7 Steps To Buy A Home

January 27, 2023

With interest rates rising, you may wonder how to buy a home as soon as possible. Here are some steps to take:

Get your credit in as good shape as possible.

 Your credit score can make a big difference when you buy a home in the form of your mortgage interest rate. You can use sites like creditkarma.com (which uses TransUnion and Equifax) and freecreditscore.com (which uses Experian) to get free credit scores from all three credit bureaus, free credit monitoring to alert you of any changes to your credit, and advice on how to improve your credit scores. The key things are to make sure you make your debt payments on time, pay off as much of your debt as possible (except perhaps car and student loans, which tend to have relatively low interest rates), and be careful of closing credit card accounts. If you have a credit card that charges you an annual fee, see if you can convert it into a no-fee card rather than close it.

You can also order a free copy of your credit reports from each credit bureau at annualcreditreport.com as long as you haven’t done so in the last 12 months. One study showed that about 70% of credit reports have errors in them, so check to see if there are any in yours that could be hurting your credit score and if so, be sure to have them corrected. It’s bad enough to suffer from your own mistakes. You don’t want to suffer from someone else’s too. Finally, you may want to put a security freeze on your credit reports to protect you from identity theft.

 Figure out how much home you can afford.

 Remember, just because the mortgage company will loan you the money doesn’t mean you should take it. There are rules of thumb, like not spending more than 28% of your income on mortgage payments, but every person’s situation is different. Two people may have the same income, but one may need to save more for retirement or choose to make large private school tuition payments for their kids. Look at your current savings and spending needs to see how much you can realistically afford to pay each month. Don’t forget to leave some room for the potential “hidden expenses” of home ownership. This includes utility bills, HOA fees if applicable, and repairs and maintenance.

Save for upfront costs.

 Ideally, you would put down 20% of your home’s purchase price to avoid paying PMI (private mortgage insurance). If you can’t put down 20%, mortgage companies usually offer you a smaller “piggyback loan” to help bridge the gap. However, those loans have higher interest rates. You may also need between 2% to 5% of the purchase price for closing costs plus whatever you want to spend on moving, furnishings and renovations.

Don’t dip too far into your savings, though. Keep at least 3-6 months of expenses set aside for emergencies. After all, you will be responsible for maintenance and repairs now. You can access $10,000 without IRA penalties for a first-time home purchase if you don’t have enough money in your regular accounts. Your employer’s retirement plan may allow you to borrow from your retirement account with a longer time period to pay off home loans. There’s always the “family and friends” route too.

Choose the right loan term for your needs.

 A 30-year loan has lower monthly payments. This can be advantageous if you make good use of the savings by investing them or paying down high-interest debt. You can always make extra payments if you want to repay the loan sooner. However, if you’re likely to splurge the money you save with a 30-year loan, the 15-year loan could be better. It will cost you less interest, and you’ll pay it off sooner.

Consider picking a mortgage with a fixed rate for the longest time you think you’ll be keeping the home. That’s because you could see your monthly payments jump up on a variable-rate mortgage if interest rates keep climbing. On the other hand, fixed-rate mortgages start with higher interest rates. So, it may not make sense to pay more to lock in a fixed rate for longer than you need.

Shop around for a mortgage.

 Even a slightly higher rate can mean paying significantly more interest payments over the life of the loan, so don’t just talk to your existing bank. Consider non-profit credit unions, websites like bankrate.com and eloan.com, and independent mortgage brokers who can shop around from multiple mortgage companies to find the best deal. Do all your mortgage shopping within a 30-day period, so it doesn’t affect your credit too much. You can then use this calculator to compare the loans.

 Start house hunting. 

Once you’ve gotten pre-approved on a mortgage, find a buyer’s agent experienced in the neighborhoods you’re interested in. Only look at homes within your affordable price range. Otherwise, you may fall in love with a place outside your price range and talk yourself into buying it.

Get an independent inspection.

 Your real estate agent may recommend a home inspector. However, they may be biased toward making the deal go through to continue being referred by the agent. Instead, consider an independent home inspector who only works for you.

The journey to buy a home is different for everyone. Lean on resources like ours and be patient with your journey so you can buy a home on your terms with less stress.

How To Find A Real Estate Agent

January 21, 2021

Because this is the person who will be guiding you through the biggest financial and legal transaction of your life, search for your real estate agent with almost as much care as you hunt for your home.

Look around your neighborhood

Is there a name that you see over and over again in the neighborhood you’re buying or selling in? Chances are, that person has the inside scoop on what’s out there and can offer insights about the neighborhood that an agent unfamiliar with the area won’t have. Beware of an agent who is over-worked though — you may be spending more time with an assistant, while the lead agent makes all the money. You want all of your contact to be with the person whose name will be on the sign and on the contract.

Look online

If you’re moving out of town or aren’t able to identify any neighborhood experts, the National Association of Realtors® website is one place to search for agents in your area who use the registered designation of REALTOR® — that title identifies a real estate professional as a member of the association and someone who agrees to abide by their code of ethics and has passed the REALTOR® exam.

HomeGain.com is another online resource that let’s you screen real estate agents. HomeGain founder Bradley Inman says buyers and sellers who use the site can expect to get about seven proposals from agents who want to represent them.

When using the Internet, be aware that agents pay for listings on some sites, so you may not be finding all of the best agents who could meet your needs. With that in mind, use the search results to check experience level, education and recent sales in your area. Then set up interviews with at least three candidates and be sure to check references.

Ask around for references

Ask everyone you know who has bought or sold a home for their recommendations — and ask specific questions such as:

  • What were the agent’s strengths and weaknesses?
  • Did the agent demonstrate knowledge of the home buying/selling process and the market?
  • Did the agent generate results (new properties for buyers to see or prospective buyers for a seller’s property)?
  • Was the agent attentive to clients’ specific needs and schedules?
  • Did the agent communicate well with the other party’s agent?
  • Most important, did the agent have integrity?

Don’t forget to ask other professionals who work with agents for their input. Check with your mortgage broker, banker, attorney and financial advisors. Ask other agents who they respect and why.

Know how your agent will be paid

When a real estate agent facilitates a purchase or sale of property, he or she receives a percentage of the sale amount as their compensation. Commissions generally run between 5 percent and 7 percent. By law, commissions are negotiable, but you’ll find that 6 percent is standard with most established agencies.

That commission is split between the listing agent and the buyer’s agent. The money comes from the seller, but you can be sure it’s built into the home’s price tag.

What to look for if you’re selling

If you’re selling your home, interview at least three agents, checking background and recent sales performance in your area, and expect each to outline his or her plans for marketing and selling your home. A listing, or seller’s, agent should also be able to advise you on ways to make your home more attractive to potential buyers.

Setting the price

Make sure your agent has a realistic (though perhaps optimistic) sales price target — setting the price too high can be as much of a problem as setting it too low. Your agent should be able to justify a particular asking price, providing support (comps, or comparable homes that have sold in the past few months) that it is in line with current market conditions.

The listing agreement

Once you decide on a listing agent, you will sign a listing agreement, which is a contract that shows what the agent is obligated to do, the price you want, the terms under which you will sell your home and the commission you will pay. The length of the agreement is negotiable, but make sure you understand that you may be giving the agent exclusive rights to sell the home until the agreement expires.

Going it alone

Eleven percent of home sellers sold their home without the assistance of a real estate agent. Some sellers find a middle ground, hiring professionals for flat fees to do some of the work, such as running open houses or listing the home on the local Multiple Listing Service (MLS) , while managing most of the sale themselves.

Whether you’re buying or selling, doing it yourself or not, you’ll need to build a team of professionals for at least some of the process. Make sure they’re the best.

Should You Invest In A REIT Or A Rental Property Directly?

January 01, 2021

What if you want to invest in real estate without all the risks and hassles of being a landlord? Another option is to invest in a REIT (real estate investment trust), which is kind of like a mutual fund for rental properties (although there are mutual funds of REITs too).  Let’s look at some things to consider when deciding between the two:

How easily might you need access to your money?

This is one of the biggest differences. You can sell a publicly traded REIT immediately like a stock. (There are also non-traded REITs that come with their own rules.) On the other hand, a directly owned rental property can take months to sell and can cost thousands of dollars in transaction costs. The advantage here clearly goes to REITs.

How important is diversification for you?

A single REIT can invest in a range of commercial and residential properties. As if that wasn’t enough, you can also buy multiple REITs individually or through a real estate fund. You need a lot more money to buy enough individual properties to even approach that level of diversification. Otherwise, you’re taking more risk with less diversification and it’s a risk that doesn’t necessarily come with higher returns.

How involved do you want to be?

With a REIT, your only involvement is whether to buy the REIT and when to sell. With a rental property, you have a lot more control over the type of property you own and how it’s managed. If you know the real estate market well and/or are good at property management (or choosing good property managers), this can be a huge advantage.

For example, many real estate investors are able to keep their maintenance costs low by doing their own repairs or having a network of contractors who they trust to deliver value. If you don’t want to be that active, you might want to delegate those decisions to a REIT.

Which provides a better tax benefit?

REITs can easily be held in tax-advantaged accounts like a 401(k), IRA, and HSA. While rental properties can be held in a self-directed IRA, that can be quite complex. However, a rental property can allow you to write-off depreciation, potentially benefit from the new 20% pass through deduction, and have the basis stepped up at death. That could make it preferable from a tax standpoint if you’ve already maxed out your tax-advantaged accounts and are looking to invest in a taxable account.

At the end of the day, the decision is a personal one. If you’ve maxed out your tax-advantaged accounts and want to be actively involved in your investing, you might prefer owning a rental property directly. If you’re investing in a tax-advantaged account or prefer having easy access to your money and being more diversified, you might choose to invest in one or more REITs.

Real Estate Investing in a Crisis

April 29, 2020

There has been a surge of renter households in the US. As a result, the economic shockwaves set off by the coronavirus pandemic will reverberate not only for tenants but the owners of those properties. Whether you are an accidental landlord that has enjoyed income from your old primary residence or if you are depending on your multi-family real estate portfolio to provide the majority of your income in retirement, here is a summary of the obstacles and opportunities you need to consider.  

Financing 

Obstacles – The current economic downturn has drawn several comparisons to the most recent recession. While the causes are significantly different lenders have tightened their criteria again for home purchases for both home buyers and real estate investors. Recently, the FHA has significantly tightened their credit scoring criteria for qualifying for a loan.. In addition Non-Qualified (NQ) lending has reportedly taken a hit as well. This is a significant concern for some real estate investors that need short-term lending to purchase and renovate if they do not meet income standards. 

Opportunity – While credit has tightened on several fronts, financing may offer significant upside for property owners that qualify. Today’s rates are near all time lows. If you meet mortgage lending guidelines you may be able to refinance a property at lower rates. Additionally, if you were planning to expand or improve your real estate portfolio you can borrow against the equity in your existing properties at historically low rates. 

Single Family housing 

Obstacles – There is no doubt unemployment has increased as a result of this pandemic. While the actual percentage is still unclear it is clear for anyone owning rental property that they are concerned about tenants not being able to pay.  Because of the passage of the CARES Act evictions are frozen for 120 days starting March 27, 2020 for renters who live in properties that receive federal subsidies such as Section 8 vouchers or for renters whose landlords have government-guaranteed loans, including loans backed by Fannie Mae, Freddie Mac, the FHA, or the USDA. If the rental unit is not covered by the CARES Act, many individual states have issued similar suspensions on evictions.  

Opportunity – While the CARES Act gives some tenants a means to avoid eviction homeowners with government-guaranteed loans may be able to request forbearance for up to a year if their income is reduced as a result of COVID. In order to determine if your mortgage is backed by a government agency, start with the two largest entities FannieMae and FreddieMac.  If your loans are not backed by a government agency speak with your loan servicer and ask about what options would be available in your situation. If your tenant is struggling to pay but they are an otherwise good tenant, consider using the mortgage reprieve to temporarily reduce or suspend rent for a predetermined period. You should also help make your tenant aware of the stimulus support and temporary unemployment benefit increase. These resources will not only help them pay you but help get them get back on their feet faster once the economic downturn subsides.  

Multi-family housing  

Obstacles – Just like smaller properties, multi-unit apartment complexes also are going to face problems with tenants who have lost their job or taken a steep pay cut.  Anything larger than 4 housing units cannot be financed with a mortgage, so the loan forbearance options through Freddie Mac or Fannie Mae don’t apply.   

Opportunity – That doesn’t mean that you are without options.  If you have a larger rental property, follow much of the same guidance as earlier – work with your tenants if they are good tenants to help them access relief so that they can pay you at least in part and stay in your unit long-term.  You also want to reach out to your bank right away to see how they can work with you.  Just like you don’t want to lose a good tenant, they don’t want your loan to go into foreclosure.  Ask them if they can work with you by skipping some payments and adding them to the end of your loan or temporarily making interest-only payments on your loan.  That way, if your tenants can pay enough rent to cover this lower payment, taxes, insurance, and other fixed costs you should be in a much better spot to navigate the COVID outbreak. 

Commercial property 

Obstacles – Similarly, many small businesses have been forced to close by state and local stay at home orders which limit their ability to bring in the revenue to pay their rent.  Commercial property cannot be financed with a mortgage, so the loan forbearance options through Freddie Mac or Fannie Mae do not apply. 

Opportunity – If your property is leased out to a small business(es) then you may want to work with your tenant to make sure that they have applied for the Payroll Protection Program if they are eligible.  If your tenants qualify for the PPP, then they can use a portion of those funds to pay their rent which is a huge relief to you.  Similarly, if you currently pay yourself a smaller salary but get more of your income from the rent your business pays to you, the PPP can help your business not only protect your paycheck, but also the rent you pay to yourself as long as it is reasonable for the local market. 

Staying prepared for future uncertainty 

By now you have noticed that if you have cash and a good credit score, it gives you more flexibility in terms of dealing with this crisis. In fact, there is a decent chance that if you make good moves in this market you can possibly walk out of this with a better real estate portfolio. Here are a few best practices to live by to keep your real estate portfolio in good standing in this and the next crisis: 

  • Maintain little or no credit card and other high-interest debt 
  • Maintain a credit score is 740 or higher 
  • Maintain enough cash to cover vacancies and maintenance on the target property for a year 
  • Maintain enough income to pay the rental property mortgage if there’s a sustained period of vacancy 

How Should I Invest In Real Estate

January 01, 2020

Know your investor personality

When it comes to managing your real estate investments, would you prefer to be heavily involved in the day to day or a passive investor that puts their trust in someone else to manage things?

If you want to be a “hands-off” real estate investor, then you’ll have little to no involvement in the selection and management of investment properties themselves, and instead will be putting your money and trust in a team of real estate professionals to make those decisions for you.

Alternatively, if you have the time, knowledge and interest in the real estate world, you may choose to be a “hands-on” investor. That means you’ll be actively researching, selecting, and managing individual investment properties, although you may choose to hire a property manager to handle the day-to-day work associated with any of your investment properties.

Evaluating Your Real Estate Investing Options

ACTIVE REAL ESTATE INVESTING OPTIONS FOR HANDS-ON INVESTORS

Single-family home

A single-family home is a standalone house meant for one family.

Pros

  • Families can be long term tenants
  • Most potential for appreciation
  • Easiest to sell

Cons

  • Maintenance is more expensive
  • Lots of capital is required to develop a diversified portfolio

Condominium/Townhouse/Co-op unit

Single unit condos and townhouses have similar investment characteristics as single-family homes. Co-op units are similar, but may have additional community regulations for owners and tenants.

Pros

  • Generally less expensive
  • More urban opportunities
  • Condo association pays maintenance

Cons

  • Condo or co-op association fees and assessments
  • Co-op board must approve tenants (but typically not condo boards)

Fix and flip

A fix and flip involves buying a house that needs updating, making renovations, and then selling quickly (hopefully for a profit).

Pros

  • Potential for a quick profit
  • Flipping looks so fun on HGTV
  • Get paid for sweat equity

Cons

  • Unanticipated renovation costs
  • It could take longer to renovate or sell
  • Carrying costs if the home doesn’t sell

Multi-family (2-4 units)

Multi-family housing contains independent dwellings for more than one family. This could be a duplex (2 units), a triplex (3 units), a quadplex (4 units) or an apartment building (5 more units).

Pros

  • Multiple monthly rents
  • You can be an owner-occupant and investor
  • Owner-occupied 2-4-unit buildings can be financed with lower down payment loans

Cons

  • Increased landlord responsibilities
  • Maintenance is more expensive
  • Apartment buildings (5+ units) are financed by an apartment loan

Manufactured/Mobile/Tiny homes

A manufactured home is ready once it leaves the factory. A mobile home is a standard sized trailer which is placed in one location.

Pros

  • Inexpensive
  • Lower maintenance
  • Easier to purchase multiple units

Cons

  • Lower rent
  • Hard to finance
  • Higher tenant risk

Commercial buildings

Commercial buildings house businesses such as offices, retail stores, restaurants, etc.

Pros

  • Comes in many sizes and purposes (office complex, shopping center, medical building, industrial, warehouse, etc.)
  • Multiple monthly rents and flexible lease terms (e.g., tenants pay maintenance)
  • Objective standards for valuation
  • Tenants have strong incentives to maintain the property

Cons

  • Increased landlord responsibilities
  • Requires professional help to maintain property
  • Specialized commercial loans which may require a personal guarantee (recourse)
  • Large down payment

PASSIVE REAL ESTATE INVESTING OPTIONS FOR HANDS-OFF INVESTORS

Real Estate Investment Trusts (Publicly traded REITs)

Pros

  • Funds must pay out at least 90 percent of income in dividends
  • Publicly traded – easy to buy and sell during market hours
  • Own real estate without the headaches of managing it

Cons

  • May need to invest in multiple REITs to be diversified
  • Requires faith in management to pick the right properties
  • Rising interest rates affect profitability

Mutual funds and exchange traded funds (ETFs)

Pros

  • Actively managed or passive index funds available
  • Diversification across real estate sectors
  • Publicly traded – easy to buy and sell during market hours
  • Own real estate without the headaches of managing it

Cons

  • Mutual fund trading can pass unexpected capital gains to shareholders
  • Stock market risk
  • Requires faith in portfolio manager if buying actively managed funds
  • Management fees

Crowdfunding sites

Crowdfunding sites match real estate investors looking for funding for their real estate project with investors looking to invest.

Pros

  • Invest in real estate loans
  • Crowdfunding site does the underwriting
  • Easier to build a loan portfolio

Cons

  • Poor investor protections/higher potential for fraud
  • Hidden fees
  • Loan risk and bankruptcy risk

Private placements – REITS and Real estate limited partnerships

Higher net worth (“accredited”) real estate investors have access to private real estate funds through private placement.

Pros

  • Potentially higher dividends or net income
  • Diversified portfolio of properties or loans
  • Funds which specialize (e.g., hospital properties, manufacturing, apartments, etc.)

Cons

  • Only available to higher net worth investors
  • High fees
  • Illiquid

Know your exit strategy before you invest

When investing in real estate, you must begin with the end in mind — before you even make an offer or purchase a fund, you need a plan for if and when you will dispose of your investment.

Decide ahead of time under what circumstances you will sell — after a certain number of years? Once the property has appreciated a certain amount? When you need the capital for something else? It’s important to establish this up front so that you aren’t at risk for emotional selling.

No matter what type of investor you are, or what type of property you would like to buy, if a short-term loss of value is something that would cause you to “cut your losses” and liquidate, you may not yet be ready to invest in real estate.

How To Know If You’re Really Ready To Become A Landlord

January 01, 2020

Becoming a landlord can be a great way to grow your wealth and develop a way to earn income “while you sleep,” with less chance of wild swings in value that can happen when investing in the stock market. However, there’s more involved than just finding the right property, so it’s important to make sure you’re truly ready.

Don’t base your decision on this

Deciding whether to become a landlord or not actually has very little to do with the real estate market. And that’s why so many people make bad decisions in this area. They base their decisions on what they think the real estate market is going to do, when instead, they should be looking at their own financial situation to make a decision.

Can you answer yes to most of these questions?

If you can answer yes to all or most of these questions, then you may be ready to invest in real estate:

  • Do you have a stable job and a decent cash cushion? Ideally that would be 1 year plus of your living expenses in a liquid account that you can tap into immediately with no or very minimal penalty (i.e., it’s not in a retirement account).
  • Do you have excellent credit? A credit score of 750 or above will help in two ways:
  1. You’ll qualify for better loan rates if you need a mortgage to buy your first property, and
  2. If you end up having more vacancies or home improvement expenses than you expect, you will have better access to credit to cover these expenses if need be.
  • Are you really ready to become a landlord? Ideally you would enjoy that responsibility and/or you can cover the costs of paying someone to maintain the property like a building super who can address issues that tenants face and ensure the property is properly maintained. This becomes very important when you are ready to sell, not to mention it is your legal obligation as a landlord to maintain the property for tenants.
  • Are you looking for a good tax shelter to offset income taxes and capital gains? While all of us want to reduce taxes, investment property can be particularly attractive for those who are in a high-income tax bracket. Some ways you can take advantage of this are through write-offs on such things as mortgage interest, property tax, gardening, property management, etc. You may also be able to write off as much as $25,000 in real estate losses against your total income depending on your adjusted gross income (AGI).
  • Are you able to separate your emotions from the process and buy for purely financial reasons rather than personal preferences? Remember, you won’t be living in this property so whether or not it’s your favorite style of architecture is irrelevant. But whether or not you have a positive cash flow (meaning your rental income exceeds mortgage and other property expenses) is very important. So, you need to be ready to cast aside a love of real estate as an art form and cultivate a love of it as an investment vehicle in order to be financially successful.

Bonus criteria, although not essential

  • Do you have a spouse with a stable job? This further reduces risk of a major cash flow problem if you lose your job.
  • Do you know a lot about real estate and/or have people around you who are experts in real estate and can advise you? Key knowledge areas include:
    • home improvements/renovations that are most likely to enhance retail value;
    • understanding of rental and vacancy rates in the area you are looking to buy;
    • trends in real estate prices and key facts about the neighborhood and how the local economy may impact future housing prices.

Real estate agents can help here, but it’s nice to have people with expertise that you know and trust on your side as well. This is why large real estate investors have teams of people who work for them.

Think twice if you answer yes to any of these questions

Remember, finding a good deal on a property is just part of being ready. If you answer yes to any of these questions, you could find yourself in dire financial straits regardless of how prime the property may be.

  • Are you stretching to buy the property, or do you have any reason to believe that your job is not secure? If your debt to income ratio begins to exceed 35% after the purchase, then you are stretching. If you do not have a liquid cash cushion (1 year plus of your living expenses is recommended) and would have to tap into your investments to cover a financial emergency (e.g., longer than expected vacancies, roof begins leaking), you are stretching and until you develop this cash cushion, you should probably not purchase the property.
  • Do you enjoy a life free of hassle and try to limit your responsibilities? In other words, you don’t want to be tied down. In this case, it doesn’t matter how attractive the deal is, you may not be ready to be a landlord and buy an investment property.
  • Do you have fair or poor credit (below 700)? In this case, you may not even qualify for a loan. Or if you do, the interest rate could significantly drive up the cost of the mortgage and make the property a money pit where you are consistently paying more in mortgage than you are getting in rent.
  • Are you already heavily invested in real estate relative to other assets? “Heavily invested” meaning 20% or more of your wealth, not including your primary residence, is tied up in real estate. This is particularly important if most or all of your real estate holdings are in one area — if housing prices plummet in that area, you could run into serious financial problems.

Making the best decision for you

Rental income can be a great way to diversify your retirement income sources, just make sure that you’ve laid the proper financial foundation before taking the plunge into investing in real estate.

What I Learned In 2018

December 26, 2018

Editor’s note: As 2018 draws to a close and we launch 2019, I’ve asked each of our bloggers to reflect on their own personal goals, plans or thoughts on the past or upcoming year. Our hope is that you not only draw inspiration from our sharing over the coming weeks, but also that we are all able to feel more connected through our shared human experience and recognize that no matter where we are on our personal financial wellness journeys, that we all have similar hopes, dreams and struggles. Happy holidays! Here’s what Erik has to say:

As we approach the end of the year, it’s a good time to review your progress toward your financial goals and begin thinking about your goals for the new year.

Tracking toward FIRE

In my case, my main goal is to save and invest for financial independence/early retirement (now popularly called “FIRE”). Despite spending more on dining out than I wanted to this year, I’m currently still on track to achieve my goal of having enough assets to cover my basic expenses in about 2-3 years.

Celebrating my anniversary as a real estate investor

The most significant update is that next year will be my 5 year anniversary as a real estate investor. In reviewing the performance of my rental properties, the bad news is that the cash flow has been less than I hoped for, mostly due to higher than expected vacancies and maintenance expenses. The good news is that the properties have appreciated a lot more than I thought they would, which has more than outweighed the lower cash flow.

One thing I learned about myself

One thing I learned is that your risk tolerance can vary based on the type of risk with different investments. For example, I’m much more comfortable with the ups and downs of the stock market than the uncertainty of maintenance expenses, perhaps because I’m simply more familiar with stocks. I also like knowing that I can easily and quickly access my stock investments by selling them at any time, while real estate takes much longer to sell and the final sales price can vary considerably from its estimated value.

For these reasons, I’m considering selling at least some of my rentals next year and reinvesting the proceeds in a more liquid and diversified investment portfolio of stocks and/or index funds. At the very least, I’m no longer planning to buy more properties, especially with today’s higher mortgage rates.

How about you? Are you still on track for your goals? What lessons have you learned? What changes, if any, do you plan to make to your finances for 2019? It’s the perfect time to review those things this week.

What You Should Know Before You Buy Your First Home

November 14, 2018

With interest rates on the rise, many first time home-buyers are looking to purchase a home before mortgage rates go any higher. If you’ve never purchased a home before, the process can be confusing and even a bit scary. When a family member recently asked me for some tips, here’s what I told him:

1) Make sure you’re ready to buy. Your credit should be in as good of shape as you can get it (740 or above will generally get you the best rates), you should have no high-interest debt like credit card debt, and you should have enough savings for a down payment (ideally 20% of the home value to avoid paying mortgage insurance), closing costs (typically 1-3% of the home value), and furnishings and moving expenses you plan to pay, and an emergency fund (at least enough to cover 3-6 months’ of necessary expenses) now that you’ll be responsible for a mortgage and maintenance costs. You should also plan to keep the home at least 3-5 years to make it worth the transaction costs and the risk of selling in a down market.

2) Get pre-approved for a mortgage. This will give you an idea of what you can qualify for and how much home you can afford (which are not the same thing). Being pre-approved gives you an advantage over other buyers if you get into a competitive bidding situation and some real estate agents won’t even show you homes until you’re pre-approved. To find the best deal, shop around online comparison sites like Bankrate.com, mortgage brokers or loan officers referred to you by your real estate agent and people you know, and any credit unions you may belong to. To avoid hurting your credit score, try to do any rate shopping within a two week time period.

3) Pick the best mortgage for the time period you intend to keep the home. If you can use the savings to invest (especially in tax-advantaged accounts) or pay down high-interest debt, a 30 year mortgage can be better than a 15 year mortgage, even when you factor in the ability to ramp up your savings once the mortgage is paid off. In any case, be sure to have the rate fixed for as long as you might keep the home. Otherwise, you may find your mortgage payments skyrocketing if interest rates are higher when the fixed period ends.

4) Use an independent home inspector. The home inspector is one of the most important and underrated members of your team. People often let their real estate agent recommend someone, but they may refer someone more prone to overlook problems in order to get the deal done. That’s why an independent inspector is more likely to be on your side. You can search for one here.

5) Look for ways to earn income from your new home. Being able to rent out one or more extra bedrooms or a “granny flat” for either short-term stays on sites like AirBnB or HomeAway or to more long term tenants can be a great way to reduce the cost of the home. Just be sure renting is allowed by your building (if it’s a condo or co-op) and city and that you’re prepared to be a host/landlord.

Buying your first home can be both exciting and stressful. Following these tips should help make it more of the former and less of the latter. Happy house hunting!

Is Buying A Home Warranty Worth It?

November 05, 2018

I spoke with someone the other day that had purchased a 20+ year old home. I could tell by the sound of his voice how excited he was, but he also gave me a laundry list of maintenance and repairs he had to make shortly after the purchase. We started talking about home maintenance plans, often referred to as home warranties. Here’s what we discussed in order to help him decide whether it was worth it.

What to know before you buy a home warranty

What does it cover?

Most companies are flexible and allow you to customize a plan that meets your specific needs and covering what’s important to you. Typically, you can choose to cover appliances (i.e. your refrigerator, washer & dryer, oven, etc.) OR you can choose to cover systems like your air conditioning and heating system, plumbing, and electrical systems. Many will also let you do a combination of the two, covering as many appliances and systems as you prefer.

How much does it cost?

Obviously this is a big part of the decision. Cost typically depends on which company you decide to go with as well as wha’ts covered (and for how long). Compare multiple companies to narrow in on the best home warranty companies. You’ll likely pay a standard monthly fee linked to the type of maintenance plan you choose. Then, you’ll agree on the per service call fee that you’ll be responsible for whenever you have a technician come out to your home. Be sure to factor these costs into your budget. If you opt to be responsible for less money out of pocket when you have a service call, you’ll pay a higher monthly fee for having the plan in place.

How does it work?

Typically, no matter what time of day, or what day of the week, if a covered item breaks, you can contact your provider and they will send a technician out to you. However, it’s important to understand that most warranties require you to use one of their technicians, so if you have an emergency and call someone else, you probably won’t be able to make a claim on your warranty.

The pros and cons of home warranties

Pros:

1) Extends the life of your appliances

2) Extra protection for homes with either the original or older appliances

3) Likely to keep home appliances and systems more energy efficient

4) Peace of mind – you don’t have to do the maintenance on your own, or find a reliable repair person on your own

5) Alleviates some of the need to maintain a larger savings account just for home repairs

Cons:

1) Potentially more costly over the long-term – you might not use the service for years and could have saved those funds for any future repairs/replacements at a lower total cost

2) Service delivery may not be prompt – some may have to wait prolonged periods for someone to come out to fix their problem and it may require multiple visits. This often won’t work if your issue is something pressing like a failed hot water heater when you have guests staying in your home.

3) Confusion around what’s actually covered – be sure you read the fine print and ask questions, so you don’t have any surprises. For example, your furnace warranty may be voided if you don’t have a technician check it annually.

4) More expensive than DIY maintenance – with a little TLC of your own you could save money, you just have to stay on top of it.

Rule of thumb for home repairs and maintenance

Before you purchase a home, be sure to put funds aside for potential repairs and replacement costs. How much you set aside depends on the age of your home – somewhere between 1% – 4% of the purchase price is a good range. If you are already in your home, include those expenses in your budget and designate money each month to get ahead of any needed maintenance.

If you’re in the process of saving and you are concerned you’ll need maintenance before you have enough funds to cover the associated costs, you might consider having the home maintenance plan for a short time-frame, like one or two years.

Alternatives To A Cash-Out Refinance

October 15, 2018

I recently wrote about cash-out refinancing to tap into the equity in your home including the pros and cons of doing so. Today I want to explore some alternatives to the cash-out refinance if you decide the bad outweighs the good in your situation. Let’s look at a few options that are available.

Take out a personal loan

A personal loan is an unsecured loan from a bank or credit union. Often the interest rates are higher than an equity-based loan because you are not using your home to secure the loan, so the bank is taking on more risk. The upside is that you aren’t putting your home at risk should you default on the loan payments.

Use a credit card promo offer

If you are tackling a small project, you could also use credit card promotional offers such as offering your 0% for a certain amount of time. Be careful here though – you want to make sure the debt is paid off before the offer expires and high interest rates take over, so make sure you can afford the monthly payment required to make that happen.

 Consider a second mortgage

A second mortgage (sometimes called a home equity loan) allows you to borrow against the equity in your home without having to change the terms of your original mortgage. So you can still tap your equity but you wouldn’t have to forfeit a great interest rate or reset the payment term. If you set up a 10-year term on the second mortgage for instance, after 10 years, you will be back to where you would have been before the loan in terms of your primary mortgage. This option often makes more sense if you’re using the proceeds to fix up your home, as the interest will still be deductible.

Look into a HELOC

A home equity line of credit (HELOC) is similar, but often comes with a variable interest rate that may increase over the life of the loan. The difference is that you only use as much of your equity as you need, rather than taking one lump sum as you do with a home equity loan. Both options will use your home as collateral, so make sure the payment fits your budget before moving forward.

Don’t forget a student loan for education

If you are looking to use the money to pay for education, consider a federal student loan to fund that instead of your home’s equity. Not only do they offer flexible repayment options and are designed specifically to pay for education expenses, if you run into a situation where you’re unemployed or have other hardships, you may even be able to put the loan into forbearance, which you can’t do with a home-based loan.

Explore a small business loan

If your goal is to fund a business opportunity, then a small business loan may make sense. This takes your home off the table should the business not pan out. Explore options for loans backed by the Small Business Administration to help keep the interest rates more reasonable.

Hopefully this series helps you weigh if a cash-out refinance is right for you, and presents some alternatives to help you make an informed decision on your cash needs and options!

Should You Invest In A REIT Or A Rental Property Directly?

October 11, 2018

I recently wrote a blog post about my decision to sell a rental property. What if you want to invest in real estate without all the risks and hassles of being a landlord? Another option is to invest in a REIT (real estate investment trust), which is kind of like a mutual fund for rental properties (although there are mutual funds of REITs too).  Let’s look at some things to consider when deciding between the two:

How easily might you need access to your money?

This is one of the biggest differences. You can sell a publicly traded REIT immediately like a stock. (There are also non-traded REITs that come with their own rules.) On the other hand, a directly owned rental property can take months to sell and can cost thousands of dollars in transaction costs. The advantage here clearly goes to REITs.

How important is diversification for you?

A single REIT can invest in a range of commercial and residential properties. As if that wasn’t enough, you can also buy multiple REITs individually or through a real estate fund. You need a lot more money to buy enough individual properties to even approach that level of diversification. Otherwise, you’re taking more risk with less diversification and it’s a risk that doesn’t necessarily come with higher returns.

How involved do you want to be?

With a REIT, your only involvement is whether to buy the REIT and when to sell. With a rental property, you have a lot more control over the type of property you own and how it’s managed. If you know the real estate market well and/or are good at property management (or choosing good property managers), this can be a huge advantage.

For example, many real estate investors are able to keep their maintenance costs low by doing their own repairs or having a network of contractors who they trust to deliver value. If you don’t want to be that active, you might want to delegate those decisions to a REIT.

Which provides a better tax benefit?

REITs can easily be held in tax-advantaged accounts like a 401(k), IRA, and HSA. While rental properties can be held in a self-directed IRA, that can be quite complex. However, a rental property can allow you to write-off depreciation, potentially benefit from the new 20% pass through deduction, and have the basis stepped up at death. That could make it preferable from a tax standpoint if you’ve already maxed out your tax-advantaged accounts and are looking to invest in a taxable account.

At the end of the day, the decision is a personal one. If you’ve maxed out your tax-advantaged accounts and want to be actively involved in your investing, you might prefer owning a rental property directly. If you’re investing in a tax-advantaged account or prefer having easy access to your money and being more diversified, you might choose to invest in one or more REITs.

Should You Buy A Home Now Or Wait For Prices To (Maybe) Drop?

October 10, 2018

There was a recent news release about certain locations in the US that have started to see foreclosures creeping up again and that has some people worried about the market dropping again and watching home prices fall as well. As a result, more people are asking if they should go ahead with their plans to buy a new home now or wait until prices drop. Here’s how I see it.

Timing the market is almost always a bad idea

The reality is that when you start asking questions like this, you’re basically trying to time the market. Your needs really should trump whatever the market is doing. Being prepared financially (i.e having a healthy credit score, funds saved towards the down payment, etc.) is the answer.

That holds true whether you’re a real estate investor looking to make a short-term investment or you’re in it for the long haul and plan to keep it as a rental property. Make sure it’s a good investment and the numbers make sense.

If you’re looking to purchase a home as your primary residence, and you find one that fits your budget that also meets your other needs, then worrying about its value decreasing in the short-term really shouldn’t be a huge concern. The longer you plan to stay in the home, the less of the impact a drop in value might have. You might feel a bit of buyer’s remorse or have less equity to start, but if the home is affordable and meets your anticipated long-term needs, it’s probably still a great deal for you.

Home prices fluctuate. When the market falls, some homes will decrease in value more than others. It’s true that when that happens, short sales and foreclosures will become available, but will the type of house you are interested in be on that list? And when will it happen? Here are some other factors to consider.

Deciding whether to buy now or wait for a good deal

1) Do you care enough to wait it out? If you’ve been dealing with a home that’s too small for your current family, you’re tired of renting, or you’re already finding investment properties that fit exactly what you’re looking for and the numbers make sense, you may prefer not to wait.

On the other hand, if are content with your current living arrangement or you aren’t in a rush to purchase an investment property, you likely don’t really feel pressure to buy now. Waiting for a deal that motivates you to move forward could make sense.

2) Are you looking for a very specific type of home? For example, do you only want to live in a particular neighborhood, or are you picky about exactly what features your future home needs to have? The more specific your list, the more of a challenge it will be to wait for exactly that type of home to become available when home prices drop.

3) Is the home you want available now and you can afford it? If it’s a good deal now (meaning it fits within your budget, is in a good location, etc.) and you can get exactly what you’re looking for, then now might be the time to go for it regardless.

4) Do you have enough cash on hand? When prices drop, many others may be going after the same homes you’re interested in. You’ll likely need funds stashed away, ready to make an offer, but be prepared to potentially be outbid.

5) Is the type of home you want more than what you can afford? This could easily be the case for those in extremely expensive real estate markets. You might choose to wait to see if you can get one that meets your needs and falls within your price range if/when prices drop. The solution is not to overspend, but it doesn’t hurt to see what’s available – assuming you can wait until such a drop happens, if ever.

6) Do you need to sell your current home? Waiting for prices to drop in order to score a better deal when buying might feel right, but if you also need to sell your current home in order to make a down payment, any savings could be washed out by a drop in value of your current home or could even cause you to miss out on a deal if you’re unable to sell your home. Unless you’re prepared to make a temporary move so you can sell your home first, it’s probably best to just buy the home you want/need when you’re ready and work to sell your current home quickly.

7) Should you go for a short sale or foreclosure? You might find what you’re looking for in a short sale, a foreclosure or a home that needs some work but has potential. The seller, whether the owner or the bank, is usually motivated to sell the property. Also, you’d likely get instant equity, but the process to purchase these types of properties can be involved and lengthy. You could save yourself a lot time and headache by going for bank approved short sales vs those that have not gone through the approval process. You can also look for foreclosure properties on Bank REO lists.

Beware that some of these properties may not be in the best condition and that you may be responsible for any repairs needed. Just know that regardless of what happens to the real estate market in the future, these types of properties are available now, so you don’t have to wait for the market to fall before you look into this option.

The bottom line

All in all, it makes sense to make a purchase when you are financially prepared and you find a property that fits your needs. If you find that now, great. Waiting to see if prices will drop could work out, or you could find yourself waiting and waiting, so it’s up to you to decide. No matter what, it’s most important to make sure you have your ducks in a row before you buy in any market.

 

Should You Do A Cash-Out Refinance?

October 08, 2018

It seems like I have been hearing a lot more advertisements for the concept of a cash-out refinance recently (maybe I just noticed it more). Perhaps due to the recent tax law change that disallows the deduction of interest for home equity loans that aren’t used for home improvements? Either way, it got me thinking about the idea and I wanted to explore the pros and cons a bit further.

A cash-out refinance is when you refinance your existing home loan with a larger loan that uses the equity you have in your home to provide cash back to you at the time of closing. It’s basically a way for you to get access to your home equity without having to sell it. Technically, you can use that cash for whatever you want, but the most common uses include:

  • Home improvements – using equity to make improvements to your home can add to the home’s market value and be a sound investment. Be careful here though – make sure the improvements are things future buyers will value, and not things only you and your family will enjoy.
  • Education – pursing a new degree or certification may help you earn a higher salary and benefit you in the long run. If you are confident that is the case, then pulling cash out of your home may make sense.
  • Business opportunities – while it may be tempting to use cash from your home to start a business or get in on that “once-in-a-lifetime” opportunity your neighbor told you about, be careful here. It is hard to make a business work long-term, and you need to make sure you can repay your loan if the venture doesn’t pan out.
  • Pay off credit cards – this seems to be the one mentioned most on the advertisements I’ve been hearing. And it makes sense on the surface – pay off high interest debt with a much lower interest rate and get that credit card monkey off your back. While getting out of credit card debt is important, using equity in your home to do it does put your house at risk if you default on your mortgage. Adding that risk to the decision is important.

Advantages of a cash-out refinance

If you are considering a cash-out refinance, it is understandable as to why. While interest rates have been creeping up in recent years, perhaps you can still lower your rate AND accomplish another goal at the same time. After all, using your home equity lets you:

  • Access a considerable sum of money – you may have tens, or even hundreds, of thousands of dollars in equity built up in your home.
  • Borrow at low interest rates – even with interest rates rising, mortgage rates are still much lower than personal loans, and certainly credit cards.
  • Repay it back over a longer time – your new mortgage can be for 15 or even 30 years, so you can really stretch that out. See below for thoughts on why that may not be such a good thing though.
  • Retain the ability to deduct the interest – the new tax law eliminated the interest deduction for home equity loans used for anything other than home improvements, but when you do a cash-out refinance, it’s the primary mortgage on your house, so you can still deduct all the interest you pay on the first $750,000 of indebtedness even if you use that cash for other purposes.

Disadvantages of a cash-out refinance

As with all things it seems, there are pros and cons to consider with a cash-out refinance. Some of the downsides to keep in mind include:

  • Interest costs – refinancing generally means you re-set the clock on the mortgage term. This increases the total interest that you end up paying over the life of the debt. So, if you use cash to pay off credit cards, you may end up paying off that debt for up to 30 years.
  • Closing costs – a fact of life with a mortgage loan. Whether you roll them into the loan or pay them up front, they are real, and they can be significant – sometimes thousands of dollars.
  • Putting your house at risk – your mortgage bank uses your home as collateral for the loan. If you don’t make payments, you face losing your home through foreclosure.
  • Your payment will go upThis calculator – unless you’re significantly reducing your interest rate, chances are your monthly payment will increase for the additional money you’re borrowing. can help you to run the numbers.

These issues often make a cash-out refinance a risk not worth taking. Of course, every situation is different, so my next post will focus on alternatives to the cash-out- refinance.

 

Important Home Maintenance Tasks I Do Every Fall

September 26, 2018

Earlier this year I wrote about home maintenance tasks I do in the spring to keep our house running efficiently. I thought it an appropriate time to revisit this issue as we move into fall to point out some things I do to make sure the house is ready for winter.

One of things I love about living in Colorado is the four distinct seasons we experience. But the fluctuations in temperature and moisture can be hard on a house. Making sure things are set for the winter helps avoid costly issues that heavy snow and freezing temps can cause.

Here are some of the things on my fall to-do list to make sure we are set for the first snow:

Winterize the lawn

As the grass starts to turn dormant for the winter, I like to give it a good feeding in the later part of fall. This helps the grass green up better in the spring and is critical to maintaining a healthy lawn.

How I do it: I head to the local garden center and pick up a winterizing fertilizer. Then I like to mow first to pick up any leaves one last time before I apply the fertilizer. Make sure to water it in and you are all set for a healthy lawn come spring!

Store garden hoses

Make sure all hoses are removed from your outdoor faucets and empty of water. Leaving them attached increases the chances of water backing up into the pipes inside the exterior walls. If that water freezes, it can crack the faucet or pipes.

How I do it: I make sure all hoses are removed from outdoor faucets early in the fall just in case a sudden cold spell rolls through. I also store the hoses in the garage over the winter to lessen exposure to the elements and prolong the life of the hoses.

Drain the sprinkler system

Even sprinkler lines that are underground can freeze, so it is a good idea to make sure your sprinkler system is ready to go for winter before it is too late. Of course, make sure the controller is off and inside valves are shut down.

How I do it: I prefer to hire an irrigation professional to come in and drain our system. They will also blow out all the lines with an air compressor to make sure all the water is out. This usually costs around $75, but it is cheaper than having to replace burst lines and valves in the spring (or having to buy an air compressor)!

Clean the gutters

I do this in the spring too, but after all the trees drop their leaves, make sure to clean out those gutters for the winter. Rain and snow melt that doesn’t flow freely can freeze and cause pricey damage.

How I do it: I use a blower and my hands (with gloves) to make sure the gutters are clean. I also look for any damage or sagging that needs attention. If you see a lot of asphalt from your roof shingles, check out the roof while you’re up there to make sure it is in good repair. It’s important to mention safety here – using a leaf blower on the roof requires concentration and strength. If you have a steeply pitched roof or are at all concerned about being steady on your feet, hire a professional for this task.

Check and service your furnace

The middle of freezing temps in the winter is no time to find out that your furnace is on the fritz. Making sure everything is working before winter will keep your family comfortable and safe on those frigid winter days (and nights). Regular maintenance may also be required in order to keep any warranties valid on your HVAC system.

How I do it: I schedule an appointment with a heating and cooling company every year to inspect and service our heating system. It usually costs $70-$100 for them to come out to the house. I also make sure I change the filters every 60 days – I do this year-round. How often you change your filters depends on your household – my colleagues with multiple pets change theirs out more often.

Other things to consider

Much of this may depend on the climate you live in, but some other things to look at include:

  • Making sure there are no air leaks around doors and windows.
  • Check your chimney to ensure it is free of debris and animal nests.
  • Trim back plants and trees. Keep limbs and branches away from your house to avoid damage and excess moisture.

There you have it – another installment of our home maintenance series! Just like spring, looking after your home in the fall helps keep costs down and efficiency up.

 

How To Decide Whether It’s Time To Sell An Investment Property

September 12, 2018

A few years ago, I wrote a blog post about why I started investing in direct rental real estate. I recently decided to sell the first property I bought. This was prompted by my property management company letting me know that they were exiting the business and suggesting that I sell the property rather than find a new property manager because they felt the neighborhood was in decline.

In addition, I saw this article about rising foreclosures, which could indicate a downturn in the real estate market. For me, it’s time to get out of this investment. Here are the things I considered in this decision.

How much is the property earning?

One way to measure this is cash flow (rental income minus expenses) and a second is total return (cash flow plus growth in equity from a declining mortgage balance and real estate appreciation). The bad news for me is that vacancies and expenses were higher than I estimated with this property, so my cash flow was much lower than expected and ended up being slightly negative overall.

The good news is that appreciation was much higher than expected (at least according to the valuations on sites like Zillow, Trulia, and Redfin) so the total return might end up being pretty good. If the property continues earning at the same rate but appreciates at a more normal 2-3% a year, my future total return would be about 6-8%.

That’s not terrible, but it’s also not great, especially given the risks of a potentially declining neighborhood and a weak real estate market if interest rates continue climbing or the economy weakens. For me, the property isn’t earning enough by either measure to justify continuing to hold it.

What are the tax implications of selling?

The ability to write off depreciation in addition to the expenses has helped reduce my overall tax burden throughout the years I’ve owned. However, all that depreciation will hurt me when it comes to paying the capital gains tax by reducing my cost basis.

I can minimize capital gains taxes by waiting until the capital gains tax is lower to sell, selling when I’m in a lower (possibly even zero) capital gains tax bracket in retirement or just holding it until I pass away and allow my heir(s) to inherit it at a stepped-up cost basis, avoiding capital gains taxes altogether. Neither of those options appeal to me, so I will just pay the taxes and move on.

While taxes are important, don’t let the tax tail wag the dog. If your goal was only to minimize taxes, you could easily do that by minimizing your income and investment earnings. Instead, make your goal to maximize your after-tax return.

What else would you do with the money?

Once you know the rate of return, you need to compare it with what you could earn with that money instead. Many investment experts expect even lower future stock and bond returns in the future, given relatively high stock market valuations and low interest rates today. However, it’s generally a good idea to invest in what you know and I know stocks and bonds better than I know real estate.

What non-financial factors should you consider?

In the end, part of me wants to sell simply because I prefer having more liquidity, one less property to worry about, and one less state to file a state income tax form in. Remember, money is just a means. Happiness is the end.

 

How Soon Can You Buy A Home After Bankruptcy Or Foreclosure?

August 21, 2018

Working in the world of financial wellness gives me almost unlimited opportunities to meet and speak with people from all walks of life. I also get to see and hear all manner of personal finance failures, setbacks, and triumphs.

Whether it’s celebrating the joy of someone who finally dug themselves out from under a mountain of soul crushing debt, or soberly talking someone else through the process of giving up the family home to foreclosure or considering personal bankruptcy as their next (and unfortunately best) financial move, some of these situations can really tug at one’s heart strings.

One thing that surprises me, though, is how resilient and mentally tough most people are when facing very serious financial obstacles. For example, people who find themselves in the middle of bankruptcy or foreclosure (sometimes both) are often in a hurry to jump back in and apply for another home mortgage right away, sometimes before the ink is dry on the foreclosure document or the bankruptcy has been fully discharged.

Safely becoming a homeowner again

Although I applaud this kind of enthusiasm, let’s take a step back and review just what we need to do in order to safely re-enter the world of home ownership after employing one of these personal finance nuclear options.

When you’ve had a foreclosure

If you were unable to make your mortgage payments in the past and ended up giving the home back to the bank through a foreclosure process, you are likely looking at a minimum of two years before you could qualify for a mortgage once again. You might have to wait even longer than that.

Different programs have different waiting periods

The waiting period following foreclosure starts after your foreclosure is completed; typically the date when your former home was sold as part of the foreclosure process. Depending on what type of mortgage you are looking at for starting over, you may have to wait up to seven years in certain circumstances.

VA: The Veterans Administration requires a minimum waiting period of two years following a foreclosure

FHA: The Federal Housing Administration has a three year wait for FHA loan qualification.

Conventional mortgage: Fannie Mae (FNMA) and Freddie Mac (FHMC) conventional loan requirements are even more strict. The waiting period for a conventional mortgage following foreclosure can be up to seven years, although certain exceptions for extenuating circumstances may enable you to qualify in as few as three years.

Your best chance to expedite the process

If you can provide a large down payment (more than 25%), some private lenders might consider underwriting your mortgage as early as two years following a foreclosure, but don’t count on receiving the best interest rate on the loan.

When you’ve had a personal bankruptcy

Chapter 13 – when your debts are restructured

Chapter 13 is the less devastating (though still financially destructive) version of personal bankruptcy where your debt doesn’t go away, but it is restructured to allow you to make full or partial payments to your creditors over a specified period of time. Under Chapter 13, you generally get to keep control of your assets, but your credit score will take a considerable hit.

Surprisingly, you might be able to qualify for a home mortgage in as few as 12 months after filing (not discharging) Chapter 13 bankruptcy. Surprise! It is possible to still buy a home while in the midst of a bankruptcy. The key will be to keep your payment habits and general credit history squeaky clean during that time, and the bankruptcy court will have to agree and approve.

Waiting periods for different programs when you’ve had Chapter 13

The general waiting periods for various types of mortgage qualification following Chapter 13 are as follows:

  • FHA: 1 year after filing
  • VA and USDA: 2 years after filing
  • Conventional (Fannie Mae & Freddie Mac): 2 years after discharge, or 4 years after dismissal

Chapter 7 – when you liquidate

Chapter 7 personal bankruptcy is the more serious of the two, and generally involves selling most of what you own to pay creditors what you can, but then you start “fresh” and debt-free, albeit with a severely banged up credit history for several years afterward. Since Chapter 7 liquidation this is the more onerous of the bankruptcy types, you can expect a longer and more difficult road back to home ownership after pulling the trigger on this one.

Waiting periods for different programs when you’ve had Chapter 7

Waiting periods for various loan programs following Chapter 7 are typically:

  • FHA & VA: 2 years after discharge (not filing) of Chapter 7
  • USDA: 3 years after discharge
  • Conventional (FNMA & FMHC): 4 years after discharge

Hitting your financial reset button

If you have ever endured (or are contemplating) foreclosure, personal bankruptcy, or perhaps the agony of both simultaneously, you may think that home ownership is never to be part of your financial picture again. Fortunately, there is more than one path back to home ownership, and the key is returning to some basic financial good habits, such as regularly saving for a rainy day and avoiding credit card debt.

Rebuilding a healthy credit score and keeping it healthy will also be critical. Although it can seem like a penalty, there is one good thing about waiting periods for mortgage programs following a foreclosure or bankruptcy – the wait time is an excellent opportunity to focus on repairing and restoring our good financial habits while saving up for a down payment, so we can enjoy a fresh start in a new home.

What You Need To Know Before Listing Your Home For Sale

August 10, 2018

Choosing when to buy or sell a home is one of those crucial financial planning decisions that will have a lasting impact on your journey to financial independence. For many Americans, home equity remains the single largest asset on the personal net worth statement.

While it’s important to never try to time the stock market, it’s just as difficult to time the housing market. The millions of homeowners who purchased real estate prior to the housing bubble provide evidence of the inherent challenges of predicting future housing prices and economic conditions.  Regardless of your current level of confidence in the housing market, there are many reasons that may prompt your desire to sell a home or investment property.

Whether you are relocating for work, moving to a more desirable neighborhood, making room for a growing family, or downsizing you need to take steps to make sure that your house is ready to sell. The peak season for selling a home in most housing markets across the country is typically during the spring. However, there are some strategies that you can put into action to help sell your home regardless of the season or current economic conditions that are out of your control.

Here are some tips and suggestions to help you get ready to sell your home or investment property:

Research your local housing market

If you have lived in your current home for at least a couple of years, you most likely have a general idea of housing prices in your neighborhood and local economic conditions. It is still a good idea to do some additional homework and research housing activity in your area. One place to find local and regional housing statistics is through the National Association of REALTORS® on REALTOR.org.

Find out how many houses are currently on the market in your area and the average number of days they have been listed. It’s also helpful to look at comparable homes in your neighborhood to get a general idea of what the competition looks like. A comparable or “comp” home has similar features and is usually located within a close proximity to your home.

Examining the number of bedrooms, bathrooms, lot size, and other features are important when seeking out comparable properties. If you really want to go the extra mile in reviewing comparable properties, visit open houses and search real estate websites that publish on the Multiple Listing Service (MLS).

Set a reasonable asking price

Pricing your home correctly from the start is extremely important. Avoid making emotional decisions or anchoring your listing price to the home’s previous value.

If you live in a “hot” market, there are more buyers than sellers and prices are likely being driven up by that demand. You can often price your house more aggressively as long as you stick within reasonable price limits. In a “cold” market, buyers tend to be more selective and pricing usually needs to be at or slightly below market value to attract an offer.

Interview real estate professionals and other potential team members

Do your homework if you decide to utilize the service of a real estate agent. It is suggested to interview 2-3 potential realtors to make sure you are choosing the best professional possible. You can use this guide to help you find the right questions to ask when talking with a real estate agent.

Other potential members of your professional team include a closing attorney, home inspector, photographer, landscaper, handyman, painter, and home stager. If you decide to go the DIY route, be sure to understand state laws regarding the sale of real estate. Some states require sellers to provide disclosure forms that obligate you to report any known facts about the property’s condition that may impact the value or the desirability to purchase the home.

Improve your home’s curb appeal

When it comes to buying a home, first impressions have a significant impact. While significant landscaping updates aren’t likely to play a major factor in a buyer’s decision making process, it does help to avoid anything that could detract from that positive first impression.

Get rid of the clutter

This step includes removing personalized photos, memorabilia, and other knickknacks. It often helps to get an independent, objective assessment of what should stay and what should go during the staging process. Major renovations aren’t usually necessary, but a fresh coat of paint and minor repairs can leave a potential buyer with a good first impression. It’s also helpful to have different pictures and furniture layouts available to provide buyers with a vision of how various spaces could be used in different ways to meet their lifestyle needs and desires.

Give your home as much social media exposure as possible

Realtor.com, Trulia, and Zillow are a few examples of real estate websites that expose your home to potential buyers. You may also find success in getting the word out about your desire to sell via social media sites. Many realtors use YouTube videos, Pinterest groups, and blogs to obtain potential buyer lists and market their services. Facebook is another potential site to help get the word out that you are in the process of selling.

Estimate the potential profit (or loss)

Before you ever get to the point of reviewing a purchase offer, you should already evaluate potential gains or losses within your acceptable price range. The selling price will be reduced by the following items:

  • Real estate sales commissions
  • Fees paid at closing
  • Title charges
  • Government recording and transfer charges
  • Any additional settlement charges
  • Debt obligations related to paying off any existing mortgages
  • Home repairs included in the sales contract or repair work completed prior to putting your house on the market
  • Preparation work to get your house ready for the market such as landscaping, painting, etc.

Understand current tax laws

Selling a home is a taxable event. The good news is that the IRS provides tax breaks for homeowners. The main requirement is that you generally must have used the house as your primary residence for 2 out of the previous 5 years. The current capital gains exclusion amount is $250,000 for single taxpayers and $500,000 for married couples that file jointly.

Capital gains are based on your home’s selling price after subtracting any deductible closing costs, selling costs, and your tax basis in the property. Your cost basis on a primary residence is the original purchase price plus any related purchase expenses. Then you can also add in the cost of capital improvements and subtract any depreciation and casualty losses or insurance payments. HomeGain provides a capital gains calculator to help calculate your profits. IRS Publication 551 provides additional information on determining the cost basis of assets.

Whether you are absolutely planning to sell your home within the next year or simply reviewing your options, it is important to have an exit strategy. Your home may be the location for countless memories (both good and bad). However, avoid letting emotions drive your selling decisions and incorporate some strategies into your financial plan that will help you get your house sold on your terms with confidence.

 

A version of this post was originally published on Forbes.

When Does A Reverse Mortgage Make Sense?

August 03, 2018

I was having lunch with a friend recently and he raised a question about reverse mortgages. His parents have been receiving mailers advertising the benefits of a reverse mortgage and he wanted to know if it was something they should explore. When this type of product was initially launched, they were considered to be a bad deal. But newer regulations have changed that, so it’s actually a viable consideration in certain instances. Here’s what I told him.

A reverse mortgage is a type of home equity loan that allows homeowners that are 62 or older to use a portion of their home equity to supplement their income and improve their cash flow each month by eliminating their mortgage payment. Here’s how they work.

The basics

  • The bank will make payments to the home-owner (or extend a line of credit) based on a percentage of equity the borrower has in their home. If you still owe on your traditional mortgage, that is paid off with the reverse mortgage, so the monthly mortgage payment ends.
  • You must be at least 62 years old to qualify, and your home must be used as your primary residence.
  • You should either have the home paid off entirely or only a small mortgage remaining.
  • The loan is payable when you:
    • Pass away,
    • Sell the home, or
    • Permanently move out (aka it is no your longer primary residence for more than 12 months)
  • Funds can be used for any purpose – common uses are to supplement income, pay for health care expenses, pay off debt, or pay for home maintenance/improvement projects.
  • You can never owe more than the value of your home, no matter how much you borrow.
  • You are required to participate in mandatory counseling from a third party to explore your options before committing to a reverse mortgage.

How much can you borrow?

The amount you can borrow through a reverse mortgage depends on several factors, including:

  • Your age (will be based on the age of younger spouse if you’re married).
    • Generally, the older you are, the more you can borrow.
  • The value of your home.
    • Limited to the lesser of the appraised value or $636,150.
  • Interest rate.

What does it cost? (aka what are the cons)

This is a critical issue to be aware of if you are considering a reverse mortgage. It is common to see higher closing costs (origination fees, upfront mortgage insurance and appraisal fees) and the interest rate is generally higher than with a traditional mortgage.

Also, you remain responsible for property taxes, insurance, and maintenance costs. And, if you want the home to stay in the family after you’re gone, a reverse mortgage can make that more difficult as the loan needs to be paid at your passing – that may mean the home needs to be sold if no other funds are available.

Does it make sense for you?

A reverse mortgage can be an effective retirement planning tool if you:

  • Don’t plan to move.
  • Can afford to pay property taxes, insurance and the costs of maintaining the home otherwise.
  • Want to improve cash flow or supplement income to pay off debt or pay for other expenses.

On the flip side, a reverse mortgage may not make sense if you:

  • Plan to move or want to keep the home in the family (and your estate would have no other means to pay off the reverse mortgage).
  • Can’t afford the costs of home maintenance, even without a mortgage payment.
  • Don’t have cash available to pay the costs to take out a reverse mortgage.

Final thoughts

In talking to my friend, it turns out a reverse mortgage was not the right fit for his parents and their situation. But, it is good to keep all options open and know what resources you have available to generate income in retirement.

It is a good idea to explore other sources of income before looking at a reverse mortgage. Spend down your retirement savings and try to reduce your expenses first. If you still have a shortfall, a reverse mortgage may make sense for you.

 

How Does Mortgage Escrow Work And Is It Worth It?

July 30, 2018

As interest rates creep back toward historical norms, you may want to take some time to determine if you have the best possible mortgage for the long-run. When I refinanced my home several years ago, one move saved me thousands of dollars at closing and continues to save me money. That move was making sure I had enough equity in my refinance to forgo my need for an escrow account.

What is a mortgage escrow?

An escrow account, in the case of a mortgage, functions as a middleman between a homeowner, tax entities, insurance companies, and anyone else whom the homeowner designates to pay with the funds saved in it. It is typically a mandatory savings account attached to the larger mortgage payment. Mortgage escrow services are popular with mortgage lenders because they prevent foreclosures due to the lack of payment of property taxes.

Why did I want to leave the escrow account in the past?

Here are some downsides to having an escrow:

  • When purchasing a home, the up-front funding for the escrow account can add several thousands to the closing costs.
  • The escrow generally must maintain a minimum balance, and if taxes and fees come in higher than estimated, your escrow payment may grow to replace that minimum balance, which means your mortgage payment will fluctuate.
  • Some escrow accounts do not earn the account holder any interest. If you have a substantial amount to pay in property taxes, imagine an account holding thousands of dollars and earning no interest.

Escrow accounts can create the ‘credit card effect’

When I completed my refinance, I set up my home’s property and casualty insurance on auto-payment. I also started a monthly deposit to a savings account to cover property taxes. Coming face-to-face with these actual costs had me taking the extra step of shopping for less expensive insurance coverage and appealing my tax assessment. Both of these efforts yielded us substantial savings.

For me, the escrow account acted as a buffer to my being totally aware of the overall cost of housing. Like using a credit card can encourage over-spending when we’re less likely to overspend when we pay cash, using the escrow account made me much less aware of exactly how much I was paying for insurance and taxes. The escrow was not at fault for me paying more than I needed to, that was my responsibility, but not having the escrow brought me face to face with the reality of what I was spending on insurance and taxes.

Escrows are not all bad

There are good reasons to maintain an escrow:

  • If you’re not great at saving for big expenses, it can save you from yourself – rather than making individual arrangements to separately save for property taxes and insurance, these expenses are included in one payment.
  • You may get a slight reduction in your mortgage rate for maintaining an escrow account. The lender benefits by having an escrow in place for taxes and insurance because it protects against the risk of the collateral for their loan (your home) being auctioned off by the county if those expenses are not paid. (it’s also worth mentioning that they probably make some money in interest from the money that accumulates in your account as well)
  • It also reduces the uncertainty of the property not being insured against catastrophe if you miss a payment.

So should you try to get away from using an escrow account?

It depends on your situation. If you are not refinancing your home, once you pay your home down below 80% loan-to-value, you may be able to request removal of the escrow account, but some lenders may charge a fee to do so.

Keep in mind that the escrow is not in place to protect the lender only. If you choose not to escrow, you will need to be very confident in your ability to save for the property taxes separately. You may also want to consider having the insurance premiums auto-debited so you don’t forget. You may be able to save money on insurance by paying it as a lump sum, so saving for the annual payment and then paying it can offer some savings as well.

If you are in a situation where you have more than 20% equity in your home and you are confident you can maintain the discipline of paying your insurance and your taxes then leaving the escrow behind can save you a lot in the long-run.

 

The Pros and Cons Of Paying PMI

July 18, 2018

When I first graduated from college, my plan was to rent for one year and then purchase my own home. When I look back at my financial situation at the time, I didn’t fall into the perfect financial scenario of home ownership: I didn’t have a 20% down payment saved that would have helped me avoid having to pay Private Mortgage Insurance (PMI), and I was still establishing a credit history, so my credit score wasn’t very high. I still purchased the home.

I’ve found that there are many others in that same boat. For various reasons, they don’t have 20% saved and/or their credit score isn’t what they would consider stellar, but they aren’t interested in renting for very long and still want to achieve their dream of home ownership sooner than later.

This is where PMI often comes in to play. PMI is there to protect the lender in case you default on your mortgage — what it means to you is that your mortgage payment will basically be higher than it would be without PMI. Having a higher credit score, and at least some form of a down payment (like 10% down) could make your PMI less expensive.

Should you wait to buy a home until you can avoid PMI? Some people prefer to do so, but others go ahead and buy the home. Here are the pros and cons.

Pros of PMI

1) Allows you to buy without using up all your savings. We all start off in different financial places. You may not have an inheritance, a large salary, a parent or family member to get a down payment from, or you may just not have the flexibility in your budget to save 20% of a home’s purchase price without compromising other savings needs, etc. It could take some people years to build enough to put 20% down on a home and in the meantime, that person might have to rent when they prefer not to. PMI can help you get there sooner.

2) Opportunity to build wealth sooner. Real estate values can fluctuate, but long-term, odds are that you will see the value of the home you purchase increase over the years. Eventually you may be able to tap into that equity by selling or obtaining a line of credit to accomplish another goal, etc.

3) You still keep control of your budget. There’s a tradeoff. Some people look at PMI as simply a cost to build wealth. If this is you, you might look at it as just another line item on your budget sheet. Make sure you factor PMI when determining whether your total mortgage payment fits within your housing budget.

4) You may be able to deduct the cost on your taxes. Congress still allows mortgage insurance premiums to be deductible as mortgage interest on your taxes. Be sure to stay abreast if tax laws eliminate or reduce your ability to claim this deduction, but for now, this falls in the ‘pro’ bucket.

Cons of PMI

1) Forego opportunity to save/invest that money instead. Let’s say your PMI is an extra $100 per month — you could take that extra payment and invest it instead over the long-term, which would help you to accumulate quite a bit in savings. This is very true, but is that what you would do with the extra hundred bucks?

2) Increases your monthly payment. To offset the cost of PMI, you could decrease spending in another area. You might spend less on a depreciating asset like a car, or cut back on how much you spend eating out or on your cable bill.

3) PMI can last for many years to come. PMI will be there until you reach 78 – 80% of the loan-to-value of your home (20% equity), or refinance (if the cost to do so isn’t higher than the cost to keep PMI) depending on the terms of your loan. As you make payments while the value of your home increases, you may find yourself getting closer to having that 20% equity sooner than you thought you would.

Keep in mind that the 20% equity is based on the home’s original appraised value when it comes to determining whether you have reached that 78 – 80% mark, so in order to take advantage of any increase in value since you purchased, you’d have to refinance to rid yourself of PMI sooner.

Also, as your financial situation gets more flexible, you might be in a position to add extra payments or a lump sum to your mortgage to help you get rid of PMI.

The bottom line

If you can save enough to get 20% down, that will save you on your monthly payment and you can put the money you would have spent on PMI towards another goal.

But if home ownership is important to you right now, and being in a position to avoid PMI doesn’t work for your situation, don’t be discouraged. Consider your budget and the pros and cons, so you can make an informed decision. It was worth it to me.

Check to see if you qualify for a First Time Home Buyer Down Payment Assistance Program that offers financial support that can be used towards the down payment and closing costs. Some plans count those funds towards that 20% requirement. You may also want to look into other programs, like NACA, which don’t require a down payment, closing costs or PMI in order to purchase a home.