Reverse Mortgages – Not the Smart Investment You Thought They Were

Reverse Mortgages-Not the Smart Investment You Thought It Was- 150x150Being retired doesn’t mean that you don’t need a good source of income anymore. Utilities, food, gas, and pretty much everything continues to become more expensive each year. The large majority of seniors have limited incomes, so they will be the most affected by these increasing expenses.

One choice that retirees who need cash have is to take out a reverse mortgage. Reverse mortgages are pretty popular right now, and a good alternative to other loans, but they might not be such a smart investment. Yes, reverse mortgages can provide you with that extra income, but, as an investment, a reverse mortgage is a poor choice.

What is a Reverse Mortgage and How Does It Work?

A reverse mortgage is a type of loan which is only available to seniors over the age of 62, and which uses the equity in the borrower’s home as collateral. This loan is designed to help home owners who are in or near retirement and have limited incomes. The borrower’s existing mortgage will have to be paid off in order for him or her to qualify for a reverse mortgage, and there are no credit score requirements. The money borrowed through a reverse mortgage can be used for many things, such as paying off other debt, medical bills, or paying for utilities and food. There are pretty much no restrictions to how a borrower can use the reverse mortgage proceeds.

The borrower can choose to receive the money from a reverse mortgage in three ways: as a lump sum of money, meaning that the borrower receives all the money at once, as a monthly payment for as long as the borrower lives or until the home is sold, or as a line of credit which is similar to a credit card. If the borrower chooses to, the money can be received as a combination of these three methods.

A reverse mortgage can be expensive because there are no standard charges, so the fees will depend on the lender and type of loan. The borrower will have to pay a mortgage insurance premium, monthly lender fees, and several closing costs. The amount that you can borrow depends on which method you are using to take out the money, how much equity is in your home, and the borrower’s age.

Why is a Reverse Mortgage Not a Smart Investment

A mortgage is considered a good investment only when you live in a home for a long time. When taking out a reverse mortgage, you can turn it into a good investment by living in the home for over 5 years, but the odds are stacked against you at that age. If you become ill and have to move into a nursing home, the monthly reverse mortgage payments will stop. Also, taking the whole amount out at once can turn ugly if you are unable to manage your finances properly. Once that money is gone, you won’t be able to take out another reverse mortgage.

Reverse mortgages also have high closing costs and other fees to pay. Because the lender doesn’t require you to have a certain income or credit score, he must take certain precautions to ensure that he doesn’t lose money, so your interest rate and fees will be higher than on a regular mortgage.

Also, after you die, your heirs will probably have to sell the home in order to pay off the debt, so they will be left with very little or nothing. If you decide to move out at a certain point after taking out a reverse mortgage, you will have to pay off the debt, and this might prove difficult at a time when money is tight.

A reverse mortgage can be a life saver when you truly need it, but it is not a great investment. An alternative to taking out a reverse mortgage and leaving your heirs with debt would be to reorganize your budget, or even ask your children for help. The high cost and the problems that may arise if you wish to move out of your home or leave it to your heirs can make reverse mortgages something that you are better off avoiding.

Part 3: How to Procure Financing for Investment Properties

Part 3- How to Procure Financing for Investment Properties-150x150Question: Where can I get financing for residential real estate? I heard it’s easier to get financing for commercial real estate- is that true? Also, I would love some information on what variables affect a lender’s decision to give financing.

Answer: Many lenders are thought to prefer lending to commercial real estate investors rather than residential real estate investors. While that may be true, there are plenty of lender possibilities for residential real estate investment. In fact, here is a list of banks and lending institutions that provide loans for both commercial and residential real estate investment:

Lending Institutions for Real Estate Investment

  1. Wells Fargo
  2. PNC Real Estate
  3. MetLife
  4. Prudential Mortgage
  5. J.P. Morgan Chase & Co.
  6. Strategic Alliance Mortgage (SAM)
  7. KeyBank Real Estate Capital
  8. CBRE Group Inc.
  9. Northwestern Mutual
  10. Cornerstone Real Estate Advisers
  11. Berkadia
  12.  NorthMarq Capital
  13. CWCapital LLC
  14. Red Mortgage Capital LLC
  15. Walker & Dunlop
  16. Natixis Real Estate Capital LLC
  17. Pacific Life Insurance Co.
  18. Grandbridge Real Estate Capital
  19. Citi Community Capital
  20. Starwood Property Trust
  21. Beech Street Capital
  22. ING Investment Management
  23. M&T Realty Capital Corp.
  24. Principal Real Estate Investors

 What a Lender Looks for in a Borrower

Lenders seem to ask borrowers almost anything before considering them for a loan. The requirements are even tougher for first time borrowers. While some questions are predictable, lenders are becoming more inquisitive these days in order to minimize the risk of defaults. Lenders aggressively ask more questions so that they can provide reasonable proof to the underwriters that the borrower will actually manage to repay.

Except your family planning and health issues that are forbidden by the law, lenders want to know the following in a borrower:

  • Credit rating- a lender is first interested with your FICO or credit score. The score ranges between 350 and 850. The lender wants to know your outstanding debt in different types of accounts, the total outstanding debt and how well you’ve been paying your bills. Missed payments raise doubts with respect to risk of defaulting. Your credit history is very important to a lender and for this reason you should ensure that your credit report does not have any errors.
  • Debt income ratio- a lender wants to know the ratio of debt compared to your monthly income. The lender explicitly wants to know how much you have to spare each month after you’ve paid out all other debts excluding the mortgage. The debt income ratio disqualifies many people for a loan. You should therefore pay down many of your credit cards before applying for a loan.
  • LTV- this is the loan to value ratio which enables the lender to determine risk. LTV is determined by dividing the value of the home by the anticipated loan amount. In simple terms, it’s the amount of money a borrower is willing to pay for the house. The lower the amount put down by the borrower, the lower the level of doubt the lender will have about their creditworthiness.
  • Cash- lenders also love hard cash because it keeps them running the company. The lender will want to know how much a borrower has saved; this is not for purposes of down payment alone but also for meeting monthly mortgage repayments when they go into a financial stalemate.
  • Collateral- once the lender has assessed that your capacity and credit score meets expectations, collateral is the other most significant thing on the list. This is done by valuation of property by an independent appraiser in order to determine its current market value. The appraised value is used to determine the LTV.
  • Lawsuits- lenders are sensitive to risk, so they have to check out every possibility on your end that can make giving you a loan a bad idea. A lender will want to know whether you are the plaintiff or defendant in any lawsuit because if judgment goes against the borrower, then it will impact their financial position negatively.
  • Divorce- the number of divorces in the United States is on the rise. Lenders want to know the financial details in a borrower’s divorce because a borrower may be responsible for their ex-spouse’s debt. If a borrower includes alimony or child support as a source of income in their loan application, the lender will also want proof of such income.
  • Ethnicity- the Department of Housing and Urban Development (HUD) requires lenders to inquire about the borrower’s race for purposes of statistics. To avoid discrimination of an applicant, no further ethnic inquiries can be made. HUD also checks lender records routinely in order to ensure that they are not turning down applications from minorities or exploiting them by charging them unusually high fees.

This concludes the three part Q&A on procuring financing for investment properties. If you have other questions, send them our way and we’ll do our best to get answers to you shortly!

Part 2: How to Procure Financing for Investment Properties

 Part 2- How to Procure Financing for Investment Properties-150x150Question: Which type of lender should you target for a real estate loan?

Answer: There are several types of real estate lenders out there. With all of the options, it can be difficult to make a decision as to the best choice for your situation. Whether you choose a mortgage bank, mortgage broker, or other type of lender, there are pros and cons associated with each. Let’s take a look at the advantages and disadvantages of each to find one that works for you!

Types of Real Estate Lenders

1. Mortgage banks- Mortgage banks sell their products in the secondary market. Once you complete an application for a loan, the bank’s employees will carefully review your application and then make a decision.

Advantages of mortgage banks

  • Speed- mortgage banks process loan applications faster than all other providers.
  • First time program implementers- if the federal government launches a new program, mortgage banks are always the first ones to implement it.
  • Reliability- a local mortgage bank is an established institution. It has strong ties with members of your community and follows state and federal regulations to the ‘T’.
  • Savings- since a mortgage bank is the loan originator itself, you will end up with a lot of savings on the loan offer based on the mortgage terms and your deposit in the bank.

Disadvantages of mortgage bankers

  • Limited options- mortgage banks only offer their programs. They tend to be inflexible to the borrower’s needs.
  • Economies of scale- a mortgage banker may not bother to listen to you extensively because of the large customer base. They can be bureaucratic at times.

2.    Mortgage brokers- Mortgage brokers are middlemen who have access to mortgage loan information from different lenders across the country. A broker aims at finding you a loan that matches your needs. After loan application approval, you can get in touch with the lender directly.

Advantages of mortgage brokers

  • Savings- you may definitely access a mortgage at a very low cost because a broker has access to a variety of lenders.
  • Variety- a mortgage broker simply finds you the best loan product that matches your needs because they compare hundreds of lenders.
  • Speed- since brokers are professionals in their field of work, they get you the right lender very fast.
  • Easy qualification- an experienced mortgage broker will even assist you in putting together the required paperwork before directing you to a lender who will easily accept you without hassle.

Disadvantages of mortgage brokers

  • Hidden charges- many mortgage brokers increase their profits by including their price in the loan offer.
  • Not guaranteed estimates- many mortgage brokers rush to seal the deal so that they can walk away with a profit. That’s why they may present you with an offer that does not necessarily coincide with the bank’s terms.
  • They may not compare all lenders- mortgage brokers may not compare all lenders in order to find you the best offer. Moreover, some lenders don’t deal with brokers.

3.    Commercial banks and credit unions- The most popular lender in the world is a commercial bank. Credit unions in the United States are also popular. Understanding their upsides and downsides can help you in making an informed decision.

Advantages of commercial banks and credit unions

  • Competitive rates- compared to other traditional mortgage lenders, commercial banks offer competitive interest rates with very reasonable repayment terms.
  • Always available- since commercial banks have to keep their customers’ money working and earning interest, they are always available at your service.
  • Better terms- commercial banks offer affordable and friendly loan terms compared with a traditional mortgagor.
  • Customers are the actual owners- both commercial banks and credit unions treat their customers very well because they also have a stake in the company.
  • Credit unions are actually non-profit institutions- the aspect of non-profit basically means that they share their profits with their customers. You also get to save in taxes because credit unions are exempt from federal tax.
  • More savings- in addition to the lower fees that a loan from a credit attracts, you will also benefit from lower interest rates as long as you have a high credit rating.

Disadvantages of commercial banks and credit unions

  • Delay in loan approval- if you need access to your loan very fast, then a commercial bank may not be the best option because they take a long time to approve loans.
  • Tough qualifications- commercial banks have tough requirements for low-interest loan qualification, which typically includes excellent credit score requirements.
  • Limited access to new technology with credit unions- credit unions sometimes aren’t up to speed technologically, which may make it difficult at times for you to access their services when needed.
  • Restricted membership- credit unions center their focus on particular communities, professions or groups of people. This can make it difficult to find a credit union for which you qualify.

4.    Real estate agencies and home builders- There are many real estate agencies and home builders. A number of them are affiliated with mortgage brokers and bankers. Additionally, their services can be accessed online.

Advantages of real estate agencies and home builders

  • Pricing prowess- real estate agencies can easily tell how much it will cost you.
  • Experience- approaching home builders gives you assurance of the best residential property because of the experience they have in developing such property.
  • Speed- home builders working together with real estate agencies process your loan request very fast.
  • They do all the paperwork- if you are not very familiar with real estate jargon or not experienced with paperwork, then real estate agencies may be the best for you because they will handle the loan documentation paperwork for you.
  • No closing problems- there are several pitfalls that can kill a deal in its final hours of execution. Real estate agencies ensure that your property is in order.

Disadvantages of real estate agencies and home builders

  • Ethical considerations- some agencies may not consider all of the professional ethical considerations in conducting their business. This may land the investor in trouble with legal authorities.
  • Extra charges- since real estate agencies and home builders don’t directly deal in the money lending business, using those results in an extra cost because they are middlemen.

5.    Internet lenders- The internet is a business powerhouse worldwide. Many lenders have flocked to the internet, giving people  access to a loan at competitive rates.

Advantages of internet lenders

  • Easy access- shopping for an internet lender is very easy because you can do it from your PC or smartphone. You can access them 24 hours a day, 7 days a week.
  • Competitive rates- unlike other mortgagors who have a physical office, they save you extra costs because they don’t pay property taxes and other overhead costs.
  • Comparative base- there are many online sites where you make comparisons on loan amounts awarded, interest rates and repayments.
  • Convenience- you can apply for a mortgage from an internet lender any time you want and wait for approval from the lender without strict deadlines.

Disadvantages of internet lenders

  • Lack of personal advice- since you don’t meet the lender face to face, a lack of personal touch may not be the ideal experience for you
  • Scams- there are many illegitimate internet lenders who may con you and disappear with your money when you give them your personal information.
  • Out of date sites- there are many online lenders’ sites that remain out of date. This may not give you the right idea of current mortgage rates today.

As you can see, there are many options for you when it comes to choosing a lender. This information should give you a complete overview of what to expect with each lending option. Look out for part 3 of this question, where we discuss lenders for both commercial and residential investment loans as well as what lenders are looking for in borrowers.

 

Part 1: How to Procure Financing for Investment Properties

Part 1-How to Procure Financing for Investment Properties- 150x150

Question: How do I go about procuring financing for investment properties? What is a checklist of things that I need to have in order to get approved? 

Answer: One factor that kills the dreams of many potential real estate investors is lack of financing. Since lenders have requirements that borrowers ought to meet based on risk, it is important to prepare with the “risk factor” in mind. Below are some tips that can help                                                                        you to obtain funding from a lender:

Financing Tips for Investment Properties

  1. Check your credit report. Acquaint yourself with your credit report and get to know how it works. If you don’t have it, get it from AnnualCreditReport.com free of charge. Review your report carefully for any errors because they can affect your score negatively. However, note that fixing errors will take some time.
  2. Don’t procrastinate. Fear and hearing about your friends’ negative experiences may discourage you from making a move. Procrastination may lead to regret and lost opportunities. Don’t hesitate to start looking around for a loan- you never know what good deals you might find!
  3. Have access to a regular source of income. Many applicants are declined because they don’t have a regular source of income. When lenders learn that you don’t have a regular source of income, they often shy away because of the perceived higher risk of default in repayments. Teaming up with a partner’s income will increase the chances of getting a loan.
  4. Shop for the right lender. Shop around for the best lender who can meet your needs comfortably. It may be beneficial to ask for advice and recommendations on the internet or from family members, acquaintances, bankers, and financial consultants.
  5. Have all the documents. Check with your lender or the lender’s website in advance in order to find out what documents are required. Some lenders may see your organization as a great quality to have in a loan recipient and decide to make you a loan offer. Having everything ready for your lender will streamline the process and make it easier for both of you. Among the documents required for getting a loan are bank statements, tax returns, pay stubs and W-2 statements. Lenders will also like to see your business proposal and business plan in order to establish the profitability from your real estate investment.
  6. Be informed. Knowledge is power. Adequate preparation by asking the lender questions will help you land a deal. Be confident and forthcoming as you supply answers to the questions that the lender will ask you. The lender will want to know what loan amount you are seeking, what your plans are with the loan, how you intend to repay the loan, and what your backup plan is if you do not receive the loan.
  7. Have a referral. All banks are working hard to manage customers’ default risk. If you are able, find a current customer of the the lender and have them refer you to increase your chances of receiving a loan offer.
  8. Discuss business risks with your lender. It is a fact that all businesses have an element of risk. One thing that all lenders will want to know is how you intend to manage particular risks facing real estate business. It is important to discuss all of these risks with the lender. Don’t forget that your lender may ask you how you will manage the risk of over-ambition and too much perceived success.
  9. Apply for the loan. If you are applying for your first loan, it may be more difficult to get approved compared to if it was your second loan. Many lenders prefer giving loans to lenders who have a good credit history. Once you have officially applied, all you can do is wait to see if you’re approved!

These tips should be very helpful for you if you are interested in obtaining financing for investment properties. Be sure to look out for the next article where we answer the second part of this question, “What type of lender should I target?”.

Property Tax Liens: A Smart Investment?

Property Tax Liens- A Smart Investment- 150x150Many investors who are affected by the stock market’s rising volatility and the near historical low interest rates are looking for an alternative that will generate a good return. One of these alternatives is investing in property tax liens, an investment which has the potential for providing great rates of return, but it also features a high risk, especially for those who are new to investing.

What are Property Tax Liens?

When a home owner doesn’t pay local or county taxes on his or her property anymore, then the city or county places a lien on the property. Having a lien on your property makes it impossible for you to sell or refinance your home until the taxes are paid. A popular practice is for the taxing authority to sell these property liens to the highest bidder at an auction. By selling property liens to third parties, the city or county in which the property is located has the chance to recover the money that should have been paid by the home owner as property taxes.

Investing in Property Tax Liens

When the taxing authority issues a lien on a property, they create a tax lien certificate which shows how much is owed and any penalties. These certificates are then sold at an auction or through an online auction to the highest bidder. Investors have a chance to buy the tax lien certificates sometimes for as little as a few hundred dollars, but most of the time they will cost much more.

After buying a tax lien certificate, the investor gains the right to all the tax-related debt on the property, as well as the interest. The investor will collect the interest, which is assigned by the taxing authority, until the debt is paid off. The repayment period usually lasts from 6 months to 3 years. If the repayment period has ended and the debt isn’t paid off, the investor has the right to foreclose on the property. This usually doesn’t happen, because most home owners manage to repay their debt on time. The investor can also become the owner of the property for a small percent of the market value of the home.

Risks Associated with Investing in Property Tax Liens

Investing in property tax liens comes with some great risks and is not recommended for beginner investors. What may seem like a good deal can quickly turn ugly and result in a waste of time and money. Here are the biggest risks associated with investing in property tax liens:

  • The investor has to make sure that he or she knows the property value before investing into a property tax lien. Investing your money before having the property inspected is very risky, as the property owner may have neglected making repairs, so the home may be worth less than you were expecting, or even be worthless.
  • The home owner may declare bankruptcy. If the owner of the property declares bankruptcy after you have invested in the property’s tax lien, then your  home investment may be at risk, because the Internal Revenue Service can have other claims on the home, which will make your tax lien worthless.
  • There may be other liens on the property. Having a title search on the property that you are about to invest in is very important, as it may have other outstanding liens, making it impossible for you to make a profit until the debt is paid off.

Property tax liens are a smart investment, but only if you are an experienced investor. Beginner investors can have success in this business, as well, but it is much easier for them to fall into a trap and end up losing money. Researching the property that you are about to invest in, and having a clear understanding of the property tax lien investment process will ensure that you make a good investment that will generate a profit, without having unpleasant and expensive surprises along the way.

How to Attract and Keep Great Tenants without Hassle

How to Attract and Keep Great Tenants without Hassle- 150x150Attracting and keeping great tenants is paramount to long term success in real estate investing. Vacant property means lost revenue, so you want to keep tenants with hopefully long-term potential; having tenants in and out constantly will be stressful and time consuming for you. Your bank account will be thankful if mortgage repayments on the property are made by tenants and not you!

In most cases, managing your own property becomes a bit easier than managing your tenants. As careful as you may be in choosing tenants, you are still susceptible to getting bad ones. Paired with a solid lease agreement, following a few other guidelines will ensure that you have the best tenants in your property.

Guidelines for Rental Success with Tenants

1.    Develop or Buy Property in an Ideal Location
You may have the best property in town, but is it located in a place where people want to live? People may be turned off if your property is located too far from schools, shopping centers, work, gas stations or public transport. The property must meet the lifestyle requirements of potential tenants.

Focus on areas that are equipped with social amenities, entertainment hubs, employment opportunities, education centers, retail centers, and a vibrant neighborhood. Even though not all of these are critical, many tenants will consider at least some of these factors in the surrounding area when deciding on a rental.

2.    Maintain an Updated, Quality Home
The general rule of thumb is that the better a home is, the better the tenant(s) it will manage to attract. A well-maintained home with curb appeal is likely to attract a better tenant. The more updated the house and its amenities, the better. Other than attracting and retaining great tenants, this will also help you command a higher rent price.

3.    Make a Killer First Impression
The first impression is always critical. You can turn off a potentially great tenant if the initial impression doesn’t meet their standards. If the potential tenant sees a well-maintained home, they will more than likely want to take care of the property as if it were their own. Not only does your property need to impress them, but you need to impress them with your professional manner and dress. If you are hiring an agent to handle your property, be sure they exude the professionalism you expect.

4.    Screen Tenants
Screening a potential tenant may not seem to be a very friendly tactic but you can present yourself as a serious and motivated landlord. It’s important that you do this so you don’t waste your time with tenants who aren’t serious. During the screening process, the potential tenant may reveal some red flags that will give you the tip-off that they may not be the best fit for you and your property.

Scrutinize all of the tenant applications very carefully. Any inconsistencies in providing information should hint to the type of tenant they have been before. Through a background check, confirm whether the client has a criminal record and also call to confirm previous addresses. You may also consider checking their business and personal references to give you a valuable insight about their conduct.

5.    Target Families
Families traditionally stay longer in one place than single tenants. Generally, families with school-age children will want to stay at the same school and avoid moving too often for the children’s sake at least. Families have more of a tendency to maintain a cared-for home because they take pride in making the home a clean and enjoyable place to live.

6.    Take Care of Your Tenants
A good tenant is an asset that adds to your net worth. If you find a suitable and responsible tenant, you should strive to look after them and the property so they hopefully stay as long as possible. If they always pay their rent in on-time, then you should ensure that you promptly attend to any problems with the home. You should also consider locking-in the rent price so the tenants can plan their budgets accordingly. If you do want to raise the rent price, be prepared to explain why and give the tenants plenty of notice to decide if they are ok with this price or want to move out.

7.    Market a Fair Rent Price
When deciding how much to charge tenants for rent, you should be very realistic. You should take into account current market prices, condition of the property and the location, among other factors. If you have taken all these factors into account and still have no renter possibilities, consider revising the price again. A slight difference between your rent price and what other similar, nearby properties are asking for may cost you a potential tenant. It’s better to lower the price a little and make a smaller profit than incur huge losses by leaving the property idle.

8.    Hire a Property Manager
This applies if you are not the one managing your property. Before you decide to hire a property manager, check their reputation from reviews and do online research. Since they are representing you, they should have your best interests in dealing with your tenants. Asking friends, acquaintances and family members can help you find a good property manager.

9.    Be Real Estate Market Savvy
As a good leasing agent, you should know where potential tenants are going to get information about the best properties in an area. They may be using newspapers, trade publications, websites, brokers, local periodicals, among other resources. Once you discover what mediums are being used the most by potential tenants, you can invest in advertising your services there.

10. Develop and Maintain a Real Estate Network
Securing and keeping exceptional tenants needs more than just advertising; you need a network for the real estate industry. Advertising will attract some potential clients, but referrals from other clients are typically going to be your best source of finding clients. If you treat your tenants professionally and respectfully, then they are likely to refer others to you. You can develop this network in part by your online activity, especially with blogs, fan pages, and other social media networking.

Real estate, like any other industry, has its ups and downs. Investing in real estate is a tough industry but has a multitude of opportunities and options for you to become a landlord, flip properties for profit, or even invest in your own home. However, finding and keeping great tenants typically presents the greatest challenge. Follow these steps to help attract and maintain ideal tenants in your properties for financial stability and stress-free business.

Investment Property Mortgage Rates- Is it Time to Invest?

Investment Property Mortgage Rates- Is it Time to Invest- 150x150The housing bubble burst that happened a few years ago resulted in a lot of investors losing their money, and made real estate investing seem like a scary thing to put your money in. Fortunately, low prices and near record low interest rates make this the best time to invest in real estate. Not only that, but the economy seems to be on the right track to recovery, which means that prices and interest rates have already started to increase, and do not seem like they are about to stop their growing trend.

Why Invest in Real Estate?

The recent economic crisis created many opportunities for those who have the means to invest in real estate. The high volume of recent foreclosures has created a larger pool of renters, which means that rental properties are a better investment than ever. Finding people to rent your properties should be easier now with more and more people finding jobs, and selling properties for a profit should be getting easier as well.

Mortgage rates are still at near record lows, which means that investing in properties is even more profitable. However, rates have already started to climb, so there isn’t too much time to take advantage of them. Add to this the fact that real estate prices are currently very low, and you have higher chances of making a lot of money by investing in this current market.

Investing in short sales is also a great opportunity right now, as more people prefer this option to foreclosure. Buying a short sale is a much better option than buying a foreclosed property, because there are bigger chances of a property being vandalized since it was foreclosed.

No matter what happens in the future, investing in real estate is still a good long-term investment. Current real estate prices are higher than they were thirty years ago, and having tenants makes the investment even more profitable.

The Future of Investment Property Mortgage Rates

Recent forecasts predict that mortgage rates will continue to increase over the next couple of years, but not significantly. Of course, even a 1 percent increase in interest rates will cost the investor a relatively large amount of money, but the increase will most likely come slowly without taking anyone by surprise.

At only 2 percent per year, the economic growth is slower than anticipated, which means that mortgage rates will also slowly increase over time. The only thing that would stop the economic growth and rates increase would be a new war or a new economic crisis in Europe. Currently, the job market is also experiencing a steady growth, meaning that more people will be relocating and looking for new homes or rentals, to the advantage of the investor.

Even if mortgage rates go over 4.5 percent in 2014, they will still be lower than before the economic crisis, keeping real estate investing still more affordable than ever.

Low mortgage rates are creating the perfect opportunity for investors to make a nice profit, but 2013 may as well be the last chance you will get to take advantage of rates this low. The good news is that any increase in mortgage rates comes slowly, so real estate investors can still make a profit in the near future. While rates are, indeed, increasing, so is the number of people who are looking for a home or a rental, so, even if the profits won’t be so great as the rates increase, the number of opportunities to make a profit will be greater in the years to come.

Real Estate Dealers and Investors- What’s the Difference?

Real Estate Dealers and Investors- What’s the Difference-150x150Many real estate investors don’t mind whether they are considered an investor or a dealer. The difference between the two can have a big impact on how much money you make in this business. Real estate investors benefit from several tax advantages, while dealers do not. The biggest difference is that investors are taxed at the capital gains rate while the dealers’ profits are taxed like regular income, which can be significantly higher. It’s up to the Internal Revenue Service (IRS) to determine who is taxed with each rate.

What is a Real Estate Investor?

A real estate investor is someone whose main goal is to purchase a property from which he or she can generate a profit. The profit is made by selling or renting the property to other parties.

One of the options that a real estate investor has when purchasing a property is to finance it with a loan. Other real estate investors, ones who have a better financial situation, choose to purchase the property without getting a bank loan. The goal is to sell the property for a profit when the prices increase. If the property’s value increases over time, the real estate investor will be able to receive a large return on their investment.

Some real estate investors choose to rent a property that they have purchased, generating a profit through rental income. The real estate investor becomes a landlord, with the responsibility of providing proper living conditions for the tenants, and maintains the property. The investor must determine the cost of running a rental property, taking into account things like repairs, regular maintenance, taxes, insurance and mortgage. After determining all of these costs, he or she can determine the appropriate rent amount that the tenants will be charged.

What is a Real Estate Dealer?

Dealers, like real estate investors, buy and sell properties for a profit as fast as possible. While real estate investors make long-term investments in properties, dealers are in it for the quick profit, and try to resell their purchases as soon as they can.

The Internal Revenue Service doesn’t allow real estate dealers, who are basically short-term investors, to benefit from the same tax rate that real estate investors benefit. Real estate investors are charged a long term capital tax rate, which is much lower than the rate that real estate dealers get from the IRS.

Factors That Determine Investor vs. Dealer

The Internal Revenue Service doesn’t have a clear set of rules that you could use to determine whether you are considered a dealer or not. The IRS analyzes your business in order to determine your classification, using the following factors:

  • Ownership Duration. If you own several properties for less than 2 years, you will most likely be considered a real estate dealer. If you hold on to properties for more than 2 years, they will be considered investments, and you will be classified as a real estate investor.
  • Statement of Intent. If your intentions of buying and reselling are expressed, then you will be considered a real estate dealer.
  • The Level of Advertising. Significant advertising and strong efforts to sell will be regarded as a real estate dealer tactic.
  • Number of Sales. The more sales you have over time, the greater the chance that you will be regarded as a real estate dealer by the IRS.

There are no fixed criteria to determine if you are a real estate investor or a dealer. The difference in tax between the two is significant, but it is up to you to decide if being a real estate dealer is worth the extra money that you will have to pay to the Internal Revenue Service. Understanding the difference between a real estate dealer and an investor will be important for your ability to take advantage of the lower tax rate, and save you a considerable amount of money.

Maximize Your Success as a Landlord with These 10 Tips

Maximize Your Success as a Landlord with These 10 Tips- 150x150Rental properties are great investments, especially in today’s housing market. But in order to become successful as a landlord, you will need to make your tenants happy. Managing rental property is as much about the people as it is about making sure that the building is properly maintained, but there are many more aspects to being a successful landlord. Here are some tips that will set you apart from the “average” landlord, and help make your business easier to run and more profitable.

Tips for Landlords

1. Check references. Don’t rely solely on first impressions or instinct when meeting a new tenant. People who seem great at first impression can become a nightmare in the future, so checking them thoroughly before signing a contract is important if you want to avoid any future headaches. Besides the credit history and background check, always ask tenants for references as well as a list of previous residences and follow up on them.

2. Keep records. In order to succeed as a rental property owner, you must know how to manage your property. Managing a rental property is a lot more difficult than managing a single-family home, so handling your finances in an organized way is the only way to make it in this business.

3. Have a policy. In order to protect your interests and the interests of your tenants, you will need a written agreement that includes the terms and conditions of tenancy. Make sure that this agreement includes many details, such as rules about pets and smoking in the rented unit.

4. Stick to your policy. Being organized is not only more beneficial to you and your business, but it also makes a good impression on tenants. Having a written policy makes your life and your tenants’ life a lot easier because you won’t have to explain yourself each time a tenant asks you why something is not allowed. If you have a written policy, you can just refer people who have questions to the document.

5. Provide quality. If your rental property offers quality, then quality tenants will be attracted. You don’t have to go overboard and invest significant money in remodeling, but providing above average quality will set a standard for the type of tenants that you want to attract.

6. Hire help if you need it. Doing everything by yourself can save you money, but it can also turn into a full-time job. Your involvement in the daily operations depends on how handy you are with repairs, how much time you have, and how close to the rental property you live. If you feel that being a landlord is taking too much of your time, you can always hire a property manager that can take care of the daily issues. This will cut into your profits, but it can also save you time and aggravation.

7. Do regular maintenance. Catching a problem with your rental property early on can save you quite a bit of money. Problems with the roof or the water heater can quickly escalate and cost you thousands to repair. Keep a log of all the appliances and fixtures, the times when they were changed, and when they need to be replaced. This way, you can shop around for better prices and take advantage of sales.

8. Have an emergency fund. Unexpected vacancies or repairs can happen at any time, so it is recommended to have some emergency cash on hand. When things break on your rental property, it is your duty to repair them as soon as possible, and not being able to may attract some trouble with your tenants.

9. Know the local rental laws. Many landlords get into trouble because they haven’t familiarized themselves with the local law. One of the biggest reasons that landlords are sued by their tenants is the security deposit. If you don’t follow the local law, you might end up having to return a tenant’s security deposit even if the tenant has damaged your unit.

10. Set contact hours. Let all your tenants know when you are available, so you won’t end up having to make repairs at night or during holidays. You can also set up a voicemail, so when a tenant calls outside of office hours, he or she can leave a message. However, it is recommended that you allow potential tenants to call at any time when you try to rent out a unit.

Taking care of your responsibilities with the unit and tenants as quickly as efficiently as possible is beneficial to everyone. Being a successful real estate investor and landlord boils down to being a good business person and keeping your tenants happy. By having the right attitude and knowledge, you can quickly turn being a landlord into a very profitable business.

The Big Question in Selling Your Home: For Sale by Owner or by Realtor?

The Big Question in Selling Your Home- For Sale by Owner or by Realtor- 150x150Selling a home takes a lot of preparation and work, and it’s not as easy as it would seem to be. The process of selling your home should be treated with seriousness, as this will make the difference between getting a good deal or a bad one. By selling a home without the help of a realtor, it is possible to save money on commissions, but this shouldn’t be the only factor in your decision to go with a realtor or sell the property yourself.

Before making your choice, make sure that you know what the home selling process involves, so you can decide if you can handle it yourself or hire a realtor. Weigh in the advantages of each option before making a decision. This article will present the most important pros of selling by owner or by realtor, helping you make the best choice.

Advantages of Selling Your Home by Owner

If you are considering selling your home yourself, then you should know that this comes with some pretty appealing advantages, both financial and practical. Here is why selling by owner is a great choice:

  • Save money. Real estate commissions can be fairly large, but they can be avoided by selling your home without hiring a real estate agent. For example, a 6 percent commission on a $180,000 house will be over $10,000, and that’s a significant amount of money you would be saving if you handled the sale yourself. Some of the selling costs may even be tax-deductible, so you will be saving some money there, as well.
  • Sell faster. When selling by realtor, there is a big chance that your home won’t sell as fast as if you did it alone. This may be caused by the fact that the price will probably have to be higher in order to compensate for the realtor’s commission. The buyer will offer less when finding out that you are using a realtor, which will probably lead to negotiations that can further delay the sale. An overpriced house will sit on the market a lot longer, and possibly lead buyers to believe that there is something wrong with it since it hasn’t sold yet.
  • Market immunity. Selling by owner won’t be very difficult in both buyer’s and seller’s markets. In a buyer’s market, by selling your home on your own, you can afford to be more competitive with the price, and sell faster than owners who have hired a real estate agent. Selling by owner in a seller’s market allows you to hold on to a maximum amount of equity.
  • More convenient. When selling your own home, you can schedule appointments whenever it is more convenient for you; you don’t have to keep your home extra clean just in case an agent wants to show it on short notice and you don’t have to leave the house while an agent is showing. Knowing when someone is going to come and see the house will save you a lot of hassle and will allow you to prepare your home in time for the showing without being hurried.
  • Less stressful. Finding a new home and moving is stressful enough, without having to worry if your real estate agent is doing their best to sell your home. By being in control when selling your home, you will have fewer things to worry about because you will be the one who is meeting the potential buyers and finding out how interested they are. Not having to wonder what is going on all the time or why no one has made an offer yet will save you headaches.

Advantages of Selling Your Home by Realtor

There are many advantages to using a realtor in order to sell your home. The biggest benefit to working with a professional is that you don’t have to go through the complex process of selling a home on your own, which requires much more of your time and energy. Realtors have the necessary training and experience to deal with the complex and often intimidating details of selling a home. Here are some of the most important advantages of working with a realtor when selling your home:

  • Pricing your home easier. Real estate agents have proper knowledge of the current housing market conditions, meaning that they will know what similar properties are selling for in the area. Knowing how much to ask for your home without having it sit for months on the market is really important when selling. With their marketing resources and real estate connections, a realtor can better establish what the best asking price for your home will be.
  • Better exposure. Selling by realtor will help get your home more exposure on the market. Your realtor will know how to do this best, whether by creating flyers or posters, having an open house, or by other means. He or she can also use his contacts in the real estate industry network to get the word out about your property.
  • More security. When selling a home on your own, you will have to show it to potential buyers. While this can be very convenient, you must keep in mind that you are inviting strangers in your home. A real estate agent has experience in dealing with buyers, and they will usually screen them through their real estate agency before allowing them to see your home.
  • Less emotional involvement. Selling your home can be a very emotional process, which can interfere with good decision making, causing you to sell your home for less than it’s worth or holding on to it because no one will buy it at the price you think it’s worth. Having a professional that has no emotional involvement and looks out for your best interests might be the better choice when selling your home.

As you can see, there are advantages to both selling your home by owner and by realtor. In the end, it is up to you to figure out your situation and decide if you want to go through the home selling process alone or with the help of a professional. Either way, you should inform yourself as much as possible on this matter so you make the best decision for you and save as much money as possible.