Rent It Out or Sell It? Options for a Home You No Longer Love

You might be one of the countless homeowners who’ve fallen out of love with your current home.

Maybe it’s the general area, the neighbors or the house itself.

3D red glass houseOr maybe the “dream” of homeownership has become a nightmare for some reason.

Regardless of your situation, push has come to shove, and it’s time to make a decision on where to go from here.

Your choices are to keep the house as a rental property for investment purposes or sell it and maybe buy elsewhere. Answering the questions below should help you decide which route is best for you.

Do I have the money to purchase another property if I hold this one?

When you purchase a home you need to have enough cash for a down payment and closing costs, plus funds for moving expenses and associated costs. A 20percent down payment is ideal because you’ll avoid paying private mortgage insurance (PMI). 

Therefore, take a look at your savings.

Do you see enough cash to be able to put down a hefty chunk of change on a new property? If you don’t, it’s probably best to sell your current property, and hopefully that will generate the cash needed to put down a large down payment on your new home.

Do I want to be a landlord?

Yes, all the TV shows make it look like owning property is fun and doesn’t take up too much of your time, energy and effort. Unfortunately reality TV isn’t reality rental property investing.

You do have the good fortune that your current home is probably already in good shape, so at least there won’t be a lot of money out of pocket to make it rental-ready. But you will still have to educate yourself, obtain leasing documents, advertise and show the property and screen prospective tenants.

It really can take a fair amount of time, so is that within your interest? Alternatively you could have a property management company handle it, but that would wipe out a lot of your potential wealth generation from the property.

Would this property even be a good investment?

Good real estate investments are cash-flow positive and provide a fair rate of return on the equity you hold in the property.

Will the rents less all the expenses and mortgage be positive? If the answer is no — and this is often the case — that particular property probably isn’t a good investment.

Talk to your financial adviser or accountant and ask for help penciling out your real estate deal based on the cash flows and current equity in the property. Once you figure out your current investment returns — free cash flow divided by your equity — you can compare those returns to other investments.

Maybe it’s better to invest elsewhere

If you could sell and generate a large chuck of change, like $100,000 or $300,000, you could invest that money elsewhere. Considering the risk factors for real estate, a well-diversified large capitalization stock mutual fund, with long-term returns of 7-9 percent per year probably is a better deal than owning real estate.

Note: As an added bonus on financial assets, no mutual fund has ever had a clogged toilet that flooded the house.

Those are some items to consider just to get into the landlord game. If none of those look appetizing related to your current home, sell it! Then you can decide whether to take a step back and rent for a while or try to find a new home and not repeat the home buying mistakes of your past. Good luck!

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6 Renovation Tips for New Landlords

If you’re new to investing in real estate, you’ll probably be really excited when you close escrow on your first purchase.

6 Renovation Tips for New Landlords-Professor-BaronThat’s great because real estate investing can be a very good way to improve your long-term wealth picture. However, if you are an average real estate investor — as 99 percent of us are — that excitement will turn quickly to the realization that a lot of hard work is coming to your plate, especially when it comes to renovating your new investment property.

Here are some items you should be aware of so you can better prepare for your future as a real estate mogul.

Budget money and time wisely

As your closing come close, you are probably putting together a starry-eyed list of all the improvements you’re going to make on a shoestring of a budget. Of course the repairs will also be completed in 30 days so you can rent the property out and start earning some income. Not going to happen! Once you get going and realize improvements cost much more than you thought and take longer to complete, you’ll be doing some major revisions to your estimates. Be cautious when estimating a low-priced and quick-turnaround renovation, as that rarely ends up being the case.

Expect to invest your sweat equity

To better educate yourself and minimize budget overruns, plan on spending a lot of time at the property from the day you close escrow until about one month after it is occupied by renters. Why? Because it’s a lot of hard work — getting bids, waiting for deliveries, reviewing work, doing work, shopping for supplies (and more supplies), advertising your property, reviewing rental applications. You’ll be doing it all at your new property. It may start out fun but will not end that way; however, you are in this for long-term wealth building, and that’s why you are willing to invest your time and energy in hopes of a better retirement.

Don’t take the first bid

You must get several bids to ensure that you’re getting a fair price for any contracting work. The more expensive the job, the more bids you should get. This is going to be exhausting and time consuming. However, doing your legwork can lead to better and/or less expensive bids in the long run.

Focus on paint and flooring

If the paint and flooring in your property don’t look nice — and they usually don’t — fix them! It’s going to cost some money, but hopefully you’ll get a little more rent when you make these improvements.

Paint:
Use a bright and neutral color, and paint all the walls the same color and sheen. When you have to do touch-ups down the road, it’s nice to just have one color in the property, and you can always have a can of that color on hand.

Flooring:
Your flooring options include carpet, tile, wood laminate and vinyl. Tile is best for kitchens and bathrooms due to water and moisture issues. Wood laminate is best for elsewhere due to its durability and easy cleaning. Carpet is not good for rentals as it stains easily, and every new tenant wants new carpet. Shop around: You can find some good laminate deals, and it’s relatively easy and inexpensive to install.

Check for plumbing and electrical issues

Properties that are more than 20 years old usually should have the water valves and electrical outlets replaced. So round up a few plumbers and electricians and get some bids. Do this while the property is empty. Water valves, supply line hoses, washing machine and dishwasher hoses and drains pose the biggest leak and flood risk. Change them all out. Electrical outlets and covers are not as big a risk, but usually look really bad with many coats of different color paint on them. An electrician can change out a whole house of outlets and on/off switches in half a day or less.

Don’t go for the lowest-priced supplies

When you get bids and are reviewing costs at a home improvement store, don’t just pick the least expensive supplies. Those items will never stick when you are actually making the decisions on what to contract for and purchase for your rental. You’ll end up buying the more expensive stuff, creating a budget headache that could have been avoided.

These basic tips should be supplemented with your investigation and seeking guidance from experienced real estate investors in your area. They’ll have other good advice, too. Just don’t think being a real estate investor is an easy walk in the park. It’s more like a marathon in the hot sun with a lot of hard work. But this hard work and determination will make your eventual success even more rewarding!

Have questions? Just leave me a comment below and I’m happy to help you!

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Buying an Investment Property? Use This Checklist to Avoid Surprises

You are ready to make the largest financial decision of your life by buying a home or rental property. But, you are concerned because of all the issues that people who bought in recent years have encountered. Perhaps properties are underwater, or the rental income doesn’t cover all the expenses, or mortgage payments have become unaffordable.

Buying-an-Investment-PropertyYou are not alone if you have some of these reservations about buying a home. While those issues are just a few of the inherent risks that are present when buying real estate, there are many more. Although these issues have been around forever, only recently have typical buyers been getting better about doing their due diligence and taking the time, energy and effort to work hard to significantly lower their risk on real estate.

The process is not overly complicated, but, it is time-consuming. We’ve put together a list of categories that should be on your due diligence list. You should learn these items, tasks, procedures and how to analyze property so you can make great choices.

Here’s how to lessen the chances of something going wrong with your purchase:

1. Understand the Purchasing Process

Buyers should have a full understanding of the purchasing process from the start. Early on review the contract you will be signing, understand how to shop for the right property and know about making an offer, contingencies, appraisals, mortgage financing, and when your earnest money deposit becomes “at risk.”

2. Does This Make Financial Sense?

• Buying Investment Property – Start by penciling out the deal. You should determine the total cash you will invest and what “cash on cash” rate of return you project to earn. Bank CDs pay 1.0 percent, Bonds 5.0 percent, but real estate is riskier – so what should you earn? Five percent is suggested. Value appreciation may come down the road and certainly will help, but let’s count our cash first!

• Personal Residence Rent vs. Own – There are some simple guidelines to follow here. If you plan to own for less than five years, you should remain a renter. You are not throwing away money renting and you avoid a lot of stress. Buying for the long term is your best move. And, don’t buy just to buy something – buy the property you “love” and that will make you happy.

3. Shop Smart

Hoping to snag a once-in-a-lifetime deal on a foreclosure or short sale? If you’re trying to chase some “great” deal like at the courthouse auction, or through a distress sale, it only wastes your time and energy with little chance at success. Be prepared. These options are complex and can often fall through the cracks.  Skip the get-rich-quick schemes. A more conservative approach is to shop for a traditional sale on listing websites.

4. Real Estate and Income Taxes

Buying to save money on your taxes? Most couples buying residences under $300,000 get little in net tax savings. People with higher incomes and more expensive homes get the biggest tax benefit. Surprised? Meet with your CPA to determine what, if any, tax benefits you will earn.

5. Mortgage Financing – Getting a Fair Deal

If you can get financing, it has become easier to get a “fair deal” because of new federal regulations. Regardless, you should understand your Good Faith Estimate (GFE) and how to dissect it to make sure you get that fair deal. Mortgages are for the long term, so take some time to interview a couple of lenders and understand your mortgage so you can make a good decision.

6. Homeowners Association (HOA) Condition

This is one of those items that most buyers do not even know to review. The finances and operations of an HOA are becoming a huge risk issue nowadays. If you do not understand and review them, you may get a surprise in the form of sharply higher fees or special assessments in the years to come. Meet with a knowledgeable person to help you decipher them. The goal is to avoid a community where the association is in really bad shape.

7. Home Inspection/Fix Up Costs

Having a home inspection is one of the most important things you can do as a buyer. During the inspection you should be putting together a list of what needs to be repaired and replaced. Then you can take your list to a home improvement store to get a feel for the total costs to bring the property up to the standards you desire. This should help you negotiate any seller’s credits and/or terminate the deal if the costs are too much.

8. Property and Liability Insurance

Insurance policies cover certain risks and have a maximum payout on any loss related to those risks. It is up to you to determine the maximum policy amount you want based on construction quality, cost to rebuild and your risk tolerance. The top issue – failing to increase coverage amounts over time as the cost of rebuilding increases. It is not difficult to understand and have the right coverage – we suggest getting with your agent and have a once a year checkup!

9. Title Insurance, Title Issues, and Lot Lines

This is another purchasing task that few people review. And while the risk of an issue is very low, the potential losses are huge. Taking fifteen minutes to review your title abstract/history and the plat or a survey of the parcel, then walk the property. It could save you endless headaches and financial stress down the road.

10. Other Investments

Fixer uppers, flipping, vacation rentals, second homes, apartment buildings, condohotels, land or building a home also have significant risk issues that should be evaluated carefully, before you make the decision to take on one of these investments.

Buyer Beware!

By taking the time to learn the risk issues and do the proper due diligence before you buy, you can significantly reduce your risk of something going wrong. And while it’s hard work, it is much easier than straightening out a “predicament” after you close escrow.

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Tips for Avoiding Rental Property Disasters

Leaky-bathroom-pipe-96664aIf you plan to be a landlord, you should know that owning and managing property is hard work and can be very stressful. All kinds of issues can occur, taking up your time, energy and effort, and possibly making you wish you had never become a landlord. Here are a few things rental property owners can do to ease headaches and help reduce the risk of having issues. They don’t always work, but hopefully they will be worth your while to implement and follow.

Put properties in good shape

Properties that are in good shape usually are treated better by your tenants. Everyone wants to live in a nice, clean place, and renters will probably take better care of your properties if you’ve provided them a nice place to live. Try to do the work when you first purchase the unit and it’s still vacant — upgrades when you have a tenant inside will be a major pain for all parties. Items such as newer flooring, paint, appliances, window coverings and landscaping are good bets. They’re expensive, but hopefully you’ll thank yourself for needing to make fewer repairs down the road.

Have plumbing fixtures and valves changed out

Water issues are prevalent in all properties, and they can cause the most damage and be the most time-consuming issues to resolve. If the plumbing valves, supply lines, faucets, toilets or washer/dryer hoses haven’t been changed in years, it’s probably time to do that. Make sure the main water shut-off valve works — and that your tenants know where it is — just in case. Again, these measures are costly, but you’re trading an upfront investment for lowering your risk of problems from a leak.

Be attentive and fix broken items

If something breaks, work hard to resolve it quickly. Obviously water, gas or electric items need immediate attention. Broken appliances might take a few days or a week, but the quicker the response the better the landlord-tenant relationship. Sometimes it’s hard to get to non-emergency items in an expedient manner, but do the best you can to fix the issue. Ultimately your tenants will be much happier and better tenants.

Treat your tenants with respect

All properties have “property” issues like the three above, but they also have “tenant” issues, which are a much bigger hassle and can take a lot longer to resolve. Treating your tenants with respect — and trying to resolve issues in an amicable manner instead of starting a fight — will hopefully have them return the favor toward you. As the landlord, it’s in your best interest to step up to the plate and make sure relations with your tenants stay on a good track. Your life will be a lot easier when a real issue occurs, such as a pipe breaking and flooding the unit.

These tips aren’t easy or quick, and you’re never going to succeed at all of them all the time. If you work hard to keep on top of the issues it should make your landlord life easier, more profitable and with a much higher likelihood of success.

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Is a Personal Residence an Investment?

If you’re going to use your hard-earned money to buy a home, you might wonder if that home is an investment. And without doubt, for the vast majority of buyers, a home is an investment.

However, just because it IS an investment doesn’t mean the house you’re interested in purchasing is agood investment — an asset. It could be a really bad investment — a liability. That’s what you should try to determine before you make the decision on whether to buy property.

What is an investment?

When you buy a home, you’re taking down payment money from your financial assets (bank account, mutual funds, stocks, bonds) where you’re earning a rate of return on your money. If you’re going to take the cash from your financial assets and invest it into another asset — a home — where you’re taking risk, and in this purchase you hope it will go up in value, then it’s an investment.

The definition of investment is “taking risk with capital in expectation of earning a profit.” Think about this: If you were guaranteed the house would go down in value, would you buy it? No, you’d rent someone else’s house and leave your money in financial assets that would better improve your wealth.

So, because you’re taking risk, and you’re expecting it to go up in value, there’s no doubt, a personal residence is an investment.

What is a good investment?

Over time, most real estate should appreciate in value, which will cause you to earn wealth from your gained equity. And that’s a good thing. However, could you have done much better financially by taking another course of action, or purchasing a different home?

For a good personal residence investment, the most important factor is that you own the property for a long time. Short-term ownership, with transaction and other costs, rarely adds net wealth to your financial picture. So go long, and that’s a minimum of five years! If you’re not 99 percent positive you will own the property for at least that long, skip it and stay a renter. You’ll most likely be better off financially.

You should also buy a property that is in good physical shape, with a fixed-rate mortgage and a homeowners association in good financial, legal and operational shape (if the property is in a common interest development). Keeping the proper type and amount of insurance in place is vital, and of course make sure to verify that there are no title issues — before you close escrow.

Oh, and don’t forget to make sure you can comfortably afford the payments — if you cannot, it’s going to end up a liability.

What is a bad investment?

Bad investments are ones where the probability of the residence adding to your net wealth is low. Examples include fixer-uppers and prize properties, which cost significantly more to own than a similar property would cost to rent; condominiums with HOAs that are a disaster; or any funky real estate purchase or personal residence investment that may have extreme financial risk issues (rent-to-own, wrap-around mortgages, short-term financing, etc.).

Real estate, every parcel, is extremely high risk — whether the condition, the financial aspects of ownership or a myriad of other issues. Owning long term can compensate for many of these issues, but making smart choices upfront is the way to reduce or mitigate the chances of making a bad investment.

As we all know, real estate is “buyer beware,” so try to know what to “beware of” before you buy, and hopefully the home you purchase will be a net addition to your wealth.

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Why Prize Investment Properties Are No Prize

Here’s a little real estate investing secret that few rental property investors know: The fancier and more prize location of a property, the worse the cash flow. In fact, most “prize” properties are going to have negative cash flows. And that’s not a smart way to invest your hard earned cash equity dollars.

Consider the options

Let’s look at an example. You want to buy about $500,000 worth of real estate, and with a 25 percent down payment plus costs, you’ll need about $150,000 in cash to close the deal. You have two choices:

  1. A swanky downtown San Diego condominium for $500,000, or
  2. Three nice moderately priced boring suburban $165,000 condominiums.

Now most people would think location, location, location and want to buy the prize downtown. That’s because their only investment criteria is that they want to buy real estate in hopes that it will go up in value. And the problem with that strategy is that they are totally missing the most important piece of rental property investing — the cash flows the property can produce.

Immediate cash flow

In reality, moderately priced cash flow positive condominiums are the best location, location, location, and here’s why.

A $500,000 downtown San Diego condo would probably generate negative cash flows of about $1,000 per month. That’s $12,000 per year — ouch — on a $150,000 cash investment or negative 8 percent return on the investment.

A moderately priced $165,000 suburban San Diego condo would probably generate positive cash flows of about positive $250 per month. Multiplied by three condominiums — so apples to apples on the $500,000 investment — is positive $750 per month. That’s positive $9,000 per year on a $150,000 cash investment, or positive 6 percent return on the investment.

See the difference? You can allocate your hard-earned $150,000 of equity into either a fancy prize property with negative cash flows of $12,000 per year, or into moderately priced properties with positive cash flows of $9,000 per year. That’s a difference of $21,000 per year on $150,000 equity investment into $500,000 of real estate.

Building wealth

If you’re hoping appreciation in value will make up the difference on your negative cash flow property, good luck with that. To be fair, over long periods of time, most real estate should appreciate in value about the same percentage each year. But as you can see, cash flows can be very different, and that’s where you earn your wealth!

You might assume that because rents increase and mortgages stay constant, the fancy prize property would turn positive one day. This is true, but it would take about 40 years until the fancy prize condominium owner really got their first dime of positive cash flow.

Think that through and pencil out your real estate deal before you take the plunge. Some properties are just much better wealth-building investments than others, primarily due to the cash flows.

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