Selecting the Right Investment Property

reversemortgage

I’ve brought up real estate a number of times. It is a great tax saving tool, appreciating asset and source of income. I’ve also brought up the role that real estate plays in my life, whether it’s through me getting a good deal on my primary residence, helping clients with their real estate transactions or being on a quest to find a good rental property that will increase my household income without requiring too much more of my time. However, knowing that real estate is a wealth building tool is only the first step. To be successful, you must know how and when to select the best property to maximize your dollars. I will give you some of my tips for choosing the best investment properties. It doesn’t mean that’s all you’ll have to do. Buying real estate is an important step. But these are going to be some of the most basic things to consider to avoid what could certainly be a disastrous choice.

Location – Location for the house you’ll rent out is not going to mean the same as location for the house you intend to rent out for income. You need to determine what will work for most people because it’s a numbers game. You don’t want to reduce your pool of potential tenants because your location is too restrictive. Buy in an area that is convenient to accessing the biggest city or town in your area. Whether it’s quick highway access, availability of public transportation or a walkable neighborhood, you need to make sure that your tenants can go to work and get their errands done with ease. Safety also makes a difference. A questionable tenant who is up to no good himself or a police officer might not mind a bad part of town, but young professionals, particularly women, and young family will cross you off the list.

Size – You want to pay attention to what is renting in the general area. You also want to be careful with the price. Personally I think 2-3 bedrooms are best. Those sizes make it easy for a wide variety of tenants to afford the rent: young working roommates who want to split a 2 bedroom, a couple with no children who want a guest room and/or office space. A young family who might want to rent a 3-bedroom. If you go with a 1-bed or a studio, you may inadvertently reduce your pool because you’re pricing people out of the apartment. For example, a 1-bed in the most affordable part of Boston can cost $1,500. However, a 2-bed will run between $1,800-2,000. A pair of roommates can split the 2-bed and pay $900-1,000 each, $500 less than each would in a 2-bed. Once you start going any larger than that, you run the risk of not having a large pool of tenants because most people who need to live in a 4-bed are usually looking to buy by the time they get to that point. At least in my area, that’s how it is. Large rental homes (4-beds+) usually perform better in the parts of town that are walking distance to a university. Anything of that size further away will struggle.

Price – Being a landlord is a business. Your goal is to maximize profits. While you set your rent price, the most realistic rent is mostly dictated by the market. That means, you can only ever charge so much. The only other way of increasing your margin is by controlling your expenses. You need to make sure you are at least breaking even on your monthly expenses (including variable and estimated incidentals) with the lowest possible rent in the area. Don’t let your mortgage be equal to or greater than average rent, let alone more with the expectation that you’ll get top of the market rent; because, if that doesn’t happen, you could be in serious trouble.

Maintenance Needs – Know what you will need to meet your city or town’s habitability standards and to provide adequate service to your tenants. Some properties are cheap for a reason. If you save $15k but it will cost $25k to make it an adequate residence, the property might not be such a good deal.

Quality – One of the worst things you can do is price yourself out of the rental market. The way to make that mistake would be to either buy the best house in the worst neighborhood, or to spend an great deal of money turning a property into the best house in a bad neighborhood. Your potential for rent will be limited although you need a certain amount of money to recoup your costs. The quality of the property should be reflective of quality of the neighborhood.

Advertisements

Home-buying Guide

 

first-time-home-buyers-north-shore-real-estate-212702

Buying a house is a significant financial and emotional investment. It takes maturity, both financial and mental. Unlike renting, you can’t escape an undesirable property with 30-60 days notice if you are dissatisfied. Here are some tips to make sure that you are prepared for a commitment of that magnitude.

Here are 5 tips to prepare you to go house-hunting:

Get your finances in order

Get a full picture of your credit by obtaining your credit report and fix any problems you find. Next, find a suitable lender and get pre-approved for a loan. This will put you in a better position to make a serious offer when you do find the right house. Many sellers will not even entertain offers from buyers who are not pre-approved.

Find a house you can afford

Other than your lender’s pre-approval, there are a number of online tools and calculators that can help you understand what you can afford. However, don’t forget, too, that there other considerations beyond the price, including property taxes, energy costs, and your daily expenses.

Hire a professional

Recruit a buyer’s agent, who will have your interests at heart (as required by law) and can help you with strategies during the bidding process.

Do your homework

Before making a bid, do some research. Come up with an asking price that’s competitive, and realistic. You don’t want to kill off negotiations with a low-ball offer anymore than you want to over-pay for a property that is not worth it.

Think long term

While you shouldn’t buy with the expectation that you will sell soon, you should also want to be in an area where you can maintain if not increase your property values. One of the ways you can accomplish that is by buying in a neighborhood with good schools and other desirable amenities.

Applying for a Mortgage: The 5 Cs

20150622231001-for-sale-real-estate-home-house

I talk a lot about real estate, but we all know real estate is expensive. There are few, if any, of us with the capabilities of buying real property with cash. Even some of the people who are in a position to do it, choose to leverage their net worth and maximize their purchasing power using borrowings. In a consumer-driven society, lending is king and that is why something as minor as a 25 basis point shift in interest rates is a news headline and a stock market mover. We hear about rates, banks and borrowers. Everyone talks about how you have to have a good credit score and some type of down payment. However the discussion usually does not expand beyond these points.

I have put a little guide together that might give you a better understanding of why they request the documents they do. But most importantly, it helps you prepare your finances so you present yourself as the type of borrower they wish to lend to.

Credit: The first thing the lender will do is look at your credit history to determine if you are “credit worthy”. In the simplest of terms, they will look at your credit score and history. These 2 things will tell them whether or not you pay your bills on time, every time. This will help them decide if they even want to move forward without or if the risk is too great that you will turn out to be a problem borrower and will default, leaving them holding the bag.

Capacity: This evaluates your ability to take on any additional debt and pay on time. This is what they mean by “debt-to-income ratio”. You may be very good at paying all your bills, but if you are breaking even every month, you are likely not able to continue meeting all your financial obligations should you take on more debt.

Collateral: Also known as “protection”, collateral is something that you own but a lender puts a claim on it, as a way of protecting their investment. The law allows them to take possession of that asset to offset any loss from you not paying your debt. In real estate, the asset used as collateral is the very property you’re buying. In rare cases where the loan is more than what the purchased property is worth, you can use another property as a second piece of collateral.

Capital: That is usually liquid assets that you may have. Primarily they want to see that you have the ability to give a down payment or at the very least pay your closing costs. If the purpose is to get an investment property, they want to see a few months worth of reserves should you have vacancies. It’s also a way to evaluate whether or not you have other sources to tap and make payments if you were to ever lose your job.

Condition: This is the purpose of the loan. Some loans are higher risk than others depending on their purpose. Not all real estate loans are created equal. A loan for a residential building will have a better interest rate than a loan for a strip mall because of the risk involved. A used car loan will also be more expensive than a new car loan. Whether it’s an equity line or a purchase or refinance will also matter.

I hope this will give you a better understanding and some of the information you need to prepare for a successful mortgage application.

Surprise Expenses: When the first bill isn’t your mortgage

reversemortgage

 

Congratulations on your first home! You did everything right. At least you think you did. You hired a real estate agent to ensure you got professional advice, you included a home inspection contingency, you hired a closing attorney to ensure you got clear title, and you got your parents opinion to confirm that you were making a good decision. Nothing could go wrong, correct? What about all the things that a home inspection doesn’t check for, or the kind of things that the seller is not required to tell you unless you ask, or even if you do ask? There are plenty of nasty little surprises you may not be ready for.

Here are some I have found through my personal experiences or the experiences of those in my circles.

  1. Traffic: Most open houses are on Sundays and most people who buy houses have jobs and aren’t available to go see houses during rush hour because they’re busy getting to work. This means that by the time you get to see house, everything is quiet and the roads are cleared so you don’t realize how busy your new street could be.
  2. Undesirable developments: Your seller will never be upfront about why they’re moving unless it’s for a positive/neutral reason like job, or downsizing because the kids are grown. Things like “a developer has been granted a permit to build a 300-unit complex.”
  3. Bad neighbors: Unless there is a formal legal complaint or action taken, the seller is not required to tell you their neighbor is a nightmare nor are they required to tell you that everyone in the association never agrees on anything so all decisions that require a simple majority always end in a tie.
  4. Parking: If you live in the south this might make no sense to you. But if you’re from the northeast like I am, particularly from New England and you have to contend, not only with space being a premium but also with massive amounts of snow, you understand that parking is not a joke. When you get that blizzard condition warning from The Weather Channel, you understand that it is not a drill. So when you move and you find out that parking is not what you thought it was, it could lead to a real nightmare situation. For example, I have a condo with 2 deed parking spots and what I understood was a certain amount of guest parking on a 1st come first serve basis. Turns out that the guest parking is only available when there is no snow because that’s where the plow truck maneuvers. So if it snows, no guests. Or at least no guests with cars.
  5. Home Owner Association Assessments: While the seller is required to tell you about any upcoming assessments, they are not required to tell you about anything that hasn’t been voted on or decided yet. So if a lack of agreement among the owners has managed to delay the decision to pay for major repairs and they’ve continuously kicked the can down the road, you might find yourself with a nasty surprise after you move in. In my case, 13 months after I moved in, I paid $2,000 in cash and faced a $50/month increase in dues, after a vote in favor of replacing some porches passed 3 months prior. Turns out that the owners had been talking about it for 10 years and since there are an even number of units, the vote was continuously tied and they never agreed to do the work. A few people who were against it moved out, shifting the vote just in time for me to be on the hook without sufficient warning.
  6. Upcoming Tax Hikes: Those are even worse. No one even asks and if they do, at least in my state, the seller is not required to tell you because you can do your own research. While the real estate agent will gladly advertise the new state of the art school the town is building, s/he will conveniently leave out how they’re going to pay for it. You might be facing a 2%+ override by your next tax bill with little warning.
  7. Noise: Are you near an ambulance dispatch center or the busiest fire station in the city? It may not be as active on a Sunday morning but on Saturday evenings when people are getting alcohol poisoning or setting their houses on fire deep-frying whole turkeys, you might be facing more disturbance than you bargained for.

Do you have personal stories of unanticipated sources of stress that came up shortly after a new home purchase?

VA Loans

I was reading an article not too long ago that said that the use of VA loans was in decline. Not because eligible veterans aren’t buying homes, but because their lenders and real estate agents are steering them away from VA products.

The VA loan, while it may not be necessary for everyone, as great advantages and I encourage anyone who is eligible to at least consider it. One of the biggest and financially tangible advantage of the VA Loan is the elimination of PMI. I don’t advocate for anyone to buy a house with 0% down because if you have no money for a down payment, you are clearly not ready for the financial commitment of a house. However, PMI is only eliminated after 20% down or more. So a family that has worked diligently to save 10-15% of the purchase price of a house shouldn’t be stuck with PMI payments because they weren’t fortunate enough to have $60,000 and “only” have $30,000. Some other advantages (or disadvantages depending on which side of the transaction you’re on) include their stringent inspection and appraisal standards.

For example when we bought our house using a VA loan, they required a termite inspection, at the sellers’ expense, and the inspection report had to be accompanied by a receipt in the seller’s name to show that we did not pay for it. In addition to the inspection, the appraisal was strict and very conservative (in my opinion). While that has the ability to tank your mortgage application if it doesn’t work in your favor, it is a boost of confidence in your decision when it does work out well.

Some of the service members interviewed for the news piece said they didn’t even know about the VA loan, which to me is mind boggling because when you sacrifice so much to serve your country, you should be aware of every possible benefit that you are entitled to.

You risked life and limb to earn every benefit out there. While you don’t have to use it, you should at least know your options. Read about the VA loan here and see if it could be right for you.

Gentrification: If You can’t Beat ’em, Join ’em

As a woman of color who grew up in an unmistakable “hood” in Boston (one of the fast-becoming least affordable cities in this country), friends and family who live in the inner city are part of my circle of friends. As developers big and small start noticing under valued neighborhood due to rising costs and decreasing space in the more desirable parts of town, the vilification of gentrifyers on my Facebook timeline is becoming a weekly occurrence.

My friends and I who grew up in the types of neighborhoods people in college made fun of us for being from (“do you have a bulletproof vest? Haha”) are now watching bike-riding, latte-drinking, kale chips-eating, Lulu Lemon-wearing hipsters shun long commutes, downsize and seek culture in some of the few the places our moderate-income families could afford decades ago. In fact, what makes it more comical is knowing the history of Boston. It becomes laughable when we see these people flocking back to pay $650-700k for a 3-bedroom walk-up condo in the same area their parents fought so hard to get away from after schools were integrated. Many times, on their way out, families would sell at a loss just to get rid of a property in an “undesirable” area as soon as the demographic change became obvious. Today, these same children, who needed protection or a “better” environment, are back and paying $2,000 a month in rent for a 2-bedroom 1-bath on the same block. We are looking at white flight all over again. Except, this time, the flight is coming from the opposite direction.

On the surface it would make sense why people would be upset. Taxes are going up, your landlord is raising the rent and the local businesses are becoming less affordable as aging community pillars, who can’t convince their children to take over, are forced to sell to a new comer who opens a concept snack bar that only sells $10 smoothies and $5 avocado toast. But if we think about it critically we have to agree to share some of the blame.

I understand the reality of economic disparity and the ever increasing gap it creates. I know that poverty is a difficult cycle to break, as it requires more than hard work, because it is not simply a by-product of laziness. In an inherently biased system designed to favor the rich, malign the underprivileged and support segregation in all forms, the less fortunate must be multi-talented to succeed. They have to remain stoic in the face of discrimination and underestimation. They have to face people who think less of them on a regular basis and leave each interaction with their self-esteem intact. They have to learn to do things to get them ahead in life on their own, that they couldn’t learn from their parents (managing personal finances, learning to invest, navigating the tax laws to their advantage). I get it. I’ve been there. But there are enough ‘hood success stories to demonstrate that it is not entirely impossible to achieve greatness in the face of adversity. So I have a question. Not for those who struggle still and haven’t been able to do better, but for those who have. I guess my question to all you now successful former hood dwellers: why didn’t YOU revitalize your neighborhood?

I am guilty of the same thing you are. As soon as I had enough for 20% down I moved. Not just from the neighborhood. I left the city altogether for another city in the same metro area. I couldn’t get far away enough from my old neighborhood. The parking situation during snow emergencies was a nightmare. The cat-calling as I walked home from the train station was constant. It was a food desert and I had to drive 10-15 minutes to the nearest reasonable grocery store (compared my current town, where I have 3 grocery stores, including a Whole Foods, within 15 minutes of my house). Crime of all kinds and severity was rampant. There were no dating prospects. What did I do to improve the neighborhood? The same thing the rest of you did: nothing. I took my money, my tax base and my upwardly mobile status to another area that contributed nothing to my upbringing.

You were in the neighborhood before the hipsters arrived. You had the advantage of being a local guy/gal done good and having their trust, but you didn’t buy there. You declined the offer to take over grandma’s house, because it’s in the stigmatized part of town, and are dismayed when auntie sells it to a nerdy looking fast-talker in a cheap suit who renovates and sells for triple the price.

Gentrification is not overnight. It is slow moving and takes time. Did you pay attention to who is moving in, both in terms of residents and businesses? Did you watch how many homes are being converted? If you did, it wouldn’t have taken long to realize you were sitting on a gold mine. And while you may not have the same opportunities as Mr. Developper to buy out the whole block one home at a time, you could have held on to what you already had. You could have been a landlord to at least one of those kids whose parents thought they were too good to go to school with you. But you left. In part because you actually began to believe that doing well meant you too were becoming to good for the ‘hood.

I did too. So what gives me the right to get on a soap box? I’m buying back. I’m looking for my investment opportunities in the neighborhoods that are well on their way to being gentrified but not quite done. My search is taking me on the block of over-priced gleaming condos where people with messenger bags walk home from the train station after work, head buried in iPhones posting “#urbanarchitecture” on Instagram. But I’m hunting for the ones that haven’t been renovated yet and will be giving my business only to the locals. I’m formulating my plan, you should too. The suburbs aren’t dying but people don’t get married at 21 anymore, and they need a place to live until they get married and can no longer avoid yard work. There is time.

If you’re mad about gentrification, here’s some advice: buy back or shut up.