Buying Investment Properties

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How Do You Know If You’re Ready To Buy An Investment Property?

First, know that the buying process is different for an investment property compared to a family home. Before you invest in property, make sure you meet the following qualifications.

You’re Financially Stable

Investment properties require a much higher financial stability level than family homes, especially if you plan to rent the home to tenants. Most mortgage lenders require borrowers to have at least a 15% down payment for investment properties, which is usually not required when you buy your first home. In addition to a higher down payment, investment property owners who move tenants in must also have their homes cleared by inspectors in many states.

Make sure you have enough money in your budget to cover the initial home purchase costs (like your down payment, inspection and closing costs) as well as ongoing maintenance and repairs. As a landlord or property owner, you must complete essential repairs in a timely manner, which can mean expensive emergency plumbing and HVAC repairs. Some states allow tenants to withhold their rent payments if you don’t fix broken home utilities on time. Make sure you budget more money than you think you need for regular and emergency home repairs.

Investment property expenses don’t just begin when tenants move in. You also need to budget money for advertising and credit checks to make sure you take in the best tenants possible. A great set of tenants are an asset for your property, while bad tenants can increase your expenses dramatically.

The Return On Investment (ROI) Is There

Real estate investors see great returns on investment properties in today’s market, but the savviest investors calculate their approximate return on investment (ROI) rates before they purchase a property. To calculate your ROI on potential property investments, follow these steps.

Estimate your annual rental income. Search for similar properties that are currently up for rent. Find an average monthly rent for the type of property that you’re interested in and multiply that rent price by 12 for a year’s worth of income.

Calculate your net operating income. After you estimate your annual potential rental income, calculate your net operating income. Your net operating income is equal to your annual rental estimate minus your annual operating expenses. Your operating expenses are the total amount of money that it takes to maintain your property every year. Some expenses include insurance, property taxes, maintenance and homeowners association fees. Do not include your mortgage or interest in your net operating expense calculation. Subtract your operating expenses from your annual rent estimation to find your net operating income.

Find your ROI. Next, divide your net operating income by the total value of your mortgage to find your total return on investment (ROI).

For example, let’s say you buy a property worth $200,000 that you can rent out for $1,000 a month. Your total potential income is $1,000 x 12 months for a total of $12,000. Let’s also assume that the property costs about $500 a month in maintenance fees and taxes.

  1. $500 x 12 = estimated operating expenses of $6,000.
  2. Subtract your operating expenses from your total rent potential: $12,000 – $6,000 = $6,000 of net operating income.
  3. Divide your net operating income by the total value of your mortgage: $6,000 ÷ $200,000 = 0.03, which makes this property’s ROI 3%.

If you buy a property in a solid area and you know that you can rent to reliable tenants, a 3% ROI is great. However, if the property is in an area known for short-term tenants, a 3% ROI may not be worth your time and effort.

You Have Time To Manage It

Investment property management still takes a lot of time. You have to put up advertisements for your space, interview potential tenants, run background checks on tenants, make sure that tenants pay their rent on time, perform maintenance on your property and make timely repairs if something in the home breaks down. You also have to do all of this while working around your tenant’s “right to privacy,” a legal standard that prevents you from dropping by unannounced without at least 24 hours of warning in most states.

Before you decide to buy an investment property, make sure you have plenty of time to maintain and monitor your space.

Other Considerations Before You Buy

Time, down payments and returns are just a few pieces of the investment property puzzle. Here are some other considerations to think about before you invest.

Housing, Market Prices And Trends

You want to choose a property that rises in value over time. But how can you tell which areas will become the next hotspot for homebuyers? The only way is to watch an area’s housing and rental trends over time and compare the direction of previous property prices and taxes to where they are now. A home purchase is a major investment, so don’t be afraid to take plenty of time to analyze market trends to find the perfect area before you dive into a loan.

Buying By Yourself Or With Partners

A partner might seem like a great idea – you can pool your money, split maintenance costs and requirements, and combine your home repair skills to save money on professional contracting costs. However, it also splits your potential profits in half and puts you in the position of sharing legal liability with another person.

For example, if your tenants tell your partner about a pest problem and your partner doesn’t fix the issue in a timely manner, your tenants may sue both of you because you are both landlords and you are both equally responsible for providing a habitable environment. You should also remember that if something goes wrong with your partner and you split the cost of the home equally, you’re both equally legal owners of a single property. Make sure that the person you choose is trustworthy, responsible and proactive when it comes to maintenance if you decide to go in on a rental property with someone else.

Property Taxes

Property taxes are taxes that homeowners pay to support their community and local government. Property taxes fund fire departments, public schools, libraries and other local projects. The amount you pay in property taxes is directly related to the value of your home. If your home is worth more money, you pay more, and vice versa.

Local governments set their own property tax rates, so the specific amount you pay in property taxes depends on your house’s location. Speak with a local real estate agent or mortgage lender to calculate how much a certain house will require in property taxes.

Use A Property Management Company Or Do It Yourself?

You need to decide whether you want to handle property repairs, tenant management and maintenance yourself or if you’ll hire a property management company to manage the daily maintenance on your behalf.

Property management companies take both scheduled and emergency repair calls, check up on your property with both drive-bys and scheduled visits to make sure that tenants respect your space. They can also collect rent on your behalf. Some property management companies also offer tenant placement services and eviction processing for an additional fee. In exchange, the property management company takes a percentage of your monthly rent. If you live far away from your property or you don’t have the home repair skills to fix your own property, hiring a property management company may be a great choice.

What Does An Investment Property Loan Look Like?

Mortgages and loans for investment properties work a little differently than those for personal homes.

Down Payments And Other Requirements

If you have a mortgage for your primary residence, you probably know that most mortgage lenders no longer require a 20% down payment to get a loan. Lenders are stingier with loans for investment properties, however, because the risks of foreclosure and default are higher.

Most fixed-rate mortgages require at least a 15% down payment for a one-unit investment property. Your credit score should be at or above 620 if you’re applying through Rocket Mortgage® by Quicken Loans®. Lenders want you to put down 25% with a 620 or higher interest rate on two- to four-unit investment properties.

Getting Preapproved

It’s a good idea to get preapproved for a mortgage before you start searching for homes so you know how much home you can afford. You can apply online with Rocket Mortgage to get a preapproval.

A preapproval is different from a prequalification. A prequalification only tells you how much money you might be eligible for – it’s not a guarantee. A preapproval requires your financial information so the mortgage company can provide a solution that’s customized for you. Always choose a preapproval when you search for a lender. As prequalification only looks at your credit and your inputted estimate for income and assets, preapproval involves a hard credit pull and proof of income and assets.

Other Considerations

When you apply for a mortgage, you also must provide some basic personal information. In most instances, your mortgage lender will require you to provide two years of tax returns, two years of W-2s and two months of bank statements to prove that you have enough money to cover your monthly payments.

Preparing Your Home for Sale

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Why should you prep your home for sale?

Selling a house is already a lot of work. You have showings to deal with, you have to keep the place clean, and the inspections, apprasials, and negotiations are a hassle. Why should you put in more effort before your home’s even on the market?

For one, it helps you command a higher sale price. Homes that are clean, appealing, and in top shape simply sell for more than properties in less desirable conditions. Buyers know the home won’t require a ton of work upon move-in, and for that, they’re willing to pay a premium.

A prepped home is also just more marketable. That usually means a faster sale, and maybe even a bidding war — which equals more profits at the closing table.

The basic rules of prepping your house for sale

Before we dive into the steps of prepping your home for sale, let’s go over the general rules first — the guidelines you’ll want to adhere to as you go about your preparations.

In general, the goal of prepping your house should be to:

  • Create a clean, clutter-free environment. Nothing makes a home look more poorly maintained than dirt, clutter, and overall messiness. A clean environment gives buyers confidence in the property and its condition.
  • Offer a neutral color palette. Prospective buyers need to be able to envision themselves in the home, and that’s hard to do if there’s a bright green wall and crazy, patterned wallpaper staring them in the face.
  • Put yourself in a buyer mindset. Think like a buyer when prepping your home. What would they like? What would give them pause? Let that drive your preparations.
  • Minimize where possible. The less furniture, decor, and personal items you have out, the better. In fact, it might even make your home look larger.
  • Emphasize curb appeal. First impressions are everything. Make sure your home’s curb appeal makes a good one.
  • Ensure your home is photogenic. A picture’s worth a thousand words, and in real estate, maybe even a little more. Make sure your home lends itself to high quality photos that will really make your listing shine.
  • Address obvious repairs. If there’s a broken window, dent in the door, or nonworking faucet, fix it — before you list the home. You can bet it will show up on the buyer’s inspection and need fixing anyway.
  • Add little details and touches that matter. At the end of the day, the property needs to feel like a potential home to buyers. Small touches like fresh flowers or the smell of warm cookies can make all the difference.
  • Prep yourself and your family — particularly for the showing aspect of selling a house. What’s your exit strategy? Where will you go during showings, and how will you keep the place clean? Having a plan in place is vital before you open your doors to prospective buyers.

When in doubt, rely on your real estate agent. They’re the expert, and they’ll have a good pulse on what local buyers are looking for and how to get your home up to speed for the current market.

Prepare to sell your house in 6 steps

Now, it’s time to put in the work. Give yourself at least a few weeks to prep your home — more if you know it needs a good amount of repairs.

Use this checklist to guide the way:

1. Make necessary repairs

Your first step is to make any obvious or large-scale repairs that are necessary — think roof repairs, problems with the floor, doors, and windows, or issues with any fixtures or plumbing. If you’re not sure what needs repairing, or you just want to be thorough, you can also consider a pre-listing home inspection. This is a full-scale, comprehensive inspection of your property that will detail any defects or issues found.

2. Declutter, donate, and minimize

Next, go through your closets, cabinets, and drawers, and donate anything you don’t need or no longer use. Then depersonalized the house. Remove any personal photos and artwork, put any bold decor items away, and think about putting some furniture and unnecessary items into storage until you’re ready to move. The more spacious your home looks, the better.

3. Touch up and repaint

Time to freshen up those walls next. Go room by room, and if you have any bold or bright colors, go buy some white or eggshell and paint completely over it (you might need primer, too, depending on how dark the original hue is). You should also touch up any areas that are smudged or dirty, including on doors, baseboards, door frames, and window sills. A fresh coat of paint can go a long way in making a home look clean and full of possibilities.

4. Upgrade your curb appeal

Take a walk outside and assess your home’s exterior. If it’s looking messy, or just plain boring, you’ll probably want to invest a little into sprucing it up before listing. To start, mow, edge, and trim the whole property, and weed the garden as well.

You also might want to:

  • Repaint your front door.
  • Replace your welcome mat.
  • Plant some flowers.
  • Add some hanging plants.
  • Install a kickplate or new doorknob.
  • Upgrade your garage door.
  • Update your mailbox.
  • Add address numbers to your house or curb.

5. Clean it from top to bottom

Once the heavy lifting is done inside, it’s time to deep-clean the place. If you can afford it, swing for a professional cleaning, as they’ll get super detailed with it — down to scrubbing the grout and hand-wiping the baseboards.

If you do it yourself, just make sure to be thorough. Don’t forget to clean the appliances (inside and out), as well as inside the cabinets, drawers, and closets. They might not be on full display at all times, but buyers will definitely take a peek in these areas when touring the property.

6. Add the final touches

Finally, it’s time for the little details: fresh flowers in the bathrooms, a wreath on the door, and a cute welcome mat on the front stoop to make buyers feel welcome. Setting the table with a runner, cloth napkins, and a full set of dishes is also nice, though you might want to save this until just before a showing.

If all this sounds a little overwhelming, feel free to bring in some professionals to help. A contractor or handyman can help with the repairs and exterior updates, and you can even consider a professional stager to get your home in tip-top shape for photographing.  Can’t bear to part with the cash? Think of it as an investment in your eventual sales profits. According to a survey from the National Association of Realtors, more than a third of buyer’s agents said staging increased a home’s dollar value anywhere from 1% to 10%. On a $200,000 home, that could mean an additional $2,000 to $20,000 more in returns.

The bottom line

Properly prepping your home is critical if you want your home to sell fast and at the maximum possible price point. And if you’re not sure where to start, ask your real estate agent. They’re well-versed in both the local market and the listing process. They can point you in the right direction preparation-wise.

The Emotional Side of Selling Your Home

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Like many people, you probably have a deep emotional connection to your home.

Your kids grew up in your house; you can still see the pencil marks you made on the door frame marking their growth.

You’ve spent many happy hours on the backyard patio. The dining room has been the setting for many great dinner parties.

Maybe you even grew up in the house yourself, and it’s been in your family for over fifty years.

You’re fortunate to have had so many good memories.

But beware: When it comes time to sell, a “love affair” with your home can work against you. Too often, people make decisions about selling their home based on emotion instead of reason.

What they’re really doing is subconsciously sabotaging their chances for success — and that can cost them money in the end. Here are 3 tips for detaching and moving on so you can get the best deal for your home.

1. Acknowledge that selling your home can be stressful.

Some people get emotionally attached to their cars and have a hard time selling them. To get an idea of what it will be like to sell your home, magnify that reaction by about 100 times.

Those who’ve been in their home just a few years are likely to have an easier time letting go than those who’ve lived there for decades or grew up in the house. Either way, it’s often stressful and emotional. Acknowledging that up front will help you make better decisions down the road.

2. Make sure you’re truly ready to sell.

Take the time to ensure you’re emotionally prepared for the sale. Talk to your real estate agent and listen carefully to their suggestions. If you’ve hired a competent agent and yet you’re resisting their suggestions, that’s a clue you may not be ready to let go. If so, don’t sell just yet. Wait until you’re ready.

Maybe you have no choice but to sell — which can be even more difficult emotionally. Get as much support as you can from friends and family.

Be honest with your real estate agent about how difficult this is for you. The more information you give the agent, the more they can work around any potential problems.

After all, your agent is looking out for your best interests and acting on the assumption you want to sell. But when you resist their suggestions because you’re actually not ready to sell, you’re setting up the relationship to fail.

This is a common source of strain in the agent-client relationship, and savvy agents are on the lookout for this — or should be.

3. Start thinking of your home as a product to be marketed.

When you haven’t detached from your home, it’s difficult to see it as a product. But that’s what it is — something you have to sell and that, with luck, others will want to buy. You can also get in your own way of succeeding.

Often, a seller who isn’t emotionally ready to sell will insist on listing at a price that’s higher than what the market will bear. This is why it’s imperative that sellers should be emotionally ready to sell; when they aren’t, they can subconsciously sabotage the process.

There have been instances where a home was on and off the market for over a year with multiple real estate agents and approaches to selling it. What started off as an overpriced home that didn’t show well ended up selling for a bargain to a buyer who capitalized on the seller’s mistakes.

Sellers often need to remove personal items out of the house as part of its staging. This can be as basic as taking down diplomas, removing pictures, or personal items such as Buddha statues, NFL memorabilia or the knick-knacks from your African Safari ten years ago.

Aside from helping to show your home in its best light, removing personal items begins to make your house feel less like your home and more like a “product” for sale. It’s a subtle but important step toward detaching. Also, by removing personal items, you’re getting a head start on moving.

Most likely, your agent will recommend some changes to make your home more attractive to buyers. The flashy red paint in the dining room or the jungle wallpaper in the kid’s bedroom should make way for something more neutral.

You should seriously consider your agent’s recommendations; they’ve been through this before and know what they’re talking about.

On the other hand, if you balk at such suggestions, it’s another sign you may not be 100 percent ready to sell.

Still not ready? Wait.

By all means, cherish the memories you’ve had in your home. But focus on the future, and imagine the wonderful memories you’ll have in a new home.

Think about the excitement that change can bring. Listen to your real estate agent’s advice; that’s why you hired them.

If you find that you can’t do any of these, then wait until you’re ready. In the long run, the most important thing is that you put your absolute best foot forward when you list your home, even if it means waiting months or even a year until you’re ready. It will be in your best interests financially.

The Homebuyer’s Go-To Guide For Competing in a Hot Housing Market

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It’s no secret that buying real estate has become something of a competitive sport across the United States.

Housing inventory is low, yet demand for quality housing is high. To compound matters, new homes aren’t being built fast enough to meet the rising demand for quality housing.

In cities like Denver and San Francisco, inventory shortages are so severe that homes are swept off the market in mere days. In these hyper-competitive markets, cash is king.

Buyers going the mortgage route often find themselves contending with bidding wars and all-cash offers. In the most competitive markets, it’s not uncommon for homes to sell well over asking price.

If you’re looking to finance a home, putting in a competitive offer can be a challenge. How are you supposed to beat multiple bids, not to mention all-cash offers?

We’ve got a few ideas. Here are some go-to tips for staying competitive in today’s cutthroat housing market:

 

Prepare yourself for what’s to come

The first thing you should do when gearing up to buy a home? Get all your ducks in a row. Let’s keep it real: buying a home is stressful.

The more work you can do upfront before entering the market, the better. The following are a few things you can do to get prepared for a tight market:

Get your finances sorted

You should have your finances in order well before even searching for a home.

That means saving up a sizable chunk of money for a down payment, improving your credit score as much as possible, and meeting with a trusted financial advisor to ensure your financial picture is sound enough to take the plunge into a new home.

Pull your credit report to make sure there are no blemishes that need fixing or explaining when it comes time to finance. The better your financial picture entering the home buying process, the stronger your offer will be.

Gather up your records

Buying a home requires a lot of paperwork. To make things easier on yourself, start compiling all of the records and information you’ll need before you start the process.

That way, if you need to order copies of any missing documents, you’ll have plenty of time to do so. Remember that issues with paperwork can lead to financing delays. Have the necessary documents sorted before you begin the process.

At a minimum, you’ll need:

  • Income verification such as pay stubs, W2s, 1099s, etc. for the past 2 years
  • Bank statements and proof of any liquid assets for the last 60 days that you plan to use for a down payment, closing costs, and reserves.
  • Gift letters from any family member that is gifting you money for the home
  • Your address/rent history for the past 2 years
  • Your employment history for the past 2 years
  • Proof of any other income such as disability, dividends, bonuses, social security or pension if you want to use them to qualify.
  • Any child support/alimony debts you pay
  • Information on any debts you owe such as car loans, your current home, credit cards, student loans, etc.
  • Information on non-liquid asset accounts such as life insurance, debts, bonds, stocks, etc.

Strengthen your offer

There is a multitude of ways to strengthen a home offer. Here are a few you should consider when buying in a competitive market:

Include a strong pre-approval or conditional approval

To have your offer considered even when there’s an all-cash offer in the mix, you’ll need a strong pre-approval or conditional approval.

Basically, you want your lender to do as much underwriting as possible up front before you’re ready to make an offer on a home. This shows the seller you’re a serious buyer who’s able to secure proper financing for the home.

Financing issues account for 37 percent of delays to the closing table. A seller wants to minimize the potential for issues.

So, find a lender who will underwrite your finances before you even make an offer on a home.

Put down a competitive earnest money deposit

An earnest money deposit (EMD) shows the seller you’re a good faith buyer who’s ready to close on a home.

Typically, a home seller contractually requires an EMD and it’s common for buyers to put down anywhere from 1% to 3%. But in competitive markets like the Bay Area, buyers tend to put down more, even up to 10%.

If you want to show a seller you’re serious about their home, consider putting in a competitive EMD that will set you apart from the rest.

 

Offer above asking

One way to potentially compete with cash is to offer more than the asking price. Cash buyers often offer just around (or sometimes even a bit below) asking price.

The cash buyer knows their offer is already attractive: it’s easier, faster, and more certain than a financing offer.

One way to combat this is to bid more than asking. In a competitive market, homes often sell for more than asking price, so this is pretty much par for the course. You may also consider an escalator clause, which essentially states that you will meet a competing bid up to a certain price point.

Make a large down payment

A large down payment is another way to strengthen your offer. Of course, it’s common advice that you should save up as much as possible for a down payment when buying a home. But in a competitive market, it’s more important than ever.

You want to show the seller that you’re able to afford this home, and that your financing will likely clear. A sizable down payment can send a message to the seller that you are a serious buyer who’s ready to put your money where your mouth is.

Accommodate the seller’s closing preferences

Typically, a home seller is working on a timeline. They might have another home they’re trying to get into, or they might need to sell to start a job in another location.

Whatever the reason, nearly every seller has a preference as to the timeline for the sale. And not everybody wants to sell as quickly as possible.

One way you can be an attractive buyer is to agree to accommodate this timeline. If the seller is looking to move the home quickly, you should construct your offer to make that possible. If the seller needs to stay in the home for a few months to finish a school year, you might include that concession in your offer.

When it comes down to it, you want your offer to meet the needs of the seller.

As anyone who’s ever purchased or sold a home knows, things don’t always go according to plan. And that makes sellers nervous when they’re choosing an offer.

There are few things more frustrating for a seller than having the deal fall through weeks into the process and needing to start over. Around 5% of real estate contracts are terminated before closing, and many, many more are delayed because of issues with financing.

You can probably understand why a lot of sellers go with the sure thing — cash — over the mere possibility of a buyer securing financing.

A big way you can make your offer more attractive to a seller when competing with cash? Contingency removal.

A contingency is a clause in a real estate contract stating that certain conditions must be met (such as financing or home appraisal) before the sale can clear.

By removing some of these contingencies, you tell the seller “I’m ready to move on this thing, and I’m going to remove as many hurdles as possible to make this sale happen.”

Before choosing to waive contingencies, you should talk with your real estate agent and/or lawyer to make sure you understand the full risks associated with doing so. While removing contingencies can make sense for highly qualified borrowers, you should also know that it can put your earnest money deposit at risk if the transaction falls through.