it any time you want without having to change the locks.  You'll know when they enter and leave your home.

Other security options can include door and window sensors, motion detectors and cameras for outside or inside the home.  The homeowner will be able to monitor from inside or anywhere else they have an Internet connection.

Smoke and carbon monoxide detectors, as well as water sensors to determine leaking water around water heaters or in basements give homeowners peace of mind.

Most of these devices are available in wireless models so you won't have to string wire throughout the home.  The Wi-Fi can introduce a potential problem of hackers who could illegally access your system.  This is true with any home that has a Wi-Fi router and precautions should be taken.

The big box stores like Lowes, Home Depot, and Amazon offer a wide variety of brands and modules.  Many people prefer it as a do-it-yourself project and others would rather have a professional do it for them.  YouTube has a lot of videos that can probably show you exactly how to install the ones you select.

Quick Plumbing Inspection

9/25/2018

Quick Plumbing Inspection

No one wants to waste water or money.  For that reason, take a few minutes every other month to do the following inspections:

  1. Check to see if cutoff valves on sinks and toilets are working properly. 

    Many times, builders will put individual cutoffs on supply lines to sinks and toilets.  It is reasonable to expect them to work but after some time, they can corrode which prevents opening and closing.  It is a good idea to test them occasionally before you need them in an emergency.

  2.  Fill each sink with a few inches of water to see if they drain in what you feel is a normal time.

    A slow-draining sink can be an indication of a clog that builds up around the insides of the pipe.  Common causes are food, grease, hair and soap scum.  Plunging can take care of some slow-running sinks.  After partially filling the sink with water, seal the plunger over the drain and pump it up and down a few times.

  3.   Inspect each toilet to see if they are leaking water from the tank into the bowl.

    Toilets that continue to run after being flushed can use a large amount of water in a month's time.  Generally, the problem comes from a flapper that doesn't seat properly.  Sometimes, the chain is keeping it from closing properly or the flapper itself may need to be replaced.

    Another issue could be that the flush valve needs to be replaced.  These can be purchased at Lowe's or Home Depot for about $20.00 and are relatively easy to change out.  There are lots of instructional videos on the internet and it can save money if you give it a try.

If you need a recommendation for a good plumber to take care of something you discover, please feel free to call me at (269) 217-4825.

How to Clean Gutters

9/25/2018

How to Clean Gutters

The gutters and downspouts on your home are intended to channel rainwater away from your home and its foundation.  When they're blocked and not functioning properly they can lead to the gutters coming loose, wood rot and mildew, staining of painted surfaces, and even worse, foundation issues or water penetration into the interior of the home.

Most experts recommend cleaning the gutters at least once a year.  More often might be necessary depending on the proximity of leaves and other debris that could collect.

If this is a task that you feel comfortable about tackling yourself, there are few things to consider.  If the debris is dry, it will be easier to clean the gutters.  Safety is important, and precautions should be taken such as using a sturdy ladder and possibly, having someone hold it while you're on the ladder.

Other useful tools will be a five-gallon plastic bucket to hook on the ladder to hold the debris; work gloves to protect your hands from sharp edges of the gutters; a trowel or scoop and a garden hose with a nozzle.

?         Start by placing the ladder near a downspout for the section of gutter to be cleaned.

?         Remove large debris and put it into the empty bucket. Work away from the downspout toward the other end.

?         When you're at the end of the gutter, using the water hose and nozzle, spray out the gutter so it will drain to the downspout.

?         If the water doesn't drain easily, the downspout could be blocked.  Accessing the spout from the bottom with either the hose with nozzle or a plumber's snake, try to dislodge the blockage.

?         Reattach or tighten any pieces that were removed or loosened while working on the downspout.

?         Flush the gutters a final time, working from the opposite end, as before, toward the downspout.

There are specialized tools at the home improvement stores like Lowes and Home Depot that can make this job easier.  Check out their websites and search for "gutter cleaning".

Moisture & Mold

9/10/2018

Moisture & Mold

Moisture is mold's best friend and it thrives between 40 and 100 degrees Fahrenheit which is why it is commonly found in homes.  Mold spores float in the air and can grow on virtually any substance with moisture including tile, wood, drywall, paper, carpet, and food.

Moisture control and eliminating water problems are key to preventing mold. Common sources of moisture can be roof leaks, indoor plumbing leaks, outdoor drainage problems, damp basements or crawl spaces, steam from bathrooms or kitchen, condensation on cool surfaces, humidifiers, wet clothes drying inside, or improper ventilation of heating and cooking appliances.

  • Control the moisture problem
  • Scrub mold off hard surfaces using soap and water or other cleanser; dry completely
  • Do not paint or caulk moldy surfaces
  • Discard porous materials with extensive mold growth
  • Avoid exposing yourself or others to mold
  • Periodically, inspect the area for signs of moisture and new mold growth

The EPA suggests that if the moldy area is less than ten square feet, you can probably handle the cleanup yourself.  If the affected area is larger than that, find a contractor or professional service provider. 

Increasing ventilation in a bathroom by running a fan for at least 30 minutes or opening a window can help remove moisture and control mold growth.  After showering, squeegee the walls and doors. Wipe wet areas with dry towels.  Cleaning more frequently will also prevent mold from recurring or keep it to a minimum.

A simple solution to clean most mold is a 1:8 bleach/water mixture.  Since homes have thermostatically controlled temperatures and water is used all day long in the kitchen and bathrooms, the environment is conducive to mold. 

See Ten things you should know about mold written by the EPA.

Reduce Refinancing Costs

9/10/2018

Reduce Refinancing Costs

There is much more than a lower rate and payment to determine whether to refinance a mortgage.  Lenders try to make refinancing as attractive as possible by rolling the closing costs into the new mortgage so there isn't any out of pocket cash required.

The closing costs associated with a new loan could add several thousand dollars to your mortgage balance.  The following suggestions may help you to reduce the expense to refinance.

?         Tell the lender up-front that you want to have the loan quoted with minimal closing costs.

?         Check with your existing lender to see if the rate and closing costs might be cheaper. 

?         Shop around with other lenders and compare rate and closing costs.

?         If you're refinancing an FHA or VA loan, consider the streamline refinance.

?         Credit unions may have lower closing costs because they are generally loaning deposits and their cost of funds is less.

?         Reducing the loan-to-value so mortgage insurance is not required will reduce expenses and lower the payment.

?         Ask if the lender can use an AVM, automated valuation model, instead of an appraisal.

?         You may not need a new survey if no changes have been made.

?         There may be a discount on the mortgagee's title policy available on a refinance.

?         Points on refinancing, unlike a purchase, are ratably deductible over the life of the loan ($3,000 in points on a 30-year loan would result in a $100 tax deduction each year.)

?         Consider a 15-year loan.  If you can afford the higher payments, you can expect a lower interest rate than a 30-year loan and obviously, it will build equity faster and pay off in half the time.

A lender must provide you a list of the fees involved with making the loan within 3 days of making a loan application in the form of a Loan Estimate and a Closing Disclosure Form.  Every dollar counts, and they belong to you.
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