Buying rental property can be an excellent decision and the better informed you are, the more likely you’ll have favorable results. The following suggestions can help you with your decisions.
Real estate is a long term investment affected by supply, demand and the economy. It isn’t an investment that is easily converted to cash. The costs to acquire and dispose of real estate are sizable and need to be spread over years to minimize their effects on the rate of return.
Invest in average price homes or slightly below average price to appeal to the broadest market not only when you are renting but later on when you sell it. The average price is relative to the market you are in and those specific prices.
Lower-priced homes will rent for more relative to higher-priced homes. There is an inverse relationship between rent as a percentage of the price. As the price increases, the rent as a percentage of the price decreases. For example, a $200,000 home might rent for $1,750 a month or 0.88% where a $400,000 home might only rent for $2,250 a month or 0.68%.
Choose predominantly owner-occupied neighborhoods because when you sell the home, it will appeal to a homeowner who will most likely pay a higher price for the home. Homes in predominantly tenant-occupied neighborhoods tend to sell to investors who pay lower prices and will not be emotionally involved with the purchase.
Purchase a property with the idea of selling it in mind. You may be able to get a property for a bargain price today but if it is due to a functional obsolescence like a bad floorplan or not enough bathrooms, that problem will still be there when you’re ready to sell the property. Identify what the problem is and what solutions are available. The property may rent fine in that condition but before you sell, it will need to be corrected.
Get the home inspected before you purchase it. Having the property checked out can save thousands in unanticipated expenses.
Consider getting a home warranty on your rental. The annual premium can limit the out of pocket expenses for repairs and maintenance.
Risk can be minimized by understanding the investment and what is involved in the acquisition, operation and disposition. For the typical homeowner, rental property is something that they can relate to because of the similar attributes of the home they live in.
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“If I tell you it’s going to rain, you can put the buckets on the porch.” If you grew up in the south, you made have heard this expression when a person is testifying to the veracity of his word. If you know a person and/or their reputation, you know whether you can trust their word or not.
However, with a stranger such as a buyer, the seller doesn’t know whether they’ll live up to the terms of the contract or not. Buyers submit earnest money along with a contract to demonstrate their commitment to the terms of the offer.
The more earnest money that the buyer deposits indicates to the seller a higher level of commitment to the contract. Except for stated contingencies in the sales contract, if the buyer fails to close on the sale, the earnest money may be forfeited. Significant earnest money makes the seller feels more secure that the contract will close.
There certainly are a lot of things that can dictate how much earnest money is appropriate. Local customs, price of the home and type of mortgage can all help to determine the proper amount. In some areas, it may be common for it to be 1-5 percent of the purchase price. In other areas, it might be a specific amount like $1,000 to $10,000 depending on the sales price. It really comes down to whatever the buyer and seller agree is the proper amount.
Another strategy is to put up an adequate amount initially until you get through the inspections or contingency period and then, to put up an additional amount when the contingencies have been removed.
The earnest money demonstrates the buyers’ sincerity in making the offer and proceeding according to the agreement so the seller can take their home off the market and start making plans to move and give possession of their home. Ultimately, both parties want to close as anticipated according to the contract and the earnest money helps facilitate that.
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Credit scores are used by lenders to measure the credit worthiness of borrowers. While there are several different companies that offer scores, the FICO, Fair Isaacson Corporation, is the model that is used most often.
There are five key components that determine the overall score or rating. The most emphasis, 35% of the overall score, is placed on payment history which reflects whether the borrower paid on time and as agreed by the terms of the credit. Being late, missing payments or going into default would have adverse effects on this part of the score.
The second largest component, 30%, is credit utilization or the amount owed in relation to amount available. A person might have a $4,000 outstanding balance on available credit of $20,000. This would be a 20% ratio and would be considered acceptable. Owing $15,000 on $20,000 of available credit would be a 75% ratio and would negatively affect this part of the credit score. FICO says people with the best scores average around 7% credit utilization.
The length of time each account has been open and the account’s activity determines 15% of the total credit score. By having a longer credit history, the credit provider has a better indication of the borrower’s long-term financial behavior. Having an open account without activity doesn’t offer a provider much information.
New credit and types of credit each account for 10% of the total score. New credit can adversely affect a score because it is a new obligation without history of how it will affect the borrower’s ability to repay all of their liabilities. Types of credit include both revolving and installment debt. A good mixture of each can indicate less risk for lenders.
The combination of all five areas make up the total score which lenders use to determine credit worthiness. Another confusing issue is that all credit scores are not mortgage credit scores. This particular score determines not only whether the lender will make a mortgage but at what interest rate.
The best place to get your credit score if you’re planning on purchasing a home is from a trusted mortgage professional. This person will be able to suggest things to improve your score if necessary. Buying a home is one of the largest investments in most people’s lives; it is really not a do-it-yourself activity.
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A homeowner’s tax savings benefit is generally realized when they file their federal income tax return after the money has been spent for the interest and property taxes. Some people look forward to the refund as a means of forced savings but some people need to realize the savings during the year.
It is possible to adjust the deductions being withheld from the homeowner’s salary so they realize the benefit of the savings prior to filing their tax returns in the form of more money in their pay checks. Employees can talk to their employers about increasing their deductions stated on their W-4 form.
By increasing the exemptions or deductions, less is taken out of the check and the employee will receive more each pay period. If a person over-estimates their exemptions and therefore, underpays their income tax, they might incur interest and would have additional tax to pay when they filed their tax return.
Buyers considering this strategy should seek tax advice and discuss it with their human relations department at work. Additional information is available on the Internal Revenue Service website about Completing Form w-4 and Worksheets.
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