What comes to mind when you hear the words “commercial real estate?”
For a long time I thought of shopping centers, malls, and skyscrapers. I also pictured industrial complexes like warehouses or factories. But my narrow definitions would have been incomplete.
Even definitions online can be misleading. Investopedia says, “Commercial real estate (CRE) is property used exclusively for business purposes or to provide a workspace rather than a living space. Most often, commercial real estate is leased to tenants to conduct business. This category of real estate ranges from a single gas station to a huge shopping center.” Commercial real estate includes retailers of all kinds, office space, hotels, strip malls, restaurants, and convenience stores.
Commercial real estate can include many assets that some consider residential and more. For the purposes of this discussion, and not at all as a definition, I propose that we segregate residential and commercial real estate as follows:
Residential real estate is valued based on comparable prices. Comps. Other houses sold on the street, in the neighborhood, etc.
Commercial real estate valuation is based on some pretty basic math.
To really compare lets look at a hypothetical flip you could do. You may buy a home for $200,000 that needs a lot of work. You fix what’s broken and beautify it to the nth degree. You build out the basement and the attic. You add a large addition and the finest landscaping in the neighborhood. At the end of the day, you’ve got $500,000 in this flip home.
Now if this home is in a $250,000 neighborhood, it’s likely going to be a big problem. Because when the appraiser comes, they won’t be able to find comparable properties to support your price. You could easily lose a lot of money, a lot can hinge on the appraisal.
Commercial real estate is and entirely different “calculation”. Commercial real estate valuation is based on a value formula. That formula is Value = Income ÷ Rate of Return. More specifically, it is Value = Net Operating Income ÷ Capitalization Rate. For more info on calculating commercial real estate and some other approaches that are used check out this page on valuepenguin.com
Commercial real estate investors have the powerful ability to “force appreciation” by increasing the net operating income. And if they’re clever enough, or fortunate enough, a shrinkage in the capitalization rate (cap rate) will multiply their value even further. Leverage just sweetens it more.
So commercial real estate, for the purpose of this article, is real estate that is valued based on math rather than comps. This includes industrial, retail, hotels, office, restaurants, and more.
Overlooked Commercial Investments
There are two classes of apartments: residential multifamily and commercial multifamily. Residential multifamily is financed using a residential loan and the values are based on comps. This is generally buildings with two to four units.
Commercial multifamily is financed through a commercial loan. Many people make another division between small commercial multifamily and large, based on the size needed to hire an onsite staff. This is typically 40-50 units in an urban setting or about 75 units in a typical suburban apartment complex.
Cap rates, the measure of value per unit of income, have been very compressed for multifamily for years since the financial crisis. This means these assets are very pricey (lower cap rate = higher price, since that is the numerator in our value equation). Cap rates in the range of 4% to 6% are common.
I didn’t think much about this over years past, and apparently the big commercial rating groups didn’t either since there has not been a separate classification for this category in most past reports.
There are over 55,000 self-storage facilities in the U.S., which is nearly the number of McDonald’s, Starbucks, and Subway restaurants combined. Self-storage has become quite popular in the past decade and the cap rates have shrunk from around 10% or so to the 5% to 7% range, so more expensive.
Mobile Home Parks
Warren Buffett also in early and owns the largest manufacturer of mobile homes (Clayton) as well as one of the most aggressive lenders (21st Mortgage) and Berkadia (a large lender that finances mobile home parks and more).
Cap rates in this asset class have compressed from the 10% to 14% range down closer to 6% to 8%. Green Street Advisors recently referred to mobile home parks as the darling of all commercial real estate. And in the midst of the COVID-19 stock market meltdown in late February, a Wall Street Journal article trumpeted the power of investing in mobile home parks.
Data centers have exploded in the past several years. Just as retail’s demise is accelerating during COVID-19, data center demand has gone up. Zoom and other online meeting platforms have taxed the limits of the existing infrastructure. Emerging technologies like the Internet of Things, artificial intelligence, 5G wireless, augmented reality, and autonomous cars will also continue the ever increasing demand to new heights.
Many investors haven’t thought about investing in this sector. Unlike self-storage and mobile home parks, there are no mom-and-pop operators to cherry-pick. You could certainly invest passively through a real estate investment trust.
Multifamily is largely overheated. Even though fundamentals remain strong, many syndicators are looking to dial in on a specific type of multifamily to obtain a better yield. Senior living fits that bill for some.
I’m not talking about skilled nursing facilities specifically, though this sector may include that. I’m talking about independent living communities that are becoming increasingly popular.
There must be a reason that almost everyone in the Forbes 400 (the wealthiest of the wealthy) invests in commercial real estate. Maybe it’s time for you to get started!
As a real instate investor or rental property owner, you have two options when it comes to managing the day-to-day operations of your property. You can choose to self-manage the property, meaning you oversee maintenance, repairs, tenant contracts, rent collections, and all aspects of the tenant-landlord relationship. You can also choose to hire a third-party professional to look after the property for you. Which is what I choose in my pursuit of building PASSIVE INCOME.
Although there is no right or wrong answer for everyone, there could be a right or wrong answer for your lifestyle. Your individual circumstances may make self-management seem impossible, and we are here to help you understand the benefits and risks of using a property management company to oversee the daily operations of your property. Before you decide, consider these pros and cons.
The only disadvantage to retaining a property management company is its effect on your profit margin. The average company will require the first month’s rent as its first payment and then 8% to 10% of each month’s rent after that. This first month’s payment requirement covers their expense for any advertising, showing the property, processing an applicant, credit administrative costs, and other general expenses that come with setting up a new account. If your goal is to have the tenant pay your mortgage with the rent, you will need to factor in the costs of the management company to determine feasibility.
Another risk associated with hiring a property management team is ensuring you hire the right property management team. Similar to any other business, not all hires are good hires. When handing the day-to-day operations of your property over to a third party, you are entrusting that third party to make the right decisions every day on your behalf. From marketing the property effectively to collecting and maintaining payment records ethically, it is important to do your homework to avoid the risk of hiring a bad apple to oversee one of your most valuable assets.
The advantages of using a management company far outweigh the disadvantages. Even if the numbers don’t quite work and you determine you may be supplementing costs to the management company to keep your rental property, it is still a great value.
Property managers are up to date on state and federal rules and regulations with respect to tenant/landlord requirements and responsibilities. You won’t risk a “violation” putting your property and finances at risk by not knowing these requirements.
Property managers will establish the current market rental rate for your property. The rental market is a fluid market. Rates can change from month to month and though you will have a set contract usually for the first year, the company will be able to assess the rents at the end of each contract to ensure you are getting the highest rent possible based on real estate markers
Property managers will do all the communication for you with the tenant. That includes the interview process and managing any complaints or emergencies that may arise day or night. There is nothing worse than having to respond to a tenant at 3:00 a.m.
Property management companies will find the best tenants. It’s not only frustrating but financial suicide to allow an irresponsible tenant into a unit. A quality company has developed a process of screening out risky tenants to ensure a steady monthly income on your property as expected.
Property management companies have connections. If your property has written in maintenance agreements, such as lawn care and gutter cleaning, management companies can refer service companies at discounted prices. Due to the volume of these service providers as they work in connection with the company, they can pass on some savings to you. Their reputation and dependability has already been tested through the management company so you can rest easy knowing they will get the job down without your supervision.
For many, real estate investing strategies have been used to diversify portfolios, increase cash flow, and build generational wealth. The beauty of buying your first rental property, is that you will soon join countless others on the road towards retirement savings, achieving investment goals, and inevitably meeting your financial objectives. However, before you can enjoy the latter benefits, you need to first know the 10 steps to buying your first rental property.
Step 1: Know Your End Goal
Understanding your end goal is the first step towards purchasing an investment rental property. This end goal should be based on realistic expectations, your financial capabilities, chosen investment strategy, and the answers to the following five questions:
When do you plan to retire and how much money will you need to cover all of your expenses?
Do you have any current retirement income sources?
How much money do you plan on investing in purchasing rental properties (and other real estate investment opportunities?
Do you need immediate cash flow?
Do you need to diversify your portfolio to reduce risk, maximize returns, or lower taxes?
These above types of questions will help you keep sight of your end goal as you begin to choose an investment strategy that works fits your needs, while considering your first potential rental property investment.
Step 2: Get Advice from Other Landlords
The next step in your real estate investment journey is to speak to other landlords. Talking to a mentor who is investing in the same area (and types of homes) that you are interested in can make all of the difference in the world. When you speak with your mentors / other landlords, it is important that you keep their “investment bias” in mind. Investment bias refers to the landlord’s own experiences, purchasing strategy, and of course end goals. With this in mind, you can begin to find investors with similar goals along with extensive resources, like the BiggerPockets Podcast. During the podcast, expert investors who use different strategies are interviewed, answer questions, and help determine your personalized investment strategy.
As you begin to explore the possibility of buying your first rental property, it’s important to keep in mind how much money to save for a down payment. Ideally, you’ll want to have a 20 – 30 percent down payment saved before: a) looking for an investment opportunity, or b) apply for pre-approval. The following five tips can help you save for a down payment in a timely fashion:
Pay off any debt that you currently have.
Set up an automatic savings deposit.
Lower your rent.
Drastically reduce unnecessary living expenses.
Take on a second job.
Step 4: Know Your Expenses
While every rental property is different, all have one thing in common … expenses. With this in mind, before you purchase a rental property, it is important that you know all about the potential monthly, and unexpected, expenses that the property will experience. These potential expenses include:
Property taxes. When purchasing a rental property, it’s important to remember that some states (as well as towns or counties within certain states) have higher property taxes than others. Additionally, property taxes can be quite expensive, which is why it’s always a good idea to review any potential investment property with your CPA, before deciding to sign on the dotted line.
Set aside money for anticipated and unexpected repairs.
Keep a rainy day fund. It’s no secret that even the strongest real estate market can dip. Have at least six months in cash reserves saved. These funds will be especially useful if you have to conduct any emergency repairs, or if your property sits vacant for along period of time.
Step 5: Get Pre-Qualified
Pre-qualification will help you better understand what types of investment properties you can afford to purchase. Listed are a few qualifications that must be met before becoming pre-qualified:
A credit score of at least 680 (an ideal score is 740 or higher).
A two year job history at a U.S. company. Self-employed individuals will need to prove their financial stability and monthly income for the past 3 to 5 years.
Have the liquid cash needed for the down payment.
Have cash available for at least six months of expenses.
Maintain a consistently low debt to income ratio.
Step 6: Research Rental Markets
Research, research, and research some more. In fact, when it comes time to purchase your first rental property, you can never research too much. As part of this process, look for the following indicators of a strong real estate market.
Job Growth. Strong real estate markets and increased job growth go hand in hand.
Population Growth. Population growth is often an indicator of a strong real estate market. The general rule of thumb is as follows, when people from out of state flock to an area, the rental housing market is generally flooded and turned into a seller’s (or landlord’s) market, leading to higher rents and property prices.
City Revitalization. A city revitalization period typically offers an opportunity to capitalize on the real estate market.
Step 7: Do Your Due Diligence
From looking at schools to understanding the own to rent ratio, there are a number of steps you can take to complete your own due diligence. It’s worth noting that the factors used in the previous step will help identify strong real estate markets. Now, as part of your due diligence, it will be your job to look into the actual neighborhoods within these markets. Ask the following types of questions to guide your research efforts.
Is the rental property within a good school district?
Are their local attributes within walking distance?
Speaking of walking, what would the property’s walk score be?
How many rental properties are in the area?
Is the crime rate low?
What is the average household income for the neighborhood?
What are the demographics for the neighborhood, and do they align with your identified rental demographics for the local market?
Step 8: Speak to the Property Manager
When it comes to buying your first rental property, it’s vital that you speak with the property manager. Be sure to ask them the following types of questions:
How much will a [insert brief bedroom-based description of your potential investment property] rent for in this area?
What are the average rents in this area?
Once you have gathered the answers to the above two questions, from multiple landlords, start to cross reference the data against what you can find on popular sites such as Craigslist, Realtor, Zillow, or even Apartments.com. This information will provide good insight on how certain property managers are able to rent out higher than average properties.
Step 9: Choose The Right Financing
Deciding on the right financing to buy your first rental property simply comes down to your real estate investing goals. Are you interested in generating positive monthly cash flow or long-term appreciation? The type of financing you use will absolutely affect your return. For instance, the higher your monthly mortgage payment, the lower your cash flow will be. The good news is, if you do your market research and buy a rental in a growing market, property owners can count on both positive cash flow and long-term appreciation. Another great thing about buying real estate is that it’s generally an appreciating, or growing asset. The longer you hold onto your rental property, the more it increases in value (appreciation), and thanks to inflation driving up rents over time, your monthly cash flow should increase too.
Step 10: Make an Offer
Once you make an offer and it’s accepted, the clock starts ticking. The amount of time you have to close will vary, but it’s wise to act quickly and make sure the deal closes before the agreed upon deadline. At this point, you should have a very solid idea about how much money and time you’ll need to get your property rental-ready. If you’ve decided to hire a property manager, start getting the ball rolling on setting up terms and agreements. The faster you can fill the rental with tenants, the faster you’ll start seeing a return on your investment.
Given the large upfront costs that come with the purchase of a home, most young people begin their independent lives renting an apartment, or more and more so move back in with their parents. As they finish college or trade school and go on to start their careers, save money, and start families, many choose to buy a home. On the other end of the age spectrum, homeowners nearing retirement may choose to sell their family homes, downsize, and become renters once more.
Regardless of the big-picture economic forces that affect homeownership rates, determining whether and when to purchase a home is a personal choice that demands careful consideration and planning. This decision varies from market to market – what makes sense in small town, USA might not work in San Diego or NYC and vice versa. Also, because American culture idealizes homeownership to a certain extent, emotional and social pressures can affect the decision almost as much as financial concerns.
Are you a renter interested in buying a home, or a homeowner wondering whether renting makes more sense at this point in your life? It’s time to evaluate the relative costs, benefits, and drawbacks of owning versus renting your home.
There’s no doubt that buying a home is a major life decision, but is it right for you? Of course, there’s no singular correct answer as there are pros and cons to both renting and buying. A major factor in anyone’s decision-making process comes down to finances. In most cases, renting seems to be the more affordable option.
However, that’s not always the case. Your decision can boil down to several lifestyle considerations such as whether you want flexibility or stability, what your career goals are and whether you want a place to truly call your own.
Read on to find out what you need to consider before deciding to rent or own your next home. Let’s first start with a list a Pros and Cons:
Renting Pros And Cons
Mobility/freedom to move around
Landlord pays for maintenance
Doesn’t require expensive closing costs
No fluctuation in monthly housing expenses
Allows you to test-drive different living spaces
You don’t build any equity
Limited ability to customize your living space
Rent could go up over time
Landlord might sell or decide to stop renting
Limited sense of home stability/permanence
Buying Pros And Cons
You build equity over time
Home value may increase over time
You may reap tax benefits
Unlimited freedom to customize your living space
Sense of home stability/permanence
Closing costs can be prohibitive
Responsibility for maintenance and repairs which requires time and effort
Less flexibility to move (at greater difficulty/expense)
Home value may decrease
Recent tax laws could hamper tax benefits
Rent Vs. Buy: How To Decide
1. How Long Do You Plan To Live In The Same Place?
In other words, are you planning on putting down roots raising your family and growing into the local community for a many years to come or do you desire more flexibility in where you live?
If you feel certain you’ll stay in a home for at least 5 years, buying a home can really start to make sense. This is because it could be both a good fit financially and emotionally – you can tailor it to your personal liking and really make it feel like it’s yours, like HOME.
On the other hand, renting is the better option if you move more often, such as in the military or you’re open to new jobs and opportunities all over the country. For example, let’s say you’re really hoping to get that job promotion but it’s halfway across the country. You may not want to have to deal with the hassle of selling a home while transitioning to a new position. Or perhaps you’ve moved to a new area and renting would give you some time to get to know the area and different neighborhoods before settling down somewhere.
Sure, you can buy a home and then sell it within a few years, but the costs are hardly worth it. Aside from initial closing and moving costs, you may be paying more closing costs when selling a home in addition to other costs such as repairs and renovations that would make the house sell for top dollar. Lastly you’re assuming your home will appreciate and that by no means is a guarantee.
2. Estimating The Cost Of Renting Vs. Buying
In many cases, renting can be cheaper than buying a home because of the upfront costs involved. This includes a down payment, closing costs, moving costs, any renovations and other home maintenance tasks.
With that said, just because you can afford a mortgage payment doesn’t mean you can afford a home; all the other expenses of home ownership add up. In addition to a monthly payment that’s more than the principal and interest on your mortgage, you’ll also have property taxes, homeowners insurance and (in some cases) mortgage insurance as well as homeowners association fees.
On the other hand, buying a home can be cheaper in the long run and it offers you an opportunity to build equity. In most areas of the U.S. buying a home is actually cheaper according to a ATTOM Data Solutionsreport that shows that renting is more affordable than buying a home in 69 percent of the counties in the report that have a population of at least 500,000 or more.
Not only that, but there are tax savings to being a homeowner. (Though with the recent tax changes there may be limits as to how much mortgage interest, state and local property taxes you can write off). As always contact your accountant or financial expert for up to date tax advice for your personal situation.
That’s not to say you should dive right into home ownership. It’s completely fine to rent for a few years, save up and purchase a home if you’re dead set on having a place of your own. The savings in costs of being a homeowner also assume you’ll stay in a home for the long term and may not factor in maintenance costs. However, if you do pay off your mortgage and continue to live in the home, the savings can be significantly cheaper even with home maintenance costs.
3. Mobility Vs. Putting Down Roots: Which Is More Important To You?
Look, life happens. Even with the best of intentions it’s hard to predict what can happen next. If you intend to stay in one place for a long time and have the financial means to do so, buying a home may make the most sense.
However, it’s important to take a look at your current life situation and think about whether or not it’ll change within the next few years. Because if it does, your housing needs could also change.
For example, you and your long-term partner may have just gotten engaged and plan on getting married in the next 2 years. In this case, buying may not make sense because you two want to figure out how to combine your finances and work out your budgeting routine before adding a home into the mix.
Or let’s say you and your spouse just got married and you aren’t sure if you want to start a family quite yet. If you have any inklings that you might want to have children soon, you shouldn’t buy a home that’s not going to accommodate a growing family in a few years.
In both these cases, it might be a good idea to rent for the time being so you have time to figure out what you want in a home, what your budgeting needs are and what kind of home might be the best fit for the lifestyle you hope to have in the future.
4. Weigh The Risks
As mentioned above, there are risks for both renting or buying a home. Although you can build equity when buying a home, there are some financial risks. For one, you could lose money if there’s a downturn in your local real estate market (Here is more info on housing market cycles, Biggerpocket.com). Or, if you sell your home sooner than you want, you may not be able to make up for what you spent in closing costs or renovations.
Let’s not forget maintenance costs. These are expenses you’ll need to pay to keep the home in top condition. Think checking air filters and vents, testing fire alarms, landscaping, fixing plumbing issues, among other things. There’s always something that comes up that needs fixing.
If you’re focused on other things in your life like a career that requires you to travel often or you have multiple young children to attend to, adding home maintenance to your list of responsibilities may not be a top priority to you.
On the flip side, renting means you won’t have the opportunity to build equity like you would with buying. Your rent could go up at any given moment. You’re also at the mercy of your landlord, such as being asked to move out or having to deal with maintenance requests being deferred.
5. Assess Your Financial Situation
It’s important to note that you need to be realistic about your financial situation when deciding between renting and buying. Once you estimate the costs of renting versus buying, be honest about whether you can afford other upfront costs like a down payment, repairs, moving costs and buying new furniture. Consider using a mortgage calculator to estimate your monthly payments as well as how much home you can afford.
Consider these questions:
Do you plan on having children? Do you know where you want to raise them or where you want them to go to school? What is the home-buying landscape like there?
Do you see yourself changing jobs in a few years or are you committed to your city for the foreseeable future?
Are you prepared to trade your weekends of leisure — biking, hitting breweries, brunching — for fixing sinks and mowing the lawn? Because that’s what homeowners do. Signing closing papers is the wedding, move-in day is the honeymoon, and homeownership is the actual marriage. There will be work and rough days, and it’s not as easy to bail if things get really bad like when you were “dating” a rental home.
What is it about owning a home that appeals to you? Is it having a physical place to make your own, to really invest in personally, not just financially? On the flip side, are you mostly looking to make a financial investment? Is it just a status thing? Do you feel like you should buy a home at this point in your life? Where is that urgency coming from?
The most important thing to remember is that buying a home isn’t the be-all-end-all of financial adulthood. Renting is not inherently a sign of an immature financial life. For a lot of people, renting could totally be the best move, at least for a period of time. And that’s okay.
In either case, do some careful budgeting right now so no matter what you choose you’ll be able to afford a home or rent.
Rent Vs. Buy: Final Thoughts
There isn’t always a clear answer to the question of whether to rent or buy. Depending on your life situation and finances, the answer might change over time. There are other options such as rent-to-own property where you start out renting then move onto becoming a homeowner. No matter what decision you make, it’s crucial you make an informed decision based on your financial situation and lifestyle.
This matters too. When it comes down to it, if the cold numbers still leave you a little on the fence, but emotionally you are honestly in love with the idea of truly owning a home, then go with that. When it comes to home buying, let your logic clear a path for your emotional fulfillment. A home isn’t just a thing you own — it’s a place you live your life. It’s more okay to weigh your feelings as heavily as you want.
Smartassest.com has a handy calculator that weighs the known costs (both financial and time) associated with renting and buying. Although this calculator can help you decide what makes the most financial sense in a particular situation, it can’t help you evaluate all the subjective, non-financial factors that affect your ultimate decision. Only you and your loved ones can make the final choice, so as you work toward an ultimate decision, keep an open mind. Remember that it’s better to wait and make the right call than rush into a choice you come to regret.
Are you deciding whether to rent or buy your home? Let us know in the comments below.
Many people start their home buying process without a real understanding of what it takes be a homeowner.
In fact many of them don’t even know the upfront costs when buying a house — including a down payment, closing costs, repairs, and so many others.
They think that if they have a sizable down payment and a stable job, that its smooth sailing from here. Well, not quite…
This lack of knowledge can lead them to make costly mistakes, including paying thousands of dollars extra in loan interest, defaulting on their home loan, or going bankrupt. The following are some of the biggest mistakes made when it comes to buying a house.
1. Not Figuring Out How Much House You Can Afford
Without knowing how much house you can afford, you might waste a lot of your time and energy. You could end up looking at houses that you can’t afford yet, or not in your ideal conditions or location that you can actually afford. Your time is valuable so treat it that way.
For many first-time buyers, the goal is to buy a house and get a loan with a comfortable monthly payment that won’t keep them up at night, generally no more than 30-40% of your monthly income. Aiming lower and not trying to max what the bank says you pre-qualify for can be and effective way to build a sort of saftey net.
To avoid this mistake: Use a mortgage calculator to help you know what price range is affordable, what’s a stretch and what’s overly aggressive. And don’t forget if it’s your first time to leave a little extra breathing room for those big expenses expected with years of home ownership.
2. Getting Only One Rate Quote
Getting a loan to purchase a house is the most expensive financial decisions most people make their entire lives. So it’s important to have the best mortgage rates possible so you don’t end up paying thousands or tens of thousands of dollars extra in interest over the life of the loan.
Yet, time and time again I see friends and family only speak with one lender when buying a home. This is a big mistake! When you speak with one lender, you don’t know what other mortgage rates are available to you. A good mortgage rate means less interest. I get 3 quotes, normally anything past 3-5 there is a smaller variation from the other loans.
Shopping for a mortgage is like shopping for a car or any other expensive item: It pays to compare offers. You or someone you know probably spends alot of time shopping for a car. But hardly spend a fraction of that when buying a home.. on something that can be more financially substantial that all the cars they buy over the life of that mortgage! According to Consumerfinance.gov, almost half of borrowers don’t shop for a loan.
To avoid this mistake: Apply with multiple mortgage lenders. A typical borrower could save hundreds in interest in the first year alone. If you’re worried about your credit score going down from all these inquiries don’t, mortgage applications made within a 45-day window will count as just one credit inquiry.
3. Not Checking Credit Reports and Correcting Errors
One of the most important things a mortgage lender looks at when deciding qualifying you for a mortgage loan is your credit score.
Yet, many don’t know the importance of maintaining a good credit score. Lacking that fundamental knowledge could cost them a lot. One is that you will have a harder time getting qualified for the loan.
Second, even if you do qualify, you will likely get a high mortgage rate. A high mortgage rate can cost you thousands of dollars in interest – money that you could contribute towards savings, investments, and retirement.
To avoid this mistake when buying a house, first figure out your credit scores through a free monitoring service like MyFreeScoreNow. A good credit score is around 700+.
Once you have an idea of what your credit score is through your credit report, take steps to improve it. One way to raise your credit score is not to max out your credit limit.
Maxing out your credit cards can hurt your credit score significantly. Ideally keeping your credit utilization rate under 30 percent.
Another way to improve your credit score is to pay your bills on time. Payment history accounts for 35% of your overall credit score making it very important to pay your bills promptly.
Mortgage lenders will scrutinize your credit reports when deciding whether to approve a loan and if so at what interest rate. If your credit report contains errors, you might get quoted an interest rate that’s higher than you deserve. That’s why it pays to make sure your credit report is accurate.
To avoid this mistake: You should use your free credit report each year from all three of the main credit bureaus. You should also dispute any errors you find.
4. Making a Down Payment That’s Too Small
A down payment on a house is arguably the most important factor when it comes to buying a house. Unless you are so wealthy that you can buy a house with outright cash, you will need to come up with a down payment.
The recommended down payment is 20% of the home purchase price. But many first time home buyers can be qualified for a FHA loan, where the down payment is 3.5%.
However, the disadvantage of putting less than 20% is that you will have to pay Private Mortgage Insurance (PMI). A PMI is extra fee added to your monthly mortgage payment.
Another disadvantage is that it will take you longer to pay off your mortgage. And your monthly mortgage payments will be much more.
One way to not have to worry about a PMI is to save for a 20% down payment before starting the home buying process. Saving for a down payment should not be that hard if you have a savings strategy in place.
You don’t have to make a 20% down payment to buy a home. Some loan programs allow you to buy a home with zero down or 3.5% down. Sometimes that’s a good idea, but homeowners occasionally have regrets and it inherently carries more risk.
Use Mortgagecalculator.org when looking at how much of a down payment to use, balance this with how much you can afford monthly.
To avoid this mistake: A bigger down payment lets you get a smaller mortgage, giving you more affordable monthly house payments. The downside of taking the time to save more money is that home prices and mortgage rates are always changing, which means it could become more difficult to buy the home you want and you may miss out on building home equity as home values increase. The key is making sure your down payment helps you secure a payment you can comfortably make each month.
Every day, you’re hustling. Maybe your hustle just isn’t enough to pay off those student loans fast enough. Or could use a few extra bucks to worry less about credit card bills. Or maybe you’re ready to buy an investment property but just need to scrape together a down payment and have cash reserves.
It’s time for you to get a real estate side hustle.
Many Americans have some kind of side hustle. A lot of these side hustlers have full-time jobs. Or they are looking to leave that full-time job and start earning passive income while they live the life they want on their own terms. If you’re looking to invest in real estate, side hustles can help you get there without making a drastic change to your lifestyle as well as get your feet wet in the industry.
Some of these side hustles require a little bit of cash to start, while others don’t. Some require a license and some training. Others require that you have great selling skills or killer connections in the industry.
But no matter where you are in your real estate journey, you can start making some extra money with at least one of these side hustle ideas.
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Real Estate Side Hustles : License Or No License
Real estate is a massive industry. After all, everyone needs a place to live. There are dozens of professions that focus on the real estate industry and there are all sorts of opportunities for real estate side hustles as well.
Some of the activities in the real estate industry require you to have a real estate license. The licensing process changes from state to state in the US, although most of the laws and rules are similar wherever you go.
The licensing laws in your state are important to understand because you DO NOT want to be performing activities that require a license if you don’t have one. The penalties are big fines and possible jail time.
Additionally, you want to be sure you aren’t putting your real estate license at risk by breaking state laws. The laws have all been crafted with consumer protection in mind and there are all sorts of ways where sloppy or unethical behavior can land you in hot water.
With that in mind, here are some real estate side hustles that may be worth exploring. It’s not a comprehensive list, but it’s a solid start.
A cash-out mortgage refinance allows you to borrow more than you owe, against your homes equity, and keep the difference as cash. Taking out a Home Equity Line Of Credit (HELOC) is another way.
Normally the most you can borrow from your house is 80% loan-to-value (LTV). So if your home is worth $1,000,000, and you have a $500,000 mortgage, the most you can refinance would be $800,000 and receive $300,000 in cash, and this money is tax free because it’s a loan that you will have to repay but can be very powerful in building a higher net worth or passive income.
Cash-out Refinance To Buy Stocks
With the coronavirus and other factors, the 10-year bond yield and 30-year bond yield have both fallen to new all-time lows. The 10-year bond yield is now below 1% after the Fed announced a surprise 50 bps Fed Funds cut. More Fed rate cuts in the future are very possible as well.
With many investors cash heavy and unsure how the stock market will perform in the short term, many are turning to other vehicles to hold their wealth. This should help slow any major swings in real estate prices, as investors buy into investment properties. And rental prices even through 08-09 were much less affected than housing prices and the stock market. Some may take this time to do just the opposite and free up money to buy into a depressed market and get stocks while they are on sale.
If you are thinking of doing a cash-out refinance to buy stocks, here are some of my pros and cons.
Pros Of A Cash-out Refi To Buy Stocks
1) Lock in massive outperformance. Let’s assume the S&P 500 is down 10% for the year when you purchase stocks. You would be able to lock in 10% outperformance on your cash-out capital. No matter whether the S&P 500 continues to go down or up, you will always be outperforming.
Although it’s great to make money when it comes to investing, the next best thing is outperforming the index or your peers. If an active fund manager were to outperform his benchmark by 10%, that would plave him in the top 1% of active fund managers. Given this performance, he’d probably get a huge bonus and attract a massive amount of assets and new investors.
To gain true wealth, you must outperform the average, otherwise, you’ll always be just average.
2) Take advantage of all-time low interest rates. The Fed cuts interest rates to make money easier to get and increase economic activity. The lower interest rates go, the more people and businesses tend to borrow to buy equipment, property, goods, and services. Doing a cash-out refinance to spend is in line with the Fed’s desires.
If inflation is running around 2% and you can get a mortgage rate at 2.425%, your real interest rate is only 0.425%. The lower the real interest rate hurdle, the higher the chance of earning a greater return. From a nominal return basis, the 2.425% mortgage interest rate drag on returns is comparable to paying a traditional wealth manager to manage your wealth or investing in a hedge fund which charges 2% of assets and takes 20% of profits.
Everybody should consider refinancing their mortgage today. But not everybody should be doing a cash-out refinance.
3) Diversify net worth. If you have a large percentage of your net worth in real estate, you may want to do a cash-out refinance to diversify your net worth. Note that your real estate exposure will only decrease based on your increased exposure in stocks. Your absolute real estate exposure won’t decrease since you haven’t sold any properties. You just have more debt.
4) You could get a tax deduction. The mortgage interest deduction may be available on a cash-out refinance if the money is used to buy, build or substantially improve your home. In general, homeowners who bought houses after Dec. 15, 2017, can deduct interest on the first $750,000 of the mortgage. Claiming the mortgage interest deduction requires itemizing on your tax return. As always, verify your situation with your accountant.
Refinancing a mortgage today is a smart move with interest rates having fallen to 6-year lows in 2020. With trade war tensions with China, Oil Price Battles, and COVID-19 wrecking many people’s ability to earn normal wages, the 10+year bull market in stocks has ended.
Lending standards are also strict with ~740 being the average credit score for denied mortgage applicants in 2020. With these higher lending standards, I feel confident that the next housing market correction won’t be nearly as bad as the last one.
Mortgage rates are still historically low and you may have plenty of loan options, but take some time to figure out whether refinancing is your best move right now. How long you plan to stay in your home, your financial goals and your credit profile all play a role in your decision about whether — and when — to refinance.
I’ve refinanced one mortgage which was a 5/1 ARM loan and currently refinancing my VA loan through the VA IRRRL (Interest Rate Reduction Loan). Here are my strategies for how you can get the lowest mortgage rate possible.
How To Get The Best Rate Possible
1) Question your existing mortgage lender: The easiest course of action is to ask your existing mortgage lender if they can lower your mortgage rate. After all, they don’t want to lose your business to a competitor.
2) Shop around online: A great option is Credible, a leading mortgage comparison marketplace to see what their lenders could come up with. I like Credible because they provide real mortgage quotes from pre-vetted, qualified lenders who are competing for your business. Within minutes of filling out the application, I was contacted with mortgage rates between 2.75% – 3%.
3) Track down your old mortgage officer: The mortgage officer who first helped you refinance your loan might have moved elsewhere. If so, track him or her down and tell him or her you’d like to do business.
Mortgage officers at new banks would love to win over business from their old bank. As a result, they may often given you a better rate. It’s worth starting a new application with a new bank so you have something in writing to negotiate with your existing mortgage lender.
4) Ask about multiple accounts: Banks are all about cross-selling you products. Not only do they want to refinance your mortgage, they’d also love for you to open a savings account, a business account, an investment account, a Home Equity Line of Credit, and more.
You want to dangle the carrot by telling the lender that if they match or beat a certain rate, you plan to open up several new accounts. As good faith, you can open up a simple account such as a savings account, especially if they have a promotion.
Banks want sticky clients with multiple accounts for cross selling and revenue generation purposes. There is no legal quid pro quo that banks can use to get you better terms. But every big bank has a tiered client system in place where clients with more assets get better access, rates, and benefits.
Real estate crowdfunding has become a real estate investment wave of the future. Individual investors can now buy pieces of commercial real estate projects throughout the country that were once limited to high net worth/income individuals.
What’s the difference between being efficient and just being busy? Why is this difference so important and how can you maximize efficiency? Many are swamped and are overwhelmed by it all. Most busy professionals who want to tap into the world of real estate “just don’t have the time.”