4 Questions to Ask Before Buying a Rental Property

This quick review can help you figure out if you've got what it takes and, if not, how you can get it.

If you’re obsessed with HGTV, remodeling and regularly use phrases like “reclaimed wood” and “farmhouse feel,” you’ve probably kicked around the idea of buying investment property. The popular TV niche has given birth to a group of people who are motivated to improve their incomes with do-it-yourself projects and tenants in tow.

While it may seem simple and fulfilling on the small screen, buying rental property carries the same risks as purchasing your primary home. The following questions are some you’ll want to answer as you consider possible investment strategies.

1. What Are Your Financial Goals?

Are you hoping to earn extra monthly income, or do you view rental property as an attractive long-term investment? Being clear about your expectations is crucial to nailing down whether investment property is a wise choice. According to Mark Ferguson, Realtor, real estate investor and voice of InvestFourMore.com, many buyers fail to think beyond square footage.

“The biggest mistakes I see are investing in a property that loses money while hoping for appreciation, paying all cash for properties when you don’t have to and trying to manage (properties) yourself without skills or time,” Ferguson said.

It’s a good idea to make a list of short- and long-term goals as well as deal-breakers for any investment you choose. Creating rules will help you stay focused.

2. Can You Afford Extra Expenses?

Maintaining rental property takes work and extra cash, and while it’s tempting to focus on the best-case scenario, you shouldn’t discount the hefty expense of rental property taxes, association dues, management, maintenance and repairs. It’s possible to cut expenses by taking on a few handy projects yourself, but it won’t eclipse the costs entirely.

It’s wise to build a reserve fund in anticipation of your property’s needs according to Scott Trench, real estate broker and vice president of operations at BiggerPockets.com. “If you have $10,000, or even $20,000-plus in a bank account set aside for reserves, you can buy your way out of many problems associated with small rental properties,” Trench said.

With that in mind, you may want to consider building an emergency fund for your business investments in addition to your personal savings account. Separating your expenses is necessary for tax purposes, and you’ll need two accounts to maintain personal and professional independence.

3. Which Real Estate Market Is Right For You?

Although analysts predict a healthy rental market in 2017, value is still subjective, and you might consider looking outside your ZIP code to see if there are better buying options elsewhere.

“Certain metropolitan areas are most attractive to the country’s largest population groups—millennials and boomers — and are growing much faster than others,” said Alex Cohen, commercial specialist for CORE, a real estate brokerage firm based in New York City.

“Some of these markets have relatively low land and housing construction costs like Dallas and Houston. But other markets, particularly on the coasts, have much higher land and construction costs, which means less housing will be built in these metros,” Cohen said. “The flip side of this phenomenon is that in these housing-supply-constrained markets, values of homes and rents are likely to rise faster than in the rest of the country.”

While some experts suggest buying in up-and-coming locations, others swear that a good deal can lead to better returns and the ability to expand. “My 16 rentals have increased my net worth by over $1 million dollars through appreciation and buying cheap to begin with,” Ferguson said.

It’s a good idea to research all your options — from foreclosures to new construction — to determine which property could produce the best income and overall bang for your buck. Don’t be afraid to venture beyond your own backyard.

4. Are Your Finances & Credit In Good Shape?

If you are a homeowner, you may feel like a pro when it comes to applying for a mortgage, closing the deal and upgrading your property. While you may have some valuable experience, buying investment property comes with its own set of rules. Unlike purchasing your primary home, most rental mortgages require a larger down payment with a few exceptions.

“The way to minimize the additional costs — particularly higher down payment requirements of an investment property — is to take out an FHA loan, for which a down payment of as low as 3.5% of the purchase price may be possible,” Cohen said. “FHA loans are available to investors in properties with up to four units, as long as the borrower’s primary residence will be one of the apartment units.”

Not familiar with the Federal Housing Administration? You can find our full explainer on FHA loans here.

If you don’t plan to live in the rental property, you’ll need to secure a standard mortgage loan with a host of federal requirements that include financial reserves based on property value and the number of rentals you own, assets required to close and creditworthiness.

The latter requirement is perhaps the most important factor in securing an affordable investment. A high score will help you find the best interest rates and save money long before you decide to buy a rental home. It’s a good idea to order free copies of your TransUnion, Experian and Equifax reports from AnnualCreditReport.com to review your information. Highlight any negative items or errors that may be affecting your scores and consult with an expert about the best way to take action. You can also view two of your credit scores for free, updated every 14 days, on Credit.com.

Remember, whether you’re hitting up the housing market to invest or find your dream home, there are plenty of things you’ll want to do to get ready ahead of your search. Fortunately, we got a 50-step checklist for house hunters right here.

Image: lmgorthand

 

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4 Things Homebuyers Worried About a Housing Bubble Should Consider

housing-bubble

It’s 2016, and home prices are rising near the levels of the housing market just before the crash. Many are asking — and wondering — if we are in some kind of housing bubble. But are we? Here are a few things to consider if you’re worried about another housing bubble.

1. The Overall Economy

Unemployment is low, wage growth is strong and the tech sector is hiring in droves. The Federal Reserve raised interest rates last December, and they’re likely to raise rates again in the near future as the economy continues to grow and evolve.

2. Mortgage Requirements

Despite what many will tell you, getting a mortgage can be intense. It requires full documentation, including tax returns, pay stubs, letters of explanation and thorough due diligence. As long as strong requirements remain in place to secure financing, one thing is for sure: A financial collapse, if it does happen, likely won’t spawn from abusive lending practices.

3. Housing Risks

Let’s say you’re putting off buying a home because you’re worried about another financial crisis. If that’s the case, you need to define what it is that you are most concerned about. If you’re concerned about your job and the future of your income, that should play a bigger role in whether you buy a home. If your financial house is in order, but you are still not sure about buying a home because you’re worried about the market being in a bubble, you should ask yourself, “Why am I buying a house to begin with?” If your intention is to buy a house to capitalize on some market appreciation and then quickly turn around and sell, well, then, yes, you should be concerned about not being able to recoup your investment, as real estate is a long-term hold vehicle. If, however, you are looking to purchase a home to have a roof over your head, enjoy the home, and live there for the next five to seven years, at a minimum. You may do very well for yourself. This also includes the additional tax benefit you’ll have that you wouldn’t with renting.

4. The Market Itself

Ultra-low mortgage rates have been around for the last few years, so at some point interest rates have to go up. The question is when. If you’re trying to purchase a home and you are qualified at a 3.625% 30-year fixed rate, for example, and interest rates rise to 4.375%, you may not be able to qualify for as much house.

Rising rates also means fewer mortgage loan originations, which means profitability in the secondary market diminishes. The only way to keep profitability going is to keep the engine running with new loan originations, and the only way to do that in a higher interest rate environment is with less restrictive underwriting.

Looser credit to the degree of the financial crisis is unlikely, given regulations that were introduced in its aftermath, but it may lead lenders to extend mortgages to applicants with slightly higher debt-to-income ratios on conventional loans or to show a bit more leniency to self-employed borrowers, for example. That’s the only practical way to offset rising rates while supporting the housing market.

So, should you buy a house or not? That depends on whether you are comfortable with the interest rate and the payment that you’re getting, and whether you feel that you can afford that payment for the long haul. If you can afford the payment and your estimated property hold time is for a while, you’re likely in a safe position. If you’re unsure about the future of your finances, perhaps buying a home right now is not in the cards.

Remember, too, purchasing a home requires a credit check, so it’s important to know where yours stands before starting the process. You can view two of your free credit scores, updated every 14 days, on Credit.com.

Image: Weekend Images Inc.

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5 Questions to Ask Yourself Before Purchasing an Out-of-State Investment Property

Mortgage

From time-to-time, the idea of securing an out-of-state property may appear appealing to some. Whether it’s because you’ve been priced out of your own market or the thought of diversifying your portfolio by adding rental properties to it in another state sounds glamorous, securing a home in another area might have crossed your mind.

If you live in one state and you’re considering purchasing a home in another, there are a couple things you should know before signing on the dotted line. Here are some basic questions to ask before buying a house out of your state.

1. Is the rental market viable in the other state?

A cheaper house in another market isn’t always a sign that you should jump on a purchase — it could also be a sign that the market isn’t strong in that other area, which may mean renting out a home there could become a chore. A little research goes a long way when it comes to buying a home, so look into all the pertinent factors — like job growth in the area, the rental market, whether or not the city’s population is growing, etc. — and not just price before buying.

2. Do you know everything you can about this house?

It goes without saying that before buying a house you should see it in person, but it’s also important to do your due diligence into the history of the house before buying, as well. What are the property taxes like? Are there any liens or probate issues to know about? A title search through the local count clerk’s office can help.

3. Do you have the money for an independent, detailed home inspection?


When buying out of state, and especially when dealing with a seller’s agent who you probably don’t know at all, it’s also best to plan for your own, unaffiliated home inspection to take place while you’re on the premises as well.

4. Are you willing to deal with a property management company or make frequent visits yourself?

If the property you’re interested in is far enough away, it may make sense to hire a management company to deal with the goings-on with your rental property when you can’t make it there easily to check things out yourself. This will of course be an added expense on your part, and it will be worth considering whether or not you’re willing to put your property in the hands of others. If you’re interested in going down the path of using a property management company, interview some and find out what they charge first so you can determine whether their cut of your profits will make the purchase worth it in the first place. Some property management fees can cost between 4% and 12% of the gross rent, and going with cheaper options may mean a cheaper quality of service, so you’ll really need to do your research before picking which one to go with.

5. Are you prepared to pay more for an out-of-state mortgage?

One other pitfall on the way to your dreams of out-of-state home ownership may be the added costs that come with applying for a mortgage for an out-of-state home. Since non-owner occupied homes are considered riskier and tend to have higher loan default rates, conventional lenders charge higher interest rates on mortgages and require at least a 20% down payment on investment properties. You’ll likely also be looking at higher insurance premiums as a landlord, since standard insurance doesn’t always cover tenant’s claims.

While these may seem like a lot of negatives, for some, owning a home that they rent out and potentially live in during part of the year really is a dream come true. The point is that you’ll need to do your homework and be aware of the added costs upfront before jumping in so that you don’t get blindsided. You can also check out this piece for even more information on why out-of-state investment properties can be risky endeavors before making your decision.

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